Corporate Systems Publishing Pty Ltd v Lingard
[2009] WASCA 158
•27 AUGUST 2009
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: CORPORATE SYSTEMS PUBLISHING PTY LTD -v- LINGARD [2009] WASCA 158
CORAM: OWEN JA
McLURE JA
BUSS JA
HEARD: 2 FEBRUARY 2009
DELIVERED : 27 AUGUST 2009
FILE NO/S: CACV 36 of 2008
BETWEEN: CORPORATE SYSTEMS PUBLISHING PTY LTD
First Appellant
NICK CHRISTOU
Second AppellantAND
KEITH GRAEME LINGARD
First RespondentSTANTON PARTNERS AUSTRALASIA PTY LTD
Second RespondentSTANTON ACCOUNTANTS & ADVISORS PTY LTD
Third RespondentNEIL KEVIN JOYCE
Fourth RespondentDEMANDEM HOLDINGS PTY LTD
Fifth RespondentGLENLEA ENTERPRISES PTY LTD
Sixth Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram :BEECH J
Citation :CORPORATE SYSTEMS PUBLISHING PTY LTD -v- LINGARD [NO 4] [2008] WASC 21
File No :CIV 1788 of 2003
Catchwords:
Trusts - Express trust - Breach of trust - Defence of consent to breach of trust - Turns on its own facts
Contract - Written contract - Construction of contract - Whether conditional - Turns on its own facts
Legislation:
Nil
Result:
Appeal dismissed
Cross-appeal dismissed
Category: B
Representation:
Counsel:
First Appellant : Mr P G Clifford
Second Appellant : Mr P G Clifford
First Respondent : Mr M L Bennett
Second Respondent : Mr M L Bennett
Third Respondent : Mr M L Bennett
Fourth Respondent : Mr M L Bennett
Fifth Respondent : Mr M L Bennett
Sixth Respondent : Mr M L Bennett
Solicitors:
First Appellant : Alan Rumsley
Second Appellant : Alan Rumsley
First Respondent : Lavan Legal
Second Respondent : Lavan Legal
Third Respondent : Lavan Legal
Fourth Respondent : Lavan Legal
Fifth Respondent : Lavan Legal
Sixth Respondent : Lavan Legal
Case(s) referred to in judgment(s):
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Corporate Systems Publishing Pty Ltd v Lingard [2004] WASC 24
Corporate Systems Publishing Pty Ltd v Lingard [No 4] [2008] WASC 21 (S)
Edmunds v Pickering (No 3) [1999] SASC 510; (1999) 75 SASR 407
Farah Constructions Pty Ltd v Say‑Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Re Pauling's Settlement Trusts [1962] 1 WLR 86
Spellson v George (1992) 26 NSWLR 666
OWEN JA: This is an appeal against a decision in which Beech J dealt with a dispute concerning the distribution of profits among the partners of an accounting practice.
Background
An accounting practice under the name Stanton Partners operated from 1989 to 1998. The partners were Stan Palassis, the second appellant (Christou), the first respondent (Lingard) and the fourth respondent (Joyce). From 1997 the four partners were entitled to an equal share of profits. In 1998 the partners fell out and Palassis left the partnership. The remaining three started a new partnership under the name Stanton Partners and litigation with Palassis ensued. But that was only the beginning of the problems.
In late 1998 or early 1999 there was a restructure of the legal framework through which the practice was conducted. I have attached as a schedule a diagrammatic representation of the framework. Briefly, it is as follows.
The accounting practice was to be conducted by the second respondent (SPA), which was the trustee of a unit trust called Stanton Partners Trust (SP Trust). The trust was created pursuant to the Stanton Partners Trust Deed dated 12 November 1998 (SP Trust Deed). There were two classes of units: capital units and discretionary income units. The former entitled holders to a proportionate share of the income or (on a winding up) return of capital and proportionate voting rights at general meetings of unitholders. The latter entitled the holders to such distributions of income (in priority to income distributions to capital unitholders) as the trustee might, in its discretion, decide to make. The discretionary income units did not confer on the holder any right to vote at general meetings.
The capital units were issued in equal numbers to Christou, Lingard and Joyce. There is a dispute as to whether any discretionary income units were issued but, for the purposes of this recitation of the background facts, it can be assumed that there were no units of that class. In accordance with the terms of the SP Trust Deed the three partners were entitled to an equal share of income distributions and an equal say in the running of the operation through the voting rights at unitholders' meetings.
There was a second or separate arm within the legal framework; namely, a service trust to provide administrative services and facilities (for a fee) to the accounting practice. The service arm was operated by the third respondent (SAA) as trustee of a unit trust called the NFI Trust. The trust was created pursuant to the NFI Trust Deed, also dated 12 November 1998. While the trust deed provided for the issue of 'special units' they play no part in the litigation and can be ignored. The deed provides that the holders of units are entitled to a proportionate beneficial interest in the trust fund. Relevantly, it provides that in each accounting period the trustee is to apply the net income of the trust fund for the benefit of the unitholders in proportion to the number of units held.
The units in the NFI Trust were issued in equal numbers to the first appellant (Corporate Systems), the trustee of a family trust associated with Christou; the sixth respondent (Glenlea), the trustee of a family trust associated with Lingard; and the fifth respondent (Demandem), the trustee of a family trust associated with Joyce. I will refer to these companies as the 'private companies'. Once again, in accordance with the terms of the NFI Trust Deed the entities associated with the three partners were entitled to an equal share of income distributions and an equal say in the management of the NFI Trust through voting rights at unitholders' meetings.
Christou, Lingard and Joyce were the sole directors of each of SPA and SAA. There is no need to delve into the beneficial shareholding in each of those companies in order to determine the issues in the appeal.
By a licence agreement, also executed on 12 November 1998, Christou, Lingard and Joyce (as the remaining partners in the old Stanton Partners practice) granted an exclusive licence to SPA to use the goodwill of the accountancy practice, including the name Stanton Partners. The consideration was expressed as 3% of the net fees derived from carrying on the business.
Ignoring for one moment the discretionary income units (and for the purposes of the appeal, they can be ignored) it is apparent that the arrangements created a relationship of equality of entitlement between Christou, Joyce and Lingard and their associated private companies.
The partners received payments in two ways: drawings and distributions of income. The drawings were regular monthly payments which were made to the partners against anticipated profits. At the end of the financial year, accounts were drawn, loan account balances were calculated and net income was determined. The net income would then be distributed to the partners so as to take into account amounts that had already been advanced by way of drawings.
Relevant facts
The following facts are taken from the trial judge's reasons. None of these facts was challenged on appeal.
From the inception of the partnership in late 1998 there were issues between Joyce, Lingard and Christou about the level of Christou's collections. By agreement between the partners, Christou was responsible for the administration of the practice. He was given a credit of $400,000 per year in fees to reflect the administrative work he carried out. Nevertheless, Joyce and Lingard were unhappy with Christou's actual collections and thought they should have been higher. They considered that a partner under the unit trust structure should generate collections of at least $1.2 million per year.
In mid‑2000 the partners appointed a consultant to review the practice. Following the consultant's report in late 2000, a general manager, Jim Haughton, was appointed to take over the administration of the practice. The question of Christou's collections was raised during the review. The consultants advised Joyce and Lingard that Christou's profit entitlement and drawings should be reduced. This would reduce the pressure on Christou to match the level of collections of Joyce and Lingard.
In early 2001 Joyce and Lingard decided that Christou's monthly drawings of $60,000 would be suspended until their concerns about his collections were resolved. In late February and March 2001 cheques totalling $60,000 were paid to or for the benefit of Joyce and Lingard. A cheque to Corporate Systems dated 28 February 2001 was cancelled. No payments were made to Christou or Corporate Systems in February or March 2001.
In early April 2001 Lingard and Joyce put an oral proposal to Christou to resolve the profit entitlement dispute. They proposed that Christou's profit share be set at 50% of his collections, but if Christou's collections reached $100,000 per month Christou could, at his election, revert to an equal one-third share profit entitlement. Lingard and Joyce told Christou that he had to agree to the proposal if the three of them were to continue in business together. Christou agreed to the proposal. Following his agreement, he was given a cheque for $33,686, which was said to be 50% of his collections for February and March 2001.
From May 2001 to September 2001 payments were made to Christou and Corporate Systems based on the 50% of collections formula. In October, November and December 2001 no payments were made to Christou. According to Joyce and Lingard, this was because Christou had not complied with his responsibility to prepare the tax return for the NFI superannuation fund. The working relationship between the partners remained problematic.
It was at this time that negotiations commenced with a company called SageCorp for the possible sale of the practice to it. SageCorp was a financial services company that was seeking to acquire accounting firms. There is no evidence that any of the partners or staff of Stanton Partners was associated with SageCorp.
No payments were made to the appellants in the months of October, November and December 2001. On 14 December 2001 solicitors wrote on behalf of Christou to Joyce and Lingard. The letter said:
We are instructed that in April 2001 our client was coerced into agreeing to drawings representing 50% of his collection and, under protest, was from the period February 2001 to September 2001 (inclusive) paid 50% of such collections.
The letter demanded the balance of drawings said to be owing from February 2001 to September 2001 to bring his drawings to the same level as Joyce and Lingard. It also demanded payment of drawings for October and November 2001 and the payment of practice expenses incurred by him. The letter said that Christou had achieved collections of $100,000 in November and he was therefore entitled to the balance of his drawings.
On 17 December 2001 solicitors on behalf of Joyce and Lingard responded to the letter. They denied the allegation that Christou was coerced into the agreement.
On 2 January 2002 Christou, Joyce and Lingard met. There were discussions about Christou's drawings and his equity position. Christou was told that his drawings for October, November and December had been withheld because he had not completed the tax return for the NFI superannuation fund. Joyce and Lingard told Christou that the April 2001 oral agreement provided that Christou's profit entitlement would be fixed at 50% of collections until he maintained monthly collections of $100,000.
Christou told Joyce and Lingard that the tax returns for the NFI superannuation fund had been prepared. On that basis, he was given a cheque for his drawings for October, November and December 2001. Christou also suggested that he could freeze the value of his equity in the practice at one-third of the value at 30 June 2001, meaning that Joyce and Lingard would share any increase in value from that date. Joyce suggested that they try to sell the practice by 30 June 2002. Christou stated that he would consider a reduction of his unitholder entitlement on the sale of the practice if an offer to purchase the practice was made.
On 21 January 2002 Joyce and Lingard sent a memorandum to Christou. Earlier that month, an indicative offer to acquire the practice had been received from SageCorp. The memorandum referred to a meeting that was said to have taken place earlier that day between Joyce, Lingard and Christou. A schedule attached to the memorandum dealt with the share of proceeds from the sale of the practice to SageCorp and the split of the proceeds of two deals, Castensen and E Genius. Castensen was a client who owed the practice money and was trying to put together a syndicate of investors to develop a retirement village in Bunbury. E Genius was an educational software company, 625,000 shares of which were held beneficially by Joyce, Christou and Lingard. Christou was also a director and secretary of E Genius. The memorandum stated that the split of the Castensen and E Genius deals was subject to the sale of the practice to SageCorp. If the sale to SageCorp did not proceed, the memorandum said, the sale of the practice to another buyer on similar terms would be sought.
Later that day, Christou spoke to Lingard. Christou said that he was scheduled to fly to Singapore shortly to raise capital for E Genius and wanted to resolve all disputes with Joyce and Lingard over the next few days. He told Lingard that he wanted 50% of Joyce's and Lingard's interest in E Genius transferred to him, regardless of whether the practice was sold, in settlement of issues relating to past and future profit entitlements. Lingard said that he agreed to the proposal, and told Joyce of the proposal the next day.
On 23 January 2002 Joyce, Lingard and Christou met. Christou told Joyce and Lingard that he now required 100% of their interest in E Genius in exchange for a reduction in Christou's share of profits. Despite protesting that they had agreed only to transfer 50% of their interest in E Genius, Lingard and Joyce agreed to Christou's new proposal. Christou said that the new agreement needed to be finalised by 25 January 2002 because he was scheduled to fly to Singapore that day.
The next day, 24 January 2002, Joyce, Lingard and Christou met once again. The meeting was a combined board meeting of SPA and SAA. Lingard opened the meeting by stating that the meeting had been convened to discuss and agree upon the terms of the settlement of the dispute between them in respect of practice entitlements. A draft agreement prepared by Lingard was tabled. After lengthy discussion and some amendments to the draft, the agreement was signed. I will call the document the 24 January 2002 agreement. Because the agreement is central to the litigation I will set out its terms in full:
AGREEMENT BETWEEN
NICK CHRISTOU, KEITH LINGARD AND NEIL JOYCE ('the Parties')
The following are the Terms and Conditions of an Agreement reached by the Parties on 24 January 2002 relating to the potential sale of the practice and settlement of all disputes and differences of opinion regarding practice entitlements.
1.The attached Template 'A' which forms part of this Agreement and the calculations and rationale contained therein will overlay the sale of the practice should such a sale eventuate. The principles set out in that template include:
(i)Mr Nick Christou shall be entitled to 29% of the cash component of the sale price achieved by the practice. If there is any increase or decrease in the sale price then Nick Christou's share of the cash component will be determined at 29% of the revised sale price cash component. All other adjustments will be in accordance with the Template.
(ii)The line headed Castensen in the Template is recognised as a means of equalising the Incentive that may be payable to Mr Lingard and Mr Joyce for them to work with the owners of the business following the sale of the practice. Should the incentive component change from that set out in the Template, then Mr Christou's share of the Castensen deal, which has a total agreed and set value of $4.815 million, will adjust accordingly to compensate Mr Christou for the increase/decrease of the incentive provided to Mr Lingard and Mr Joyce. There is to be no change to the agreed value figure of $4.815 million.
(iii)The practice agrees to invest in the said Castensen investment to earn an additional 39% bringing the total investment to 49%. The effect of the transaction will be such that the Parties loan accounts will be debited equally pro rata for the consideration paid for the increased equity. The final investment price will be determined once the debtors and work in progress offset amounts have been finalised.
(iv)The loan account of the practice in respect of Nick Christou's entitlement will be determined in accordance with the accounts ruled off at 30 June 2001. The loan account of the Parties at 30 June 2001 after effecting the debit adjustment referred to at paragraph (iii) will be equal.
(v)When the practice is sold, Mr Christou may, if he so chooses, utilise an office, parking and secretarial services at rates not exceeding cost to the practice.
(vi)Mr Christou will be entitled to a profit entitlement equalling 50% of his professional fee collections until such time as the practice is sold. If Mr Christou attains average collections over a 12 month period of $100,000 per month, then Mr Christou reverts to a profit entitlement from that point equal to Mr Joyce and Lingard at his discretion.
2.Mr Nick Christou will take over all of the practice's interest in the company E Genius in settlement of Mr Christou's past claims of profit entitlements other than the entitlement referred to at 1(vi). The transfer of the firm's interest in E Genius shall take place immediately upon signing of this Agreement and is effective regardless as to whether a sale of the practice eventuates. Mr Christou will be responsible for Stamp Duty and related costs associated with the transfer. Upon transfer of the shares, Mr Christou will take over E Genius as a client for the consideration of $1 and Nick Christou will be entitled to all future benefits from that client relationship.
3.If the current dispute with Esanda is settled, it will be paid by the practice. On the sale of the practice, any outstanding lease commitments that may arise as a result of the practice financing the settlement funds required in relation to this action, will be paid equally by the Parties.
4.The current action with Chattock (Palassis) will continue. Any proceeds from settlement of that action will be split equally and any work and legal costs incurred in arriving at a settlement in relation to that action will be split equally between the Parties.
5.If any of the above Terms and Conditions are disputed by the Parties, then the matter shall be referred to Mr Michael Hollingdale, Barrister, Mr Hollingdale's interpretation and direction will be binding and final on the Parties.
[Signed by Christou, Joyce and Lingard on 24 January 2002]
In the months following the signing of the agreement tensions between the parties remained. The NFI superannuation tax returns continued to be an issue.
In June 2002 there was a dispute between the parties about accounting for the proceeds of a settlement with Palassis. In late 2000 a confidential settlement had been reached with Palassis, the former partner, in relation to part of the dispute that was being litigated in the Supreme Court. As part of the settlement, Palassis agreed to pay the partnership $850,000. Pursuant to that agreement, Palassis had made payments to Stanton Partners from November 2000 to October 2001. About $350,000 in payments were made in the 2001‑2002 financial year.
Christou believed that he was entitled to treat the proceeds of the settlement as collections to his credit. To that end, he prepared an invoice addressed to Stanton Partners from Stanton Partners (an internal invoice) in the sum of $850,000, representing the proceeds from the settlement. A standoff ensued when the general manager, Haughton, refused to process the invoice and Christou threatened to terminate his employment. It appears that the invoice was never processed.
In the second half of 2002 a number of further issues arose between Christou, Joyce and Lingard that did little to improve the relationship. Some of those issues related to the preparation by Christou of a budget and business plan for his division and his level of billings, debtors and work in progress. Around this time negotiations for the sale of the practice to SageCorp, which had been suspended since mid-2002, were terminated.
On 3 July 2003 Christou gave written notice to Stanton Partners terminating the partnership. The following day this action was commenced. Since that time, SPA has continued to conduct the Stanton Partners accounting practice pursuant to the Licence Agreement.
On 13 November 2003 notice was given of a meeting of directors of SPA, proposed to be held on 18 November 2003. The resolution the subject matter of the meeting was that the payments made to Glenlea and Demandem in 2001 and 2002 be ratified pursuant to the 24 January 2002 agreement and the SP Trust Deed. On 18 November 2003 Christou obtained an injunction preventing the proposed meeting from being held.
On 28 June 2004 an agreement for the sale and purchase of business assets was signed between SPA and SAA as vendors and a company called Stantons International Pty Ltd as purchaser. Both Lingard and Haughton, the general manager of the practice, were directors of Stantons International. On 30 June 2004 Pullin J made an interim order restraining the sale, and on 1 July 2004 SPA, SAA, Joyce and Lingard gave an undertaking that they would not proceed to settlement.
In the years that followed it appears that, notwithstanding the termination of the partnership, Christou, Joyce and Lingard continued to work at the practice. No steps were taken to implement a winding up the partnership.
On 17 September 2007 the trial of the action commenced before Beech J. On 28 February 2008 his Honour published his reasons for decision and heard counsel as to the orders that should be made. But he did not pronounce final orders. On 28 March 2008 his Honour published supplementary reasons and made final orders.
Nature of the claim and the defence
In their further re‑amended statement of claim filed 28 September 2007 (statement of claim) the appellants made various claims against the respondents, most of which arose from alleged breaches of trust by SPA and SAA.
The appellants pleaded that SPA made payments to or for the benefit of Joyce and Lingard in amounts greater than was paid to Christou in breach of the SP Trust Deed. They also pleaded that SAA paid made payments to the private companies of Joyce and Lingard in amounts greater than was paid to Christou's private company in breach of the NFI Trust Deed. It was said that in making unequal payments to the beneficiaries, SPA and SAA had, with dishonest and fraudulent design, breached their respective trust deeds and their fiduciary obligations.
The appellants advanced claims against Joyce, Lingard and their private companies under both limbs of Barnes v Addy. Even during the hearing of the appeal there was a dispute between the parties as to how the Barnes v Addy claim had been pleaded and advanced. It seems (ts 29) that the appellants' case was that Demandem and Glenlea were liable as recipients under the first limb of Barnes v Addy. The appellants also alleged that Joyce and Lingard, as directors, knowingly assisted in SPA's and SAA's breaches of trust with knowledge of SPA's and SAA's dishonest and fraudulent design and were thus liable under the second limb of Barnes v Addy. Whether a first limb case was pleaded against Joyce and Lingard and (or) a second limb case was mounted against the Demandem and Glenlea is problematic. In the end it does not matter.
The appellants also sought orders winding up the partnership.
Separate defences were filed by SPA and SAA, and Joyce, Lingard and their private companies. The reason that separate defences were filed is addressed later in these reasons.
The further re-amended defence of the second and third defendants filed 5 October 2007 (trustees' defence) contained mostly admissions, non-admissions and denials. The only positive defence raised by SPA and SAA was a defence under s 65(7) of the Trustees Act 1962 (WA). SPA and SAA claimed that s 65(7) acted as a bar to proceedings against them for breach of trust until the appellants had pursued to judgment or compromise their claims against the beneficiary respondents (that is, Joyce, Lingard and their private companies).
In the further further re-amended defence of the first, fourth, fifth and sixth defendants filed on 4 October 2007 (beneficiaries' defence) the beneficiary respondents contested several points. First, the beneficiary respondents denied that SPA or SAA had made unequal payments in breach of trust. Secondly, they relied upon the oral agreement of April 2001 and the written agreement of 24 January 2002 in defence of the claim that SPA and SAA had breached their respective trusts. They contended that the appellants' profit entitlement for the period February 2001 to December 2001 were settled by the transfer of the interest in E Genius and his subsequent profit entitlement was fixed at 50% of his collections. Thirdly, they pleaded that SPA and SAA had acted in accordance with the April 2001 agreement and the 24 January 2002 agreement in making unequal payments and hence had not acted with dishonest or fraudulent design. Finally, they pleaded that the appellants were estopped from making their claims due to representations they had made, including representations made by the agreements of April 2001 and the 24 January 2002. It was contended that the appellants had represented that they would accept a profit entitlement of 50% of Christou's collections in lieu of his one-third share and the beneficiary respondents had relied on that representation in choosing to continue to be involved in the practice.
In relation to the claim for an order winding up the partnership, the beneficiary respondents pleaded that there are no steps to be taken to wind up the affairs of the partnership. Joyce and Lingard also brought a counterclaim against Christou, claiming that he breached his duty of reasonable care and diligence as a director of SPA. The alleged breach of duty arose as a result of Christou's failure to act on instructions he was given to sell Telstra instalment receipts held by SPA.
In the reply to the defence of the first, fourth, fifth and six defendants filed 9 October (reply) the appellants denied the existence of the April 2001 oral agreement. They also made several points in relation to the 24 January 2002 agreement. First, they pleaded that the agreement was made between Christou, Joyce and Lingard solely in their capacity as partners, and hence did not bind SPA, SAA or Corporate Systems. Secondly, they pleaded that the agreement was conditional on the sale of the practice. Thirdly, they pleaded that the agreement contained an implied term that the practice would be sold within a reasonable time, and because no sale had occurred the agreement had been terminated. Finally, they contended that Christou entered the 24 January 2002 agreement in reliance on misleading or deceptive conduct on the part of Joyce and Lingard. That misleading or deceptive conduct was said to be representations that the practice would be sold and settlement would occur by June 2002, and that the appellants would receive 50% of Christou's collections each month until the sale of the practice. These representations were said to have been untrue.
Several important issues emerged from the pleadings. The first issue was whether SPA and (or) SAA made unequal payments to the beneficiaries. The second issue was whether an oral agreement was made in April 2001 and, if an agreement was made, its effect. The third issue was the construction and effect of the 24 January 2002 agreement. The fourth issue was whether Christou entered the 24 January 2002 agreement on the basis of misleading or deceptive conduct. The fifth issue was whether SPA and (or) SAA acted with dishonest or fraudulent design. The sixth issue concerned the knowledge of the beneficiary defendants.
These issues were all argued before, and decided by, the trial judge.
Trial judge's reasons
Findings on liability
The trial judge began by outlining the background to the dispute and making findings of fact. None of those findings is the challenged by the parties.
His Honour first considered the claim against the trustees, SPA and SAA. SPA and SAA had raised a defence under s 65(7) of the Trustees Act 1962 (WA), which provides that in some circumstances where a trustee has made a distribution of trust assets a beneficiary cannot claim against the trustee until he has exhausted all other remedies available to him.
The trial judge rejected SPA and SAA's defence under s 65(7) but, as those conclusions are not challenged in the appeal, I need not analyse the reasoning process.
The next issue considered by the trial judge was whether SPA and SAA had breached their obligations under the relevant trusts. The provisions of the trust deeds required that income be equally distributed to Christou, Joyce and Lingard and their private companies. His Honour found, however, that greater amounts were paid to Lingard and Joyce and their private companies than Christou and his private company. In the case of SPA, the trustee paid the extra money to Joyce's and Lingard's private companies in the form of a 'salary' or 'partner's salary'. His Honour found that in making these payments SPA and SAA had breached their obligations under the respective trust deeds, saying (at [204]):
For these reasons I find that, subject to the question of the effect of the January 2002 Agreement:
(a)SPA breached the Stanton Partners Trust in that it failed to distribute the income of the Trust in the years 2001 and 2002 equally between the three beneficiaries, in that the payments of partner's salary in the amounts already referred to were, properly characterised, income of the Trust which should have been distributed equally; and
(b)SAA breached the NFI Trust in that it distributed the net income of the Trust, for the years 2002, 2003 and 2004 financial years, in unequal amounts, as reflected in the NFI tax returns for those years.
Having found that SPA and SAA made payments in breach of trust and that they could not rely on s 65(7) of the Trustees Act as a defence, his Honour turned to consider whether they could rely on the 24 January 2002 agreement as a defence, even though it had not been pleaded expressly in their defence. SPA and SAA submitted that if the beneficiary respondents' defence based on the 24 January 2002 agreement succeeded, that would also be a defence to claims against them. They advanced alternative arguments. The first argument was that all the parties had conducted the litigation on the basis that if the 24 January 2002 agreement defence pleaded by the beneficiary respondents succeeded, that defence would also defeat the claim against SPA and SAA. The second argument was that SPA and SAA should be allowed to amend their defence.
The appellants argued that SPA and SAA should not be allowed to amend their defence for two reasons. First, they submitted that SPA and SAA had given an undertaking to the Full Court in September 2004 that they would only plead the s 65(7) defence. Secondly, they submitted that they would be prejudiced by the amendment.
The trial judge rejected these arguments and allowed SPA and SAA to take the benefit of the defence based on the 24 January 2002 agreement. In relation to the undertaking, the trial judge found that the amendment was not inconsistent with undertaking given to the Full Court. His Honour said (at [219] ‑ [221]):
The assurance or undertaking sought and given was in terms that the trustee defendants would 'abide' the decision of the court. There is a question as to what that means … In my opinion, upon a reading of the whole of the transcript of the hearing on 21 September 2004, abiding the decision of the court meant being bound by the findings of the court in the litigation between the plaintiffs and the beneficiary defendants, whichever way that litigation was decided.
The context of the argument before the Full Court was that, in the substantive action, the individuals (and their private companies) were litigating about the agreements which were said to regulate the conduct of the parties, including the trustees…
In that context, it is not clear to me why the Full Court would have intended to produce the result now invited by the plaintiffs, namely that, at the trial, notwithstanding that the beneficiary defendants succeeded in their defence based on the agreements, judgment be entered against the trustee defendants.
In relation to the issue of prejudice, his Honour said (at [211]):
The question of prejudice invites attention to whether any aspect of the plaintiffs' conduct of the case, prior to or at trial, would or may have been different, had the amendment now sought been made at an earlier stage. I am unable to see any respect in which, in such circumstances, the plaintiffs would or may have acted differently in the context of their claims against the defendants … I am satisfied that the issues respecting the January 2002 Agreement (and the April 2001 Agreement) were fully fought at the trial of this action.
For those reasons, his Honour allowed the amendment to SPA and SAA's defence.
His Honour then moved to the claim against the beneficiary respondents and the effect of the 24 January 2002 agreement. The trial judge dealt first with the beneficiary respondents' argument that that the 24 January 2002 agreement effected a variation of the terms of each of the trusts. This argument was rejected by the trial judge, because each trust contained a provision that the trust deeds could only be amended by the relevant trustee. As the 24 January 2002 agreement was not and did not purport to be an act of the trustee, the agreement did not effect a variation of the trust deeds. This conclusion is not challenged in this appeal.
The trial judge then turned to the key question in the action: whether the 24 January 2002 agreement gave rise to a defence of consent or acquiescence on the part of the beneficiaries. One of the primary submissions of the appellants was that cl 1(vi) of the agreement ‑ which provides that Christou's profit entitlement be 50% of his collections ‑ was conditional on the sale of the practice. His Honour analysed the agreement in great detail in order to determine its proper construction. He concluded that cl 1(vi) was not conditional on the sale of the practice. As a result, assuming that the agreement was on foot, it could provide a defence to the respondents on the basis that the appellants had consented to or acquiesced in the breaches of trust. His Honour summarised his findings about the construction of the agreement as follows ([304] ‑ [305]):
For these reasons I conclude that, on a proper construction:
(a)the agreement as a whole is not conditional upon a sale of the practice;
(b)the operation of cl 1(vi) is not conditional upon a sale of the practice;
(c)there is no implied term that the contract is conditional upon a sale of the practice within a reasonable time;
(d)the parties to the agreement were the three individuals and the three private companies associated with them, but not SPA and SAA;
(e)the agreement authorised the distribution of income of SPA and SAA to the plaintiffs in an amount equal to 50% of Mr Christou's professional fee collections, with the balance to be distributed equally between Messrs Joyce and Lingard or their private companies, unless and until Mr Christou attained average collections over a 12 month period of $100,000 per month, in which event Mr Christou would revert to a profit entitlement equal to Messrs Joyce and Lingard, if he so elected; and
(f)cl 2 unconditionally settled claims by Mr Christou for profit entitlements up to December 2001, other than the entitlement to 50% of his collections pursuant to cl 1(vi).
I conclude that (assuming the agreement is valid and in force) by the January 2002 Agreement the plaintiffs consented to or acquiesced in the breaches of trust of which they now complain.
Having found that the respondents consented to or acquiesced in the breaches of trust if the agreement was on foot, the next issue to be determined was whether the agreement was valid and in force. The appellants argued that the agreement should be avoided on account of the misleading or deceptive conduct of Lingard and Joyce. The appellants submitted that Joyce and Lingard had made two representations to Christou that were misleading or deceptive. The first alleged representation was that the sale of the practice was imminent and settlement would take place by June 2002. The second alleged representation was that Christou would be paid 50% of his collections each month until the sale of the practice.
The trial judge rejected the argument that Lingard or Joyce had represented that the sale of the practice was imminent, saying (at [308]):
As to the first alleged representation, I am not satisfied that Messrs Joyce or Lingard represented to Mr Christou that the sale of the practice was imminent and settlement would take place by June 2002.
The trial judge also rejected the argument that the second alleged representation was misleading. His Honour said (at [312] ‑ [313]):
Payments were not made to Mr Christou in the months of February and March 2002. However, that provides no evidence that Messrs Joyce and Lingard did not intend, as at 24 January 2002, that Mr Christou would be paid 50% of his section's collections or that there were not reasonable grounds for a representation to that effect. On the evidence, nothing was said to Mr Christou, up to 24 January 2002, as to the timing of such payments. Further, there is evidence as to particular reasons why, in the circumstances as they developed in February and March 2002, the payments of 50% collections to Mr Christou were not paid until later; see exhibit 1 pages 572 ‑ 575.
I am satisfied that, at the relevant time, namely 24 January 2002, Messrs Joyce and Lingard had reasonable grounds for representing that Mr Christou would be paid an amount equal to 50% of his collections.
For those reasons, his Honour rejected the contention that the agreement should be set aside on the grounds of misleading or deceptive conduct.
Having found that the appellants consented to or acquiesced in the breaches of trust by virtue of the 24 January 2002 agreement, the trial judge turned to consider whether it would be just and equitable that the appellants be permitted to sue for a breach of trust. His Honour examined the circumstances in which the agreement was made, saying (at [321] ‑ [323]):
In this context it is, I think, relevant that on 21 January 2002 and on 23 January 2002 Mr Christou expressly stated that, contrary to the proposal from Messrs Joyce and Lingard, he wanted the interest of Messrs Joyce and Lingard in E Genius to be transferred to him regardless of whether the practice was sold, in settlement of issues relating to past and future profit entitlements. His notes of the meeting of 23 January include a statement that he would take over 100% of E Genius 'for past and future entitlements'. As already mentioned, these matters are not relevant to the question of construction. However, they are evidence of what Mr Christou understood and intended, and seem to me to bear upon the question of whether, in all the circumstances, equitable relief should be refused on grounds of consent.
Further, at the time of the meeting Mr Christou had solicitors acting for him (ts 662) and, as he accepted in his evidence (ts 664), he made a choice to enter into the agreement. There is no evidence to suggest that his will was overborne in the negotiations for the agreement. Indeed, there is evidence, which I accept, that Mr Christou was agitating for the conclusion of an agreement before his departure for Singapore on 25 January 2002. The negotiations proceeded over several days and Mr Christou succeeded, in the course of those negotiations, in obtaining some concessions from Messrs Joyce and Lingard. For example, Mr Christou succeeded in negotiating the unconditional transfer to him of all of Messrs Joyce and Lingard's rights in E Genius.
I am satisfied that, by the January 2002 Agreement, the plaintiffs consented to payments of trust funds in accordance with the terms of cl 1(vi) and thus not equally to all beneficiaries, and that, in all the circumstances, it is fair and equitable that the plaintiffs' claims should fail on grounds of consent.
His Honour dealt briefly with the claims brought by the appellants against the trustees under the second limb of Barnes v Addy and against the beneficiary respondents under both limbs of Barnes v Addy. Dealing with the claim against the trustees, the trial judge noted that liability under the second limb only applies when the acts of the trustee (or other fiduciary) have been perpetrated with a dishonest and fraudulent design. In the circumstances of this case, however, there was no adequate foundation for finding that the trustees had a dishonest and fraudulent intention. Similarly, in relation to the claim against the beneficiary respondents, the trial judge pointed out that both limbs require knowledge on the part of the defendant. In this case, the beneficiary respondents did not have the knowledge required for liability to be established. According to the trial judge (at [343]):
I have found that Messrs Joyce and Lingard believed that the January 2002 Agreement authorised the unequal distribution of income of SPA and SAA, and that they were correct in that belief. In those circumstances, the beneficiary defendants believed correctly, and so by definition reasonably, that the plaintiffs had consented to the breaches of trust committed by SPA and SAA. Even if, contrary to my opinion, the belief of the beneficiary defendants had not been correct, it would, nonetheless, have been a reasonable belief. In circumstances where a person reasonably believes that the relevant beneficiary has consented to a breach of trust, in my opinion equity does not attach liability to a recipient of funds paid in breach of that trust.
For those reasons, his Honour dismissed the claims against the respondents under both limbs of Barnes v Addy.
The result of the trial judge's findings was that the appellants failed in their claims against the respondents based directly on the failure to distribute income equally. His Honour summarised his decision in relation to their claims as follows (at [344]):
For the reasons explained above, the monetary claims against the beneficiary defendants fail on the grounds that:
1.by the January 2002 Agreement, the plaintiffs consented to SPA and SAA's breaches of trust; and
2.the requirements of knowledge, on the part of the beneficiary defendants, for liability under each of the two limbs of Barnes v Addy are not satisfied.
Further, the claim based on the second limb of Barnes v Addy fails on the additional ground that I am not satisfied that the trustees acted with a fraudulent and dishonest design.
His Honour also made orders winding up the partnership and found for Joyce's and Lingard's private companies in a counterclaim against Christou for breaching his duty of reasonable care and diligence as a director of SPA. Neither of these matters is challenged on appeal and they are not relevant to the disposition of the appeal.
Decision on relief
On 28 March 2008 Beech J issued supplementary reasons dealing with the final relief to which the parties were entitled: see Corporate Systems Publishing Pty Ltd v Lingard [No 4] [2008] WASC 21 (S).
His Honour dealt with two matters that are the subject of this appeal. First, he found that the appellants were entitled to some monetary relief as against the trustee respondents. Secondly, he ordered that the appellants pay 80% of the costs of the beneficiary respondents.
In relation to monetary relief, the trial judge found that the appellants were entitled to monetary relief to the extent that income distributed to them fell short of the 50% of collections to which they were entitled under the 24 January 2002 agreement. The point had been argued by the appellants who submitted that, even though the trial judge had found that the 24 January 2002 agreement operated as a defence to the breaches of trust, the respondents had not fulfilled their obligation pursuant to that agreement to pay the appellants 50% of Christou's collections.
The respondents advanced several arguments in opposition to the appellants' claim. The respondents submitted that the trial judge's reasons in relation to liability precluded any claim for monetary relief on the part of the respondents. They also submitted that the appellants had not pleaded any claim that would support the order for monetary relief of the sort the judge was being invited to make.
The trial judge rejected both of the respondents' arguments. In relation to the respondents' first point, his Honour said (at supplementary reasons [10]):
[I]n submissions at trial, while numerous issues were raised respecting whether the January 2002 Agreement gave rise to a defence of consent, attention was not given to whether distributions were made to the plaintiff in an amount equal to 50% of collections and whether, to the extent that that was not so, the agreement could give rise to any defence. On the findings which I have made, this seems to me to remain an issue. The plaintiffs should not be foreclosed from putting submissions on the point.
In relation to the pleading point, his Honour said (at supplementary reasons [12]):
I accept that no claim of the kind referred to was pleaded by the plaintiffs. However, I accept the submissions of the plaintiffs that it was not incumbent upon the plaintiffs to plead a claim in this respect, because the Agreement was relied on by the defendants as a defence. The plaintiffs' claim pleaded a breach of trust. In some respects (although not in all respects pleaded by the plaintiffs) I made findings of breach of trust, set out in [6(2)] of these reasons. The defendants pleaded the January 2002 Agreement as a defence. The defendants succeeded in relation to a defence based upon the Agreement in that I found that it gave rise to a defence of consent. Consent is by its nature a positive defence [207]. In my opinion, it was for the defendants to prove that the consent of the plaintiffs, arising from the Agreement, to breaches of trust extended to authorise all breaches of trust that were established by the plaintiffs.
His Honour found that the 24 January 2002 agreement did not provide a defence against claims that the trustee had failed to pay the appellants 50% of Christou's collections, saying (at supplementary reasons [7]):
I did not find that the plaintiffs consented to receiving no distribution of income of the two trusts. What they consented to, by the January 2002 Agreement, was to receiving an amount calculated as 50% of net collections in satisfaction of their entitlement to an equal distribution of income. Thus, to the extent that the trustees did not distribute the excess of an equal share of net income above the amount representing 50% of collections, the January 2002 Agreement provides a defence of consent. However, the agreement would not provide a defence of consent in respect of any amount by which distributions made to the plaintiffs were less than 50% of Mr Christou's collections (and less than an equal one-third share).
After performing some calculations, the trial judge made an order that SPA pay Christou $122,399 and that SAA pay Corporate Systems $98,676. His Honour also made an order that payment by SPA of $122,399 to Christou would satisfy the order that SAA pay $98,676 to Corporate Systems. Similarly, payment by SAA of $98,676 to Corporate Systems would satisfy, to the extent of the payment made, the order that SPA pay $122,399 to Christou.
In relation to costs, the trial judge ordered that the appellants pay 80% of the costs of the beneficiary respondents. The appellant had argued that the trustees ought to pay the costs of the appellants and the beneficiary respondents. The submissions of the appellants were summarised by the trial judge as follows (at supplementary reasons [46]):
The plaintiffs relied upon O 66 r 4 of the Rules of the Supreme Court 1971 (WA), and submitted that in a claim arising out of a trust the successful applicant's costs are usually paid from the trust fund. The plaintiffs also pointed to the fact that they succeeded in establishing breaches of trust; that the consent defence was, they submitted, only partially successful; and the fact that the trustees' defence was amended at a late stage (to plead reliance on the January 2002 Agreement to the extent that the beneficiary defendants' defence succeeded in that regard).
The trial judge rejected those arguments. In finding that the appellants should pay the beneficiary respondents' costs, his Honour said (at supplementary reasons [48]):
In substance, this litigation involved a contest between the plaintiffs, on the one hand, and the beneficiary defendants, on the other. The central issues related to the existence, enforceability, conditionality, construction and effect of the January 2002 Agreement. In my judgment, the beneficiary defendants have been substantially successful in the contest. A beneficiary whose claim of breach of trust fails on the ground that the beneficiary had consented to the breach of trust should not necessarily expect that the costs of the action will be paid by the trustee. Given the equal beneficial entitlements of the three parties, an order that the costs of the action be paid by the trustee defendants would, in substance, have the result that two-thirds of those costs would be borne by the beneficiary defendants. To my mind, that would not be a just exercise of the costs discretion in this case. Rather, the plaintiffs should pay the beneficiary defendants' costs of the action.
Because the appellants had a measure of success in certain issues, the trial judge declined to order the appellants pay all the beneficiary respondents' costs. Instead, he ordered that the appellants pay 80% of the beneficiary respondents' costs.
Grounds of appeal
There is an appeal and a cross‑appeal. The appellants' grounds of appeal are as follows:
1.The court erred in finding the Appellants/Plaintiffs had consented to and in part, acquiesced in, the breaches of trust by the Second and Third Respondents/Defendants [305], [319], [323] and [397.1(e)] in that:
(a)consent and or acquiescence in the breaches of trust was not pleaded in the defence used at trial or the defence amended after trial or argued at the Trial; and/or;
(b)the Appellants/Plaintiffs were not called upon by the trustees to do some unequivocal act consenting to or acquiescing in the breaches of trust until October of 2003 when the Plaintiffs sought and obtained injunctive relief restraining the Respondents/Defendants from ratifying the breaches of trust; and/or;
(c)contrary to the express and implicit provisions of the 24 January 2002 Agreement, at no time did the Respondents/Defendants inform the Appellants/Plaintiffs the accounting practise [sic] was not to be sold and/or the payment of 50% of collections in lieu of equal distributions was to be indefinite; and/or;
(d)on its proper construction, the 24 January 2002 Agreement was conditional upon a sale of the practise [sic] at least as far as clause 1 and the profit distributions to the Appellants/Plaintiffs is concerned.
2.The Court erred in finding that assistance liability under the second limb of Barnes v Addy applies only where the trustee (or other fiduciary) acts with a dishonest and fraudulent design (and the defendant assists with knowledge of that) [325].
3.Further and in the alternative to Ground 2, the Court erred in not finding that the Second and Third Respondents/Defendants acted with a fraudulent and dishonest design in paying or distributing to the Appellants/Plaintiffs less than the Appellants/Plaintiffs were entitled to either under the relevant trust deeds or under the relevant trust deeds read with the 24 January 2002 agreement.
4.In the alternative to Grounds 1 and 3, the Court erred in finding that equity does not attach liability to a recipient of funds paid in breach of trust in circumstances where the recipient reasonably believes that the relevant beneficiary has consented to a breach of that trust [343].
5.The Court erred in granting the Second and Third Respondents/Defendants leave to amend their defence in terms of order 1 of the Orders made at trial, or at all [209] in that the amendments allowed pleads a positive defence on behalf of the trustee Respondents/Defendants (SPA and SAA) in breach of an undertaking given by Counsel for the Respondents/Defendants to the Full Court.
6.The Court erred in not finding that the Appellants/Plaintiffs were entitled to recover their costs from the Second an Third Respondents/Defendants in that:
(a)the case and argument presented by the Respondents/Defendants at trial was almost wholly unsuccessful;
(b)the costs ought to have been paid by the Respondents/Defendants because the Appellants/Plaintiffs were substantially successful;
(c)if the Respondents/Defendants were not liable for the costs of the Appellants/Plaintiffs the Appellants/Plaintiffs costs ought to have been paid by the trustees; and
(d)in the event the appeal is successful, the Respondents/Defendants ought to pay the Appellants/Plaintiffs' costs.
7.The Court erred in not finding that the 24 January 2002 Agreement came to an end on 30 June 2002, on its face, except in respect of clause 2.
The respondents, by notice of contention, seek to uphold the trial judge's decision on the ground that appellants were estopped from asserting that SPA and SAA had breached the terms of the SP Trust and NFI Trust (respectively). I will set out the grounds of the cross‑appeal later in these reasons.
Ground 1 ‑ consent to or acquiescence in breach of trust
In the first ground, the appellants contend that the court erred in finding that the appellants had consented to, or acquiesced in, the breaches of trust by SPA and SAA. The ground is supported by four separate sub‑grounds. I will consider each of them in turn.
Ground 1(a) ‑ consent not pleaded
First, the appellants complain that the respondents did not plead the defences of acquiescence and consent either in the defence used at trial or in the defence amended after trial, and the issue was not raised at trial.
The crux of the trial judge's decision to dismiss the appellants' primary claims for monetary relief was that the appellants had consented to or acquiesced in the breach of trust by SPA and SAA. The appellants submit, however, that the respondents defended the case on the basis of estoppel rather than consent. The respondents' pleadings did not disclose any defence of consent or acquiescence.
An examination of the respondents' pleadings reveals that consent and acquiescence were not raised explicitly as a defence to breaches of trust. In pars 23 and 24 of the statement of claim, the appellants allege that SPA had, in breach of trust, made payments to Christou which were less than his entitlement under the trust, and payments to Joyce and Lingard which were more than their entitlement under the trust. In the beneficiaries' defence those respondents denied the allegations contained in pars 23 and 24 of the statement of claim. In further answer to the allegations, they pleaded the oral agreement of April 2001 and the written agreement of 24 January 2002.
Similarly, in par 31A of the statement of claim the appellants alleged that SAA had, in breach of trust, paid greater amounts to the private companies associated with Lingard and Joyce than was paid to the family company associated with Christou. In par 32D it was alleged that SAA's conduct was intended to deny the private company of Christou the benefit of any profit in the NFI Trust. In the beneficiaries' defence the allegations contained in pars 31A and 32D, respectively, of the statement of claim were denied. Further, in par 32D the respondents once again pleaded the oral agreement of April 2001 and the written agreement of 24 January 2002.
In the penultimate paragraph of the beneficiaries' defence, the respondents pleaded that the appellants were estopped from recovering the sums claimed in the statement of claim. This aspect of the beneficiaries' defence was put in these terms:
38.Further or alternatively, the first, fourth, fifth and sixth defendants say that if (which is denied) the amount of any of the payments made to Christou, Corporate Systems, Lingard, Glenlea, Joyce or Demandem in 2001 and 2002 were not justifiable as having been made pursuant to the agreements referred to at paragraphs 23 and 24 hereof, or were otherwise not justified in law, or alternatively did not comply with the terms of the Stanton Partners Trust Deed or the NFI Trust Deed then:
38.1Corporate Systems and Christou are estopped from claiming the sums claimed in the Further Re-Amended Statement of Claim by reason of an express representation and/or promise of Corporate Systems and Christou, made to the First, fourth, fifth and sixth defendants, with the intention that the First, fourth, fifth and sixth defendants should act on such representations and/or promise, which the First, fourth, fifth and sixth defendants did, in fact do, and;
38.2The representation was that as from February 2001, Christou and/or Corporate Systems should accept in substitution for a one third share of profit from the Stanton Partners entities, a share of profit from the Stanton Partners entities calculated at 50% of professional fee collections generated by Christou in Stanton Partners Australasia Pty Ltd, until or unless Christou achieved maintainable monthly cash collections of $100,000, in which event Corporate Systems and/or Christou would revert to (between them) a one third share of such profits.
The paragraph was supported by particulars but it is not necessary to set them out here.
At trial, the defence of consent and acquiescence was not raised in clear terms until closing addresses, and then by the trial judge. The first mention of consent and acquiescence came in the following interchange between the trial judge and counsel for the respondents (ts 897):
BEECH J: If the 24 January 2002 agreement did not constitute a variation or amendment of the trust deed, do you say that ‑ I know that you say that it's a defence in any case, and is that said because the complaining beneficiaries have consented by the agreement to what would otherwise be the breach?
BENNETT, MR: Yes. There's a fallacy in the plaintiff's case that you need to actually vary the trust deeds. You don't need to vary them; 18.2.20 provides a mechanism where you can do it without a variation to the trust deed. You can achieve the same effect without changing the language of the deed. What you have is the consent of all of the beneficiaries and the directors to a payment of additional remuneration to some of the unit offers.
BEECH J: Yes, but your submission is not limited in that way, I take it?
BENNETT, MR: No.
BEECH J: It's also the broader submission.
BENNETT, MR: The broader position that a beneficiary can't be heard to complain if that's what he consents to.
The trial judge also raised the issue with counsel for the appellants during closing submissions in the following exchange (ts 920 ‑ 922):
BEECH J: So I'm just wanting to understand how you say the agreement between the unit holders without the trustee ‑ you accept that does take effect and I'm just wanting to understand how it is that it takes effect.
CLIFFORD, MR: It's effectively a promise by Christou that he will have a reduced entitlement for this time period. It does not take effect as between SPA, in this case, and the partners. There is no intersection of this agreement and the trust deed in that respect. The trustee was simply in breach when the unequal payments were made.
BEECH J: And the promise to take less, even if communicated to the trustee, wouldn't be relevant to whether the beneficiary could maintain an action for breach?
CLIFFORD, MR: If the trustee objected on that evidence there might be a problem but it doesn't here. There is nothing coming from the trustee saying 'I was not obliged to make a one-third payment in this period or any other period.' It's just a fact, your Honour.
BEECH J: Can I ask a general sort of question? If there is a certain number of beneficiaries and they agree among themselves to a distribution of their entitlements that differs from that which is provided in the trust deed and if they said to the trustee, 'This is what we have agreed', and the trustee then paid in accordance with it, could a beneficiary who got less than entitlement say, 'That's a breach'?
CLIFFORD, MR: Certainly. It might be met with a defence from the trustee saying 'But you promised that you would take F' but that's the trustee's case, not the other unit holder beneficiaries. It highlights --
BEECH J: When you say it's the trustee's case, are you adverting here to the fact that the trustees have taken a more passive role?
CLIFFORD, MR: Yes. The trustees, with the exception of that Trust Act subsection at 65, don't plead that - in fact what they do is admit that the payments of the net income or income of the trust were not paid equally and then they deny the payment was in breach and that is the extent of their plea. They don't put up some explanation of the nature that I'm answering your Honour's question on.
BEECH J: I may wish to hear Mr Bennett about that in due course but leave that to one side for the moment. So leaving that point to one side, do you accept that in the general position that I have postulated, a trustee might say, 'Well, you can't complain of a breach if you consented to it'?
CLIFFORD, MR: Yes. It would have to say it expressly and give its reasons, but it certainly would be on those facts open to the trustee to say it.
It seems clear that the issues of consent and acquiescence were not explicitly pleaded in the beneficiaries' defence, and were only raised in closing submissions. It does not follow, however, that the trial judge erred in considering those defences and ultimately finding that those defences were made out by the respondents. The defences of consent and acquiescence were grounded on the oral agreement of April 2001 and the written agreement of 24 January 2002. Those agreements were clearly pleaded by the beneficiary respondents in answer to the allegation that payments were made by SPA and SAA in breach of trust. Although the pleadings did not characterise this defence as one of consent or acquiescence, the case squarely mounted by the beneficiary respondents was that the appellants had agreed to reduced payments and, as a consequence, were not entitled to relief for breach of trust.
In my opinion, the acts and events which constituted the consent and acquiescence as found by the trial judge were in substance and reality the same acts and events as those advanced in the estoppel claim. Although the parties might not have characterised the issues of consent and acquiescence formally as a defence, they well understood that the key questions in the case were whether the appellants had consented to reduced payments and whether, if they had consented, they ought to be able to sue for breach of trust. There was a fair opportunity for the parties to argue those points. The trial judge came to the view that, had consent and acquiescence been specifically pleaded as a separate defence, the appellants would not have run their case differently. I cannot fault that conclusion. It is important to note that the appellants, in their written and oral submissions in this appeal, did not point to any way in which their approach at trial would have changed or to any other detriment they had suffered as a result of the beneficiary respondents' failure to plead consent and acquiescence.
I do not think there is merit in ground 1.
Ground 1(b) ‑ appellants not called upon to do some unequivocal act
Secondly, the appellants argue that they were not called upon by the trustees to do some unequivocal act consenting to or acquiescing in the breaches of trust until October 2003. They say that on 13 November 2003 they received notice of a meeting of SAA, proposed to be held on 18 November 2003, to ratify the breaches of trust. In response, the appellants sought and obtained injunctive relief from this court to prevent the meeting from occurring. It was submitted by the appellants that this was a clear and unequivocal act objecting to the breaches of trust and it cannot be said that they had consented to or acquiesced in the breaches of trust.
The appellants' use of the words 'unequivocal act' mirrors the language used by Handley JA in Spellson v George (1992) 26 NSWLR 666. In that case his Honour noted that consent or acquiescence need not be express, saying (at 669 ‑ 670):
Consent may take various forms. These include active encouragement or inducement, participation with or without direct financial benefit, and express consent. Consent may also be inferred from silence and lack of activity with knowledge. However consent means something more than a state of mind. The trustee must know of the consent prior to the breach.
Handley JA then considered whether a beneficiary's silence in the face of an imminent breach of trust by the trustee could constitute consent to or acquiescence in that breach. According to his Honour, when a beneficiary becomes aware that a breach of trust will occur (at 672):
[the beneficiary] is entitled to wait and keep his or her options open until called upon to do some unequivocal act to carry the proposed breach into effect or perhaps until confronted with clear evidence that the breach is about to take place …
However, the respondents never advanced a case that the appellants' conduct in seeking and obtaining an injunction to prevent the ratification of SPA's breaches of trust in November 2003 amounted to consent to or acquiescence in the breach. The question here is whether the oral agreement of April 2001 and the written agreement of 24 January 2002 constituted consent to or acquiescence in the breaches. If either or both of those agreements are found to amount to consent or acquiescence then what happened months or years later is irrelevant. That is what the trial judge found and I see no reason to interfere with that finding. In other words, if the appellants consented to or acquiesced in the breaches in April 2001 or January 2002, it does not matter what they did in November 2003.
In my view ground 1 has not been made out on the basis of the contention in the second sub-ground.
Ground 1(c) ‑ quality of appellants' consent
The appellants argue in this sub‑ground that the trial judge erred in finding that the appellants had consented to or acquiesced in the breaches of trust because the respondents did not inform them that the practice was not going to be sold and (or) that the reduced payments would continue indefinitely.
The thrust of this submission is that the respondents failed to provide the appellants with information which was material to their decision whether to enter the 24 January 2002 agreement. Counsel for the appellant summarised the relevant contention in these terms (ts 40):
There is a requirement for the trustee to prove, where there is a breach of trust, that the consent was of the relevant quality … It has to be fully‑informed consent and the obligation to provide the full information rests with the trustee.
It is said that the trustees' failure to inform the appellants that the practice would not be sold and that the reduced payments would continue indefinitely meant that they had not fulfilled their obligation to provide all the information material to the decision.
A beneficiary will not be held to have consented to conduct constituting a breach unless he has a full knowledge and understanding of the material facts: Re Pauling's Settlement Trusts [1962] 1 WLR 86 ,108 (Wilberforce J); Spellson v George 670 per (Handley JA), 675 (Hope AJA); Edmunds v Pickering (No 3) [1999] SASC 510; (1999) 75 SASR 407, [1429] ‑ [1434] (Lander J). Even if a beneficiary has consented to a breach of trust, the court may take into account 'subjective matters' relied upon by the beneficiary in determining whether it is 'fair and equitable' that the beneficiary be permitted to sue the trustee: Spellson v George at 675 (Hope AJA). It would therefore be open to the court to reject a defence of consent if a beneficiary had a misapprehension about certain matters material to the decision whether to consent which the trustee had failed to correct.
This ground of appeal involves the proposition that the respondents knew or at least contemplated that the practice would not be sold and that, therefore, the 50% of fee collections formula would continue indefinitely. This is inconsistent with the express terms of the 24 January 2002 agreement. It is inconsistent with the fact that negotiations were being conducted with SageCorp. Counsel for the appellants did not identify the evidentiary base for the proposition that the respondents had the requisite knowledge. In addition it is also tantamount to an allegation that the respondents represented that the practice would be sold, knowing that the representation was false. As pleaded in the reply, the appellants alleged that the Lingard and Joyce represented to Christou that the sale of the practice was imminent and would be settled by 30 June 2002. They say that this constituted misleading or deceptive conduct. But the trial judge made no finding to that effect nor, in my view, should he have done so.
Dealing first with the sale of the practice complaint, the preamble to the 24 January 2002 agreement provided that the agreement related to the settlement of all disputes and differences of opinion regarding practice entitlements and the 'potential sale of the practice' [emphasis added]. Clause 1 of the agreement provided that Template A and the calculations and rationale contained therein would 'overlay the sale of the practice should such a sale eventuate' [emphasis added]. Clause 2 was said to take effect immediately upon the signing of the agreement and was effective 'regardless as to whether a sale of the practice eventuate[d]'. The language of the agreement indicates that the agreement was entered into on the basis that the sale of the practice was a possibility, but not a certainty. It is difficult to see how a reasonable person would conclude from reading the agreement that a sale was bound to occur. Indeed, the trial judge found none of the partners thought that a sale was bound to occur, saying ([285]):
I do not accept that the parties shared (or, indeed, that any of them held) an assumption that the imminent sale of the practice was a virtual certainty.
Counsel for the appellants did not identify evidence of statements or representations made by the respondents that, despite the language of the agreement, a sale was bound to occur. Nor did counsel indentify evidence that, at the time the agreement was signed, the respondents knew that no sale of the practice would eventuate. The trial judge found that the respondents had not made any representation to the appellants that the sale of the practice was imminent. His Honour said ([308]):
As to the first alleged representation, I am not satisfied that Messrs Joyce or Lingard represented to Mr Christou that the sale of the practice was imminent and settlement would take place by June 2002. The evidence of Mr Christou did not provide any clear support for a conclusion that a representation to that effect was made by Messrs Joyce or Lingard (see ts 581- 583). To the extent that Mr Christou gave evidence of a statement that the sale of the practice was imminent, such statements were said to have been made by Mr Haughton in meetings with Mr Christou at which Messrs Joyce and Lingard were not present. Moreover, although this would not, of itself, be determinative, the flavour of what is stated in documents during January 2002 as to the proposed sale provides no support for the representation alleged. See, for example, the minutes of the meeting of 2 January, the memorandum of 21 January 2002 and the terms of the agreement of 24 January 2002 itself (exhibit 1 pages 522 ‑ 523; 535 ‑ 536; 541 ‑ 543).
In my view it was open to the trial judge to make those findings. And the reverse holds equally true. There was no sufficient evidentiary base for a finding that the respondents knew a sale would not be effected.
In the circumstances, the appellants cannot complain that the respondents failed to inform them that the sale of the business would not proceed. The respondents did not know that the sale would not proceed. The 24 January 2002 agreement contemplated that the sale might not proceed. The respondents did not tell the appellants that the sale would proceed. The respondents therefore were not required to inform the appellants of the fact that the sale might not proceed; such a fact was obvious.
Similarly, the complaint that the respondents failed to inform the appellants that the reduced payments might continue indefinitely must fail. Clause 1(vi) of the 24 January 2002 agreement provides that:
Mr Christou will be entitled to a profit entitlement equalling 50% of his professional fee collections until such time as the practice is sold. If Mr Christou attains average collections over a 12 month period of $100,000 per month, then Mr Christou reverts to a profit entitlement from that point equal to Mr Joyce and Lingard at his discretion.
The agreement sets out the two ways in which the appellants' reduced payments will come to an end. The first is the sale of the practice. The second is when Christou's average monthly collections over a 12 month period amount to $100,000 and he elects to receive the same profit entitlement as Joyce and Lingard. It follows, logically, that if neither of those events occurs, the reduced profit entitlement will continue indefinitely.
The appellants do not point to any finding by the trial judge that the respondents had represented that the reduced payments might come to an end earlier than as provided in the agreement, nor do they identify any evidence to support that contention. Nor do they point to evidence supporting the proposition that Christou mistakenly believed that the reduced payments might come to an end earlier than is provided in the agreement and the respondents knew about this belief but said nothing.
Again, the third sub‑ground of ground 1 is without merit.
Ground 1(d) ‑ cl 1(vi) conditional on sale of practice
Fourthly, the appellants argue that upon its proper construction the 24 January 2002 agreement is conditional on the sale of the practice, at least so far as clause 1 and the profit distribution to the appellants is concerned.
The appellants advance several reasons in support of the proposition that cl 1(vi) is conditional on the sale of the practice. First, cl 1 commences with the following words:
The attached Template 'A' which forms part of this Agreement and the calculations and rationale contained therein will overlay the sale of the practice should such a sale eventuate. The principles set out in that template include:-
It is said that, in light of the opening words of cl 1, the subclauses contained within cl 1 ought to be construed as being conditional upon the sale of the practice. The second contention is that there is no commercial sense in the appellants agreeing to a reduced profit entitlement unconditionally and indefinitely when they would otherwise be entitled to an equal share of the profits. Finally, the unconditional and indefinite reduction in profit entitlement had previously been proposed to Christou and he had rejected it. There was therefore no reason for him to agree to it on 24 January 2002.
In order to construe cl 1(vi) of the 24 January 2002 agreements, a detailed analysis of the agreement's terms, language and structure must be carried out.
The opening sentence of the agreement states that its terms relate to two things: the potential sale of the practice; and the settlement of all disputes and differences of opinion regarding practice entitlements. Clause 1 begins by stating that Template A forms part of the agreement and its calculations and rationale will overlay the sale of the business. It then sets out, in subclauses (i) ‑ (vi), principles that are said to be included in Template A. I will return later to examine this clause and its subclauses more closely.
Clause 2 provides that Christou will take over the practice's interest in E Genius in settlement of his past claims of profit entitlement, other than the entitlement referred to in cl 1(vi). This is to occur immediately upon signing and regardless of whether the sale of the practice eventuates. Clause 3 provides that if the dispute with Esanda is settled, any monetary liability will be paid by the practice. It also provides that on the sale of the practice, any outstanding lease commitment which arises as a result of the settlement will be paid equally by the parties to the agreement (that is, Christou, Lingard, Joyce and their associated private companies). Clause 4 provides that the current action against Palassis will continue, and any proceeds from settlement or costs incurred will be split equally between the parties. Clause 5 is an arbitration clause.
It seems to me that the agreement is neither wholly conditional on the sale of the practice nor wholly unconditional. Clauses 2 and 4 do not appear to be conditional on the sale of the business. The first sentence of cl 3 is not conditional on the sale of the practice, but the second sentence is.
As I mentioned earlier, cl 1 commences by stating that the principles in Template A will overlay the sale of the practice should such sale eventuate. It then sets out in subclauses some of the principles said to be in the template. Subclause (i) provides that Christou will be entitled to 29% of the cash component of the sale price, subject to some adjustments contained in Template A. Subclauses (ii) and (iii) provide details of how the practice will invest in the Castensen deal, and how the partners will receive a share of the deal. Subclause (iv) provides that the loan account of the practice in respect of Christou's entitlement will be determined in accordance with the accounts ruled off at 30 June 2001. Subclause (v) provides that when the practice is sold, Christou may use an office space, parking and secretarial services. Finally, subclause (vi) provides:
Mr Christou will be entitled to a profit entitlement equalling 50% of his professional fee collections until such time as the practice is sold. If Mr Christou attains average collections over a 12 month period of $100,000 per month, then Mr Christou reverts to a profit entitlement from that point equal to Mr Joyce and Lingard at his discretion.
There is little doubt that subclauses (i) ‑ (v) all related to the projected sale of the practice. Subclauses (i) ‑ (iv) are all matters which are dealt with in Template A, and the principles in Template A are said to overlay the sale of the practice if such a sale eventuates. Although subclause (v) is not dealt with in Template A, the opening words of the subclause ‑ 'when the practice is sold' ‑ indicate that it is only to operate if such a sale takes place.
Subclause (vi) is different from the other subclauses for several reasons. First, it is not a matter which is dealt with in Template A. Template A is concerned with the equity and loan accounts of the parties but does not deal with income or profit entitlements. Secondly, subclause (vi) deals with matters which occur before any sale of the practice, while the other subclauses deal with matters which would occur at or after the sale of the practice. In other words, the profit entitlement the subject of subclause (vi) is the profit entitlement up to the sale of the business, while the other subclauses specify the parties' entitlements after the sale of the practice.
These considerations, among others, led the trial judge to find that subclause (vi), despite the opening words of cl 1, was not conditional on the sale of the practice. The appellants argue that the trial judge erred, and invite this court to construe subclause (vi) as being conditional on the sale of the practice. They submit that a plain reading of the clause supports this construction. They also submit that it would make little commercial sense for Christou to agree to subclause (vi) if it were unconditional, and that Christou had earlier rejected a proposal that his profit entitlement be reduced indefinitely.
The wording of subclause (vi) does not indicate that subclause (vi) is conditional on the sale. The question is whether, when cl 1 is read as a whole and considered in the context of the agreement as a whole, that result ensures.
In my opinion, the trial judge was correct to construe subclause (vi) as being unconditional. I have already mentioned that subclause (vi) deals with matters that are not the subject of Template A and occur before any sale of the practice. These factors distinguish subclause (vi) from subclauses (i) - (v). There are several other factors which militate against subclause (vi) being conditional. The first reason is the opening words of the agreement provide that the agreement relates to the potential sale of the practice and the settlement of all disputes and differences of opinion regarding practice entitlements. Subclauses (vi) deals squarely with profit entitlements, providing a scheme to calculate the profit entitlement of Christou. In an agreement which is said to relate to the settlement of disputes about profit entitlements, it makes little sense for such an important subclause to be conditional.
I turn now to the O 66 r 4 argument. Order 66 r 4(1) provides:
Where property is the subject of any action or matter, or where any question arising therein will affect any right or claim to property, the Court may make an order that the costs of any party may be recovered out of the property with or without recourse against any other party: Provided that no such order shall be made unless the Court is satisfied that the party seeking the order had a genuine interest to protect, or that it was reasonable in the circumstances that he should appear.
This rule does not compel the court to make an order for costs out of the property. The word 'may' indicates that, ultimately, the award of costs in these circumstances is a matter of discretion. The trial judge did not order SPA and SAA to pay the costs of the appellants and beneficiary respondents because, given the equal beneficial entitlements of Christou, Joyce and Lingard (or their private companies), such an award would mean that the beneficiary respondents would in substance bear two thirds of the costs. Such an award would not reflect the success of the beneficiary defendants in the litigation. In my opinion, the appellants have not demonstrated that the exercise of his Honour's discretion in this manner was inappropriate.
I am not persuaded that the trial judge erred in refusing to order SPA and SAA to pay the appellants' costs. Ground 6 fails.
Ground 7 ‑ implied term
This ground of appeal alleges that the trial judge erred in not finding that the 24 January 2002 agreement came to an end on 30 June 2002, on its face, except in respect of cl 2.
The appellants argue that there is an implied term in the agreement that the agreement (with the exception of cl 2) would come to an end automatically if the practice was not sold within a reasonable time. The appellants submit that a reasonable time is the end of the financial year, namely 30 June 2002. In the appellants' submission, the implied term arises because the relevant trust deeds require that a set of accounts be taken and the income distributed at the end of the financial year. If that were not done, the trustees would be assessed for income tax at a 'penal' rate.
A similar argument was put to the trial judge, who rejected it. In the argument put to the trial judge, the appellants submitted there was an implied term that the whole agreement would come to an end if the practice was not sold within a reasonable time. His Honour said ([291] ‑ [292]):
Clause 2 is also a significant obstacle to the plaintiffs' further argument that the agreement was subject to an implied term that the sale of the practice would take place within a reasonable time, failing which the agreement would or could be terminated. Clause 2 is directly inconsistent with such an implied term. In itself, that would seem to be fatal to the alleged implied term.
Further, and in any event, on a reading of the agreement as a whole I am not satisfied that the well known tests for the implication of a term are satisfied.
In my view his Honour was correct to find that there was no implied term that the whole agreement would come to an end if the practice were not sold within a reasonable time. Even if the appellants' argument is re-framed so as to exclude cl 2 from the operation of the implied term, the same result would follow.
The rules governing the implication of a term in a contract are well known. I need do no more than refer to BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, in which the Privy Council said (283):
[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
I do not believe that the implied term advocated by the appellants is necessary to give business efficacy to the contract. The contract seems perfectly capable of operating sensibly without the need for an implied term providing that it should come to an end at the end of the financial year. Further, I do not think that the alleged implied term is so obvious that it goes without saying. Given the context within which the agreement was entered (there was a serious dispute between the parties about profit entitlements) and the fact that none of the parties held an assumption that the imminent sale of the practice was a certainty (see the trial judge's reasons at [285]), such a term seems unlikely.
Ground 7 fails.
Notice of contention ‑ estoppel
In their notice of contention, the respondents argue that the decision of the trial judge ought to be upheld on the basis of estoppel. As none of the appellants' grounds of appeal has been made out, there is no need for me to deal with the notice of contention.
The cross‑appeal
Grounds of the cross‑appeal
The second and third respondents, SPA and SAA, also appeal against the trial judge's decision. The three grounds of their cross-appeal are set out below:
1.The primary court erred in law in holding that the Agreement only afforded a conditional (or partial) defence, and that the appellants' claim should have been allowed to the extent that appellants did not receive 50% of collections, resulting in the making of orders 2 to 5, in that:
1.1that the appellants should not have been permitted to advance the claims leading to the making of those orders in circumstances where they did not plead any such claims, nor refer to or articulate them until after the revised reasons for decision were delivered 28 February 2008.
1.2The second and third respondents were therefore deprived of the opportunity of pleading matters by way of defence to such claims, and adducing additional evidence, which they would have done.
2.The primary court erred in fact in making an order for payment of the shortfall between the appellants' profit entitlement for 2002, and the distribution actually made, in that profit share does not necessarily reflect loan account balance or payment entitlement. There may have been other transactions between the appellants, and the second and third respondents, that affected the balance of the appellants' loan accounts.
3.The primary court erred in fact in calculating the amounts in orders 2 and 3 in that the primary court overlooked evidence that amounts totalling $194,846 had been paid to the appellants in 2002 which reduced the appellants' loan account and hence the amount due and owing to the appellants in that year.
Cross‑appeal ground 1 ‑ claim not pleaded
In this ground, SPA and SAA contend that the trial judge erred in finding that the appellants could obtain monetary relief against SPA and SAA to the extent that they did not receive 50% of Christou's collections in 2002. The substance of their complaint is that this issue was not pleaded by the appellants and, as a result, SPA and SAA were unable to adduce additional evidence to defend those claims.
In their written submissions, SPA and SAA argue that the appellants had run their case on the basis that they were entitled to an equal one‑third share of profit and SPA and SAA had, in breach of trust, made payments to the appellants which were less than a one-third share of profit. The appellants had not specifically pleaded a case that SPA and SAA failed to make payments to them in accordance with the 50% formula. Nor had they specifically pleaded a claim that they were entitled to the shortfall between what they actually received from SPA and SAA and what SPA and SAA should have paid them under the 50% formula contained in the 24 January 2002 agreement. It was submitted that, as a consequence of the appellants' failure to plead this claim, SPA and SAA did not have the opportunity to defend it.
I am not persuaded by SPA and SAA's argument. The appellants claimed that SPA and SAA had, in breach of trust, failed to pay the appellants their one-third share of profits to which they were entitled under the trust deeds. The respondents raised a positive defence, arguing that the appellants had consented to receive 50% of Christou's collections in breach of trust. This is a defence that is equitable in nature. It would not sit well for the trustee respondents to call in aid an equitable defence to their breach of trust (albeit a breach consented to by the beneficiary) and then to deny to the beneficiary a right to assert their entitlements according to the tenor of the consent. It would be inapposite for the respondents simply to say: 'You agreed to accept X rather than your entitlement under the trust'. They must also say: 'You agreed to accept X rather than your entitlement under the trust and that is your present entitlement'.
In any event, as the trial judge said in his supplementary reasons, at [7], the 24 January 2002 agreement (on which the defence of consent was based) would not provide a defence of consent in respect of any amount by which the distributions to the appellants were less than 50% of collections and less than an equal one‑third share. Leaving to one side the distinction between 'distributions' and 'payments', to which I will return in discussing the third ground of the cross‑appeal, this explains the approach to this aspect of the appellants' monetary claim.
In my opinion it was not necessary for the appellants to plead expressly that they had been paid less than their entitlement under the 24 January 2002 agreement. The respondents, in relying on the 24 January 2002 agreement, had the onus of showing that SPA and SAA had acted in accordance with the obligations flowing from the agreement. SPA and SAA cannot say that they were taken by surprise by the claim now advanced by the appellants. It should have been obvious that if the respondents were successful on the issue of consent, the appellants could claim the difference between what they received in payments and what they should have received under the 50% of collections formula.
In fact, this is how the evidence was led. Christou's witness statement contained a spreadsheet, Annexure 3, in which he set out, on a month by month basis for the years 2001 to 2007, his fees collected, 50% of those collections and the amount received. The spreadsheet then contains columns for the 'balance outstanding for the month', interest on that balance at 6% and the 'balance outstanding cumulative'. Christou was cross‑examined at length on the Annexure and he acknowledged some inaccuracies in it; for example, the failure to bring GST to account. The respondents also adduced evidence on this question. Joyce's witness statement, par 136, refers to a 'reconciliation of the amounts payable for the period January 2001 to 30 June 2006' (in fact it goes through to 2008) which sets out the respondents' calculations of the 50% fees collections and 'cheques banked by Christou'. In relation to ground 3 of the cross-appeal (to which I will turn shortly) the respondents rely heavily on this document to establish the amounts actually paid to the appellants. The respondents also tendered a statement of Daniel Dowsett (the Credit and Administration Manager of SPA), one of the purposes of which was to identify certain payments said to have been made to the appellants and not reflected in Annexure 3. Again, I will have more to say about Dowsett's evidence later. This is the way the trial was run and I do not think the respondents can claim that they were denied a proper opportunity to defend the claim.
The first ground of the cross‑appeal has not been made out.
Cross-appeal ground 2 ‑ order for payment
In the second ground of the cross-appeal, SPA and SAA argue that the trial judge erred in ordering that SPA and SAA pay the shortfall between what the appellants were actually paid and what they should have received under the 50% of collections formula for the financial year ending 30 June 2002.
The orders the subject of complaint are orders 2, 3 and 4 made by the trial judge on 28 March 2008. Those orders were (at supplementary reasons [66]):
2.The second defendant do pay to the second plaintiff the sum of $122,399.38, and interest thereon at 6% per annum from 30 June 2002 until judgment.
3.The third defendant do pay to the first plaintiff the sum of $98,676.66, and interest thereon at 6% per annum from 30 June 2002 until judgment.
4.Satisfaction of order 2 discharges order 3 and satisfaction of order 3 discharges, to the extent of the payment made, order 2.
SPA and SAA submit that the trial judge should have made declarations that the appellants had profit entitlements of the relevant sums, but not ordered that SPA and SAA pay those sums to the appellants. The trustee respondents submit there is a difference between a profit entitlement and an entitlement to the payment of moneys. Through loan accounts, adjustments are made to reflect other transactions between the partner and the partnership. It is the balance of the loan account to which a partner is entitled to payment. For example, suppose a partner (with authority) used $10,000 from the partnership account for personal (non‑partnership) expenses. While his profit entitlement from the partnership might be $100,000 for that year, his entitlement to payment, as reflected in the loan account, would only be $90,000 so as to reflect his debt to the partnership. Similarly, if a partner were to make drawings throughout the year against anticipated profit the entitlement to payment at the end of the year would be the profit entitlement less the aggregate of the drawings (and any other debts to the partnership).
SPA and SAA submit that there may be adjustments that need to be made to the appellants' loan account to reflect debts owed by the appellants to the partnership. For example, Christou may have bought personal items using the partnership credit card. SPA and SAA submitted that the more appropriate order would be a declaration that the appellants have profit entitlements of the relevant amounts. SPA and SAA could then amend their accounts to reflect the new profit entitlement. Any outstanding debts owed by the appellants could be balanced against the profit entitlement and the appellants' entitlement to payment could be calculated. In other words, the trial judge should have made a declaration as to the appellants' profit entitlement and then left the parties to do the sums, taking into account any offsetting claims.
In my opinion, the trial judge did not err when he ordered the payment of the shortfall between the appellants' entitlement to 50% of Christou's collections and what they actually received. There are several reasons for this conclusion. First, the trial judge formed the view that issues concerning the entitlements under the 50% of collections formula for the financial years 2001 and 2002 were fully joined and argued. His Honour took a different view of the entitlements for 2003 and following (see supplementary reasons [30] ‑ [32]) and hence made order 5, which is limited to declarations as to fee collections under the 50% formula for those years. But in relation to 2002 the evidence was led and the issues fought out. It is uncomfortably clear that this judgment may not resolve all the issues between the parties and that further litigation is likely. Nonetheless, where issues have been aired and decided there ought to be finality. These proceedings have been on foot for more than five years; they need to be resolved. The award of a fixed monetary sum is more likely to serve that end, at least in respect of one issue.
Secondly, the respondents had the opportunity to adduce evidence of adjustments that ought to be made to Christou's loan account, or debts that were owed by him to the partnership. It should have been apparent to the respondents that if they were to rely on the 24 January 2002 agreement as a defence, they would need to show that they had paid the appellants their entitlements under that agreement. Similarly, if there were issues that justified the non‑payment to the appellants of what would otherwise have been their full entitlements it would have been necessary for the respondents to prove those matters. They have not done so and they cannot now say that they should not pay sums owing under that entitlement because there might be adjustments that need to be made to Christou's loan account.
The third reason is closely linked with the second. It seems that even at this stage the respondents cannot identify any adjustment which they say needs to be made to Christou's loan account. In their written submissions, SPA and SAA say that 'it is possible that there may have been adjustments' to Christou's loan accounts. At the hearing of the appeal, counsel for SPA and SAA illustrated his point about adjustments by talking about the hypothetical partner who pays for travel or alcohol for himself on the firm account. He did not suggest, however, that in this case Christou had made any such purchases on the firm account. In the absence of a serious suggestion that material adjustments ought to be made to Christou's loan account, it seems to me that SPA and SAA's contention that his entitlement to payment might be lower than his profit entitlement is little more than speculation.
For these reasons, the second ground of the cross-appeal fails.
Cross‑appeal ground 3 ‑ incorrect figure used in calculation
The final ground of the cross‑appeal alleges that the trial judge erred in calculating the shortfall between what the appellants were paid and what they were entitled to under the 50% of collections formula, in that he overlooked evidence that amounts totalling $194,846 had been paid to the appellants.
The trial judge calculated the shortfall as follows (at supplementary reasons [18] ‑ [20]):
The plaintiffs are content for the court to proceed on the basis of the defendants' evidence as to the amounts to which the plaintiffs were entitled under the 50% formula. Mr Joyce's witness statement (exhibit B, par 136) referred to and tendered a document entitled 'Summary' that set out Mr Christou's collections for each financial year and calculated an amount for 50% of collections net of disbursements (exhibit 1, page 838). That evidence is to the effect that, under the 50% formula, the plaintiffs' entitlements in respect of [2002 is $233,500.17].
…
In the 2002 financial year, distributions to the plaintiffs were made in amounts of $19,253.79 by SPA [38], and $91,847 by SAA [46]. Thus, the distributions made in favour of the plaintiffs totalled $111,100.79. According to the 50% formula, the plaintiffs were entitled to distributions in the sum of $233,500.17. Thus, to the extent of the difference ‑ $122,399.38 ‑ the defence of consent does not apply.
The trial judge then made orders that SPA and SAA pay a total of $122,399.38 to the appellants.
SPA and SAA submit that the trial judge erred in finding that distributions totalling $111,100.79 were made to the appellants. They say that the evidence shows that distributions totalling $194,846.00 were made to the appellants. This would have the effect of reducing the shortfall in payments from $122,399.38 to $38,654.17.
The trial judge's figure of $111,100.79 was based on distributions of $19,253.79 and $91,847 by SPA and SAA respectively to the appellants. The SPA figure was obtained from the SP Trust accounts. The SAA figure, however, was not obtained from the NFI Trust accounts, as the financial statements of SAA tendered at trial were incomplete. The SAA figure was instead obtained from the tax return for the NFI Trust.
In any event, SPA and SAA submit that the trial judge should have calculated the payment to Christou not by reference to the financial statements (or tax returns) but in accordance with a document entitled 'Summary' (exhibit 1, page 838) (the summary document). The document sets out material for each financial year from 2001 ‑ 2007 and for what appears to be part of 2008. The column headings and the entries for the first two years only (with the dollar figures rounded) are as set out in the following table.
Date
Collections
50%
50% of disbursements
Net
Cheque banked by Christou
2001
241,862
120,931
2,542
118,389
225,420
2001
474,170
237,084
3,584
233,500
194,846
I should add that the entries in the sixth column (Cheque banked by Christou) for 2004, 2005 and 2006 are $58,432, $6,490 and $96,852 respectively. The reason why I have mentioned those figures will become apparent shortly.
As I have already mentioned, the summary document was adduced in evidence by Joyce. So far as I can see Joyce was not cross-examined on its contents. Counsel for the respondents told this court that the evidence was unchallenged at trial (ts 75). There is, therefore, no explanation as to what is meant by the heading to the sixth column 'Cheque banked by Christou'. This ground of the cross‑appeal is predicated on the proposition that sixth column sets out the amounts distributed to the appellants and against which any balance due to him under the 50% of collections formula would have to be calculated.
It is not easy to discern exactly what happened at trial concerning these figures. At the hearing on 28 February 2008, after the supplementary reasons had been delivered, counsel for the appellants handed up an 'aide memoire' containing some calculations apparently based in part on the summary document and in part on Christou's evidence. Counsel indicated that while there were some minor differences between the calculations they had made and those contained in the summary document the appellants accepted the figures in the summary document (save for 2008). But a close reading of the relevant exchange (ts 988 ‑ 991) indicates that the appellants' concession was primarily in respect of the first five columns of the summary document; that is, the calculation based on the 50% of collections formula. The exchange between the trial judge and counsel for the appellants continued (bearing in mind that '838' is the summary document and 'exhibit 2' is Christou's witness statement) (ts 991 ‑ 992):
BEECH J: All right. Then the first column of your aide-memoire that you have handed up that is headed, Difference Between Payments Made by SBA and SAA and 50 per cent of Collections, the first substantive column which is headed, 50 per cent of Collections, comes?
RUMSLEY, MR: From page 838 with one exception, your Honour.
[This exchange continued in relation to the 2008 figure and is not relevant for the purposes of this appeal.]
BEECH J: … I understand the source of the first column. … Then you have 'amount received'.
RUMSLEY, MR: That comes from exhibit 2, which is the witness statement of Mr Christou. … In part ‑ and in part, there is common ground between it and 838. On page 838, the number for 2004 at 58,432 is common to both documents, as is the 6490 and the 96,852. So there are three entries for the 04, 05 and 06 figure where there is no difference between the figures the defendants say Mr Christou received and the amounts that Mr Christou, on his evidence, says he actually received.
In respect of the other years, those amounts are drawn from the annexure to his witness statement, which is exhibit 2, the final two pages; pages 42 and 43. … Let's take the easy approach first. Page 43, five columns across from the left, is headed Amount Received.
[There then followed an exchange identifying p 42 and p 43 as Annexure 3 to Christou's witness statement.]
RUMSLEY, MR: So if we are on page 43 in annexure 3, fifth column, headed Amount Received, you will see that it there does not summarise the annual amounts but sets out specific cheques received on specific days. I say go to the easy one first because the first number of $6490 is the only payment received in the 2005 financial year, and that is reflected in - - -
BEECH J: Is the position that when the numbers in the amount received column are added up for a particular financial year, the total given is the amount you have put in for the 2001, 2002 and 2003 years?
RUMSLEY, MR: That's correct. In fact for all of those years, and for the three that I took you to earlier, the amounts are just common. Those same amounts are reflected in both documents; but yes.
It seems to follow from these exchanges that the appellants accepted the accuracy of the first five columns of the summary document. There is, therefore, no ongoing dispute as to the amount representing 50% of Christou's collections. It also follows from these exchanges that the appellants accepted that the figures in sixth column of the summary document (Cheque banked by Christou) and those reflected in Annexure 3 of Christou's statement (Amounts received) are comparable. This is borne out by the reference in the middle of the cited passage to '58,432, 6490 and 96,852'. But it does not necessarily follow that the sixth column was accepted as correct in its entirety. The tenor of counsel's submissions seems to bear out the proposition that the difference between 50% of collections (as to which there is no dispute) and the 'amounts received' or 'cheques banked by Christou' (which remain contentious) is the amount to which the appellants said in closing that they were entitled under their monetary claim.
For present purposes attention can be confined to the 2002 financial year. A question arises from the last comment of counsel for the appellants in the passage set out above; namely, whether (and if so to what extent) the 'amounts received' (as included in the appellants' aide memoire) differed from those in the sixth column of the summary document. When he said 'those same amounts are reflected in both documents' was he explaining the appellants' case as being based on an acceptance that for 2002 the 'Amounts received' (Annexure 3) and 'Cheque banked by Christou' (summary document) were the same figure? In this respect I need only refer to the entries for 2002.
According to the summary document, in the financial year 2002 the appellants received $194,846. The relevant portion of Annexure 3 of Christou's witness statement shows that in the financial year 2002 (namely, between 2 August 2001 and 8 May 2002) the appellants received five payments totalling $158,648 (rounded).
I mentioned a little earlier a witness statement of Daniel Dowsett that was tendered by the respondents. In it Dowsett identified a number of payments totalling $116,198 made by SPA to Christou. Relevantly, there were four cheques totalling $36,198 drawn in the 2002 financial year. If the amount of those four cheques ($36,198) is added to the payments listed in Annexure 3 ($158,648) the total ($194,846) equates to that appearing in the sixth column of the summary document. I doubt that is mere coincidence.
When counsel was closing the respondents' case at trial he tendered Dowsett's witness statement. Counsel for the appellants told the trial judge that he understood the purport of Dowsett's evidence to be that the four cheques (among others) should have been added to Annexure 3 as 'amounts received'. He would only need to cross‑examine Dowsett to establish that those cheques 'should not be included'. Counsel told the trial judge that three of the cheques were related to an investment jointly entered into by Joyce and Christou called Hill Trolley. The fourth was marked on the cheque butt 'transferred into main account' and was not a payment to Christou. This was the subject of an exchange at ts 848 ‑ 850. Counsel for the appellants indicated that on the basis of what was said in response he did not require Dowsett to attend for cross‑examination. The exchange concluded with these comments:
CLIFFORD, MR: So on that basis‑ well, let me be clear. My friend is accepting that … the rest are Hill Trolley except for the transfer to the main account, which is the 2099 cheque.
BEECH J: Yes, and he has accepted that what is written on the cheque includes the words 'transfer into main account' and it is to be concluded from that that that is indeed what occurred.
Counsel for the respondents did not intervene at that point. It can be assumed, therefore, that counsel did not feel the trial judge had misunderstood the position. Nor did he return to the matter in oral closing submissions.
Although it was not included in the appeal papers I have seen the aide memoire. I appreciate it is not 'evidence' but it purports to reflect other evidence that had been adduced. In the column headed 'Amount Received' the entry for the 2002 financial year has a figure of $150,393.55. This differs from my calculation of the 'Amounts received' in financial year 2002 as shown in Annexure 3 ($158,647.51) by a figure of $8253.96. The latter figure is precisely the amount shown in Annexure 3 as having been received on 2 August 2001. Again, I doubt that is mere coincidence. I can only assume, therefore, that in the aide memoire the receipt on 2 August 2001 of $8253.96 was inadvertently excluded.
The purpose of examining the aide memoire is not to ascribe to it any evidentiary effect. It is simply to assist in understanding the way the appellants' case was put in closing. I do not think the appellants' case was run or closed on the basis that the sixth column of the summary document was accurate. Given what occurred at ts 848 ‑ 850 it cannot be said, therefore, that the summary document stood 'unchallenged'. The challenge was to have been made in the foreshadowed cross-examination of Dowsett. This seems also to be the effect of the submissions made by counsel for the appellants on 28 February 2008: ts 994 ‑ 995.
If I am correct in making the two assumptions that I have described as being unlikely to have been mere coincidences, the appellants' claim for the financial year 2002 (based on the summary document for collections and an adjusted Annexure 3 for payments received) would be as follows:
50% of collections $233,500
Less payments received ($158,648)
Net claim $74,852There would be a difficulty in basing orders on those figures because neither the summary document nor Annexure 3 differentiates between payments made by SPA and those made by SAA. In any event, that is not how the trial judge dealt with the issue. I need to describe in a little detail the reasoning process that led his Honour to the conclusion he reached. The main reasons were delivered on 28 February 2008. His Honour dealt with the question whether there had been breaches of trust as alleged against SPA and SAA. He noted [194] that both trust deeds required equal distributions of the income of the trust to unitholders and there had been no variation of the terms of the deeds. He also noted [196] that the effect of both deeds was that the unitholders were entitled to proportionate shares of the 'net income of the trust fund', defined to mean 'net income of the trust estate' as provided for in the Income Tax Assessment Act 1936 (Cth). Under s 95 of the Act the 'net income of a trust estate' is the total assessable income of the trust estate calculated as if the trustee were a resident and taxpayer in respect of the income, less all allowable deductions, with certain immaterial exceptions. His Honour described the difference between 'salaries', 'drawings' and 'distributions' and found that it was necessary, in some instances, to add back salaries and drawings in order to arrive at the proper amount of distributions: see, for example, [38], [39] and [330].
The trial judge examined the SP Trust financial statements and found [199] that, relevantly in 2002, SPA did not distribute the income of the trust equally between the three beneficiaries. The accounts disclosed 'net income' of $57,761, a third of which was credited to each of the private companies. But a further amount of $1,474,105 was recorded under expenses as partners' salaries. Half of that amount was paid to each of Demandem and Glenlea and none to Corporate Systems: see [38]. His Honour found that the amount of $1,474,105 should have been distributed equally and the failure to do so constituted a breach of trust: see [198].
His Honour then turned to the NFI Trust. Apparently, the financial statements were incomplete and he could not do the same exercise as he had carried out for the SP Trust. His Honour found [202] that the best evidence of the net income of the NFI Trust and of the distributions made to each of the three beneficiaries was the tax returns for the relevant years. They showed that in 2002 the net income was distributed as to $239,862 to each of Demandem and Glenlea and as to $91,847 to Corporate Systems: see [46]. By failing to distribute the income equally SAA breached its obligations under the NFI Trust Deed. In reaching this finding the trial judge noted [203]:
When the NFI tax returns were put to Mr Joyce in cross examination, he was at pains to emphasise that what was in the tax returns reflected the 'distributions of taxable income' and that 'tax is different to accounting because there's adjustments for all sorts of things' (ts 797 ‑ 800). However, given the definition of 'net income' of the NFI Trust, it is to taxable income that attention is to be directed. Thus, I find, the tax returns constitute the best evidence of the net income of the trust and of the distributions of that income.
Two things are to be noted from these findings. First, his Honour was dealing with the question whether or not there had been a breach of trust. The breach alleged by the appellants was a failure to distribute the net income of the trust to the beneficiaries equally as required by the terms of the trust deeds. Of necessity his Honour had to make a finding about what 'income' fell to be distributed and what had been 'distributed' so as to decide whether there had been a breach of the obligation. Had the trial judge found that there was no breach he would not have been required to go on to determine whether, by entering into (or as evidenced by) the 24 January 2002 agreement, the appellants had consented to the breach of trust. He found that they had consented. What was to flow from the implementation of the 24 January 2002 agreement (properly construed) was a different matter.
Secondly, his Honour decided that, in order to find whether there had been a breach of trust, the tax returns of the NFI Trust provided the 'best evidence' both as to the income of the trust and to the distributions that had been made. It is to be inferred that he reached the same conclusion about the financial statements of the SP Trust.
It is apparent that the parties had been provided with a copy of the main reasons before the hearing on 28 February 2008. It is to be assumed that the minutes of proposed orders and the aide memoire were prepared accordingly. In delivering his supplementary reasons on 28 March 2008 the trial judge (over objections from the respondents) ruled that the appellants could mount a monetary claim in an amount representing the extent (if any) to which distributions to the appellants fell short of the amount due based on the 50% formula. But he rejected the basis on which the appellants had advanced the claim. In doing so he reiterated his earlier findings that there had been breaches of trust but that the breaches were excused by the consent. However, he said (at [7] and [13]):
I did not find that the plaintiffs consented to receiving no distribution of income of the two trusts. What they consented to, by the January 2002 Agreement, was to receiving an amount calculated as 50% of net collections in satisfaction of their entitlement to an equal distribution of income. Thus, to the extent that the trustees did not distribute the excess of an equal share of net income above the amount representing 50% of collections, the January 2002 Agreement provides a defence of consent. However, the agreement would not provide a defence of consent in respect of any amount by which distributions made to the plaintiffs were less than 50% of Mr Christou's collections (and less than an equal one-third share).
…
[I]t is important to give careful attention to the proper identification of the trustees' obligations and any breaches of those obligations. The relevant obligations of the trustees were to make distributions of income in equal amounts [14], [18], [194], [199] and [202]. Although the plaintiffs' case complained of the making of unequal payments, the breaches of trust which I have found to have occurred related to the making of distributions in unequal amounts [199], [202], [204] (the conclusion at [397](1)(c) and (2)(a) mistakenly refers to payments when it should refer to distributions). In this regard, I also refer to the discussion, in the reasons, of the distinction between drawings and distributions: see, for example, [330], [333].
On this basis the trial judge declined to act on evidence as to payments made to the appellants. Both the summary document and Annexure 3 were items of evidence of that character. Instead, his Honour identified the amounts to which the appellants were entitled under the
50% of collections formula, which was not controversial, and then deducted from it the amounts of the distributions made by the trustees as reflected in what he regarded as the best evidence; namely, the financial statements of the SP Trust and the NFI Trust tax return.
The trial judge was clearly cognisant of the fact that the appellants' claim lay essentially in a breach of trust. His Honour recognised that there had been consent to the breach of trust but the consent was circumscribed by the terms of cl 1(vi) of the 24 January 2002 agreement. It did not extend to any breach or all breaches that might have been committed. He drew a distinction between a claim based in breach of trust (albeit affected by consent) and one in which the claimant sought to enforce the 24 January 2002 agreement. He said ([24]):
The [appellants] submitted that, on the [respondents'] case (which was, it said, accepted), the plaintiffs' entitlement to distribution based on the 50% formula is not conditioned upon or limited by the extent of the income of the trust for that year. That would be relevant if the [appellants] were enforcing the January 2002 Agreement. However, as I have said, the [appellants'] claims are not of that character. Their claims are for breach of the obligation to distribute income equally.
In my view this treatment of the monetary claim is consistent with the basis on which liability was found to exist. It was open to his Honour to proceed on the basis of distributions, strictly so called, rather than payments. In any event, the evidence on which the appellants sought orders in the hearing of 28 February 2008 and the supposedly 'unchallenged' evidence on which the respondents based this aspect of the cross-appeal is not without difficulty. For these reasons the third ground of the cross-appeal also fails.
Conclusion
I would dismiss both the appeal and the cross‑appeal.
McLURE JA: I agree with Owen JA.
BUSS JA: I agree with Owen JA.
Schedule
Diagrammatic representation of the SP Trust and the NFI Trust:
Key Legal Topics
Areas of Law
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Contract Law
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Trusts & Equity
Legal Concepts
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Contract Formation
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Breach of Trust
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Express Trust
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Defence of Consent to Breach of Trust
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4
1