Chickabo Pty Ltd v Zphere Pty Ltd (No 2)
[2019] VSC 580
•30 August 2019
| 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: | 31 July to 1 August 2019 |
DATE OF JUDGMENT: | 30 August 2019 |
CASE MAY BE CITED AS: | Chickabo Pty Ltd & Ors v Zphere Pty Ltd & Ors (No 2) |
MEDIUM NEUTRAL CITATION: | [2019] VSC 580 |
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PRACTICE AND PROCEDURE – Joinder of parties – Necessary parties – Trial in stages – Findings of breach of fiduciary duty by first and fourth defendants made after first stage – Plaintiffs sought constructive trust over property in the hands of first to fourth defendants – Reasons given but no orders made – Plaintiffs seek to trace proceeds of property to family members of the fiduciary – Family members were not parties at the trial of the first stage – Family members joined as seventh to twelfth defendants after reasons delivered – Whether seventh to twelfth defendants bound by findings or are entitled to have the reasons set aside – Whether a new trial should be ordered before a different Judge – Seventh to twelfth defendants were not directly affected by the findings or orders made at the first stage – Seventh to twelfth are bound by the findings made at the first stage - Boyd v Thorn (2017) NSWLR 390.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | J P Moore QC and J McComish | HWL Ebsworth |
| For the First to Fourth and Seventh Defendants | A G Uren QC and R J Harris | Herbert Smith Freehills |
For the Fifth and Sixth Defendants | B Ryde | Strongman & Crouch |
| For the Eighth to Eleventh Defendant | M Garner | K & L Gates |
| For the Twelfth Defendant | No appearance | No appearance |
HIS HONOUR:
A Introduction
On 22 February 2019, I published reasons (the Reasons)[1] following the trial of the first stage of this proceeding held in November 2018 (the Principal Proceeding).
[1]Chickabo Pty Ltd v Zphere Pty Ltd [2019] VSC 73 (Sifris J). I will assume familiarity with the Reasons and defined terms bear the same meaning. No orders were made.
The Reasons include various findings of breach of fiduciary duty and of the Partnership Act 1958 (Vic) (Partnership Act) by the fourth defendant, Gary Graco (Graco) and a company controlled by him, the first defendant, Zphere Pty Ltd (Zphere). Two of Graco’s associated companies, the second and third defendants, GFBR Nominees Pty Ltd (GFBR) and Glenaldon Pty Ltd (Glenaldon) respectively, were found to be liable as accessories to the various breaches. Despite publication of the Reasons, I did not make any substantive orders or grant substantive relief in favour of the plaintiffs. That is to say, I did not order compensation, disgorgement or impose or declare constructive trusts over assets (or proceeds) the subject of the various breaches.[2]
[2]The Reasons did not deal with or make any findings as to the identity or whereabouts of such proceeds.
At a directions hearing held on 1 March 2019, Queen’s Counsel for the plaintiffs indicated that in addition to pressing appropriate relief against the defendants, the plaintiffs would seek relief, by way of tracing, against other non-parties comprising various family members, individuals and corporate entities associated with Graco. The stage, following the delivery of Reasons, will be referred to as the Tracing Stage.
The additional parties were joined partly on the basis of evidence given by Graco in the course of the hearing of the Principal Proceeding to the effect that some of the traceable proceeds of the Investment and Additional Payment had been received by them. Findings that they had received such property were not made in the Reasons. Such proceeds were not identified. It was foreshadowed that the plaintiffs would be seeking to enforce a proprietary interest in the property held by such added defendants.
Presently before the Court is an application to set aside the Reasons, and orders for a re-trial before a different Judge, on the issues that were the subject of the Principal Proceeding and the remaining issues against the recently added defendants. The application was heard on 31 July and 1 August 2019.
The critical question raised by the application is whether the joinder of the added defendants entitles them to, as of right, have the Reasons set aside and have a new trial before a different Judge. For the reasons that follow, the added defendants have no such right, and the orders they seek will not be made. The application will be dismissed.
B Relevant Factual Background
The plaintiffs are Partners in an accounting firm, the Moore Stephens (Vic) Partnership (Partnership).[3] Graco and Zphere were each also Partners of the Partnership.[4]
[3]An issue in the Fiduciary Proceeding was whether Graco and the natural person plaintiffs (the Principals) were Partners of the Partnership in their own right. I found that they were. See Reasons [83]-[121].
[4]The fifth and sixth defendants, not presently relevant, were also formerly Partners in the Partnership. They contend that they are entitled to a proportion of the benefits derived by Graco and recovered by the plaintiffs. This question has not yet been dealt with.
While acting for the Partnership, Graco sat as a non-executive director on the board of one its clients, Swisse Wellness Group Pty Ltd (Swisse). While on the board of Swisse, he was offered the Opportunity to subscribe for shares in the company (the Investment). Through GFBR, he took up that offer and invested $203,780 in the Investment. The majority of Swisse’s shares were later purchased by Biostime, a Hong Kong company. In September, 2015, Graco caused GFBR to sell its Swisse shares, and GFBR realised a profit in the amount of $11,593,544.71.
Soon after the takeover of Swisse, on 4 November 2015, a payment of $4,861,000 was made by entities formerly associated with Swisse to the account of Glenaldon (Additional Payment). The Additional Payment was gratuitous in nature, but represented the difference between the value of the Investment, and the value of a 1 per cent shareholding in Swisse. Put another way, it was a ‘top-up’ payment that had arisen by virtue of Graco’s fiduciary position.[5]
[5]Reasons [153]-[154].
Graco or Zphere did not disclose to the Partnership their shareholding in Swisse, or the Investment or Additional Payment that GFBR or Glenaldon received. The plaintiffs alleged, that as a result of their failure to disclose the investment opportunity, and to seek approval and then to account for the benefits derived from the Investment and the Additional Payment, each of Zphere and Graco breached various contractual, statutory and fiduciary duties owed respectively under the terms of the Partnership Deed, Partnership Act, and the general law.
A further claim of accessorial liability was made against Graco in relation to the breach of fiduciary duties on the part of Zphere. Finally, the plaintiffs claimed that each of GFBR and Glenaldon were accountable to the Partnership for their knowing receipt of property obtained in breach of fiduciary duty, and knowingly inducing or procuring the breaches of fiduciary duty by Zphere or Graco.
The plaintiffs were successful on almost all claims they pressed. They were not successful in establishing that Zphere breached the ‘no profit’ rule or s 33 of the Partnership Act. Likewise, I declined to find that Graco engaged in a dishonest and fraudulent design, and consequently, GFBR and Glenaldon were not liable on the ‘knowing participation’ limb of Barnes v Addy.[6] In summary, I found the following:
[6](1874) LR 9 Ch App 244.
(a) Graco is liable as a fiduciary in breach of each of the ‘no profit’ and ‘no conflict’ obligations.
(b) Graco is liable as a Partner in breach of ss 32 and 33 of the Partnership Act.[7]
[7]Section 32 of the Partnership Act requires Partners to render true accounts to the Partnership and to give the Partnership full information of all things affecting the Partnership. Section 33 requires Partners to account for a benefit derived without consent from a transaction concerning the Partnership or from the use of a Partnership business connection.
(c) Zphere is liable as a fiduciary in breach of the ‘no conflict’ obligation.
(d) Zphere is liable as a Partner in breach of s 32 of the Partnership Act.
(e) Graco is liable, as an accessory, for knowingly inducing or procuring Zphere’s breach of fiduciary duty.
(f) GFBR is liable, as an accessory, for knowingly receiving property (the Investment) obtained in breach of Graco’s fiduciary duty.
(g) GFBR is liable, as an accessory, for knowingly inducing or procuring Graco’s breaches of fiduciary duty.
(h) Glenaldon is liable, as an accessory, for knowingly receiving property (the Additional Payment) obtained in breach of Graco’s fiduciary duty.
(i) Glenaldon is liable, as an accessory, for knowingly inducing or procuring Graco’s breaches of fiduciary duty; and
Having made various findings and having dealt with the issues as pleaded, I did not, as noted, make any orders. I proposed to deal with the nature, scope and extent of relief that flowed from the breaches, any allowances, and any other matters, including the proportionate entitlement of the fifth and sixth defendants,[8] at a separate hearing. This brings me to the events that following publication of the Reasons.
[8]See footnote 4.
C Relevant Procedural Background
On 5 March 2019, I made orders joining the following parties:[9]
[9]The joined parties were not present or represented at the directions hearing of 1 March 2019. The Graco Defendants were present and represented.
(a) Frana Maude Graco (Mrs Graco), the wife of Graco was joined as seventh defendant.
(b) FBR Fund Management Pty Ltd (FBR Funds), a company controlled by Graco or Mrs Graco, was joined as eighth defendant.
(c) Baden Rhain Graco (Baden), the son of Graco, was joined as ninth defendant.
(d) Rhian Victoria Graco (Rhian), the daughter of Graco, was joined as tenth defendant.
(e) Emily Denise Graco (Emily), the spouse of Baden (and daughter-in-law of Graco), was joined as eleventh defendant.
On 15 May 2019, the plaintiffs filed a Further Amended Originating Process and Statement of Claim (FAOP and FASOC) which added Danijel Francis Lloyd (Danijel), the spouse of Rhian (and son-in-law of Graco) as the twelfth defendant.
Collectively, the seventh to twelfth defendants will be referred to as the Added Defendants. The first to fourth defendants will be referred to as the Graco Defendants.
Following the joinder of the Added Defendants, summonses were filed:
(a) on 20 May 2019, by the seventh defendant;
(b) on 20 May 2019, by the eight to eleventh defendant; and
(c) on 27 May 2019, by the twelfth defendant.
The summonses are in substantially the same form and seek the following orders:
(a) An order pursuant to the inherent jurisdiction of the Court that the Reasons be set aside;
(b) Further or alternatively, an order that there be a new trial on all issues before a different Judge of the Court;
(c) Further orders or directions for the further conduct of the proceeding consequential upon the making of Orders 1 and/or 2;
(d) Alternatively to Orders 1 to 3 above:
(i) An order pursuant to r 46.08 of the Supreme Court (General Civil Procedure) Rules (the Rules) that the Orders made on 5 March 2019 or 3 May 2019, joining each of the Added Defendants as defendants in this proceeding be set aside; or
(ii) Alternatively, an order pursuant to r 9.06(a) of the Rules that each of the Added Defendants cease to be a party to this proceeding.
(e) An order that the plaintiffs pay the costs of the Added Defendants of and incidental to this application.
Mrs Graco seeks a further order that the claims against her, set out in paragraphs 58 to 64 of the FASOC be struck out or dismissed.
Danijel seeks a further order that pursuant to s 90(3) of the Transfer of Land Act 1958 (Vic) that the caveat lodged by the fifth plaintiff in dealing number AS104789T over the title to the land described in certificate of title volume 8342 folio 600 and known as 11 Jennifer St, Cheltenham, Victoria 3192 be removed.[10]
[10]On 4 July 2019, the solicitors acting for Danijel notified the Court that he would no longer be taking an active role in the proceeding and would abide by the outcome as far as it concerns him. As such, it is not necessary to deal with the application for removal of the caveat.
In summary, the Added Defendants seek orders setting aside the Reasons, and a re‑trial on all issues, or alternatively orders setting aside their joinder or causing them to cease being parties to these proceedings. Substantial submissions were exchanged and responded to, which are summarised below.
D Added Defendants’ Submissions
The Added Defendants submitted that the Reasons should be set aside, and a new trial held on all issues. It was submitted, that they were necessary parties from the point in time at which the plaintiffs claimed an order that the Investment, Additional Payment or the proceeds thereof were held on constructive trust for the Partnership. At that point in time, the Court was invited by the plaintiffs to make orders which directly affected the rights or liabilities of the Added Defendants, who were not yet parties to the proceeding. As such, the plaintiffs’ tracing claim depended on orders that the Graco Defendants hold or held that property on constructive trust, and those orders directly affected their rights or liabilities.
They submit that they were each entitled to be heard and to adduce evidence, as necessary parties and as a matter of natural justice. Further, it was submitted that the fact that the Added Defendants have now been joined as defendants does not regularise or remedy the failure for them to be joined earlier.
The submissions fall into three broad categories:[11]
[11]Submissions were filed separately by the seventh defendant (Mrs Graco), the eighth to eleventh defendants (FBR Funds, Baden, Rhian and Emily), and the twelfth defendant (Danijel). The submissions cover the same matters and have been discussed together.
(a) the setting aside of the Reasons and the need for a new trial;
(b) the new claims that have now been advanced against Mrs Graco and FBR Funds; and
(c) the need for a new Judge of this Court to hear the re-trial to avoid any reasonable apprehension of bias.
Setting aside the Judgment
The Added Defendants[12] relied principally on John Alexander’s Clubs Pty Limited v White City Tennis Club Limited (JACS),[13] Cameron v Cole,[14] Boyd v Thorn,[15] and Hampshire Automotive Centre Pty Ltd v Centre Com Sunshine Pty Ltd (Hampshire Automotive).[16] These decisions are discussed below.
[12]Mrs Graco was represented by the same solicitors and counsel as the Graco Defendants. The remaining Added Defendants have retained separate solicitors and counsel. I have dealt with their respective submissions together.
[13](2010) 266 ALR 462.
[14](1944) 68 CLR 571.
[15](2017) 96 NSWLR 390.
[16][2019] VSCA 77.
It was submitted that the Added Defendants ought to have been joined prior to, or during the course of the trial of the proceeding – from the point in time at which the plaintiffs became aware that they had received various items of property from the Graco Defendants, alleged to be the traceable proceeds of the Investment and Additional Payment. They submitted that it is not to the point that the Added Defendants had knowledge or notice of the proceeding as the duty is on the plaintiff to join all necessary parties at the point in time at which they ought to be joined.
The Added Defendants submitted that, where a court is invited to make, or proposes to make, orders directly affecting the rights or liabilities of a non-party, the non-party is a necessary party and ought to be joined. As such, where the orders sought establish or recognise a proprietary interest in property, all persons who have or claim an interest in the subject matter are necessary parties, the rule being that a person directly affected by an order or determination made in a proceeding to which that person was not party is entitled as of right to have that order or determination set aside. That is to say, the Added Defendants are entitled to have the Reasons set aside as of right, quite aside from the exercise of any discretion.
It was submitted further that the Added Defendants were and are entitled to call evidence, and be heard, on all aspects of the plaintiff’s cause of action which leads to the claim for orders directly affecting them. That is to say, that right is not restricted to disputing the claims against them. They were and are entitled to claim that the plaintiffs’ substantive case (the Principal Proceeding) was not strong enough to succeed. They were and are entitled to call evidence against that substantive case and even if they did not wish to call evidence, to make submissions on weaknesses in the plaintiff’s case.
In other words, their right, it was submitted, is not just in respect of what relief should follow from any findings of breach, but also on the questions whether Graco and Zphere owed any (and if so, what) fiduciary duties to the plaintiffs and if they did, whether they breached those duties and then whether GFBR and Glenaldon were accessories to those breaches.
It was further submitted that a re-opening of the Principal Proceeding would not be sufficient. Such a re-opening could only proceed on the basis that the determinations made in the Reasons are not binding on any of the Added Defendants. Further, it would have to be before a different Judge. It was submitted, that if I were to permit a re-opening of the Principal Proceeding before me, I would effectively be conducting an appeal from my earlier decision.
As a consequence of the plaintiffs not having joined the Added Defendants to the Principal Proceeding, each of the Added Defendants submitted that the Judgment should be set aside and a new trial ordered before a new judge on all issues.
New claims against Mrs Graco and FBR Funds
The FASOC advances new claims against each of Mrs Graco and FBR Funds. These claims go beyond a simple tracing exercise and leave was not sought in respect of them. The plaintiffs alleged that FBR Funds and Mrs Graco knowingly received property obtained through Graco and Zphere’s breaches of fiduciary duty.
Mrs Graco and FBR Funds each submitted that the new claims, sought without leave, and dependent on the findings of breach of fiduciary breach made in the Principal Proceeding further necessitate the need for a new-trial.
Mrs Graco and FBR Funds further submitted that the new claims alleged specific knowledge and were dependent on breaches of fiduciary duty of other defendants, on the fault of other defendants, and on other matters of fact and law, as to which the trial had concluded, and findings had already been made. As such, they had an entitlement, but were not permitted, to adduce evidence, and to be heard, against all aspects of the plaintiffs’ cause of action. Therefore, it was submitted, a new trial must be ordered.
The need for a new judge
The Added Defendants submitted that if a new trial is ordered, or a re-opening permitted, such trial or re-opening ought to occur before a different Judge of this Court. This is necessary to ‘avoid any appearance of pre-determination’.
It was submitted, that where the questions for determination at the new trial will be the very same questions in respect of which I have already made considered findings in the Reasons, which were intended as final findings dispositive of those issues, a fair-minded lay-observer would reasonably apprehend that I would not be able to bring an impartial mind to the resolution of those questions.
E Plaintiffs’ Submissions
Setting aside the Judgment
The plaintiffs challenged the application on five primary grounds:
(a) First, the giving of reasons is different from the entry of judgment. As no judgment has been entered, there is nothing to set aside.
(b) Second, the Added Defendants were not necessary parties to any of the issues determined in the Reasons. It was submitted that no claim, and in particular no claim for proprietary relief, was made against the Added Defendants in the Principal Proceeding. The question of whether Graco and Zphere were liable as fiduciaries, and GFBR and Glenaldon as accessories, did not directly affect the rights or liabilities of the Added Defendants. The Reasons found and ordered nothing (adverse or otherwise) about any non-party’s proprietary rights or personal liability, and as such the Added Defendants were not necessary parties. As they were, it was submitted, neither directly affected or necessary parties, they do not have the right to set aside the Reasons.
(c) Third, even if the Reasons ‘touched on’ their proprietary rights, the Added Defendants are not third parties who have independent proprietary rights that ought to have been taken into account. The plaintiffs referred to McNab v Graham,[17] University of Technology v Wilson[18] and Youssef Victoria University of Technology[19] and submitted that the Added Defendants were volunteer recipients and, as such, it was submitted that they had no greater rights than the fiduciary wrongdoers, the Graco Defendants. That is to say, JACS, Boyd v Thorn, and Hampshire Automotive can be distinguished as cases concerned with third parties who were good faith purchasers for value and without notice. They were not, as the Added Defendants are here, volunteer recipients of property obtained in breach of fiduciary duty.
(d) Fourth, it was submitted that even if the Reasons were set aside or the case reopened, the evidence already tendered by the plaintiffs and by the first to fourth defendants, which was sufficient to prove Graco and Zphere’s breaches, remains as evidence in the proceeding even now that the Added Defendants have been joined. On this point, the plaintiffs further submitted that there were almost no disputed facts in the Principal Proceedings. The issues were, or were almost, entirely legal in nature. As such, it was submitted that it is fanciful for the Added Defendants to now suggest that they would have given any evidence that could affect the result. In this sense, it was submitted, that it ‘beggers belief that the Added Defendants would be privy to any factual information about the conduct of the Graco Defendants that was not known to, and deployed by, the Graco Defendants in their defence at trial.’ As such the findings would be entirely the same on any re-trial. The Added Defendants could bring nothing fresh, relevant or of value.
(e) Fifth, all questions of relief and remedy remain to be determined by the Court. The Added Defendants remain free to put on additional evidence and make submissions on those questions.
[17](1944) 68 CLR 571.
[18][2004] VSC 33.
[19][2005] VSC 223.
The need for a new judge
On the Added Defendants’ submissions that any new trial must take place before a new judge, the plaintiffs submitted that:
(a) the Court has expressed no view, however tentative, about any evidence or additional arguments that the Added Defendants may now wish to proffer and questions relating to remedies remain wholly unexplored; and
(b) no reasonable apprehension of bias and no denial of procedural fairness, can arise simply because the same judge is required to determine a legal or factual contention that has not previously been put.
In challenging the Added Defendants’ submission that a new judge hear the proposed new trial, the plaintiffs submitted that their reliance on Hampshire Automotive was inapt, stating that in contrast to that case, there can be no reasonable apprehension of bias in this case for the following reasons:
(a) no question touching any party’s proprietary rights had been considered by the Court;
(b) no final orders have been made; and
(c) no determination, however preliminary, has yet been made on any issue between the plaintiffs and the Added Defendants.
The seventh, and eighth to eleventh defendants each filed submissions in response to those filed by the plaintiffs. They will be dealt with and referred to in the course of these reasons as is necessary or desirable. In summary, the Added Defendants submit that the principles of natural justice expressed by the authorities are not limited or confined in the manner contended by the plaintiffs. That is to say, they are applicable to all persons, and not mere those who are ‘unconnected’ with the fiduciary wrongdoing.
F Setting aside the Reasons - were the Added Defendants necessary parties to the Principal Proceeding?
As the authorities below demonstrate, if the Added Defendants were directly affected by orders or findings made in the Principal Proceeding, they are necessary parties and required to be joined, either at the commencement of the proceeding or at the earliest possible opportunity, so that they may participate in the trial, the outcome of which directly affects them. The failure to join a party directly affected is in effect a denial of procedural fairness and natural justice and usually results in the setting aside of any judgment or order.
Whether the Added Defendants are or were directly affected by the findings (no orders have been made) in the Principal Proceeding is the critical issue in the application.
Having considered the detailed submissions of the parties, both written and oral and having considered the numerous authorities referred to, I am of the opinion that the Added Defendants, were not relevantly directly affected by the findings in the Principal Proceeding. Further, I am satisfied that they were properly joined at the right time.
Legal Principles
Where a court is invited to make, or proposes to make orders that will directly affect the rights or liabilities of a non-party, that non-party is a necessary party and ought to be joined to the proceeding. In JACS, the High Court adopted the following statement of principle expressed in News Ltd v Australian Rugby League Ltd (News Ltd):[20]
There are some classes of case where the ascertainment of the necessary parties who “ought to have been joined” is not difficult. Where the orders sought establish or recognise a proprietary or security interest in land, chattels or a monetary fund, all persons who have or claim an interest in the subject matter are necessary parties. This is because an order in favour of the claimant will, to a corresponding extent, be detrimental to all others who have or claim an interest … Where the subject matter of the proceedings is not of this kind, the ascertainment of necessary parties who ought to have been joined may be more difficult.
[20]JACS (2010) 266 ALR 462, 492-3 [131]-[132] (French CJ, Gummow, Hayne, Heydon and Kiefel JJ) citing News Ltd (1996) 64 FCR 410, 524-5 (Lockhart, von Doussa and Sackville JJ).
In JACS, White City Tennis Club (the Club) commenced proceedings, alleging that a piece of land was held by Poplar on constructive trust for the Club. The trial judge declared the land to be held on constructive trust. This was upheld by the New South Wales Court of Appeal (NSWCA). After the decision in the NSWCA, Walker, a finance company, applied to the NSWCA to be joined as a party to the appeal and sought an order that the previous declaration of a constructive trust over the land be set aside. The NSWCA refused that application.
Walker held an unregistered mortgage over land that had been specifically identified in the orders White City was seeking and over which a constructive trust had been declared. On appeal, the High Court considered, that Walker was, as of right, entitled to have the declaration of constructive trust set aside. The declaration adversely affected Walker’s rights as it exposed Walker to a priority dispute with the Club. The High Court said:[21]
[133]The relief claimed and granted – a constructive trust and a transfer of the land subject to the trust to the Club so as to make the interest transferred indefeasible on registration – directly affects the interests of any other person, like Walker Corporation, claiming an interest in the land, because orders in the Club’s favour would, to a corresponding extent, be detrimental to those other persons.
[21]JACS (2010) 266 ALR 462, 293 [133] (French CJ, Gummow, Hayne, Heydon and Kiefel JJ).
A non-party has no duty to seek to be joined, and they do not need to explain why it is that they have not sought this. In this regard, the non-party’s knowledge or notice of the proceeding is entirely irrelevant. The plaintiff must properly constitute their suit, and it is at their peril to not do so. This was the case in JACS, where the affected non-party knew of the proceeding, but simply thought that it would fail.[22]
[22]Ibid 490 [116].
A person who is directly affected by such orders in a proceeding, to which that person was not a party is entitled to have it set aside and to a new trial.[23] While the order is not a nullity, that person is entitled to have the order set aside, as of right, rather than needing to seek the favourable exercise of a discretion from the court.[24] This position does not depend either on the person being a party or on the rules of court, ‘it depends on matters of right affecting non-parties which rest on general law principles of natural justice.’[25]
[23]Ibid 494 [136].
[24]Ibid [137].
[25]Ibid 500 [157] citing Victoria v Sutton (1998) 156 ALR 579, 598 [77] (McHugh J). See also Ross v Lane Cove Council (2014) 86 NSWLR 34 [57] (Meagher JA and Tobias AJA agreeing).
Where that non-party is a necessary party because they are directly affected, they are not restricted to disputing the particular claims against them. The non-party is entitled to claim, if it wished, that the plaintiff’s substantive case is insufficiently strong to succeed at all. The non-party is entitled to call evidence against that substantive case, and even if it did not wish to do that, it is entitled to be heard on the weaknesses in the substantive case.[26] As the High Court said in JACS:[27]
[116] …the field for contention was not subsequent litigation of what is described as disputed priority between the Club and Walker Corporation; rather, the issue should have been whether that dispute was to be created in the first place by the decision, in the absence of Walker Corporation, to declare Poplar a constructive trustee for the Club.
[26]JACS (2010) 266 ALR 462, 493 [134] (French CJ, Gummow, Hayne, Heydon and Kiefel JJ).
[27]Ibid 490 [116].
In Cameron v Cole, Cameron had not received notice of a petition and subsequent hearing to make him bankrupt. A sequestration order was made against him, which had the effect of vesting his property in his trustee in bankruptcy. Cameron succeeded in having the sequestration order set aside on the basis that he did not have the opportunity to contest it. Rich J said:[28]
It is a fundamental principle of natural justice, applicable to all courts whether superior or inferior, that a person against whom a claim or charge is made must be given a reasonable opportunity of appearing and presenting his case. If this principle be not observed, the person affected is entitled, ex debito justitiae, to have any determination which affects him set aside; and a court which finds that it has been led to purport to determine a matter in which there has been a failure to observe the principle has inherent jurisdiction to set its determination aside: …. In such a case there has been no valid trial at all. The setting aside of the invalid determination lays the ghost of the simulacrum of a trial, and leaves the field open for a real trial (citations omitted)
[28]68 CLR 571, 589 (Rich J).
The test regarding whether a non-party is a necessary party was stated by Lord Diplock delivering the advice of the Judicial Committee of the Privy Council in Pegang Mining Co Ltd v Choong Sam (Pegang Mining):[29]
The cases illustrate the great variety of circumstances in which it may be sought to join an additional party to an existing action. In their Lordships’ view one of the principal objects of the rule is to enable the court to prevent injustice being done to a person whose rights will be affected by its judgment by proceeding to adjudicate upon the matter in dispute in the action without his being given an opportunity of being heard. To achieve this object calls for a flexibility of approach which makes it undesirable in the present case, in which the facts are unique, to attempt to lay down any general proposition which could be applicable to all cases.
It has been sometimes said as in Moser v. Marsden [1892] 1 Ch 487 and in Farbenindustrie Agreement [1944] Ch 41 that a party may be added if his legal interests will be affected by the judgment in the action but not if his commercial interests only would be affected. While their Lordships agree that the mere fact that a person is likely to be better off financially if a case is decided one way rather than another is not a sufficient ground to entitle him to be added as a party, they do not find the dichotomy between ‘legal’ and ‘commercial’ interests helpful. A better way of expressing the test is: will his rights against or liabilities to any party to the action in respect of the subject matter of the action be directly affected by any order which may be made in the action? (emphasis added)
[29][1969] 2 MLJ 2, 56 (Lord Diplock).
In News Ltd, the Full Court refined the test proposed by Lord Diplock:[30]
In our opinion, the question should be decided according to the test proposed by Lord Diplock. The test involves matters of degree, and ultimately judgment, having regard to the practical realities of the case, and the nature and value of the rights and liabilities of the third party which might be directly affected. The requirement that a third party’s rights against, or liability to, any party to the proceedings be directly affected is an important qualification that recognises that many orders of a court are likely to affect other people to a greater or lesser extent. This is particularly so with remedies in the nature of an injunction: see Silktone Pty Ltd v Devreal Capital Pty Ltd (1990) 21 NSWLR 317 at 322 per Kirby P. The requirement of a direct effect on rights or liabilities differentiates the case where a person ought to be joined, from other cases where the effect of the order on non-parties can be characterised as only indirect or consequential.
Where, before trial, a question arises whether a necessary party has been joined, attention should be directed to the orders sought in the proceedings. It is the effect of the orders upon the third party that must be determined. The test is not whether the conduct of the third party is raised in the pleadings between the existing parties, or whether the third party is a party to a contract, the meaning or effect of which is pleaded as a matter relevant to the ascertainment of the rights between those parties. Where the question arises after final orders have been made in the proceedings, the inquiry must be directed to the orders actually made, or which, on appeal it is contended should be made: cf Associated Grocers Co-operative Limited v Hubbard Properties Pty Ltd (1986) 42 SASR 321 at 341. (emphasis added)
[30]News Ltd 1996) 64 FCR 410, 525 (Lockhart, von Doussa and Sackville JJ).
The High Court endorsed and applied this test in JACS.[31]
[31](2010) 266 ALR 462, 492-3 [131] (French CJ, Gummow, Hayne, Heydon and Kiefel JJ).
In Associated Grocers Co-operative Limited v Hubbard Properties Pty Ltd (Associated Grocers), the plaintiff, who was entitled to a first right of refusal (to lease a shop) against a landlord (the defendant), claimed specific performance in circumstances where the landlord had, in breach of the right, granted a lease to Coles. Coles, not a party to the action, applied to be joined on the appeal. The application was opposed by the plaintiff on the basis that no relief was claimed against Coles in the proceeding. Jacobs J said:[32]
The notice of cross-appeal is dated 13th September, 1985 and it is to be observed that at that time Coles was not, and never had been, a party to the action. The learned trial Judge had pointed to this difficulty in the course of the trial, particularly in dealing with the plaintiff’s claim for specific performance and an injunction, which involved a challenge to the agreement for lease said to have been entered into between Hubbards and Coles. In resisting that claim, counsel for Hubbards was able to inform the trial Judge that he had instructions to resist it on behalf of Coles as well as on behalf of Hubbards. In the result, the primary judgment did not adversely affect the interest of Coles, and there the matter was allowed to rest for the time being. The notice of cross-appeal, however, posed a further direct challenge to the purported agreement for lease between Hubbards and Coles in the terms already stated, and Coles accordingly applied at that late stage to be joined in the action as a defendant. The application was opposed by the plaintiff but it was granted and, in my opinion, properly granted, by order of a Master dated 19th November, 1985. The plaintiff objected to the joinder on the ground that it did not seek, and never had sought, any relief against Coles, but that begs the question, because the relief it sought against Hubbards in the action, and in the cross-appeal would, if granted, quite plainly affect Coles to the detriment of Coles. It was necessary for the due administration of justice, and to avoid a multiplicity of suits, that Coles should be heard as a party, and should be bound by the judgment in the action.
When the appeals were called on in this Court Mr Gray QC and Mr Bagot duly appeared as counsel for Coles, whereupon counsel for the respondent informed the Court that the respondent did not now intend to prosecute its cross-appeal, or to challenge the order discharging the injunction, and that accordingly the only issue to be litigated on the appeal is whether Hubbards, as found by the learned trial Judge, is liable in damages for breach of contract. An order was therefore made by Mohr J, who had made the order discharging the interim injunction, and the Court made the following order as to costs …
[32][1986] 42 SASR 321, 341 (Jacobs J).
In State of Victoria v Sutton (Victoria v Sutton), there was a question as to whether either CFMEU or (members of) BLF had a beneficial interest in certain property. The members of BLF were, however, not parties to the proceeding and should have been. McHugh J said:[33]
[33](1998) 156 ALR 579, 598-9 [78]–[81] (McHugh J).
[78]The test for determining whether a person is a necessary party has usually arisen in the context of a person seeking to join proceedings rather than a failure to join a relevant person. But the same principle must apply in both situations. Thus, in News Ltd v Australian Rugby Football League, the Full Federal Court held that an order "which directly affects a third person’s rights against or liabilities to a party should not be made unless the person is also joined as a party. If made, the order will be set aside.” The Full Court pointed out that O 6, r 7 of the Federal Court Rules which states that proceedings will not be defeated by a misjoinder or non joinder was “intended to give effect to the abolition of the plea of abatement”. The Court said that the rule was directed “to cases where there is a curable defect, for example the misnaming of a party”.
[79]In the present case, the learned Chief Justice of the IRCA made several binding declarations of right, including that:
“3. CFMEU is beneficially entitled to the funds and property presently in the possession, custody or control of the first respondent, Ian Gordon Sharp, including any funds or property vested in him as Custodian under an Order in Council, subject to deduction therefrom of any costs, charges and expenses properly incurred by him as Custodian pursuant to an Order in Council.”
[80]The declaration as to the right of the beneficial entitlement to the property in par 3 clearly affects the interests of members of the BLF and the registered proprietors of the real estate. Prior to the amalgamation agreement, the members of the BLF were beneficially entitled to the property in question. In Bacon v O’Dea the Federal Court held that the beneficial interest of the property was vested in all the members but that each individual member only holds a contractual right to have that property dealt with in accordance with the rules. That may be so, but a declaration concerning the entitlement to the beneficial interest in the property affects the interest of all of the members of the BLF.
[81]Both before and after the filing of the Custodian’s pleading, the beneficial interest in the property belonged either to the CFMEU or to the members of the BLF. Consequently, they were entitled to be heard and should have been represented in the proceedings. It may be that the interests of the BLF members could have been represented at trial by relevant officers of the federal executive council or a member in a representative capacity. However, the only members joined did not represent all members of the BLF. In addition, neither the Federal Executive Council nor the Trustees were joined as parties or heard in the proceedings. Accordingly, O 3 at least ought not have been made in the absence from the proceedings of the members of the BLF.
In Tiao v Lai [No 2], the critical question related to the authority of purported directors to represent an association and make what was contended to be an unauthorised sale of its property. Although the case was concerned with the internal workings of the Association, the purchaser of the property sold by the Association was not joined as a party to the proceeding. After referring to Pegang Mining, News Ltd and JACS, Buss JA said:[34]
[118]In my opinion, declaration 7 and order 5 of the final orders made by the trial judge on 22 May 2009 directly affected Level Holdings’ rights against and the liabilities to the Association in respect of the Level Holdings Contract. Declaration 7 directly affected Level Holdings’ rights in relation to claiming specific performance of the contract and claiming damages for any breach by the Association of its obligations under the contract or for any repudiation of the contract. Declaration 7 also directly affected Level Holdings’ liabilities to the Association by potentially exposing Level Holdings to a claim for damages or other relief in connection with work carried out and other action taken by Level Holdings on or in respect of the Land pursuant to or in reliance on the contract.
[119]Order 5 directly affected Level Holdings’ rights against and liabilities to the Association in respect of the Level Holdings Contract and the Land by enabling the Association, upon satisfaction of the conditions specified in order 5, to apply to the court for an order that, despite the terms of the Level Holdings Contract and the work carried out by Level Holdings on the Land, at its cost, pursuant to the contract, Mr Tiao and Mr Hui Wang be ordered to restore the Land to the condition in which it was before the contract was entered into on 11 May 2004. If this were to occur, the amount expended by Level Holdings in carrying out the work would be wasted, and the benefit it would otherwise have enjoyed under the Level Holdings Contract as a result of that expenditure would be lost.
…
[125]In my opinion, the general rule that a third person is entitled to have an order made by a court set aside where the order affects the third person, and the third person should have been, but was not, joined as a necessary party, should be applied in the present case. The orders contended for by counsel for the Association do not resolve adequately the situation which has arisen. Declaration 7 and order 5 must be set aside. My reasons are as follows.
[126]First, the dispute between Level Holdings and the Association (and, at least, Mr Lai) as to the validity and enforceability of the Level Holdings Contract should not be determined on a piecemeal basis. It should be determined by a trial on the question of authority as a whole, and not merely on the question of apparent (or ostensible) authority alone. Secondly, Level Holdings had a right to be heard before the trial judge (and will have a right to be heard at a subsequent trial) on the issue of Mr Tiao’s express or implied actual authority to enter into the contract on behalf of the Association. Level Holdings may adduce evidence, cross-examine the Association's (or Mr Lai’s) witnesses and make submissions. Thirdly, there is the potential for inconsistency of reasoning and inconsistent judgments if declaration 7 and order 5 are not set aside.
[34][2010] WASCA 189 [118]–[119] and [125]–[126] (Buss JA with Owen and Murphy JJA agreeing).
In Australian Securities and Investments Commissioner v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) (ASIC v Lanepoint), the High Court held that in an application to wind up a company it was not necessary to join any other company within the first company’s corporate group to the application, notwithstanding that they may be affected by it. The High Court said:[35]
[49]It is not apparent why the majority in the Full Court considered that other parties were necessary to be joined in the proceedings. Their Honours did not elaborate upon the matter. Generally speaking, consideration is necessary to be given to the joinder of other parties where orders might be made directly affecting the rights and liabilities of a non-party. An order that Lanepoint be wound up in insolvency may have financial, and even legal, implications for other entities within the Westpoint Group, but it does not itself affect their rights and liabilities.
[35](2011) 277 ALR 243, 254-5 [49] (Gummow, Heydon, Crennan, Kiefel and Bell JJ).
At first instance, the trial judge opined that various intra-group transactions could have been voidable pursuant to an application made by the liquidator brought under s 588FF of the Corporations Act 2001 (Cth) (Corporations Act). This was a further basis on which the Full Court of the Federal Court thought that the group companies ought to have been joined. The High Court held that the trial judge was merely offering an opinion on that matter, as an application under s 588F section was not before his Honour. Their interests could not have been affected as there had been no final determination on the validity of the transactions. The High Court said:[36]
[36]Ibid 254-5 [47]-[51].
[47]In his findings his Honour described the transactions as being improper and accepted ASIC’s submission that they were ineffective. His Honour’s views in this regard were relevant to his rejection of the evidence which sought to explain and justify the changes to the accounts. His Honour’s reference to the transactions being “ineffective” should be understood in this context and not as suggesting some legal consequence which was not relevant to the questions before his Honour.
[48]His Honour said that the transactions were liable to be set aside under s 588FF. His Honour clearly appreciated that he was volunteering an opinion, and was not making a ruling under the section, for he stated on more than one occasion that they were liable to be set aside at the instance of the liquidator of Westpoint Management. No such application was before his Honour. His Honour appears to have offered his opinion about s 588FF in response to a submission to that effect by ASIC. But it was not necessary for the determination of the issues before his Honour to do so. His non-acceptance of the explanations about the alterations to the accounts was sufficient for that purpose.
…
[50]The majority might have in mind the possibility that an issue estoppel might later be said to have arisen from Gilmour J’s determination about the monies owed by Lanepoint and the findings along the path to that conclusion and that this had the potential to affect the other companies involved. There may be some difficulties in raising an issue estoppel, but they do not need to be expanded upon for present purposes. If such a question did arise, the position of those companies vis-à-vis the winding up proceedings might assume some relevance. But this could provide no warrant for their joinder to those proceedings.
[51]The majority expressed concern that officers and employees of Lanepoint and other Westpoint companies were exposed to findings concerning their conduct without the benefit of pleadings in that regard. Their Honours no doubt had in mind that a plea akin to fraud requires detailed particulars and that such pleadings would not usually be provided in proceedings for winding up. The concern rather overlooks the fact that any questions concerning the propriety of the conduct of these persons, in relation to the financial affairs of the WIF and Lanepoint, did not arise from allegations made by ASIC. The persons in question were called by Lanepoint to prove that the alterations to the accounts were for a legitimate purpose.
In Martin Bruce Jones v Miami Waterfront Developments Pty Ltd, receivers sought declarations as to the validity of their appointment and joined the director as a party. The director unsuccessfully sought his removal as a party. Edelman J said:[37]
[37][2012] WASC 483 [3] and [30]-[45] (Edelman J).
[3]Mr Reiffer was properly joined as a defendant to these proceedings. The orders sought have a direct effect on his powers and duties as a director. And Mr Reiffer’s joinder to the action is further supported by case management considerations.
…
[30]In Pegang Mining Co Ltd, Lord Diplock said of the rule concerning joinder of an additional party:
[O]ne of the principal objects of the rule is to enable the Court to prevent injustice being done to a person whose rights will be affected by its judgment by proceeding to adjudicate upon the matter in dispute in the action without his being given the opportunity to be heard.
[31]Another rationale is case management. It has been held that the meaning of the words ‘necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined’ encompasses ‘modern notions of case management and the desire of the justice system to minimise time and costs in litigation’. This also reflects the remarks concerning the direct effect test that ‘[t]he test involves matters of degree, and ultimately judgment, having regard to the practical realities of the case, and the nature and value of the rights and liabilities of the third party which might be directly affected.’
Is Mr Reiffer a necessary and proper party to the action?
[32]Mr Reiffer is a necessary and proper party to be joined to the proceeding. Mr Reiffer accepted, as he must, that his powers as a director are affected by the appointment of the Receivers. The powers of the Receivers diminish Mr Reiffer’s powers as a director.
…
[40]Mr Reiffer’s argument was essentially that because he disputed the entirety of the Receivers’ appointment, rather than merely the scope of their powers, the claim by the plaintiffs ‘does not affect any disputed legal rights of [Mr Reiffer]’. This submission must be rejected. The declaration sought by the plaintiffs seeks to bind both Miami Waterfront and Mr Reiffer. By challenging the entirety of the appointment of the Receivers, Mr Reiffer implicitly asserts that his powers and duties as a director are unaffected by the appointment. It is not to the point that there is no dispute currently raised concerning the scope of his powers as a director.
…
[45]As explained above, this conclusion is also supported by case management considerations which aim to ensure that all matters in dispute are effectually and completely determined. A small selection of matters can be referred to from the voluminous correspondence in evidence. For instance, in correspondence Mr Reiffer has said that he is not prepared to give any undertakings in relation to the property of Miami Waterfront unless and until the issues concerning the validity of the Receivers’ appointment are determined. Mr Reiffer has requested that DOS Foxtrot (the second plaintiff) circulate his director’s report to the shareholders of Miami Waterfront. And the plaintiffs say that Mr Reiffer, as sole reporting officer of Miami Waterfront, has continually refused to provide a statutory report required by the Receivers to perform their statutory functions.
In Fletcher and Anor (as liquidators of Octaviar Administration Pty Ltd) v Anderson, the New South Wales Court of Appeal held that where a liquidator sought an extension of time within which to file proceedings against the Commissioner of Taxation, which would necessarily have a flow-on effect in the nature of indemnity proceedings against the directors of a company, both the Commissioner of Taxation and the directors were directly affected and necessary parties to the application. Barrett JA said:[38]
[38][2014] NSWCA 450 [97]–[100] (Barrett JA with Beazley P and McColl JA agreeing).
[97]In the present case, for the reasons I have stated, the liquidators had, as at 19 September 2011, well developed plans to institute s 588FF proceedings against the Commissioner in respect of payments made by OA that are within s 588FGA(1) categories. The liquidators correctly acknowledged that the Commissioner was therefore a person who had a relevant right, interest, or expectation that would or might be affected by the extension order under s 588FF(3)(b) for which they moved before Ward J on that day.
[98]Given the distinct likelihood that any such s 588FF proceedings would be brought in “the Court” and the statutory liability that would accrue automatically under s 588FGA(2) if such proceedings were successful, the persons who were directors of OA when the payments in question were made (Mr Anderson and Mr White) also had a relevant right, interest, or expectation that would or might be affected by that extension order. Their identities were known to the liquidators.
[99]Failure of the liquidators to give Mr Anderson and Mr White notice of the application that came before Ward J therefore rendered the extension order, once made, liable to be set aside as it affected them. The primary judge was correct so to conclude. Furthermore, there was no scope for his Honour to exercise his discretion otherwise than by ordering that the order be set aside to the extent necessary to protect the rights of Mr Anderson and Mr White. It is relevant to quote again from the judgment of Spigelman CJ in Miltonbrook Pty Ltd v Westbury Holdings Kiama Pty Ltd (above) at [85]-[87]:
“It is axiomatic that when a statutory power like s 601AH(2) is conferred on a court, the legislature intends that procedural fairness will be accorded to all who may be affected by the order, unless there is a clear statement to the contrary. The denial of procedural fairness by a court is a fundamental irregularity which would entitle a person aggrieved to set aside an order as a matter of unconditional right. (See Cameron v Cole (at 591); Taylor v Taylor (1979) 143 CLR 1 at 16). The exercise of the discretion under r 36.15 must be similarly clear cut.
The respondents’ submission that the circumstances of this case do not constitute an irregularity or ‘sufficient cause’ within r 36.15 should be rejected.
In my opinion, the fundamental nature of the irregularity flows through to the exercise of the discretions under s 1322(4)(b) and under r 36.15. This Court must not be, nor appear to be, an instrument for procedural unfairness.”
[100]In this case too, to allow to stand an order that was made in circumstances where rights of Mr Anderson and Mr White were denied would be to cause the court to be an instrument for procedural unfairness.
In Ross v Lane Cove Council, orders for the demolition and reinstatement of residential building works were set aside because the current registered proprietor (Ms Chami) had not been joined. The parties to the litigation were the Council, the former owner and the builder. Leeming JA said:[39]
[64]Ms Chami was directly affected by the orders sought by Council. First, on its proper construction, the order requires Mr Ross to enter onto Ms Chami’s land and perform work there. He would have a defence of lawful authority to what would otherwise be a trespass to her land, even if she later applied to the Court for the order to be discharged. “Acts done according to the exigency of a judicial order, afterwards reversed, are protected: they are ‘acts done in the execution of justice, which are compulsive’”: Commissioner for Railways (NSW) v Cavanough (1935) 53 CLR 220 at 225, citing Dr Drury’s Case (1610) 8 Co Rep 141b at 143a; 77 ER 688 at 691; MacIntosh v Lobel (1993) 30 NSWLR 441 at 459.
[65]What the orders involve is no small trespass. As will be seen from its terms, what is required includes (a) refilling an underground double garage, (b) removing concrete slabs under the eastern end of the house and along the entire width of the building's rear wall, (c) removing the concrete poured over most of the backyard, (d) removing a 2.5m high block wall at the rear of the site, (e) removing an external concrete stair and a concrete block lift core shaft, and (f) removing some windows and reinstating others.
[39][2014] NSWCA 50 [64]–[65] (Leeming JA with Meagher JA and Tobias AJA agreeing).
Earlier in the decision, his Honour noted that in modern times, proceedings would not be dismissed for want of parties (a point reiterated in Boyd v Thorn), and then said:[40]
[61]All of that said, because the underlying concern is (as McHugh J said in Victoria v Sutton) natural justice, joinder is not always necessary. That reflects a very old approach. Although the common law knew nothing of the joinder of a party merely for the purpose of having that party bound by the judgment, equity was not so strict. Where no prejudice would be suffered by a party not being joined, his or her presence could be dispensed with: see for example Smith v Brooksbank (1834) 7 Sim 18; 58 ER 743, where the non-joinder of the executors who were alleged to have assented to the bequest was held not to be fatal. The direct ancestor of the rules in the UCPR governing joinder of parties is the rule of procedure contained in O XVI r 13 in the First Schedule to the Supreme Court of Judicature Act 1875 (UK). That in turn reflected chancery practice. In particular, and relevantly for present purposes, UCPR r 6.23 “Proceedings are not defeated merely because of the misjoinder or non-joinder of any person as a party to the proceedings” is merely a modern formulation of the chancery practice.
[62]The positive assent to an order by the executors who were not joined in Smith v Brooksbank has its modern counterpart in the course adopted by Preston CJ in Woollahra Municipal Council v Sahade. His Honour, recognising that the owners corporation was directly affected by the proposed demolition of a staircase which extended onto the common property, proceeded on the basis that the practical impact was low and its attitude to the orders was abundantly clear (the owners corporation was notified of the proposed order, and informed the Court through the applicant local council that it wished neither to be joined nor heard, but had passed a resolution supporting the orders proposed).
[40]Ibid [61]-[62].
In Seller v Jones, McColl JA (with whom Ward JA agreed) said:[41]
[49]A person or entity should be joined as a party to litigation where orders might be made directly affecting that person or entity's rights and liabilities: State of Victoria v Sutton [1998] HCA 56; (1998) 195 CLR 291 (at [76] - [81]) per McHugh J; John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1 (at [131]); Australian Securities and Investments Commission (ASIC) v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) [2011] HCA 18; (2011) 244 CLR 1 (at [49]).
[50]The threshold as to whether orders may have the effect referred to in [49] is not high. In State of Victoria v Sutton (at [77]) McHugh J said it was “the invariable practice of the courts to require a person [whose rights or interests may be affected by an order a court was asked to make] to be joined as a party if there is an arguable possibility that he or she may be affected”. The reason for that "practice" is, at minimum, observance of the rules of natural justice and the desirability of avoiding a multiplicity of suits (cf s 63 Supreme Court Act 1970 (NSW), s 56 Civil Procedure Act) and inconsistent decisions: State of Victoria v Sutton (at [77]); Associated Grocers Co-operative Ltd v Hubbard Properties Pty Ltd (1986) 42 SASR 321 (at 341).
[51]In News Ltd v Australian Rugby Football League Ltd [1996] FCA 870; (1996) 64 FCR 410 (“News Ltd”) (at [525]) the court said that where the question whether a necessary party has been joined arose after final orders had been made in the proceedings, the inquiry as to whether a necessary party has been joined must be directed to the orders actually made. The court referred for that proposition to Associated Grocers Co-operative Ltd v Hubbard Properties Pty Ltd (at 341). In that case GJ Coles and Coy Ltd (“Coles”) had been joined as a defendant following a trial, and pending appeal, where a notice of cross appeal directly challenged a purported agreement for lease between Hubbards and Coles. This was because, while the plaintiff did not seek relief against Coles, the “relief it sought against Hubbards in the action and in the cross-appeal would, if granted, quite plainly affect Coles to the detriment of Coles”: Associated Grocers Co-operative Ltd v Hubbard Properties Pty Ltd (at 341).
[41][2014] NSWCA 19 [49]-[51] (McColl JA with Ward JA agreeing).
In Parker v BHP Billiton Ore Pty Ltd (Parker), Edelman J (as his Honour then was), gave two examples of cases where a consequential or “knock on” effect was a direct effect, for the purposes of the principle: [42]
[42][2015] WASC 95 [66]-[71] (Edelman J).
[66]Two examples can be given in which the direct interest test was applied to find that third parties to a contractual dispute had a direct interest and were appropriately joined.
[67]The first case is Pegang Mining Co Ltd itself. That case concerned a tripartite agreement between a lessee of a mining lease, a sublessee, and a subsublessee. Each of the three parties was a party to the litigation. However, one person, described as the Contractor, was not party to the litigation or the tripartite agreement.
[68]The Contractor had entered into a separate agreement with the subsublessee by which the sub-sublessee promised the Contractor that she would grant the Contractor liberty to enter on the lands, and to win and work the materials.
[69]The question for the Privy Council was whether the Contractor should have been joined to the appeal. The Privy Council held that the Contractor was directly affected by an order made in the action. Although the Contractor was not a party to the tripartite agreement, the Contractor’s interest was sufficiently direct because the success or failure of the appeal would affect whether the Contractor could exercise separate rights under his licence from the subsublessee to enter the land and to win the minerals for the sub-sublessee in exchange for a share of the proceeds of sale.
[70]The second case is News Ltd v Australian Rugby Football League Ltd. That case involved proceedings to set aside Commitment Agreements and Loyalty Deeds between the Australian and NSW Rugby Leagues and associated clubs. A cross-claim brought by Australian and NSW Rugby Leagues and loyal clubs alleged breach of contractual and fiduciary duties by rebel clubs who had joined the Super League.
[71]The Full Federal Court held that players and coaches allied with the Super League should have been joined. Although the players and coaches were not parties to the contracts, the orders sought would directly affect their rights to choose the employer for whom they would work.
In China First Pty Ltd v Mount Isa Mines Limited (China First), Gotterson JA (with whom McMurdo and Fraser JJA agreed) expanded on the ‘direct effect’ test:[43]
[43][2018] QCA 350 [60] (Gotterson JA).
[60]These cases reveal a systematic approach taken by courts to the determination of whether orders made or sought have had, or if made, will have, a direct effect on a legal right or liability. That approach has involved an identification of the specific legal right or liability said to have been affected or liable to be affected, and an assessment of its legal characteristics. Next, the court has inquired into whether the right or liability itself has been affected, or is liable to be affected. Typically, the inquiry has sought to establish whether there is an effect on the existence of the right or liability or on its legal characteristics; or whether there is an effect on the legal environment in which the right might be exercised or the liability discharged, such as would impact upon its exercise or discharge from a legal perspective. An effect of either kind has been regarded by courts as a direct effect on the right or liability for the purposes of the test.
…
[63]None of these provisions expressly confers a right on the Chargee, as each appellant is. They impose obligations on the Chargor. The orders made on 20 November 2017 do not impact upon the existence of those obligations or their legal characteristics. From a legal perspective, their nature and content are unaffected by the orders.
[64] As well, the orders do not affect the legal environment in a way which impacts upon the enforcement of such obligations by the Chargee against the Chargor. If, with the benefit of Orders 1 and 3, MIM causes the Equipment to be dismantled, removed and delivered to QNS, then such conduct will be that of MIM. The orders do not have the effect of attributing MIM’s conduct to the Chargor. For example, the Chargor would not thereby dispose of, part with possession of, or otherwise deal with the Equipment in contravention of clause 2.4.
…
[68]Such effects are not effects upon the legal characteristics of the Chargee’s rights or upon the legal environment in a way which affects the exercise of such rights from a legal perspective. They are not direct effects for the purpose of the test. They are appropriately characterised as consequential effects, which are financial, rather than legal, in nature. As Lord Diplock observed in Pegang Mining, such effects have consistently been recognised by courts as an insufficient basis for joinder.
[69] Similarly, any effect that the orders might have on the viability of the refinery business as a security are both indirect and consequential. Her Honour was correct in finding that the effects on the Equipment and on the refinery business relied on by the appellants are not direct effects within the current context.
In Lowe v Kladis,[44] orders had been made at first instance requiring certain neighbours to consent to the construction by the respondent of an elevated driveway over several adjacent parallel strips of land, one of which the respondent owned and two others over which he had rights of carriageway. Other neighbours, the owners of No 24, Musgrave Street, had a right of way over the respondent’s strip of land. They had not been joined as parties. On appeal, the orders made at first instance were set aside. The court concluded that the owners of No 24 should have been joined. Sackville JA (with whom Meagher and White JJA agreed) explained the reasons for that conclusion as follows:
[76] In my view, the owners of No 24 should have been joined as parties to the Equity Division proceedings. It was not simply a matter for the appellants to decide whether or not they wished to advance arguments based on the adverse impact of the proposed development application on No 24. It was the responsibility of Mr Kladis as the party seeking relief from the Court to join those whose rights were directly affected.
[77] The orders sought by Mr Kladis would not of themselves result in works that would impair the rights of carriageway appurtenant to No 24. The lodgement of a development application would only result in work being carried out if the Council, as the consent authority, granted development consent. Even so, the orders made by the primary Judge required the owners of the properties on which the proposed development was to take place to give their consent to the development application. The owners of No 24 could still lodge an objection with the Council to the development application. But the objection would be limited to planning matters that a consent authority can take into account under the Environmental Planning and Assessment Act 1979 (NSW). The owners of No 24 could not successfully object to the development application simply on the ground that the proposed works would interfere with their rights of way.
[44][2018] NSWCA 130 [76]-[77] (Sackville JA with Meagher and White JJA agreeing).
In Hampshire Automotive, a tenant commenced proceedings against his neighbour for trespass, after having used the tenant’s property for access and ingress from its own property and for storing motor vehicles used in its business. The tenant counterclaimed, seeking the declaration of an easement over the subject property. VicTrack was the registered proprietor of the land. One issue was whether VicTrack ought to have been joined as a proper party to the proceeding. The Court of Appeal said:[45]
[128]In our view, at least where the easement has not been recognised by the owner of the dominant tenement and the tenant seeks a declaration as to the existence of the easement, the owner should be joined as a party to the proceeding. The orders sought by the applicant are plainly apt to affect the legal interests of VicTrack. VicTrack should be bound by the judgment.
[129]Further, where, as here, it is to be contended that the easement does not exist or has been abandoned it is important that the party with the legal interest in the fee simple be a party to the proceeding. The applicant submitted that it was not necessary to join VicTrack and that, as a party in possession, the applicant was the only necessary party in relation to the dominant tenement. We do not agree.
[130]In John Alexander v White City the High Court held that where a court is invited to make, or proposes to make, orders directly affecting the rights or liabilities of a non-party, the non-party is a necessary party and ought to be joined. The declaration sought was as to a proprietary interest in the land owned by VicTrack; it was thus not simply a suit that affected the applicant and the respondents. Further, as we have discussed above and do so further below, an issue remains as to whether, on the assumption an easement was created and has not been abandoned (both of which directly affect VicTrack) the easement was included in the lease to the applicant. A suit that determines the terms of a lease is plainly apt to affect the legal interests of the parties to the lease.
[45][2019] VSCA 77 [128]-[130] (Tate, Niall and Emerton JJA).
In Re GRP, after referring to the relevant authorities, the court held that executors were proper and necessary parties to the motion to discharge an adoption order. Hallen J said:[46]
[78]There are a “great variety” of circumstances where persons may be necessary parties and a “flexibility of approach” is required to determine whether they are necessary parties: Pegang Mining Co Ltd v Choong Sam [1969] 2 MLJ 52, at 56.
[79]I have little doubt that the executors are both proper, and necessary, parties to the discharge motion.
[80]A discharge order will have a direct effect on the administration of the deceased’s estate. As executors, the applicants for joinder have a substantial interest in the efficient administration of the deceased’s estate. The order that will be made on the discharge notice of motion will be very relevant to them in a legal sense.
[81]Considering the practical realities of the discharge motion, this is not a case in which the effect of an order discharging the adoption, on the executors, can be characterised as only indirect or consequential. One has to consider the orders sought in the Queensland proceedings. If the order sought by GRP in the discharge notice of motion is made, he will be a person eligible to continue with the Queensland proceedings, and if those proceedings are successful, any order for additional provision will have a direct, and material, effect, on the value of the deceased’s estate.
[46][2019] NSWSC 710 [78]–[81].
Boyd v Thorn
The parties placed much emphasis on this case. Although helpful, in the final analysis the court did not decide the critical issues engaged by the application before me.
In Boyd v Thorn, Mrs Thorn, as executor of the estate of Mrs McAuley (the Estate), commenced proceedings against Mr Boyd. She alleged that he improperly obtained $260,000 from Mrs McAuley.[47] Mrs Boyd, then a joint tenant of the subject property, was not a party to the proceeding when it was heard by Robb J in 2014 and 2015.
[47]Boyd v Thorn (2017) 96 NSWLR 390, 393 [4] (Macfarlan JA). Mr Boyd was Mrs McAuley’s tutor, and she was his elderly aunt and used it to repay a mortgage on his property.
The proceeding was heard in two stages. At first instance, and by a Judgment delivered on 25 August 2014, Robb J found that Mr Boyd had procured the sum from Mrs McAuley by undue influence and unconscionable conduct (Robb J 2014 Judgment).
On 6 November 2014, Robb J made declarations that Mr Boyd acted unconscionably and in breach of fiduciary duty, and the Estate was entitled to trace the sum into any property to which it had been applied (Robb J 2014 Orders).
On 13 March 2015, by a further Judgment, Robb J declared that Mr Boyd held his interest in the subject property on a constructive trust for the Estate of Mrs McAuley to the value of $200,000 and that the Estate’s judgment debt constituted an equitable charge on Mr Boyd’s interest in the property (Robb J 2015 Orders).
On 24 March 2016, Mrs Boyd filed a summons in a fresh proceeding, seeking orders setting aside the Robb J 2015 Orders. She did not seek to set aside the Robb J 2014 Orders. She claimed that ‘as a registered owner and occupant of the property’, she was a ‘necessary (indispensable) party to the proceeding who ought to have been joined.[48]
[48]Ibid 394 [7].
On 11 May 2016, White J set aside the relevant declarations and orders, finding that Mrs Boyd had been a necessary party to the proceedings before Robb J, at least from the time that the Estate pursued its claim for the declarations and orders made on 13 March 2015. His Honour considered that the declarations and orders ‘directly affected Mrs Boyd as they expose[d] her to the prospect of the property of which she in a co‑owner being sold upon the appointment of trustees for sale’. Further, she ‘had an interest in denying that the breaches of duty that Mr Boyd was found to have committed should result in the grant of a proprietary remedy.’[49] Orders were also made joining her to the principal proceeding.
[49]Ibid [8].
The proceeding came before Sackar J on 19 and 20 September 2016. Mr and Mrs Boyd were unrepresented and filed no evidence. On 22 September 2016, Sackar J made orders which in effect reconstituted the orders which had been set aside by White J on 11 May 2016. This included a declaration that Mr Boyd held his interest in the property on a constructive trust to the Estate to the value of $200,000, and an order under s 66G of the Conveyancing Act 1919 (NSW) (Conveyancing Act) appointing trustees for sale of the property.
Mr and Mrs Boyd appealed the decision of Sackar J on three grounds, the first of which is relevant to the Summonses before me. The Boyds submitted that, Sackar J erred in granting declarations that were founded upon the factual findings of breach of fiduciary duty made by Robb J, in circumstances when Mrs Boyd was not, at that point in time, a party to the proceeding.[50]
[50]Ibid 396 [15].
Macfarlan and Leeming JJA and Emmett AJA each delivered separate Judgments, and it is necessary to refer to each in turn. The Court unanimously found that Mrs Boyd was not a necessary party to the proceeding before Robb J in 2014, and also was not entitled to set aside the findings of breach of Mr Boyd’s fiduciary duty. However, their reasoning, and the consequences of that finding, differs in critical respects. That is, in terms of whether Mrs Boyd was bound by the findings of breach of fiduciary duty, and the extent to which she was able to challenge those findings.
The Reasons of Macfarlan JA
Macfarlan JA did not consider that the declaration of a charge affected Mrs Boyd’s interest – it related only to Mr Boyd’s. However, the orders under s 66G of the Conveyancing Act prejudicially affected her interest in the property as they ‘required the sale of a property of which she was a part owner.’[51] She had a right to object to the making of those orders.[52] As part of her entitlement to object to those orders, Mrs Boyd ‘was entitled to contend that the Estate did not have any standing to seek the orders’, by submitting that there was no evidence before Sackar J that Mr Boyd had procured money from his late aunt by undue influence or unconscionable conduct.’[53]
[51]Ibid [17].
[52]Ibid [18].
[53]Ibid 397 [21].
His Honour considered that unless Mrs Boyd was effectively represented by Mr Boyd as her privy at the hearing leading to the Robb J 2014 Orders, the findings would not be binding on her.[54] The Estate argued there was such a privity of interest as between Mr and Mrs Boyd.[55] McFarlan JA rejected this – Mrs Boyd did not have a legal interest in the outcome of the proceeding. Those proceedings were concerned solely with Mr Boyd’s personal liability, and the Estate’s entitlement to trace the money Mr Boyd was found to have wrongfully procured.[56]
[54]Ibid [22].
[55]Ibid [24].
[56]Ibid 398 [28]-[31].
McFarlan JA disagreed with Leeming JA on the question of whether Sackar J erred in precluding Mrs Boyd from contending that she was not bound by the findings made in Robb J’s Judgment of 25 August 2014, reflected in the Robb J 2014 Orders. Macfarlan JA remained ‘of the view that at the hearing before Sackar J Mrs Boyd was entitled to assert that the 2014 findings and orders of Robb J were not binding on her.’ As she was not a party, and was not privy, those findings and orders were not binding on her.[57]
[57]Ibid 399 [35].
Macfarlan JA then discussed the point in time at which Mrs Boyd became a ‘proper and necessary party’:[58]
[36]In 2014 the Estate did not need to join Mrs Boyd as a party. This obligation only arose in 2015 when the Estate commenced to pursue claims for relief in relation to the property of which Mrs Boyd was a co-owner. At that stage her interests became directly affected and she was entitled, and required, to be joined as a party.
[125](2017) 350 ALR 582, 588 [21] (Keane, Nettle and Edelman JJ).
The Added Defendants submit that I am precluded from considering that the Stead principle, or its application, disentitles them to a new trial. First, because their right to a hearing is an inalienable and secondly, because they received ‘no’ hearing. I do not accept this submission. First, the High Court was not considering the relationship between JACS (and the other authorities referred to) and Stead. Secondly, Leeming JA considered such matters in Boyd v Thorn, where Mrs Boyd received ‘no hearing’ at which she was able to contest the findings of fiduciary duty made by Robb J in 2014, and where his Honour opined that the right to a new trial was not a ‘universal principle’ and might well be limited in particular circumstances, and specifically by the rules of court and considerations of civil procedure. Likewise, Macfarlan JA expressly referred to Stead in Boyd v Thorn, although his Honour found that he could not be satisfied that there would not have been a different outcome. Thirdly, DWN042 concerned the Supreme Court of Nauru’s complete failure to hear the applicant’s notice of motion prior to delivering final Judgment. In the case before me there has, to the knowledge of Mrs Graco (and the other Added Defendants), been a substantial hearing.[126] Finally, this application provided them with the opportunity to make submissions and adduce evidence on substantive matters that they would or could have raised in the Principal Proceeding. They have done so, and that material does not assist them.
[126]A hearing which Mrs Graco’s counsel and solicitors (acting for the Graco Defendants) participated fully, particularly in relation to the very matters that it is suggested she was directly affected by. Had they acted for her, it is inconceivable that they would have done anything differently.
The futility of a new trial - the outcome would be the same
I am entirely satisfied, for the reasons that follow, that on an application of the Stead principle, the outcome of any new trial would be the same. Mrs Graco and FBR Funds and indeed all of the Added Defendants cannot establish that they had been deprived of the possibility of a successful outcome. Therefore, they have suffered no substantive unfairness or injustice.
The crucial and critical point which leads me to conclude as I have is that the Reasons involve no facts which could, on any relevant view, be considered contentious or disputed. The facts were incontrovertible. Mr Graco’s own evidence was that:[127]
[127]Plaintiffs’ Submissions at [7] and transcript and court book references therein.
(a) Becoming a director or client-related entities was part of the service he regularly offered clients in his capacity as principal of the Partnership;
(b) He had no prior connection with Swisse or its officers before he commenced his work for them as a principal of the Partnership and its predecessor firms;
(c) He was not engaged or remunerated by Swisse otherwise than in his capacity as a principal of the Partnership;
(d) He (and the other Principals) offered client-related investment opportunities to the other principals of the Partnership and took up such opportunities;
(e) He had a relationship of trust and confidence with his fellow Principals;
(f) The terms on which the Partnership was engaged by Swisse encompassed a wide range of professional services relating to the board and corporate governance;
(g) His work as a director of Swisse and other companies was invoiced by the Partnership to the relevant client;
(h) His work that was invoiced by the Partnership to Swisse occurred within and outside business hours;
(i) There was a direct practical conflict between his interests as a shareholder in Swisse and his duty as a principal of the Partnership so far as the invoicing of professional services to Swisse was concerned;
(j) He actively turned his mind to the question of whether he was obliged by the Partnership Deed to disclose the opportunity to invest in Swisse to the Partnership, and deliberately decided not to;
(k) It would ordinarily have been proper to disclose the Opportunity to invest in Swisse to the Partnership;
(l) The Partnership found out about the payment (the Additional Payment) from Fiske by accident.[128] Mr Graco agreed that he had no intention to ever to disclose the payment to the Partnership.
[128]Fiske is an entity formerly associated with Swisse.
The Reply Submissions of the Seventh Defendant referred to a number of matters which it sought to characterise as disputed ‘matters of fact’. I refer to each and comment accordingly:
(a) That each of the Principals of the Partnership, including Graco, were Partners of the Partnership pursuant to the Partnership Deed. This was, purely, a question of contractual interpretation.[129] The Partnership Deed spoke for itself.
[129]Reasons [83]-[121].
(b) That each of the Principals, including Graco, were parties to the Partnership Deed. This was a mixed question of fact and law, answered with reference to the objective intentions of the parties, drawn exclusively from the terms of the Partnership Deed.[130]
[130]Reasons [102]-[110].
(c) That it followed from a breach of cl 11.4 of the Partnership Deed that the Investment and the Additional Payment represent an unauthorised benefit or profit received by Mr Graco (and at his direction GFBR and Glenaldon) to the detriment and against the interests of the Partnership and in breach of fiduciary duty. This was a question of law, which flowed as a matter of common sense from the breach, and required no further evidence other than that of Graco.[131]
[131]Reasons [122], and in particular ‘it must follow that the Investment and the Additional Payment represent an unauthorised benefit or profit’.
(d) That the Opportunity and its implementation or exploitation placed Graco in a position of actual or potential conflict. This was a question of fact and law, and was established by Graco’s own evidence that he took up the Opportunity, in breach of cl 11.4, without disclosing it to the Partnership.[132]
[132]Reasons [122].
(e) That Graco was or accepted that he was in a position of conflict when considering this write-off, because of his position as a shareholder, and that he had acted improperly by not disclosing his shareholding to the Partnership. He also accepted that he was in a similar position of conflict when considering subsequent write-offs or the fees that would be payable by Swisse to the Partnership. This was a question of fact, established by Graco’s own evidence.[133]
[133]See Reasons, fn 73: ‘During his cross-examination, he accepted that he was in a position of conflict when considering this write-off, because of his position as shareholder, and that he had acted improperly by not disclosing his shareholding to the Partnership. He also accepted that he was in a similar position of conflict when considering subsequent write-offs or the fees that would be payable by Swisse to the Partnership.’ See also fn 74.
(f) The following may be dealt with together, on the basis that they were questions of fact and law, each having been established by Graco’s own evidence:
(iii) That there was any real or sensible conflict of interest or potential conflict of interest.
(iv)That Graco, ignoring his duty of loyalty, fidelity and trust and in breach of his fiduciary duty, acted entirely in his own interests.
(v) That by taking up the offer of shares, in his nominated entity, Graco used the Partnership’s business connection to Swisse.
(vi)That Graco received a ‘benefit’ within the meaning of s 33(1) of the Partnership Act, being the Investment (and proceeds of sale in the amount of $11,593,544.71 that resulted therefrom) and the Additional Payment in the amount of approximately $4,861,000.
(vii) Graco entered into the confidentiality undertaking for his own befit and in his interest, and that the undertaking was for his own benefit and in his own interests.
(viii) That GFBR and Glenaldon were knowing recipients of the Investment and the Additional Payment.
(ix) That GFBR and Glenaldon caused, procured or induced Graco to breach his duties to the Partnership.
(g) The Swisse investment was within the business of the Partnership. This was largely irrelevant to the Judgment.[134] In any event it was answered by reference to cl 11.4 of the Partnership.
[134]Reasons [136].
The eighth to twelfth defendants similarly pointed to the following finding of ‘fact’:
(a) The finding,[135] that had Graco asked the directors of Swisse whether the Opportunity could be extended to the Partnership, the directors would likely have said ‘yes’, and Graco would have been permitted to put the Opportunity to the Partnership. This was not a fact critical to determining whether Graco was in breach.[136]
[135]Reasons [22] and [29].
[136]Reasons [126] and [66]: ‘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.’
(b) The finding,[137] that 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. That conclusion arose from the terms of the Partnership Deed.[138]
(c) The finding,[139] that the fiduciary duties owed by Graco specifically included the obligations referred to in cl 11.4 of the Partnership Deed. That conclusion, too, arose from the terms of the Partnership Deed.
(d) The finding, that the Opportunity was a part of the Partnership business endeavour. That arose directly from cl 11.4.[140]
[137]Reasons [40(c)].
[138]Reasons [78] and [81].
[139]Reasons [82] and [122].
[140]Reasons [125].
The plaintiffs submitted, both at the trial of the Principal Proceeding and on this application, that it was not necessary for me to resolve any disputed facts. I accepted that submission then, and I am again satisfied of it on review of the Reasons and the evidence.[141] The Reasons involved no contentious findings of fact on the critical questions of liability. Any matters that were denied by the pleadings, apparently contentious (or contended now to be so) were established by Graco’s evidence, and in this sense, they cannot be deemed ‘contentious issues of fact’.
[141]Reasons [23].
To put this into context, the following critical facts were not disputed or were admitted by Mr or Mrs Graco or by other evidence:
(a) The Partnership, as a part of its business, often had Partners or Principals sit on the board of directors of its clients.
(b) Prior to his appointment, Graco had no relationship with Swisse.
(c) Graco was not remunerated by Swisse other than in his capacity as a Principal or Partner of the Partnership.
(d) A relationship of trust and confidence existed between the Partners and Principals of the Partnership.
(e) Graco received (through GFBR and Glenaldon) the Investment and Additional Payment from Swisse or related entities.
(f) Graco did not disclose, and had no intention of disclosing, to the Partnership, the shareholding in Swisse, the proceeds of that Investment, or his receipt of the Additional Payment.
(g) Graco accepted that his shareholding in, and his entry into the confidentiality undertaking in favour of Swisse put him in a position of conflict with the obligations he owed to the Partnership, first with respect to Cl 11.4 of the Partnership, and then in relation to when he was considering write-offs to the Partnership’s Swisse account.
(h) Graco ran the affairs of Zphere, GFBR and Glenaldon.
(i) Mrs Graco and Baden’s role, as directors of GFBR, was limited to the extent that they would sign documents when that was required of them.
It was made plain, not by reference to evidence, but only by reference to the construction of the Partnership Deed that Graco was a party to the Deed and a Partner of the Partnership in his own right, in addition to Zphere. Further, Cl 11.4 made it plain that the investment in Swisse was a concern and part of the Partnership business. By the express words of Cl 11.4, Graco was required to present that opportunity to the Partnership. He did not. That was precisely what made the profit unauthorised. Evidence was unnecessary to establish that fact or the scope of the Partnership endeavour. The Partnership Deed, which no party sought to qualify through evidence, spoke for itself. In this regard, I adopt the observations of Leeming JA (with McFarlan JA and Sackville AJA agreeing) in Zhang v ROC Services (NSW) Pty Ltd:[142]
[217] … A denial of procedural fairness on the question of the construction and application of an exclusion clause cannot be an independent ground of appeal. It was not suggested that the evidence would have been different. If the construction is right, any denial is immaterial. If the construction is wrong, then it will be corrected on appeal. Either way, nothing turns on the complaint that the determination of a question of law is not procedurally fair. This is the point made in Stead v State Government Insurance Commission (1986) 161 CLR 141 at 145. It has been repeatedly applied: see for example CSR Ltd v Eddy (2008) 70 NSWLR 725; [2008] NSWCA 83 at [42] and Peregrine Mineral Sands Pty Ltd v Wentworth Shire Council [2014] NSWCA 429 at [194]–[195].
[142][2016] NSWCA 370 [217] (Leeming JA).
These were the critical facts necessary for the plaintiffs to succeed. They were made out on the defendants’ (principally, Graco’s) own evidence. I must assume that the evidence adduced by the defendants would be the same as it was adduced in the original trial. The Graco Defendants could not use the first trial as a practice run for a further trial in terms of how they should or could run their case or what evidence they would adduce. The Graco Defendants have not appealed those findings. That is the avenue by which the Reasons, and in particular the findings on questions of law and the construction of the Partnership Deed, may be tested or challenged. No further cross-examination would qualify the answers given by Graco. No further submissions would colour the evidence in another light. It is what it is. That evidence irrefutably made out the plaintiffs’ claim.
As such, no disputed factual questions were determined by the Judgment, let alone disputed facts on which the interests of Mrs Graco or the other Added Defendants diverged from those of the Graco Defendants.
Mrs Graco submitted that the question of whether she would call further evidence, or whether the evidence previously admitted would be admitted is not to the point of this application – it is entirely irrelevant. I cannot accept that submission. The Added Defendants do not articulate any basis on which the evidence of Graco is now said to be inaccurate or otherwise capable of controversion.[143] On this basis, I must accept that the evidence of Graco stands now as it would in a subsequent retrial. That is to say, on Graco’s evidence alone the findings of fact necessary to establish both the existence and breach of his (and by extension, Zphere’s) fiduciary duties are there (as are the facts necessary for the accessorial liability claims). The evidence necessary to make those findings was there then, and those findings would be made again if that evidence were unnecessarily elicited again. In this sense, how could it be suggested that there could even be the possibility of a different or successful outcome.
[143]In this regard, the Added Defendants assert that they may or may not adduce evidence, and would make different submissions but do not articulate the ambit or content of either. They submit that they are entitled to consider that matter and are not required to either put anything before the Court at present, or indeed at all. See Reply Submissions of the Seventh Defendant at [28], [30], [51] and [53]; Reply Submissions of the Eighth to Twelfth Defendants at [49].
I do not accept that the Added Defendants would be or are privy to any factual information about the conduct of the Graco Defendants or Partnership that was not known to, and deployed by, the Graco Defendants in their defence at trial.
It is entirely clear that the Added Defendants could provide no evidence in chief that would be of any relevance to the questions of the operation of the Partnership, the dealings of Graco or Zphere vis-à-vis the Partnership or Swisse, or the knowledge or actions of GFBR or Glenaldon. Of these, Mrs Graco is the closest associated, and the children are one step removed.[144]
[144]While Baden is a director of GFBR, it is unlikely that he could say anything of value in relation to that company. See Witness Statement of Frana Maude Graco dated 1 November 2018 at [3] where she said: ‘Gary [Graco] generally runs the affairs of GFBR. My involvement mainly consists of signing documents as required….Our son Baden is in a similar position to me.’
Mrs Graco gave evidence at the trial of the Principal Proceeding. That evidence was vague, hearsay in nature, and went to an irrelevant point, to the effect that the Investment was not an ‘investment’ in the traditional sense, but a much needed capital injection to Swisse. Mrs Graco offered various opinions to the effect that there was ‘nothing wrong’ with receiving the Investment or Additional Payment by GFBR or Glenaldon. The plaintiffs objected to 8 paragraphs of her evidence (which ran to 13 paragraphs) on the basis that it was ‘pretty egregious inadmissible material’ on the grounds of irrelevance and hearsay.[145]
[145]T358.
I acceded to that objection, giving due leeway to the Graco Defendants and the weight I would place on that evidence, by way of a ruling during the trial:[146]
I have initially thought that I should strike out the whole statement and not accept any evidence as being irrelevant. On consideration, I propose to allow the objection in relation to paragraphs 5, 6, 8 and 11 and 12. Five, six, eight, 11 and 12 should come out. The reasons will appear as part of the judgment. Paragraph 9, I will receive that evidenced directed to state of mind not proof of the truth of the contents of the particular statement.
And I should also add that I have some doubts about the weight to be attached to any of the evidence but if Mr[s] Graco desires to give evidence, I will permit the evidence to be given as set out in one, two, three, four, seven, nine, 10 and 13, and there can be cross-examination.
[146]T361.
That evidence was referred to once in the Reasons, and rather than going to any matter of any substance or contention, it merely confirmed the already established fact that Graco was the directing mind and will of GFBR.[147] That is to say, it was on her own evidence that Graco ‘generally runs the affairs of GFBR.’[148]
[147]Reasons [198].
[148]Witness Statement of Frana Maude Graco dated 1 November 2018.
In relation to the position of the Added Defendants, other than Mrs Graco, I am of the same view as Leeming JA, in respect of Mrs Boyd:[149]
[178] … Although the parties’ written submissions did not address the possibility of a rehearing or the matters summarised above telling against it, the difficulties faced by Mrs Boyd by reason of the failure to supply a defence or draft defence, or the evidence she would seek to adduce at any such hearing, were exposed during the argument on the appeal.
[149]Boyd v Thorn (2017) 96NSWLR 390, 427 [178] (Leeming JA).
The eighth to twelfth defendants pointed to two matters which they would have, at the Principal Proceeding, or at a retrial, cross examined the plaintiffs’ witnesses on:
(a) The character of the venture, undertaking, or business for which the Partnership exists, and whether the Opportunity was a part of that business or endeavour;
(b) Whether any fiduciary relationship which existed (or which might otherwise have existed) between Graco/Zphere and the other partners of the Partnership was modified or excluded by agreement of the other partners, so as to take the impugned conduct of Graco and Zphere outside the scope of any fiduciary duties owed by them to the other Partners.
The first matter fails to grapple with the fact that such matters were absolutely established by the Partnership Deed which spoke for itself and did not require explanation by evidence. It also was not a point critical to the issues.[150] Further, and in any event, these were matters which Queen’s Counsel for the Graco Defendants cross-examined on.[151] It is difficult to accept that had the Added Defendants been present or later afforded the opportunity, and these precise topics had been cross-examined on, that their counsel would have then proceeded to cover the same topics, but somehow bring to light a point that was crucially relevant to the conclusion but woefully missed by the Graco Defendants or myself.
[150]See for instance, Reasons fn 4, and paragraphs [156] and critically, [125].
[151]See cross-examination of Sakkas at T130:17-T131:25, T132:1-4; T136:11-14; T142:4-14; T144:5-12: T148:13-T149:8; T150:16-21: T156:8-13; T161:2-11; T162:12-T163:8. Cross-examination of Mullen at T189:20-192:12. Cross-examination covered, inter alia, directorships on the board of clients, investments with clients and other matters relevant to the business of the Partnership.
The same point can be made about the second matter. The question of the nature, extent and scope of the fiduciary obligations of the parties was the subject of cross-examination.[152] Further, no question of modification or exclusion of fiduciary duty by the Partnership Deed, nor of variation to the Deed, arose in the case.[153] As discussed above, the nature, extent and scope of the fiduciary obligations was a question of mixed fact and law, answered by reference to the Partnership Deed and in particular Cl 11.4,[154] which no party attempted or succeeded in qualifying through evidence.[155]
[152]See cross-examination of Sakkas, where Queen’s Counsel for the Graco Defendants challenged the witness on their belief as to whether they believed that they, and the remaining Principals, were Partners (in their own right) of the Partnership: T152:18-153:25. In any event, a Partners’ subjective belief as to whether they are a Partner is irrelevant in circumstances where the Partnership Deed defined the term ‘Partner’. Whether the Principals were Partners was primarily a question of construction. See Reasons at [83]-[121]. As is evident, there is no reference to the evidence of any witness in that section.
[153]Reasons [81(a)].
[154]Reasons [73], [78], [81] and [164].
[155]See footnote 152. In fact, the opposite is true. In the transcript reference referred to above, it is clear that Sakkas believed and continually advised Graco, that Graco was bound by the Partnership Deed, and obliged by Cl 11.4 to make disclosure, which he did not. This was cross-examined on. Any further cross-examination on the matter would attempt to go behind the incontrovertible evidence given by the witness.
There is one further point, of a more general nature, that fortifies my view. Where new parties are joined, the Court must afford justice to all parties, and must facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute. That is made plain by ss 7 and 8(a) of the Civil Procedure Act. Like Leeming JA, I do not think that there is anything unjust in refusing a new trial, my offer to re-open the case having been rejected. Substantive injustice has not been suffered. I am entirely satisfied, that had the Added Parties been present, or if they were given a chance to be heard, it is inevitable that the findings would be precisely the same as they were made in the Reasons. It would be futile. A re-trial would cause the costs to blow out astronomically and unnecessarily. A second, ten-day trial (or perhaps longer given the additional parties) would not serve the litigants, or the Court well in resolving the real issues remaining in the case. Those issues are not the liabilities of the various Graco Defendants, on which the Added Defendants can say nothing of relevance or value; but relief as against the Graco Defendants, including relief and any allowances, the whereabouts and nature of the proceeds, and the defences and liability in respect of those proceeds as far as it concerns the Added Defendants.
It would be absurd if, every time a fiduciary is found to have committed a wrong and an order is made for an accounting, which reveals a gift thereof to a third party, no matter how far detached from the wrongdoing, that the third party is entitled to say that the court’s original decision against the fiduciary must be set aside, either for want of parties, or because the third party wanted to be heard on whether the fiduciary actually was a fiduciary or whether they had done anything wrong. It follows, that there would have to be a fresh trial, on all issues, against all parties, and before a different judge if it later transpired that the third party gifted part of the proceeds to a fourth party, and then the fourth party gifted part of the proceeds again to a fifth, and so on. If it were a ‘universal principle’ that would be the outcome, no matter how detached the recipient was to the wrongdoing.
This may be tested another way. Suppose we have a similar situation, involving a defaulting fiduciary who misappropriated corporate property and gifted that property or its proceeds. Suppose then, that throughout the course of the proceeding the fiduciary only provides very limited information to the plaintiffs as to the true destination of the misappropriated proceeds. The hearing proceeds and it is found that the fiduciary breached his duties. An accounting is ordered and the destination of those proceeds is only then discovered to be the fiduciary’s spouse. The spouse is wholly unconnected with the fiduciary wrongdoing, or the beneficiary to whom the fiduciary’s duty is owed. The conduct of the defendant led to this situation; but must the plaintiffs suffer the consequences of the fiduciary’s default by having to yet again be put to proof on the issue of their liability?
That example may be taken one step further. Let us say that rather than having drip‑fed information to the plaintiffs in relation to the whereabouts of the proceeds of property allegedly acquired in breach of fiduciary, the fiduciary intentionally and wilfully, in breach of their disclosure obligations (not this case), withholds information or provides false information in order to shield the fact that the property acquired in breach was gifted to his or her family. Again, the family have not been joined to the fiduciary stage of the proceeding. On their joinder, it could not seriously be contended that they can hide behind the fiduciary’s objectionable conduct in the litigation. It cannot be a universal principle. In other words, the right to be heard could not in those circumstances be absolute. It must be subject to the flexible content of the rules of procedural fairness, and the doctrines of abuse of process and estoppel that seek to prevent such abuses.[156]
[156]See e.g. Tomlinson v Ramsey Food Processing (2015) 256 CLR 507.
I Conclusion and disposition
The remedial consequences of the breach of the Graco Defendants remains to be determined. For the purpose of this application, I have assumed that proprietary relief is available to the plaintiffs flowing from the Reasons. That is not to say that the claim for such relief has been made out.[157] The precise scope of what property they have received has not been determined. It has not been determined whether they received such property as volunteers, or for good value without notice, or whether they have any other applicable defences, whatsoever they may be. In that determination it is open for the Added Defendants to resist the proprietary relief now sought by the plaintiffs, by seeking to establish some defence. However, the Added Defendants cannot resist the orders sought by the plaintiffs by contesting the legal consequences of the determination of indisputable facts or legal consequences of events that did not concern them or their proprietary interests and on which they can say nothing.
[157]See paras [121] to [125].
In conclusion, the Added Defendants are entitled to be heard on the question of their amenability to any remedies. They are not entitled to put the plaintiffs to proof all over again, in the same or a new proceeding, to establish the same inevitable findings that they have already been made. In other words, the Added Defendants are entitled to put forward evidence and make submissions to resist their own liability. That does not extend to asking this Court to re-run the trial on the Graco Defendants’ liability.
The remaining claims in this proceeding will proceed in the ordinary manner. The Added Defendants will not be entitled, whether by a re-trial or re-opening, to adduce matters challenging or contradicting the findings made in the Reasons. The summonses will be dismissed.
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