Dempster Nominees & Anor v Mallina Holdings Ltd

[1995] HCATrans 110

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P32 of 1994

B e t w e e n -

DEMPSTER NOMINEES PTY LTD
(ADMINISTRATOR APPOINTED)

First Applicant

DALLAS REGINALD DEMPSTER

Second Applicant

and

MALLINA HOLDINGS LIMITED

First Respondent

BIALA PTY LTD AND TS HOLDINGS
  PTY LTD (for and on behalf of the
  Shareholders of the First Respondent
  (First Defendant) except for the Second   Defendant, the Third Defendant, the
  Fourth Defendant and the Fifth Defendant
  in Action No 2248 of 1989 consolidated
  with Action No 1736 of 1992 in respect
  of Associates)

Second Respondents

Application for special leave to appeal

BRENNAN CJ
TOOHEY J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 5 MAY 1995, AT 2.56 PM

Copyright in the High Court of Australia

__________________________

MR D.M.J. BENNETT, QC:   May it please the Court, I appear with my learned friend, MS L.C. EVANS, for the applicants.  (instructed by Clayton Utz)

MR P.G. CLIFFORD:   May it please the Court, I appear for the first respondent.  (instructed by Freehill Hollingdale & Page)

MR T.F. BATHURST, QC:   May it please the Court, I appear with my learned friend, MR A.F. MIZEN, for the second respondents.  (instructed by A. Mizen)

BRENNAN CJ:   Yes, Mr Bennett.

MR BENNETT:   Your Honours, I have prepared a short summary which concentrated on the main point rather than the longer one which your Honours have. 

BRENNAN CJ:   Yes, Mr Bennett.

MR BENNETT:   Your Honour, where there is a breach of fiduciary duty, one starts with the proposition that there is an election between an account of profits or equitable compensation.  In this case we are concerned only with equitable compensation.  Then there is a distinction, which is recognised in the authorities and is referred to and discussed briefly in an article your Honour Justice Gummow wrote in Youdan’s book on Equity, Fiduciaries and Trusts, between cases where there is trust property strictly so-called and there is a breach of trust causing loss or damage to that, and what is sometimes called a mere breach of fiduciary duty causing damage to the plaintiff’s own property.

Now, it does not matter where there is an account of profits; the result is the same whichever of those it is.  But with equitable compensation there is a difference.  Re Dawson is a decision of Mr Justice Street, as he then was, in 1966, which is regarded as the leading case in the common law world dealing with equitable compensation in the first type of case.

It was a fairly simple fact situation.  In 1938 a trustee had paid away a large sum of money in New Zealand pounds.  The equitable compensation was being given in 1966, at which time the Australian dollar was worth much less against the New Zealand pound.  His Honour held that the plaintiff was entitled to the higher rate, to the current Australian rate.  The reason was that it was the duty of the fiduciary to restore the trust property ‑ the trustee in that case.  When there was a duty to restore, one naturally assesses the value at the date of trial.

The other type of case is illustrated most clearly by a decision of Mr Acting Justice Dixon of the Supreme Court of Victoria, as his Honour then was, in McKenzie v McDonald.  That was also a very simple case.  An elderly widow owned some land which was held to be worth four pounds, five shillings an acre.  A land agent, who was in a fiduciary relationship to her, told her that the land was only worth four pounds an acre and succeeded in persuading her to sell it to him at that price.  He then resold it at four pounds, ten shillings an acre.  For various reasons the plaintiff elected for equitable compensation rather than an account of profits.  As equitable compensation she got five shillings an acre, not ten shillings an acre.  She got the difference between the four pounds she had received and the four pounds, five shillings which was the value, rather than the difference between four pounds and four pounds ten, which the fiduciary had subsequently received and which was, no doubt, the value at the date of that sale.  The point is that where one is dealing not with trust property but with a breach of fiduciary duty, equitable compensation is calculated at the date of the loss and fixed then. 

In this case the loss was the loss of a chance.  It was, in a sense, a classic Poseidon-type case.  All that the parties had was some prospects in a scheme they had in their minds upon which they had spent I think something like $27,000 - I think it was a very small sum - but, of course, it had high expectations.  Ultimately, as we know, there was the realisation by my clients of $50 million in relation to their half share.

For reasons again, which I need not take your Honours to, were concerned with equitable compensation, not an account of profits.  The reason is a fairly obvious one; it was our share which we received the $50 million for which we would have had anyway.  It was the plaintiffs’ share which the other party, Connell, had.

The reasoning is set out in paragraph 7 of our argument.  That reasoning is this:  the Dempster half of the Connell/Dempster joint venture asset was sold for $50 million.  That represented its value.  Therefore, that was the sum which would have been expected at the time of the wrong to have been obtained by a Connell ventured Dempster joint venture.  A Mallina/Dempster joint venture had only 60 per cent as good a chance of success as a Connell/Dempster joint venture because Mallina did not have the influence with the government that Connell had and the various other factors which his Honour referred to.  Therefore, Mallina should recover 60 per cent of the $50 million less some hypothetical costs.

The fallacy with that reasoning, we respectfully submit, lies in step B because step B is a proposition which depends on hindsight.  It does not value the asset at the date of the loss.  It does not value the loss of the chance at the date of the loss.  It values the loss of the chance based on what subsequently occurred.  What it says is, “We know that this venture was going to succeed and get $50 million.”  The only question was that with Mallina in it, it only had 60 per cent of the chance it had with Connell in it, therefore 60 per cent of the damages.  But what should have been said is, “The whole venture has an Xx per cent chance of succeeding.  We do not say it is 100 per cent because we know it happened.  We start with the sum percentage, and it is that per cent of 60 per cent which should have been awarded.”

Now, the correctness of that analysis and the application of the McKenzie v McDonald approach rather than the Re Dawson approach, was affirmed by the majority of the Supreme Court of Canada in Canson Enterprises Ltd v Boughton & Co and that is a case in which the court divided on the very question which arises in this case.

BRENNAN CJ:   Is that right?

MR BENNETT:   Your Honour, what is even more interesting about it, is that both the trial judge and the Full Court cited the minority view and my learned friend in his submissions takes that up and says the minority view is the better view.  May I just show your Honours the two views.  The view in that case for which we contend appears at page 146 in the judgment of Justice La Forest and three other justices agreed with his Honour, of the eight sitting in the case.  They divided four:three and one took a very different point of view which we need not be concerned with, which is probably closer to mine, but I will not be taking your Honours to that on the leave application.

If your Honours go to page 146b, his Honour says this:

The appellants urged us to accept the manner of calculating compensation adopted by the courts in trust cases or situations akin to a trust, and they relied in particular on the Guerin case ‑

that was an Indian land case which involved questions of fiduciary duty and how one calculated them.  It is at a somewhat more sophisticated level than the issues in this case. 

I think the courts below were perfectly right to reject that proposition.  There is a sharp divide between the situation where a person has control of property which in the view of the court belongs to another, and one where the person is under a fiduciary duty to perform an obligation where equity’s concern is simply that the duty be performed honestly and in accordance with the undertaking the fiduciary has taken on ‑

In the case of a trust relationship, the trustee’s obligation is to hold the res or object for his cestui que trust, and on breach the concern of equity is that it be restored to the cestui que trust or, if they cannot be done, to afford compensation for what the object may be worth.  In the case of a mere breach of duty, the concern of equity is to ascertain the loss resulting from the breach of the particular duty.  Where the wrongdoer has received some benefit, that benefit can be disgorged, but the measure of compensation where no such benefit has been obtained by the wrongdoer raises different issues.

His Honour then refers to McKenzie v McDonald with approval.  Now the opposite approach was taken by the minority, principally Mr Justice McLachlin ‑ ‑ ‑

GUMMOW J:   Madam Justice McLachlin.

MR BENNETT:   Madam Justice McLachlin, I am sorry, I had not appreciated that - at page 156.

BRENNAN CJ:   What page was that?

MR BENNETT:   Page 156, your Honour.

GUMMOW J:   But everyone was agreed about the result of this case which was an extraordinary case really, from the appellant’s point of view.  How they ever imagined they would win, I cannot begin to believe.

MR BENNETT:   It is a surprising situation.

GUMMOW J:   Yes.

MR BENNETT:   At line d on page 156 after referring to Mr Justice La Forest’s judgment, she says:

From this it appears that he -

that is Mr Justice La Forest -

would treat benefit to the fiduciary on the basis of equitable principles, and losses to the plaintiff on the basis of common law.  In my view it is preferable to deal with both remedies under the same system - equity.  Rather than begin from tort and proceed by changing the tort model to meet the constraints of trust, I prefer to start from trust, using the tort analogy to the extent shared concerns may make it helpful.  This said, I readily concede that we may take wisdom where we find it, and accept such insights offered by the law of tort, in particular deceit, as may prove useful.

My second concern with proceeding by analogy with tort, is that it requires us to separate so called “true trust” situations, where the trustee hold property as agent for the beneficiary, from other fiduciary obligations.

And then, her Honour goes on to discuss ‑ ‑ ‑

GUMMOW J:   I did not read the courts of Western Australia at any stage to be doing anything else than what her Ladyship is saying in these passages.

MR BENENETT:   They are, your Honour.  We submit the correct approach is that of Justice La Forest, which is the approach for which I have contended in these short submissions, and the problem is the application of hindsight.

BRENNAN CJ:   Could I take you back to the judgment at page 146 that you relied on.  His Lordship says there:

Where the wrongdoer has received some benefit, that benefit can be disgorged, but the measure of compensation where no such benefit has been obtained by the wrongdoer raises different issues.

That seems to postulate a dichotomy which may not be complete.  If one is speaking in the first part there, “has received some benefit”, one naturally thinks in terms of an account of the benefit received.

MR BENNETT:   Yes.

BRENNAN CJ:   And one naturally can think in the second part in terms of compensation.

MR BENNETT:   Yes.

BRENNAN CJ:   But it does not seem to me to follow that where a benefit has been received compensation is impossible on a basis more elaborate than that of the loss incurred at the time.

MR BENNETT:   This is not a case where relevantly a benefit was received because this is not a case where we are being asked to disgorge a profit made because of our wrong.

BRENNAN CJ:   What you are saying is it is not a case where you are being asked to account for the profit received?

MR BENNETT:   Precisely, your Honour.

BRENNAN CJ:   But if it is a question of compensation of what the plaintiff has lost and you have received a profit, why is it that the receipt of a profit is not material to a consideration of what the plaintiff has lost?

MR BENNETT:   Your Honour, first, we did not receive a profit because the plaintiff disposed of its half interest.  Connell acquired a half interest and we received at the end of the day reward for our half interest which we always had and always would have had.  So that was the reason, no doubt, there was no election for an account of profits.  In the Full Court there was some argument put about an account of profits and it was discussed and ultimately the court said it did not have to decide it, but the damages were assessed against us both by his Honour Mr Justice Ipp and by the Full Court on the basis of equitable compensation.  The dichotomy being set up really assumes, we would submit, that in the case where there was a profit the person has elected for an account of that profit.  The dichotomy is not intended to say, we would submit, that where there has been no benefit at all but there is still an election for compensation, then one applies other factors.

BRENNAN CJ:   I will put it another way.  Why is it that if one takes the second limb, one is restricted to a consideration of a loss incurred at the time when the breach of the fiduciary duty has had its first effect?

MR BENNETT:   Because, your Honour, that is the way equitable compensation has always operated.  That is the way Mr Justice Dixon held that it operated in the McKenzie Case and that is the way the Full Court suggested it would apply in this case and, indeed, as I will submit in a moment, that may well be the way it would have applied at common law if one was dealing with deceit.  It is in a sense related to the question which was considered in Johnson v Perez about whether one can have hindsight and take into account facts one subsequently knows in assessing what the damages are.

Your Honour and Justice Dawson both took the view in that case that one could not use hindsight.  One had to take the facts as they were at the time and look at what would have happened at the time.  Of course, that is logical in the sense that if one looks at compensation, one is compensating for injury that one suffers at the time.  One may look to what is going to be suffered in the future.  We do not cavil with looking at the loss of a chance as being a correct approach, but we do cavil with the concept that in looking at that loss of a chance one then says, “But we know it would have been granted so we count 100 per cent for that part of the chance and we’re only left with the element of whether it was this company or Connell who got the other half.”

So that is the issue, your Honour.  The case could be looked at by this Court in a number of ways:  if one took the view, as was hinted in the decision of Mr Justice Rowland, that one would apply a unifying principle and endeavour to assimilate the common law and the equitable rules in this area, your Honours, at page 247 of the application book in volume two, his Honour said this at the bottom of the page:

The matter was not argued during the hearing; but our attention has now been drawn to Poseidon.....It lends support to his Honour’s method of assessment.  It also, it seems to me, draws attention to the way in which our law progresses in tending to obliterate traditional distinctions between remedies in contract, tort and some statutory remedies, and perhaps a logical extension of that trend would include damages in equity.

If one went as far as that, and one would not have to to make the contentions we seek to make, we would then seek to argue that the views expressed by your Honour and Justice Dawson in Johnson v Perez were appropriate, so that one could never look with hindsight in a loss of a chance case.  That issue was not considered in Poseidon.  One needs to sort of hypothesise cases about fiduciaries appropriating lottery tickets and matters of that sort, to look at the extreme cases of how one values the loss of a chance with and without hindsight and gets very different figures.  But it is an important issue which has not been finally resolved.

Johnson v Perez was concerned with a specific type of case, which is not the general situation of loss of a chance, and indeed it was not treated as a loss of a chance case and, in our submission, that question would also be important.  But the major question is that the court has simply failed to recognise the distinction between cases like Re Dawson, cases like McKenzie v McDonald, and in effect has not followed McKenzie v McDonald, and we would wish to submit that McKenzie v McDonald shows the true approach, where one is not dealing with the loss or destruction of trust property itself.  Also, of course, there is a very large amount of money

involved in this case and we would submit that is a factor in favour of special leave.  May it please the Court.

BRENNAN CJ:   Thank you, Mr Bennett.  Mr Clifford.

MR CLIFFORD:   If it please, your Honours, it has been agreed between the first and second respondents that the first respondent will follow the second respondent in its answer to the application..

BRENNAN CJ:   Yes.  Mr Bathurst.

MR BATHURST:   If the Court pleases.  Your Honours, in making the representations which form the basis of the action in these proceedings, Dempster Nominees not only committed the tort of deceit, but also breached the relationship of trust and confidence it owed to its co-venturer, Mallina.  It is that fact, the latter fact, and that fact alone, which gave rise to a right in Mallina to equitable remedies.  An account of profits, in the circumstances of this case was, we accept, inappropriate.  Dempster Nominees retained its interest in the joint venture, but Mallina was induced to sell its interest to a third party who was held by the courts to be an innocent third party.

The first proposition we put is that the fact that there was a current liability in deceit does not in any way affect the entitlement of the respondent to be compensated by use of equitable principles if it desires to, as it did, pursue that course

The trial judge found that as a result of the breach by Dempster of its fiduciary obligation, Mallina parted with its interest in the joint venture.  He then proceeded and, we submit with respect, correctly, to seek to make restitution to Mallina because, we submit, the object of whatever equitable remedy is imposed, be it a constructive trust on account of profits or equitable damages or compensation, is to make restitution.  The fact that the trial judge and the Full Court took as a starting point the value of the half interest in the joint venture at the time it was effectively disposed of by Mr Connell and Mr Dempster through the company which then held the interest is consistent, in our submission, with the approach taken by Mr Justice Street, as his Honour then was, in Re Dawson, because what his Honour did in Re Dawson was, in effect, look at the market value of what the trust property that was misapplied, not at the date of misapplication but rather at the date he was considering the matter. 

In those circumstances, we submit, for the applicants to be successful they have to show that although the underlying principle is restoration to the fiduciary, or restitution for what he has lost, there has to be a difference in a trustee beneficiary situation to a fiduciary obligation, which does not involve a trust in the strict sense.  The applicants’ submissions also involve a proposition which, we would submit, is unusual in that a different result would occur where the default by the fiduciary involved the beneficiary in transferring an asset to the fiduciary himself and where it was transferred to an innocent third party. 

If, for example, in the present case Dempster Nominees, by its misrepresentation, had procured for itself Mallina’s interest in the joint venture, Mallina would have been entitled to an account of profits or possibly to a finding that that interest was held on a constructive trust in favour of Mallina.  The end result would have been that it would have got the actual value or the profit incurred at the time of the disposal.  There is no reason, in our respectful submission, where the same conscious breach of duty ‑ because that is what is being dealt with in this case ‑ involves the fiduciary in transferring the interest to a third party whom the fiduciary regards, for whatever reason, as a more desirable partner.

BRENNAN CJ:   Except that the remedy of account provides a powerful incentive to the fiduciary not to commit a breach of his duty.

MR BATHURST:   We accept that, with respect.

BRENNAN CJ:   And if the profit goes to a third party, then that consideration does not have the same effect, does it - does not have the same weight?

MR BATHURST:   We would rather, with respect, submit that the way equitable revenue has been framed without regard to causation remoteness, for example, has been done with the object of holding a fiduciary strictly to its obligation; and the obligation to make restitution is done, in our submission, for the same reason.  If that be correct, we would submit, it, as a matter of policy, it is equally desirable to impose the same disincentive to a fiduciary:  certainly in the case of a conscious act where he induces a transfer to himself, or in the case where he induces a transfer to the third party, who in this case has been held to be innocent.

We would submit that there is no reason in principle to distinguish between the position of a trustee, for example, in the strict sense, and the position of a fiduciary such as Dempster, certainly at least in the case such as this one, where the beneficiary has lost an asset as a result of what we submit has been found was a deliberate breach by the fiduciary of his obligation.  That is an issue on which the Supreme Court of Canada did divide; however, Justice McLachlin, with respect, was able to reach a

perfectly sensible result in that case by what we would submit is an application of more traditional reasoning, and that is a view that we submit is consistent with what was said by Mr Justice Street in Re Dawson and, if that be the issue, should be preferred.  But at the end of the day, we would submit that in the case of a conscious breach, there certainly can be no reason for drawing that distinction.

Indeed, although it is correctly accepted that common law damages for tort or breach of contract are generally assessed as at the date of breach, that rule will yield, in certain instances, to some other date if that is ultimately held necessary to provide adequate compensation.  Equity, in our respectful submission, has at least the same flexibility in restoring to the beneficiary of a fiduciary obligation the value of what he lost, and there is no reason to circumscribe that flexibility in the manner that we submit the applicant would seek to urge upon this Court.

The present case in any event is not, we would submit, having regard to the findings of fact made in the court below, one which would squarely raise for this Court issues as to the extent that common law methods of assessment and methods of assessment of equitable damages should be unified.  There is no issue in this case, as we perceive it, of causation in the common law sense, remoteness in the common law sense - much less anything such as contributory negligence - being relevant.

The only issue in this case is simply whether in endeavouring to restore the beneficiary to what he has lost the court was entitled to look at the position as it was when Dempster Nominees and Connell sold the asset.  That, in our respectful submission, is not a question which warrants the grant of special leave.

There is one other matter we would seek to raise.  In the draft notice of appeal which appears in volume two of the book at page 290, ground 3 which is at line 50 does not raise a ground which has been the subject of any argument in this application.  If the Court was minded to grant leave, it is our respectful submission that leave should not be extended to arguing that particular ground.  They are our submissions, if your Honour pleases.

BRENNAN CJ:   Thank you, Mr Bathurst.  Yes, Mr Clifford.

MR CLIFFORD:   If it pleases, your Honours, the first respondent adopts the submissions of Mr Bathurst and does not seek to add anything to them.

BRENNAN CJ:   Yes, Mr Bennett.

MR BENNETT:   Your Honour, we do not press ground 3 in the notice of appeal and we would concede that if special leave is granted it should exclude that ground.  Your Honours, in relation to Re Dawson it is very clear that both my learned friend and the courts below have placed very great weight on his Honour’s decision.  When one reads that, it repeats again and again reference to trust and trust property and the duty of a trustee.  It is very clearly a decision which was dealing only with that.  It was not a decision which can be regarded as extending to breaches of fiduciary duty generally and that is the point which, we would submit, is very clearly made in some of the articles and by Justice La Forest.

We do not seek, your Honours, to circumscribe the flexibility of the remedy.  What we do say is that on neither basis, neither the equitable basis nor the common law basis, is the plaintiff entitled to more than the value of the chance it lost.  It lost a chance, it was deprived of a chance; under Poseidon that must be valued and it must be given that.

BRENNAN CJ:   But you wish to fix the value as the market value as at the date on which the Mallina interests were transferred to the Connell interests.

MR BENNETT:   Yes, your Honour.  On any view of it, that is the date for fixing the value.  The issue is does one then apply hindsight in seeing whether the chance came off or not.  That is the issue.

GUMMOW J:   I am not sure you are right about Re Dawson either, Mr Bennett.  If one looks at the top of 216 of Re Dawson at line 6, what Sir Lawrence Street says there.  He is talking about:

the obligation to make restitution, which courts of equity have from very early times imposed on defaulting trustees and other fiduciaries -

et cetera.

MR BENNETT:   Yes, that is where he is referring to the general proposition and saying that in general equity has been stricter in the common law, but he then goes on to say that to apply the rule in relation to:

the actual form of relief granted in equity -

this is six lines further down -

in respect of breaches of trust.  The form of relief is couched in terms appropriate to require the defaulting trustee to restore to the estate the assets of which he deprived it.  Increases in market values -

et cetera.  So in the part of the judgment which is dealing with the reason for the actual relief it is confined to trustees.  In relation to the broad proposition that equity extends further than the common law it applies to fiduciaries as well and, in our respectful submission, the issues are issues of considerable importance to the law.  They are issues which have not been determined.  This is the only case we have found where loss of a chance has been applied in relation to equitable compensation and the issues of whether one can have hindsight either there or at common law are, we submit, of great importance.

BRENNAN CJ:   Mr Bennett, you have stated, as quite a clear proposition, that market value at the time of the transfer of the Mallina interests is undoubtedly the basis.  Why do you say that?

MR BENNETT:   Because, your Honour, one compensates a person for what the person has lost and one measures that loss at the time of the damage.  That is a sort of basic concept of the law of compensation and damages, whether in tort, contract or equity.  Certainly, there are questions as to whether one looks forward and certainly, there are questions ‑ there is an exception in the case of the trust property, which is the exception of Re Dawson but other than that exception, there is no reason why one would apply a different rule in relation to equitable compensation.

Suppose, for example, the property had gone down in value, suppose the venture had failed, would that have deprived the plaintiffs of a right to the chance of which they were deprived?  In our respectful submission, the appropriate course is for the Court to say, “What were you deprived of?” and, “You were deprived of a chance.”  “What was the value of that chance?”

BRENNAN CJ:   Well, what it was deprived of was its interest in the joint venture and the question is what is the value of the interest in the joint venture which it gave up.  The proposition that the answer to that question necessarily depends upon the market value as at the date of the giving up, seems to me to be surprising, either in equity or at common law.

MR BENNETT:   I do not put it as market value, your Honour.  There may be no market for it.  The court values it and values the value to the plaintiff.  The value to the plaintiff is that the plaintiff is a speculator who has a chance, a chance of making a lot of money.  One says what is the fair

compensation to that plaintiff for the loss of that chance at that time and one does that by saying, how much will be received and what is the chance of receiving it.

BRENNAN CJ:   One further question, Mr Bennett:  if special leave were granted, would there be any finding of fact which you would seek to challenge?

MR BENNETT:   No, your Honour.

BRENNAN CJ:   Thank you.

MR BENNETT:   If the Court pleases.

BRENNAN CJ:   The Court will adjourn briefly in order to consider the course it will take in this matter.

AT 3.35 PM SHORT ADJOURNMENT

UPON RESUMING AT 3.41 PM:

BRENNAN CJ:   In the circumstances of this case, where there has been a finding of a conscious breach of fiduciary duty, the Court is not satisfied that the challenge to the assessment of equitable compensation enjoys sufficient prospects of success to warrant a grant of special leave to appeal.  Accordingly, special leave is refused.

MR BATHURST:   We would seek costs, if the Court pleases.

BRENNAN CJ:   You have nothing to say to that, Mr Bennett?

MR BENNETT:   Only that there should be only one set of costs, your Honour.

BRENNAN CJ:   Do you have anything to say, Mr Bathurst?

MR BATHURST:   No, your Honour.

BRENNAN CJ:   Special leave is refused with one set of costs.

AT 3.42 PM THE MATTER WAS CONCLUDED