Deutsch v Deutsch
[2012] VSC 227
•1 June 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2008 05515
BETWEEN:
| ROBERT DEUTSCH & ORS | Plaintiffs |
| - and - | |
| ERWIN DEUTSCH & ORS | Defendants |
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JUDGE: | HARGRAVE J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 14, 26-30 March, 2, 4, 17 April, 9, 24, 30 May 2012 | |
DATE OF JUDGMENT: | 1 June 2012 | |
CASE MAY BE CITED AS: | Robert Deutsch & Ors v Erwin Deutsch & Ors | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 227 | |
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TRUSTS – Derivative claims by potential beneficiaries against defaulting fiduciary – Whether standing to sue – Whether new trustees should be appointed to deadlocked corporate trustees.
FRUSTRATION – Whether appointment of receivers frustrated terms of settlement.
ACCORD AND SATISFACTION – Accord and conditional satisfaction – Plaintiffs elected to treat terms of settlement as at an end and to sue on the compromise – Osborn v McDermott [1998] 3 VR 1, 10-11 applied.
RELEASE – Scope of release using general words – Whether claims in proceeding within contemplation of parties – Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112 applied.
EQUITY – Defaulting fiduciary – Whether allowance should be made for fiduciary’s work in managing trust business.
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APPEARANCES: | Counsel | Solicitors |
| For Plaintiffs/Defendants by counterclaim | Mr S Anderson SC with Mr J Slattery | Holding Redlich |
| For the First Defendant | Mr E Deutsch in person | |
| For the Second to Eighth Defendants | No appearance | |
| For the Ninth to Sixteenth Defendants/Plaintiffs by counterclaim | Mr G Efron, Solicitor | Efron & Associates |
TABLE OF CONTENTS
Summary of facts and issues in the main proceeding................................................................. 3
Do the plaintiffs have standing to sue on behalf of the trusts?.............................................. 15
Did Erwin misappropriate any trust funds?............................................................................... 17
Was time of the essence of Erwin’s obligations under the terms of settlement? Was it an implied term of the terms of settlement that Erwin would perform his obligation within a reasonable time? 18
Did Erwin breach the terms of settlement?................................................................................. 20
Were the terms of settlement frustrated before any breach by Erwin?.................................. 27
Did Erwin’s breaches constitute a repudiation of the terms of settlement? If so, has that repudiation been accepted?.................................................................................................................................. 32
If the repudiation was accepted, what claims may be pursued?............................................. 40
If the repudiation was not accepted, what claims may be pursued?...................................... 40
Did Robert suffer recoverable loss?.............................................................................................. 50
Did the St Kilda Road trust and/or the Cooee Trust suffer recoverable loss?...................... 51
Did the property trusts suffer recoverable loss?......................................................................... 51
What management role did Erwin play in the Cooee business at relevant times?.............. 52
Is Erwin entitled to any adjustment to compensate him for his management role?........... 60
What monetary relief should be ordered in the main proceeding?........................................ 66
Should a new trustee be appointed to some or all of the trusts?............................................ 67
Conclusion and orders.................................................................................................................... 67
HIS HONOUR:
Robert and Erwin Deutsch are brothers. Robert is the older brother. They and their families both observe and practice the Jewish religion in an orthodox manner. For approximately 30 years, they jointly conducted a series of businesses. Along the way, they invested in commercial and residential real estate. The business and properties relevant to this dispute were, and some of the properties still are, owned by corporate trustees of which they are the only directors.
Since September 2007, the brothers have engaged in bitter disputes. As a result, the proper management of the corporate trustees has been deadlocked. The brothers have been unable to agree on how the trusts should be conducted in the best interests of the beneficiaries, or at all. Many basic obligations of the trustees have remained unperformed. For example, no company or tax returns have been lodged since 2007. This unacceptable situation ought to have been resolved years ago – by the simple appointment of a new and independent trustee pursuant to s 48 of the Trustee Act 1958 (Vic). For reasons which it is unnecessary to consider, that has not occurred.
There are two proceedings before the Court.
In the first proceeding, which I will call the ‘main proceeding’, Robert and other potential beneficiaries under the trusts related to him seek relief against Erwin. The deadlocked corporate trustees were joined as defendants to ensure they are bound by the result. As none of the other potential beneficiaries gave evidence, and it is apparent from the evidence as a whole that the main proceeding has been conducted by Robert, references to Robert will include references to all of the plaintiffs unless it is necessary to distinguish between Robert’s personal interests and those of the plaintiffs as potential beneficiaries.
In the second proceeding, which I will call the ‘caveat proceeding’, Erwin’s wife Tziporah Deutsch claims compensation from Robert and some potential beneficiaries. In that proceeding, Tziporah alleges that Robert and the other defendants lodged caveats over a property owned by her without reasonable cause, and pursuant to a conspiracy to injure her and Erwin. Pursuant to r 9.12(1)(c),[1] the Court ordered that the two proceedings be tried at the same time. For reasons which it is not necessary to now describe, the Court has deferred delivering judgment in the Caveat proceeding pending evidence that a sale of the property has been completed.
[1]Supreme Court (General Civil Procedure) Rules 2005.
Summary of facts and issues in the main proceeding
The dispute between the brothers had been brewing for some time prior to September 2007, when Erwin effectively locked Robert out of the management and control of the only business then being conducted by the brothers. Each brother, more particularly Erwin, directed evidence towards the rights and wrongs of the underlying dispute leading to the lockout. For reasons which I gave prior to the commencement of evidence, and repeated and elaborated upon during the course of evidence, I determined that it was unnecessary to investigate at trial or decide who of Robert or Erwin was at fault, or most at fault, for the dispute elevating to the extent that Erwin decided he was justified in locking Robert out of the business. In summary, I took that view because of the form of the pleadings, the need to further the overarching purpose stated in the Civil Procedure Act 2010 (Vic) by avoiding the waste of the Court’s time and resources in determining a dispute which would have no legal consequence and, ultimately, the fact that Erwin frankly acknowledged that he had no legal justification for locking his brother out of the business and conducting the business on his own through unauthorised bank accounts under his sole control until receivers were appointed by Cooee’s banker in October 2008 (the ‘lockout period’). Erwin’s conduct in this regard was a clear breach of his fiduciary obligations – a matter denied in his pleadings but admitted during the course of the trial.
At the time of the lockout and consequent deadlock, the corporate trusts controlled by the brothers owned the following relevant assets:
(1) 333 St Kilda Road Pty Ltd (‘333’), in its capacity as the trustee of the Deutsch Grandchildren Trust (the ‘St Kilda Road trust’), owned the property situate at 333 St Kilda Road, St Kilda. The St Kilda Road property was mortgaged to Westpac Banking Corporation to secure funds borrowed by 333 to acquire the property and to develop the building on it for use as a 270 bed backpacker hostel business. 333 did not operate that business. It leased the St Kilda Road property to another corporate trustee controlled by the brothers, Cooee On St Kilda Pty Ltd (‘Cooee’), at an annual rental of $400,000. If paid, the annual rental was sufficient to service 333’s loan obligations to Westpac.
(2) Cooee conducted the hostel business as trustee of the Cooee Trust. The brothers established an authorised bank account with Westpac for the conduct of the Cooee business (the ‘authorised account’), and an associated overdraft facility. Each brother was a signatory to the authorised account. Under the formal banking arrangements with Westpac, both brothers needed to sign cheques drawn on the authorised account. It appears that this practice was not always followed, with some cheques being signed by only one brother, but nothing turns on that.
(3) 253 Bay Street Pty Ltd in its capacity as trustee of the Deutsch Children Family Trust (the ‘Bay Street trust’) owned the property situate at 253 Bay Street, Port Melbourne (the ‘Bay Street property’). The Bay Street property was leased to an external party. The property was mortgaged.
(4) Prycroft Ninety One Pty Ltd in its capacity as trustee of the Zedoko Unit Trust (the ‘Johnston Street trust’) owned the property situate at 137-141 Johnston Street, Fitzroy (the ‘Johnston Street property’). The Johnston Street property was also leased to an external party. It was subject to a mortgage to secure the same finance facility secured against the Bay Street property. The combined rentals of the two properties were sufficient to meet the mortgage obligations.
(5) Fashion Fabric Cuts Pty Ltd in its capacity as trustee of the International Development Unit Trust and the Delfrid Superannuation Fund (the ‘Green Street trusts’) owned the property situate at 6 Green Street, East St Kilda (the ‘Green Street property’). This property was or had been used as office premises for the various trusts. Further, at times, it was occupied by one or more of Robert’s children or Erwin’s children. The property was (and remains) unencumbered.
There were occasions where one of the trusts was unable to meet its obligations. For example, Cooee may have had insufficient funds to pay the whole of the rent due to 333 and, as a result, 333 could not meet its obligations to Westpac unless it obtained alternative funding. Another example is where the timing of rental receipts by the Bay Street or Johnston Street trusts did not permit them to meet their obligations to their mortgagee. On such occasions, the brothers used available funds from one or more of the other trusts to meet the obligation which was due. The brothers undertook these informal loans consensually while they were in joint control of the trusts, and later arranged for repayment or necessary accounting adjustments to reflect the payment by one trust of the obligations of another. Erwin continued this practice while he was in sole control of the receipts of the Cooee business. Robert makes no complaint about that aspect of Erwin’s conduct.
Following the lockout, Erwin ceased banking the receipts of the Cooee business into the authorised account. Instead, he opened unauthorised bank accounts under his sole control, and conducted the Cooee business through those accounts. For a short while, he used an account with the National Australia Bank (the ‘NAB account’). When that account came to Robert’s attention, he ceased using it and thereafter conducted the Cooee business through an account in the name of Studio 412 Pty Ltd (a company controlled by Erwin and his wife Tziporah) with the Australia and New Zealand Banking Group Limited (the ‘Studio 412 account’). From this time, while Erwin operated the Cooee business, he deposited receipts of the Cooee business into the Studio 412 account, and paid Cooee’s business expenses from that account. He also paid some expenses of other trusts from this account, but nothing turns on this.
Central to the issues in the main proceeding are payments totalling approximately $400,000 made by Erwin from the Studio 412 account for the following purposes:
(1) to pay Erwin or his family’s personal debts, totalling approximately $130,000; and
(2) to pay Erwin for ‘management fees’ claimed by him for his role in managing the Cooee business, totalling approximately $270,000.
Robert contends that these two classes of payments were unauthorised, not for the benefit of the Cooee Trust, and amounted to misappropriation by Erwin of trust funds in breach of his fiduciary duties as trustee of the Cooee Trust. On behalf of the Cooee Trust, he claims that Erwin must repay these amounts to Cooee as trustee. Erwin acknowledges that he took Cooee funds to pay his personal expenses, and for management fees. He contends, however, that the claims for all or part of these amounts were released by the terms of settlement described below. In the alternative, Erwin contends that the management fees were reasonable in all the circumstances, were agreed to by Robert in principle at the time the Cooee business was being set up, and that he is entitled to keep those fees in whole or substantial part.
The main proceeding was commenced by Robert against Erwin in April 2008, in the Corporations List. Robert claimed various relief, including orders for access to the books and records of Cooee, orders restraining Erwin from continuing to act as a director of Cooee, orders requiring all of Cooee’s funds to be transferred into the authorised account and an order that a new trustee be appointed to the Cooee Trust. The main proceeding was commenced by originating motion without pleadings. The potential beneficiaries were not added as plaintiffs in the main proceeding until February 2009, in the context of pleadings ordered in the circumstances described below.
There were a series of interlocutory applications in the main proceeding. The Court fixed an early trial date, on 1 September 2008. In the meantime, on 12 August 2008, Robert and 18 of the 19 other potential beneficiaries who are now plaintiffs in the main proceeding commenced a separate proceeding by writ in this Court (the ‘writ proceeding’). Again, unless necessary to refer to Robert’s personal interests, references to Robert in connection with the writ proceeding will include references to all plaintiffs. In the writ proceeding, Robert claimed relief against Erwin, including that he pay equitable compensation or make restitution to the trusts for breaches of fiduciary duty by, amongst other things, taking money from the receipts of the Cooee business to pay his personal debts and for unauthorised management fees.
On 28 August 2008, the Court appointed Michael Dwyer and David Scott as joint receivers and managers of Cooee in its capacity as trustee of the Cooee Trust until the hearing and determination of the main proceeding (the ‘first receivers’).
The trial of the main proceeding was re-fixed for 22 September 2008. I infer that the appointment of the first receivers acted as a catalyst for commonsense to finally, but regrettably only temporarily, prevail. A mediation was arranged and a compromise of all disputes, including the claims in the writ proceeding, agreed. Formal terms of settlement were executed by Robert and Erwin, in their personal capacities and as directors of each of the corporate trustees. The terms of settlement are dated 22 September 2008. On the following day, 23 September 2008, the parties consented to the main proceeding being struck out with a right of reinstatement. This had the effect of terminating the appointment of the first receivers.
In summary, as subsequently varied, the terms of settlement provided:
(1) for the first receivers to be re-appointed, but in a different capacity as joint administrators of the Cooee business;
(2) for the orderly sale by the administrators of the St Kilda Road property and the Cooee business under powers of attorney;
(3) for the orderly sale by the respective trustees of the Bay Street property, the Johnston Street property and the Green Street property; and
(4) for the division of the net sale proceeds of the various sales in the following manner:
(a) to enable the trusts to perform their outstanding statutory obligations, including for the preparation of statutory returns and the payment of tax;
(b) to enable three of the trusts to pay specified amounts totalling $315,000 to Robert; and
(c) following vesting of the trusts, to pay the balance of the net sale proceeds to the brothers equally.
Further, the terms of settlement contained:
(1) provision for the sale of a property owned by the brothers jointly in New Jersey, USA. This aspect of the terms of settlement did not form any part of the claims made in the main proceeding. I do not consider it further;
(2) mutual releases between the brothers personally, and between the brothers and each of the trusts, covering all disputes between them except for disputes concerning properties in the United States of America other than the New Jersey property;
(3) specific machinery provisions requiring each of the brothers to ‘do all such things and execute all such documents and instruments as are reasonably necessary: (a) to better effectuate [the] terms of settlement; and (b) to bring about the orderly winding up of the corporate entities, trusts and superannuation fund referred to in [the] terms of settlement’.
Erwin did not sign the documents which were reasonably necessary to effectuate the terms of settlement. In the circumstances described below, he waited until 23 October 2008 (one month after the terms of settlement were signed) to sign a document appointing the first receivers as administrators of the Cooee business. He refused to sign other documents requested by the receivers as a condition of them accepting the appointment. The first receivers never assumed office as administrators of the Cooee Trust.
By this time, the 333 and Cooee banking facilities had been in default for some time, but bank officers had been allowing time to the brothers to resolve their disputes by appointing an independent third party to sell the Cooee business and the St Kilda Road property. In this context, Westpac officers knew of the dispute between the brothers, knew of the appointment of the first receivers, knew of the terms of settlement, knew of Erwin’s refusal to sign documents to effectuate the terms of settlement, knew that Erwin had resumed control of the Cooee business following termination of the first receivership on 23 September 2008, knew that the brothers remained in dispute and knew that the brothers were unable to present Westpac with a united front – either to implement the terms of settlement or to agree on a firm proposal for the refinancing of the Westpac debts within an acceptance timeframe. In these circumstances, Westpac’s patience finally wore out. Later on 23 October 2008, the brothers were informed that receivers had or would be appointed by Westpac. By instrument dated 24 October 2008, Westpac formally appointed Andrew Hewitt and Matthew Byrnes as joint receivers and managers of the Cooee business, and as agents for Westpac as mortgagee in possession of the St Kilda Road property (the ‘Westpac receivers’).
The Westpac receivers proceeded to sell the St Kilda Road property and the Cooee business. Robert claims that the Westpac receivers would not have been appointed if Erwin had complied with his obligations under the terms of settlement and signed all documents reasonably necessary to effectuate them.
Erwin refused to perform any of his other obligations under the terms of settlement. Accordingly, the Bay Street, Johnston Street and Green Street properties remain unsold.
In these circumstances, Robert, on his own behalf and on behalf of each of the trusts, claims damages from Erwin for breach of the terms of settlement.
The claims made on behalf of the St Kilda Road trust and the Cooee Trust may be summarised as follows.
First, Robert claimed that the sale prices obtained by the Westpac receivers for the St Kilda Road property and the Cooee business were less than would have been obtained by administrators acting pursuant to the terms of settlement. This claim was abandoned at trial.
Second, Robert claimed damages equal to the amount of the Westpac receivers’ fees and expenses, totalling approximately $310,000 plus GST. That claim was also put on an alternative basis; that the fees and expenses were caused by Erwin’s breaches of fiduciary duty, by locking Robert out of the Cooee business, conducting the business through unauthorised bank accounts, and misappropriating receipts of the business. The contractual claim was abandoned at trial, but the fiduciary duty claim was pursued.
Third, Robert claims damages from Erwin as a result of the delay in selling the Bay Street property, the Johnston Street property and the Green Street property. Determination of these claims has been deferred pending the sale of these three properties and the taking of accounts. This is because it may transpire that the delay has not caused damage to Robert or the trusts, as the sale prices may have increased significantly since the time the properties would have been sold pursuant to the terms of settlement. The Bay Street and Johnston Street properties are to be sold by or on behalf of the mortgagee. Although there was no default under the mortgages, the term of the loans expired and Robert and Erwin were unable to agree upon a refinancing. The Green Street property is to be sold by an independent solicitor acting pursuant to order of the Court.
On his own behalf, Robert claims the sum of $315,000 from Erwin as damages for breach of the terms of settlement. Erwin acknowledges that the relevant trusts could have paid this amount if the terms of settlement had been performed. For reasons which were unexplained, Robert has not claimed damages for loss of his entitlement to one half of the net sale proceeds of the assets of the trusts.
Erwin denies that he breached the terms of settlement or that he is liable for damages if he did. He contends that time was not of the essence of his obligations to sign documents reasonably necessary to effectuate the terms of settlement, that the Westpac receivers were appointed prior to the time for performance of his obligations to sign documents, and that the terms of settlement were accordingly discharged by frustration upon the appointment of the Westpac receivers. If Erwin is right in that contention, it would follow that all of the breach of fiduciary duty claims made against him could be pursued, but none of the contractual claims for breach of the terms of settlement. Robert and the potential beneficiaries deny frustration. They contend that the terms of settlement remained on foot until repudiated by Erwin shortly after the Westpac receivers were appointed. They contend that they then elected to accept that repudiation, thus entitling them to treat the terms of settlement as at an end and proceed on their original causes of action based on breaches by Erwin of his fiduciary duties.[2] Moreover, in an apparent contradiction of that stance, they contend that they remain able to sue for damages for breach of the terms of settlement.
[2]Osborn v McDermott [1998] 3 VR 1, 10-11.
Erwin denies the repudiation relied upon, but, in the event that it occurred, he contends that Robert elected to enforce the terms of settlement and therefore remains bound by them. Accordingly, Erwin contends that his only liability is for damages arising from any breaches of the terms of settlement. Erwin’s contentions on that hypothesis involve an acknowledgment that he must, in such circumstances, pay Robert’s personal damages of $315,000, and any damages proved by the trusts by reason of the delay in sale of the Johnston Street, Bay Street or Green Street properties. On this hypothesis, however, Erwin maintains his denial of liability for the costs and expenses of the Westpac receivers, on causation grounds. He also contends that the claims for misappropriation of the funds of the Cooee Trust, for both personal purposes and as management fees, were released by the terms of settlement.
Based on the above summary of the facts and issues, the following issues arise for determination in the main proceeding:
(1) Do the plaintiffs have standing to sue on behalf of the trusts?
(2) Did Erwin misappropriate any trust funds?
(3) Was time of the essence of Erwin’s obligations under the terms of settlement? Was it an implied term of the terms of settlement that Erwin would perform his obligation within a reasonable time?
(4) Did Erwin breach the terms of settlement?
(5) Were the terms of settlement frustrated before any breach by Erwin?
(6) Did Erwin’s breaches constitute a repudiation of the terms of settlement? If so, has that repudiation been accepted?
(7) If the repudiation was accepted, what claims may be pursued?
(8) If the repudiation was not accepted, what claims may be pursued?
(9) Did Robert suffer recoverable loss?
(10) Did the St Kilda Road trust and/or the Cooee Trust suffer recoverable loss?
(11) Did the property trusts suffer recoverable loss?
(12) What management role did Erwin play in the Cooee business at relevant times?
(13) Is Erwin entitled to any adjustment to compensate him for his management role?
(14) What monetary relief be ordered in the main proceeding?
(15) Should a new trustee be appointed to some or all of the trusts?
Before proceeding to determine these issues, I make some general comments about the main proceeding.
First, the parties and their previous representatives evidently intended to litigate the rights and wrongs of the disputes culminating in Erwin’s decision to lock Robert out of the Cooee business in September 2007. To this end, a 10 volume court book was prepared and two supplementary court books were later added. The 12 volumes contained much irrelevant material directed to the underlying disputes, and to other issues which do not arise on the pleadings or which it is otherwise unnecessary to determine.
Second, both Robert and Erwin wasted Court time in their oral evidence by giving irrelevant evidence, usually by non-responsive answers to questions. Viewing the evidence as a whole, the disputes between the brothers have bred pure hatred by each for the other. Against this background, the evidence of each of them must be viewed with caution. However, insofar as the evidence relates to the main proceeding, I prefer the evidence of Robert to that of Erwin where conflicts cannot be resolved by reference to contemporaneous documents and the objective probabilities.
Third, the intensity of the dispute between the brothers was inflamed by the solicitors who previously acted for them. The court books are full of correspondence of a most intemperate kind by the solicitors for both sides. I infer that much time and cost was likely wasted as a result of the previous solicitors becoming personally involved in the developing hatred between the brothers. Some of the correspondence from each of the respective solicitors was inexcusable. For the avoidance of doubt, these comments do not relate to the solicitors who acted at trial or to counsel engaged on behalf of the parties at any time.
Fourth, Robert was represented at the trial by newly engaged solicitors, senior and junior counsel. Erwin appeared on his own behalf, unrepresented. He had previously been represented by the solicitors previously referred to and by junior counsel. However, he has for some time lacked the necessary funds to be represented.
Fifth, the Court gave considerable assistance to Erwin as an unrepresented party. This was done without objection by counsel for Robert. Indeed, Robert’s legal representatives generally provided due assistance to Erwin in the conduct of the trial. Further, Erwin generally conducted himself well as an unrepresented litigant. He paid careful attention to the evidence and made many responsible, although belated, concessions and acknowledgments against his interest. However, as stated by Robert’s counsel, he had little choice. The concessions were obviously called for and were preceded by years of denial of the indefensible.
Sixth, each of Robert and Erwin endeavoured to present themselves to the Court as having adopted a moderate and reasonable approach to the resolution of the issues between them. I am not satisfied that this approach was consistently adopted by either of them during the course of their bitter feud. However, I accept that Robert’s evidence that, at the time he was locked out of the Cooee business and first discovered that Erwin had ceased using the authorised account, he and his first solicitor acted moderately; seeking only that Erwin repay Cooee’s funds into the authorised account and re-commence using that account for the conduct of the Cooee business. At this time, Robert was hoping Erwin would agree to this reasonable request, and was ‘hoping we’ll have bygones be bygones’. Further, there are documents demonstrating periods during which Robert and his lawyers acted moderately and reasonably in an endeavour to resolve the disputes. For example, Robert offered to assume, in the first instance, financial obligations which the terms of settlement cast upon Erwin but which he lacked the capacity to pay.
Seventh, the above statement of the issues for determination was deliberately broken up into small issues to assist Erwin as an unrepresented litigant in the conduct of his defence. The issues were identified and agreed upon prior to the commencement of the trial, and further expanded upon during the trial, in order to assist Erwin in focussing upon the real issues for determination and not irrelevant side issues. This was largely successful, and had the added benefit of securing appropriate concessions from Erwin.
Do the plaintiffs have standing to sue on behalf of the trusts?
The plaintiffs in the main proceeding are Robert and some other potential beneficiaries under the relevant trusts. For the most part, Robert and the other plaintiffs are mere objects of discretionary trusts. The question arises as to whether Robert and the other plaintiffs have standing to sue Erwin for his alleged breaches of trust, or whether only the corporate trustees can bring such proceedings. Robert also brings proceedings in his personal capacity, seeking damages from Erwin for breach of the terms of settlement. Those damages are limited to the $315,000 promised to him under the terms of settlement. No issue arises as to Robert’s standing to seek damages in this amount. Robert’s claim in this regard is considered separately below.
Where a trustee refuses, fails or is unable to initiate proceedings involving the rights or property of the trust, beneficiaries of the trusts may in exceptional circumstances bring a claim in their own name to protect their beneficial interests in the property or right.[3] For example, exceptional circumstances have been held to exist where:
[3]Lamru Pty Ltd v Kation Pty Ltd and Ors (1998) 44 NSWLR 432, 436-437; Ramage v Waclaw (1988) 12 NSWLR 84, 91-92; Lidden v Composite Buyers Limited (1996) 67 FCR 560, 563; Wood & Jack v McLean [2011] VSCA 37, [7].
(1) the plaintiff is most materially interested in due enforcement of the claims, or would be most seriously prejudiced if they were abandoned or not duly prosecuted;[4]
[4]Ramage v Waclaw (1988) 12 NSWLR 84, 92, citing Stainton Carron Co 155-156, 62.
(2) it is alleged that assets have been handed over to a third party ‘hastily, improvidently, and not in conformity with their duty’;[5]
[5]Ramage v Waclaw (1988)12 NSWLR 84, 91 citing Consett v Bell (1842) 1Y & CC 569; 62 ER 1020.
(3) there exists a substantial impediment to the trustee prosecuting the proceedings;[6]
[6]Highland v Labraga (No 2) [2005] NSWSC 1212, [161].
(4) it can be shown there exist recoverable assets which would ‘probably be lost to the estate’ but for such a suit;[7]
(5) the decision by the trustee not to institute proceedings was made by a party against whom the claim may lie;[8] and
(6) due to ‘the nature of the assets or the position of the personal representative, it would be either impossible, or, at least, seriously inconvenient for the representatives to take proceedings’.[9]
[7]Ramage v Waclaw (1988) 12 NSWLR 84, 92, citing Stainton v Carron Co 159; 63.
[8]Lidden v Composite Buyers Ltd (1996) 67 FCR 560.
[9]Ramage v Waclaw (1988) 12 NSWLR 84, 93, citing Hilliard v Eiffe (1874) LR 7 HL 39, 44(n).
In my opinion, Robert and the other plaintiffs have sufficient standing to bring the main proceeding against Erwin, alleging breaches of his fiduciary duties to the corporate trustees. This is because each of the corporate trustees is deadlocked. Clearly, Erwin would not authorise the corporate trustees to bring proceedings against him personally. Until the trial, he denied all of the allegations made against him. The bitterness of the dispute between the brothers makes it fanciful to suppose that Erwin may, if asked, have agreed with Robert to break the deadlock and authorise the commencement of the main proceeding against him.
As I have said, however, where a corporate trustee is deadlocked and cannot act, the proper course is to appoint a new trustee with power to act – either consensually or by Court order. That is what competent lawyers ought to have advised both brothers in this case. Had that happened, this dispute could have been wholly or substantially avoided. The failure to adopt this course has resulted in the waste of large amounts of money and time; and the parties and their families have had to bear the strain of the proceeding as it slowly made its way to trial. Further, there has been significant waste of Court resources. However, none of these results can be undone. The fact remains that the money has been spent, the time wasted and the proceeding fixed for trial. Taking all of that into account, together with the need to resolve the bitter disputes to the maximum extent the Court is able, the Court should proceed to determine the dispute. However, if an application to appoint new trustees had been made early in the proceeding, it ought to have been granted.[10]
Did Erwin misappropriate any trust funds?
[10]Cf Deutsch v Deutsch [2011] VSC 345.
Although he denied it in his pleadings, Erwin admitted at trial that he had appropriated trust funds arising from the conduct of the Cooee business for his own use in two respects:
(1) approximately $130,000 in respect of personal expenses incurred for his benefit and that of his family.
(2) approximately $270,000 to pay ‘management fees’ which he claims were his entitlement, given the management role undertaken by him in the Cooee business since exception.
These belated concessions by Erwin were made following the exchange of detailed forensic accounting reports by accountants engaged by each of the brothers. In their initial reports, there was a significant difference between the conclusions reached by the two accountants. However, following court orders for the preparation of a joint report and the giving of concurrent evidence, the experts reached substantial agreement. In their joint report, the experts differed in two relevant respects only:
(1) Robert’s expert, James Miller, was of the opinion that Erwin’s misappropriation of funds for personal use was not $129,501.04 (as now conceded by Erwin) but about $71,000 more than that. In final submissions, counsel for Robert did not press Mr Miller’s points of difference, and accepted the rival opinion given by Erwin’s valuer, Mark Lipson, that the funds used for personal purposes totalled $129,501.04.
(2) The experts agreed upon the amount of management fees taken by Erwin from the receipts of the Cooee business. However, they disagreed as to the amount of Erwin’s entitlements to receive management fees, if any. Mr Lipson expressed the opinion that Erwin was entitled to management fees in the sum of $85,338 for the lockout period of approximately 12 months, when Erwin controlled the Cooee business to the exclusion of Robert. He noted that this assessment did not take account of any entitlement Erwin may have for management fees in prior years. Mr Miller was of the opinion that Erwin should not be entitled to any management fees for the period during which he excluded Robert from the management of the Cooee business, because he was acting in breach of fiduciary duty in doing so. That, of course, is a matter for the Court not Mr Miller. In the event that the Court determined Erwin was entitled to any management fees for that period, Mr Miller was of the opinion that those fees should not exceed the sum of $66,170, which was the amount he received in the financial year ended 30 June 2007.
Was time of the essence of Erwin’s obligations under the terms of settlement? Was it an implied term of the terms of settlement that Erwin would perform his obligation within a reasonable time?
Erwin contends that time was not of the essence of his obligations to execute documents reasonably necessary to effectuate the terms of settlement. Robert denies this and contends that it was an implied term of the terms of settlement that Erwin would perform his obligations within a reasonable time, that reference to the whole of the terms of settlement and the context in which they were signed indicates that the parties intended them to be effectuated promptly; in particular, so as to avoid, if possible, Westpac calling up its loan and moving to appoint receivers. For the following reasons, I accept Robert’s submissions.
First, where a contract imposes an obligation upon a party to perform an act, but does not specify any time within which the act is to be performed, it is an implied term of the contract that the act will be performed within a reasonable time.[11]
[11]Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537.
Second, the terms of settlement when read as a whole clearly envisage that the Cooee business and the subject properties would be sold within a limited period of time. Sales of the Cooee business and the St Kilda Road property were to take place and be completed within eight months.[12] Sales of the Bay Street property, the Johnston Street property and the Green Street property were to take place and be completed within six months.[13] Further, the brothers were each required to procure the appointment of estate agents ‘forthwith’ to sell those properties;[14] and the brothers agreed that they would not, personally or by their servants or agents, disrupt or interfere with any of the sales to be effected pursuant to the terms of settlement.[15]
[12]Clauses 2(d) and (e).
[13]Clause 2.4.
[14]Clauses 2(a), (b) and (c).
[15]Clauses 2AA, 10.
Third, the terms of settlement were executed in a context. The loan to Westpac was in default, and Westpac was threatening to appoint receivers unless the brothers satisfied it that there was a firm and irrevocable proposal for the sale of the Cooee business and the St Kilda Road property; on terms and by an independent third party acceptable to Westpac. A significant part of the terms of settlement dealt with that issue. The terms of settlement provided for the appointment of the first receivers as administrators of the Cooee business and for them to be given a power of attorney to sell the business and the St Kilda Road property on specified terms. In these circumstances, objectively considered, a substantial purpose of the terms of settlement was to endeavour to avoid the appointment of receivers to the Cooee business and entry into possession of the St Kilda Road premises by Westpac as mortgagee. Taking the evidence as a whole, I find that both Robert and Erwin well knew that this was a real risk and that this purpose could only be achieved if the brothers acted promptly to effectuate the terms of settlement and informed the bank that they were doing so.
In all the circumstances, I conclude that a reasonable time for Erwin to sign the documents necessary to effectuate the terms of settlement was seven days from the time the necessary documents were presented to him for signature. That time was sufficient for Erwin to consider the terms of the documents and raise any legitimate issues arising from the form or content of the documents.
Did Erwin breach the terms of settlement?
Clause 13 of the terms of settlement provides:
13The parties shall do all such things and execute all such documents and instruments as are necessary:
(a)to better effectuate these terms of settlement; and
(b)to bring about the orderly winding up of the corporate entities, trusts and superannuation fund referred to in these terms of settlement …
Taking the evidence as a whole, I find that Erwin breached the terms of settlement by failing to execute all documents necessary to effectuate the terms of settlement, and by failing to do all other things reasonably necessary to effectuate the terms and bring about the orderly winding up of the corporate trustees and the trusts.
The terms of settlement were signed on 22 September 2008.
At a meeting on 3 October 2008, at the offices of Robert’s previous solicitors, Robert gave Erwin documents appointing real estate agents to sell the Bay Street and Johnston Street properties, and asked Erwin to sign those documents then and there. Erwin refused to sign the documents, and took them away with him to consider. Either at this meeting, or at latest about a week later, Robert provided Erwin with a document appointing a real estate agent to sell the Green Street property and asked Erwin to sign it. Erwin took this document away also to consider. It is common ground that, notwithstanding repeated requests, Erwin did not sign or return any of these authorities to Robert or his solicitors. Erwin’s failure to sign and return these authorities within seven days of receipt constituted breaches of the terms of settlement. Those breaches occurred by 17 October 2008 at latest.
The terms of settlement originally provided for the appointment of one of the first receivers as administrator of the Cooee business and as attorney to sell that business and the St Kilda Road property. The nominated receiver refused to accept a sole appointment and Westpac also raised objection. As a result, Robert and Erwin signed a variation of the terms of settlement on 3 October 2008. That variation required them to appoint both of the first receivers as a joint administrators of the Cooee business and joint attorneys to sell the business and the St Kilda Road property. Further, the varied terms of settlement inserted clause 2AA, in the following terms:
2AA Robert and Erwin hereby agree:
(a)not to interfere with, revoke or threaten to revoke the powers conferred upon [the joint administrators] hereunder;
(b)not to obstruct, frustrate or hinder [the joint administrators] in the exercise of such powers conferred hereunder in any manner whatsoever;
(c)not to obstruct or interfere with the exercise of powers which [the joint administrators] are called upon to exercise in the conduct of the Business;
(d)not to obstruct or interfere with the exercise of powers which [the joint administrators] are called upon to exercise under the Irrevocable Power of Attorney with respect of the sale of Business and the sale of the St. Kilda Property;
(e)to execute all documents provided to them by [the joint administrators] including but not limited to:
(i)a power of attorney to sell the Business and the St Kilda Road Property;
(ii)an irrevocable authority to act as joint and several administrators with the powers conferred upon an administrator under Part 5.3A of the Corporations Act 2001 notwithstanding that [the joint administrators] have not been formally appointed as administrators under the said Act;
(iii)a deed of indemnity.
Following execution of the deed of variation, the form of the documents required by the proposed joint administrators was provided to Robert’s solicitors on 10 October 2008. On the same day, Robert’s solicitors informed Erwin’s solicitors that the documents had been received and were acceptable to Robert. The letter continued:
It is of some urgency that we meet today for the purpose of execution of the Agreement as it is in the interests of both parties to have the “Independent Third Party” (administrator) installed in the business as soon as possible.
Please acknowledge receipt of this correspondence and advise when you and your client can be at our office today.
In his oral evidence Erwin denied that he was aware of any urgent need to sign these documents. I reject that evidence. As I have said, a substantial purpose of the terms of settlement was to prevent, if possible, Westpac appointing receivers to the Cooee business and entering into possession of the St Kilda Road premises as mortgagee. The urgency of the situation was emphasised by an accountant endeavouring to assist the brothers, Joseph Franck, in a memorandum dated 23 September 2008 to the brothers and their solicitors. Reading that memorandum as a whole and in context, it is clear that Mr Franck was advising the brothers that Westpac was insisting upon evidence that the administrators had been appointed in accordance with the terms of settlement by the end of the following week, that Westpac would otherwise exercise its right to appoint receivers and that, in these circumstances, it was ‘absolutely imperative’ that the administrators be appointed ‘very quickly’.
In evidence, Erwin endeavoured to justify his belief that the appointment of the proposed administrators was not urgent, because at a meeting on 10 October 2008, prior to receipt of the documents required by the administrators and the request that Erwin sign them, a meeting had been held with representatives of Westpac. According to Erwin, the proposals for sale of the Cooee business and the St Kilda Road property by the administrators pursuant to the terms of settlement were rejected by Wayne Thomas of Westpac, and accordingly there was no point in him signing documents appointing the administrators because Westpac would not allow them to act in accordance with the terms of settlement. I do not accept Erwin’s evidence or submissions on this issue. However, even if Erwin’s evidence and submissions be accepted, Westpac’s attitude did not excuse Erwin from his contractual obligations under the terms of settlement. He was required to do all such things and execute all such documents and instruments as were reasonably necessary to effectuate the terms of settlement. From 10 October 2008, he was aware that the documents necessary to appoint the administrators were available for execution. His refusal to sign those documents within seven days, by 17 October 2008, was a further breach of the terms of settlement.
Erwin also endeavoured to justify his failure to sign the documents appointing the administrators to the Cooee business, and the various sale authorities, on the basis that the real estate agents were claiming the payment of advertising fees as a condition of their appointment, and the administrators were claiming a payment of up-front fees as a condition of their appointment. Neither of these matters provided Erwin with a justification for failing to sign the documents. Clause 16 of the terms of settlement required all advertising costs as recommended by any real estate agent to be ‘shared equally by Robert and Erwin and be paid forthwith to such agent upon request by such agent’. Further, the request by the administrator for the payment of up-front fees was a reasonable one in all the circumstances, and Erwin was accordingly required to pay his share of those fees as part of his obligation under clause 13 of the terms of settlement to ‘do all such things and execute all such documents and instruments as [were] reasonably necessary’ to effectuate the terms of settlement.
Erwin contends that neither he nor any of the corporate trustees had sufficient funds to enable payment of the up-front fees demanded by the administrators. I do not accept that submission. If Erwin had genuinely wanted to do all things reasonably necessary to effectuate the terms of settlement, he could have sought Robert’s agreement to fund the up-front fees personally, on the basis that he would be recompensed from the net sale proceeds, or from the assets of one or more of the trusts. Indeed, when it became apparent that Erwin’s refusal to sign the documents necessary to effectuate the terms of settlement was based upon the demands for advertising fees and up-front fees by the administrators, Robert agreed to pay all of these amounts, on the reasonable basis that he would be reimbursed from the net sale proceeds of the properties. At a hearing on 23 October 2008 in this Court, Erwin refused to agree to this reasonable proposal by Robert. I find that Erwin was acting at this time to prevent the terms of settlement being effectuated, in clear breach of his obligations to assist that process.
Erwin made this intention explicit during a conversation with Robert after the court hearing on 23 October 2008, when he said words to the following effect:
I will not sign anything. I hope that the banks take everything away and you get nothing.
Erwin denied that he made this statement. I reject his denial. The content of the conversation as recounted by Robert is consistent with Erwin’s conduct at the time as I have described it.
I have considered whether a letter sent by Erwin’s solicitors by facsimile later on 23 October 2008 is inconsistent with my finding that Erwin made the statement quoted above. In my opinion, it is not inconsistent. Indeed, when read together with the letter from Erwin’s solicitors sent the following day, the correspondence is consistent with Erwin wishing to avoid his obligations under the terms of settlement.
The 23 October 2008 facsimile from Erwin’s solicitors to Robert’s solicitors was sent at 6:00 pm, in the following terms:
Dear Sir
Deutsch
Further to telephone discussion with you at 5:25PM today we confirm your advice that your client is prepared to meet the following:
1.Advertising fees to estate agents in respect of sale of properties Fitzroy, Port Melbourne and Caulfield.
2.Payments of any upfront fees claimed by [the proposed administrators] and provide an agreement with respect personal indemnity if required.
3.The payment of interest now due and owing to Westpac Bank in the sum of approximately $96,000.00.
It is understood that any payments advanced by your client are reimbursable from proceeds of sale of any asset and notwithstanding your clients assurance that he will not be claiming interest, we are no doubt certain that a commercial interest arrangement will follow any advancement of monies.
After discussion with our client he instructs that on the basis of your client confirming the aforementioned he will agree to execute the deed of appointment and authorities regarding the sale of real estate.
Our client adds one proviso; that your client agree to keep the Westpac Bank in funds regarding ongoing interest payment and will do so until a refinance is achieved. The terms of the refinance are to be the same or better than that currently obtained by our client with JR Finance, copies of which you already have.
Please note that our client's financier is prepared to move and to settle within 7 days as our client already has obtained a valuation from Charter Keck Cramer.
In our discussion with Wayne Thomas of the Westpac Bank today that Grant Thornton has been as a receiver of both companies, such appointment being predicated upon the fact that our respective clients could not come to an agreement as to outstanding interest payments and refinance.
We put you on notice that we require the discovery of all correspondence between your office and the Westpac Bank as our client holds your client responsible for the appointment of the receiver and the subsequent detrimental effect to the assets of the trust held for the beneficiaries of the trust.[16]
[16]Emphasis added.
Although conditional, this letter is capable of supporting an argument that, at least by this time, Erwin was prepared to comply with his obligations under the terms of settlement, albeit well after the time for performance had passed. However, the letter was in my opinion written in an endeavour to make Erwin appear to be acting reasonably. In doing so, it was disingenuous. The time for reasonableness, and the possibility of avoiding the appointment by Westpac of its own receivers, had passed. Indeed, as the emphasised portion of the letter shows, the letter was written at a time when it was known that Westpac had or would forthwith appoint its own receivers.
Erwin’s real intentions were made plain by the letter written on the following day by his solicitors to Robert’s solicitors, in which he contended that the terms of settlement had been terminated by frustration upon the appointment of the Westpac receivers. The letter is in the following terms:
Dear Sir
Deutsch
The Westpac Bank has appointed Grant Thornton as receiver (‘the Receiver’) of the two companies, 333 St Kilda Road Pty Ltd and Cooee on St Kilda Pty Ltd and thereby rendered performance of the terms of settlement dated 22 September 2008 and varied on 3 October 2008 (‘the Terms of Settlement’) impossible, having effectively removed control of the sale of the freehold and business at 333 St Kilda Road, Melbourne, from Messrs R and E Deutsch, and vested it in the Receiver.
In these circumstances, the appointment of the Receiver constitutes a supervening event that has brought about a termination of the Terms of Settlement by frustration and released Messrs R and E Deutsch from their respective obligations to perform the same.
The Terms of Settlement are now at an end and of no further force or effect.
In all the circumstances, having regard to the above findings, I am satisfied that Erwin breached the terms of settlement in many respects by no later than 17 October 2008. Further, the combination of this conduct, his conduct as evidenced by the transcript of proceedings in Court on 23 October 2008, and his statement to Robert after the conclusion of that hearing, constituted a repudiation by him of his obligations under the terms of settlement. All of that conduct occurred prior to the appointment of the Westpac receivers, whether that appointment was later on 23 October 2008 or only came into effect upon the formal instrument of appointment being signed by Westpac on the following day, 24 October 2008.
Whether Erwin’s breaches and repudiation of the terms of settlement were the cause of the appointment of the Westpac receivers is considered further below.
Were the terms of settlement frustrated before any breach by Erwin?
The modern concept of frustration of a contract was stated in the following terms by Lord Radcliffe in Davis Contractors Ltd v Fareham UDC:[17]
frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for would render it something radically different from that which was undertaken by the contract … It was not this that I promised to do.[18]
[17][1956] AC 696.
[18]Ibid, 729.
This statement was adopted by Mason J (as he then was) in Codelfa Construction Pty Ltd v State Rail Authority of NSW.[19] For the following reasons, the appointment of the Westpac receivers did not frustrate the terms of settlement.
[19](1982) 149 CLR 337, 357.
First, even if it be accepted that the appointment of the Westpac receivers was a frustrating event in the relevant sense, that event did not occur without fault by Erwin. For the following reasons, Erwin’s conduct (which is properly categorised as ‘default’) was a substantial cause of the appointment of the Westpac receivers:
(1) For the reasons given above and expanded upon below, I find that Erwin’s breaches of the terms of settlement were a significant contributing cause of Westpac losing patience with the brothers and its consequent appointment of the Westpac receivers. On the balance of probabilities, if Erwin had punctually complied with his obligations under the terms of settlement, the brothers would have been able to present a united front to Westpac and the Westpac receivers would not have been appointed.
(2) For the reasons given below:
(a) if Erwin had not wrongly diverted the receipts of the Cooee business from the authorised account to other bank accounts controlled by him, in particular the Studio 412 account; and
(b) if Erwin had not wrongly used Cooee’s funds for personal expenses and management fees during the period he locked Robert out of the Cooee business prior to the appointment of the Westpac receivers (the ‘lockout period’); then
(c) the authorised account would have had sufficient funds to meet all of the expenses of the Cooee business, including the annual rental payable to 333; and
(d) as a result, the Westpac facility would not have been in monetary default.
The findings in sub-paragraph (2) above are justified by expert evidence given by forensic accountants engaged by the parties in a supplementary joint report, filed pursuant to the Court’s orders made 30 March 2012. When a concession made by Robert as to a $70,000 difference is taken into account, the experts have concluded that, on the basis of the matters summarised in (2)(a) and (b), the takings of the Cooee business in the lockout period would have enabled Cooee and 333 to meet all of their financial obligations to Westpac, have surplus funds of between $216,000 and $235,000, and still have Cooee’s $100,000 overdraft facility available if required. Indeed, on the basis of the supplementary joint report, Cooee would not have been in monetary default to Westpac, even if the whole of the management fees taken by Erwin during the lockout period were justifiable.
There were also non-monetary defaults justifying Westpac in calling-up its facilities and appointing receivers to Cooee. However, taking the evidence as a whole, I find Westpac would not have acted in the absence of monetary default. In particular, although there was a technical default when the first receivers were appointed, I find that Westpac knew of that appointment and (although reserving its rights) would not have appointed a receiver if that was the only default. Indeed, Westpac was involved in the choice of one of the first receivers.
Second, I am not satisfied that the appointment of the Westpac receivers was a frustrating event in the relevant sense. Although a substantial purpose of the terms of settlement was to endeavour to avoid Westpac calling in the loan facility, appointing receivers to Cooee and selling the St Kilda Road property as mortgagee, the principal objective purpose of the terms of settlement was to finally and completely resolve the bitter dispute between the brothers, and allow for an orderly disposition of the trust assets, realisation of the net sale proceeds, the vesting of the trusts and the division of the net sale proceeds; thus avoiding continuation of the dispute and the associated protracted and expensive litigation. The appointment of the receivers and agents for Westpac as mortgagee in possession did not destroy the whole of the bargain under the terms of settlement, making performance of its terms something radically different from that which was undertaken by the parties. All that changed was that the Westpac receivers, and not the proposed administrators, controlled the sale of the St Kilda Road property and the Cooee business. Further, the costs and expenses of the Westpac receivers were of the same order as would have been incurred by the proposed administrators.
Moreover, the net sale proceeds could and should have been dealt with under the terms of settlement as if the sales had been effected by the administrators. In my opinion, it was an implied term of the terms of settlement that the net sale proceeds of sales by the Westpac receivers should be dealt with in this manner. Such an implied term satisfies all of the conditions necessary to ground the implication of a term, as summarised by the majority in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council,[20] and accepted by Mason J (as he then was) in Codelfa Construction Pty Ltd v State Rail Authority of NSW:[21]
[20](1977) 180 CLR 266, 283.
[21](1982) 149 CLR 337, 347.
(1) The term is reasonable and equitable. It would require the net sale proceeds of the assets to be dealt with in accordance with the agreement of the parties in respect of sales by the administrators. Sales by the administrators could not occur given the appointment of the Westpac receivers. The term would promote the underlying purpose of the terms of settlement, to completely resolve the disputes between the warring brothers;
(2) The term is necessary to give business efficacy to the terms of settlement, because otherwise there is no agreement as to how the net sale proceeds obtained by the Westpac receivers will be distributed;
(3) The term is in my opinion so obvious that it goes without saying. In the absence of frustration of the terms of settlement, there is no other reasonable manner in which to deal with the net sale proceeds;
(4) The term is capable of clear expression;
(5) The term does not contradict any express term. Rather, it is consistent with the terms of settlement, as it requires the net sale proceeds to be dealt with in accordance with the bargain struck by the parties.
Third, the possibility of the appointment of receivers by Westpac was well known to the parties when they signed the terms of settlement. They made no express provision for what would happen in that circumstance. In these circumstances, I infer that the parties were aware of and accepted the risk that a receiver may be appointed by Westpac. In those circumstances, neither party can avail itself of the doctrine of frustration to avoid obligations arising under the terms of settlement.[22]
[22]Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169, 222-3.
Fourth, the appointment of the Westpac receivers did nothing to undermine the remainder of the obligations concerning the sale of the Bay Street property, the Johnston Street property or the Green Street property. Nor did it prevent the dissolution of the relevant trusts. All of those obligations could and should have still been performed, notwithstanding the appointment of the Westpac receivers.
It was contended by Erwin that frustration of the provisions of the terms of settlement concerning the appointment of administrators to sell the Cooee business and the St Kilda Road property was so fundamental to the terms of settlement that, upon those aspects of the bargain being frustrated, the remaining terms were also frustrated. Reliance was placed upon the fact that the terms of settlement were intended to provide for a complete separation of the interests of the brothers and an end to all disputes. Erwin contended that this meant that either the whole agreement was frustrated or it was not. It was not possible to sever the remaining aspects of the terms of settlement and enforce them or claim damages for their breach.
I do not accept Erwin’s submissions. An event preventing or prohibiting performance of some but not all obligations under a contract does not necessarily bring about a frustration of the whole contract. Even if it be accepted that the provisions concerning the appointment of administrators and the sale of the Cooee business and the St Kilda Road property by them were frustrated, the remaining portions of the terms of settlement are in my view severable and remained in force. This includes the implied term discussed above as to the application of the net sale proceeds of sales by the Westpac receivers of the Cooee business and the St Kilda Road property.
In Ardee Pty Ltd v Collex Pty Ltd,[23] Palmer J considered whether the contract at issue was frustrated as a whole or only as to those aspects of the contract which could not be performed by reason of the frustrating event. Palmer J summarised the applicable legal principles in the following terms, which I accept and adopt:
It is well established that an event preventing or prohibiting performance of some but not all obligations under a contract does not necessarily bring about a frustration of the whole contract. Whether the contract is discharged by frustration wholly or partially depends upon whether what has happened defeats the main purpose of the contract. If performance of that part of the contractual obligations which remains performable makes as much commercial sense as performance of the whole of the obligations then performance of those obligations which are prevented is severable and the parties are only excused pro tanto from performance of their obligations under the contract: see Treitel, [“Frustration & Force Majeure” (1994)], paras 8-022 to 8-024, 8-034.[24]
[23][2001] NSWSC 836.
[24]Ibid, [55].
In my opinion, the clauses of the terms of settlement requiring the appointment of the administrators and the sale by them of the Cooee business and the St Kilda Road property are severable from the remainder of the terms of settlement. Although there is no universal test for determining whether an unenforceable provision in a contract is severable from the remaining provisions, the generally accepted test is that stated by Jordan CJ in McFarlane v Daniell:[25]
When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature ... If the elimination of the invalid promises changes the extent only but not the kind of the contract, the valid promises are severable ... If the substantial promises were all illegal or void, merely ancillary promises would be inseverable.[26]
[25](1938) 38 SR (NSW) 337.
[26]Ibid, 345.
This test was approved by the High Court in Thomas Brown & Sons Ltd v Fazal Deen.[27]
[27](1962) 108 CLR 391, 411.
In my opinion, severing the administrator clauses from the terms of settlement would not alter the nature of the terms of settlement. It would only alter their extent. The remaining promises are accordingly severable and enforceable. Taken in conjunction with the implied term discussed above, the terms of settlement were well capable of being performed and having the overarching purpose of bringing about a complete settlement of the disputes which were the subject matter of the contract.
Did Erwin’s breaches constitute a repudiation of the terms of settlement? If so, has that repudiation been accepted?
For the reasons given above, I am well satisfied that Erwin’s breaches amounted to a repudiation of the terms of settlement. Without any proper excuse, he simply refused to perform any of his obligations until his belated execution of one of the documents needed to appoint the administrators. That was too late. Taking the evidence as a whole, Erwin evinced an intention to no longer be bound by the terms of settlement and thereby repudiated them.
The case made for Erwin in this regard was that, if repudiation is established, Robert elected to affirm the terms of settlement by approaching the Court on and from 23 October 2008 and seeking specific performance of the terms of settlement or damages for their breach.
In paragraphs 12A and 19 of the amended statement of claim, Robert claims that Erwin’s breaches of the terms of settlement constituted both breaches of his fiduciary duties to the trusts and breaches of contract. He claims loss and damage on behalf of the trusts, and on his own behalf for the $315,000 payment due to him. In paragraphs 20 and 21 of the amended statement of claim, Robert alleges that Erwin’s conduct in breaching the terms of settlement, during the conversation after Court on 23 October 2008, and by his contention on 24 October 2008 that the terms of settlement had been frustrated by the appointment of the Westpac receivers, constituted a repudiation of the terms of settlement; with the consequence that he and the trusts are entitled to recover loss and damage arising from Erwin’s failure to perform his obligations under the terms of settlement. In the following paragraphs of the amended statement of claim, Robert makes a series of claims against Erwin for breaches of fiduciary duty owed to the trusts. These claims include claims for the misappropriation of funds of the Cooee Trust, for excluding Robert from the Cooee business, for banking the receipts of the Cooee business into unauthorised accounts, and for appropriating funds of Cooee to his own personal account and for unauthorised management fees.[28]
[28]Amended statement of claim, [47] and particulars.
In paragraph 20 of his defence, Erwin pleads that if (which he denied) he repudiated the terms of settlement, Robert: ‘did not within a reasonable time or at all accept such repudiation but, on the contrary, elected to treat the [terms of settlement] as still binding and operative’. In paragraph 21 of his defence, Erwin pleads that the loss and damage claimed as consequent on any repudiation by him of the terms of settlement: ‘was not caused or occasioned by … any repudiation’. Taking Erwin’s pleadings on this issue as a whole, his contention is that Robert is limited to claiming specific performance, damages or equitable compensation for his failure to perform the terms of settlement; and that Robert has waived any right to proceed on the causes of action alleged in the various proceedings which were compromised by the terms of settlement. Erwin summarised his contentions in this regard in the following terms:
Following the mention on 17 April and his Honour’s clarification of the fact that the plaintiffs are now seeking to rely solely on the ‘Fiduciary Duty Issue’, I wish to make the following point which I was incapable of doing, on the spot, when I was before his Honour.
It occurs to me that the plaintiffs actually gave up and forwent any claims they may have had against me for breach of fiduciary duty when they entered into the terms of settlement. Since the terms of settlement were never vitiated, the plaintiffs cannot now look behind them for the purpose of agitating any claims for breach of fiduciary duty.[29]
[29]Email from Erwin Deutsch to the Court and the parties, 18 April 2012.
Erwin’s contention that ‘the plaintiffs cannot now look behind [the terms of settlement] for the purpose of agitating any claims for breach of fiduciary duty’ must be considered in the context of the legal principles relating to accord and satisfaction, and as to the scope of general words of release. For present purposes, it is sufficient to note that Robert accepts that the terms of settlement in this case should be classified as an ‘accord and conditional satisfaction’, as identified by Phillips JA in Osborn v McDermott,[30] and with the consequences described by his Honour:
Where there is accord and conditional satisfaction, the plaintiff is bound to await performance and accept it if tendered, but if there be no performance, then the plaintiff may proceed according to general principles called into play when any agreement is repudiated: the plaintiff may either treat the agreement (the accord) as at an end and proceed on his original cause of action; or he may, at his option, sue on the compromise agreement, in place of the original cause of action.[31]
[30][1998] 3 VR 1.
[31]Ibid, 10-11.
In construing the width of a release given in terms of settlement compromising a proceeding, the general principle is that a release expressed in general words will usually be read down by reference to what was in the contemplation of the parties at the time of execution of the release.[32] Accordingly, even if the releases remain effective, a factual issue arises as to whether some or all of the plaintiffs’ claims against Erwin for breach of fiduciary duty fall outside the scope of the releases. This factual issue is considered below.
[32]Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112.
I turn to consider the factual issues concerning Robert’s election in the face of Erwin’s repudiations of the terms of settlement. This involves a close examination of Robert’s conduct on and from 23 October 2008. As stated, Robert contends that he elected to accept Erwin’s repudiations, and Erwin contends that Robert elected to sue on the compromise effected by the terms of settlement in place of the existing causes of action. As appears below, I find that Robert is pursuing inconsistent remedies. In the amended statement of claim, he both makes claims for damages for breaches of the terms of settlement and makes claims against Erwin for breaches of fiduciary duty; some of which claims were compromised under the terms of settlement.
The transcript of proceedings on 23 October 2008 demonstrates that counsel for Robert sought to reinstate the main proceeding for the purposes of seeking orders for specific performance of the terms of settlement. As an alternative, in the event that the Court was not prepared to grant specific performance of the terms of settlement, Robert’s counsel submitted that reinstatement should take place to enable the proceeding to be litigated in full. In my opinion, Erwin’s conduct by this time had amounted to a repudiation of the terms of settlement. Accordingly, the submissions made by Robert’s counsel, at that time, constituted an election to affirm the terms of settlement on the basis of the repudiation then existing.
However, Erwin’s subsequent conduct amounted to a further repudiation of the terms of settlement. For the reasons given above, I accept Robert’s evidence as to the statement made to him by Erwin following the conclusion of the hearing on 23 October 2008 (‘I will not sign anything. I hope that the banks take everything away and you get nothing’). That further repudiation was not undone by the facsimile letter sent by Erwin’s solicitors to Robert’s solicitors later that evening. For the reasons given above, that was a disingenuous letter and, in any event, was based upon conditions which Erwin had no right under the terms of settlement to insist upon. It was further repudiatory conduct.
Erwin repudiated the terms of settlement yet again on 24 October 2008, when his solicitors wrongly asserted that the appointment of the Westpac receivers frustrated the whole of the terms of settlement and discharged him from the performance of any obligations under those terms.
Erwin’s further repudiation of the terms of settlement gave Robert another opportunity to elect which course to pursue. On his own behalf, and in his capacity as a potential beneficiary under the trusts, he could either proceed on the original causes of action, including the claims in the writ proceeding, or sue on the terms of settlement in place of those causes of action. Robert contends that, acting on his own behalf, as a director of the corporate trustees and as a potential beneficiary under the trusts, he elected to terminate the terms of settlement and sue on the pre-existing causes of action against Erwin. It was submitted that this election was made when Robert filed a statement of claim on 24 November 2008, in which he made no claim for specific performance but claimed only damages for Erwin’s breaches of the terms of settlement. It was contended further that Robert and the potential beneficiaries made a similar election when those potential beneficiaries were joined as plaintiffs in the main proceeding in February 2009 and an amended statement of claim was filed; which statement of claim made no claim for specific performance but, on behalf of the trusts, made claims only for breaches of the terms of settlement and for breaches of fiduciary duty by Erwin.
I do not accept the plaintiffs’ submissions in this regard. My reasons follow.
First, the fact that specific performance of the terms of settlement was not sought in the statement of claim or amended statement of claim is not to the point. By these pleadings, Robert sought to sue on the terms of settlement, claiming damages for breach. The claims were made on Robert’s personal behalf and on behalf of each of the trusts. That conduct is consistent with seeking to enforce the terms of settlement, and is inconsistent with electing to treat the terms of settlement as at an end and to proceed on the original underlying causes of action.
Second, viewed as a whole, the conduct of Robert (through his counsel) at a series of directions hearings in the main proceeding during October and November 2008, evinced a clear intention to enforce the terms of settlement.
At the first directions hearing following the further repudiations, on 31 October 2008, Robert’s counsel denied that the terms of settlement had been frustrated by the appointment of the Westpac receivers and sought to reinstate the main proceeding for the purpose of enforcing the terms of settlement, as demonstrated by the following exchange:
HIS HONOUR: All right. Let’s assume that you press on with a claim for specific performance, alternatively damages for breach. What’s the consequence if there is specific performance of the terms of settlement?
[COUNSEL]: Consequence that the underlying causes won’t need to be litigated, that terms of settlement will subsume everything and both parties would be held to have to adhere to those terms of settlement.[33]
[33]Transcript of proceedings, 31 October 2008, 7.
Later, in the course of discussing directions to enable the dispute as to whether the terms of settlement had been frustrated or remained on foot and, if they remained on foot, whether they had been breached, the judge noted he would not shut Robert out from seeking specific performance or damages for breach of the terms of settlement, and asked the parties to formulate some directions to enable the issues to be resolved as quickly as possible; including directions as to discovery that may be relevant to the issue of specific performance or breach of the terms of settlement.[34] The directions hearing was adjourned to enable discussions and agreement on appropriate directions to this end.
[34]Ibid, 10.
The main proceeding returned to Court on 7 November 2008. Reading the transcript as a whole, Robert’s counsel again sought to enforce the terms of settlement. Counsel noted that if the terms of settlement had been frustrated, as Erwin’s counsel contended, then there would be nothing to specifically perform and, in those circumstances, Robert wished to proceed with the causes of action alleged in the writ proceeding, including in respect of alleged misappropriations of Cooee’s funds through the use by Erwin Deutsch of the Studio 412 account. In this context, Robert’s counsel acknowledged that the claims in the writ proceeding had been resolved as part of the terms of settlement.[35] Directions were made for an early trial of the frustration issue and whether Erwin had breached the terms of settlement. Directions were made for the exchange of lists of discoverable documents and a court book limited to those issues.
[35]Transcript of proceedings, 7 November 2008, 4-6.
The main proceeding was before the Court again on 13 November 2008, in respect of an application concerning evidence to be adduced at the trial of the issues concerning the terms of settlement. Again, Robert’s counsel made submissions on the basis that Robert was seeking to enforce the terms of settlement. Although the judge said at one stage that he did not understand Robert’s counsel to be seeking specific performance of the terms of settlement, that comment appears to have been directed at specific performance of the agreement in the terms of settlement to appoint administrators, because that appointment had been overtaken by the appointment of the Westpac receivers.
To your observation, what hours per week was Mr Erwin Deutsch putting in in relation to the Cooee business in the period from when you joined until 2007, when there was a change because of the dispute with his brother?---He was there quite a lot, and I think he worked from home a lot as well. There was a lot of email communication and phone calls. In hours, it's hard to know. He sort of lived and breathed it, so it was probably quite a few hours.
So he was there frequently, was he?---Yes, he was there every day.
And, as you say, contactable by telephone or email?---Absolutely, yes.
At this period did the same go for Robert? Was he also significantly involved?---Not in a positive way.
All right. Putting that to one side, he played a role also?---He would attend the odd meeting, but I didn't receive emails from him, I didn't receive phone calls from him. He wasn't really working on the business, from my observation.
Tell me if you don't agree with this, but is it a fair summary to say that you viewed Erwin as the person who was the principal controller of the day-to-day operations of the business?---Erwin was the one who had gone out before I even came along and had researched the industry and been out and done marketing and had the sort of passion to build the business. So Erwin was, yes, he was the one that I guess myself and the staff were working with to build it.
After September 2007 until the receivers were appointed in October 2008, did Erwin's role change materially?---No, not really. We were still working hard to build the business.
So this statement of 5 August 2008 should be taken as applying to the whole of the period that you observed.
Erwin - - -?---Yes.
From the time you arrived until that date?---Yes, until the very end, basically.
Until the receivers came?---Yes. We handed in our submission to the Victorian Tourism Awards I think the day before the receivers walked in the door, so we were working hard right until the end.
To my observation, Ms Heaton was a truthful witness. She is well placed to speak about the effectiveness of Erwin’s contribution to managing the Cooee business. In reaching this conclusion, I have taken account of the fact she continued to manage the Cooee business for the new owners for about two years after sale by the Westpac receivers. Further, she was the only independent witness on the issue. Senior counsel for Robert did not submit to the contrary. However, as appears below, it was nevertheless contended on behalf of Robert that the role played by Ms Heaton and Ms Lee is inconsistent with Erwin performing any substantial hands-on management role himself.
Although obviously well-disposed towards Erwin, and bearing a degree of antipathy towards Robert, Ms Heaton nevertheless acknowledged that her role was more important than Erwin’s in the operations side of the Cooee business. In relation to the marketing side of the business, Ms Heaton said that she was not involved to a significant degree, and that Erwin and Ms Lee were responsible.
It was submitted on behalf of Robert that, notwithstanding Ms Heaton’s evidence, Erwin’s evidence as to the extent of his management role was exaggerated, and constituted an after-the-event attempt to justify his wrongful conduct in paying himself substantial and unauthorised management fees during the lockout period. It was submitted that, taking the evidence as a whole, the Court should find that Erwin’s management role was no more than that of an interested director or proprietor; and was limited to monitoring the bookings (usually remotely from home), ‘popping in’ to socialise with guests, making occasional suggestions to Ms Heaton and attending various interstate and international conferences.
In support of this submission reliance was placed on Ms Heaton’s evidence that she performed duties including ‘the day-to-day operations, overseeing reception, housekeeping, security, employing people, HR, making sure people were following systems, processes, marketing – everything really’. On this basis, it was contended that Erwin’s role in the management of the Cooee business was at a general supervisory level only, and that he required the assistance of someone skilled and experienced in the industry to perform the hands-on management role.
Further, it was submitted the Court should infer that that Erwin asked Ms Heaton and Ms Lee to prepare their testimonial in order to justify instructions which he gave in late April 2008 to the Cooee bookkeeper, Mr Hotton, to make back-dated entries classifying payments previously made to him as management fees. I accept that submission and draw that inference.
As to the sales and marketing role undertaken by Erwin, he gave evidence that his interstate and international travels to backpacker conferences, and his conversations with backpackers staying at the Cooee hostel and other hostels he visited, gave him an insight into the hostel business, enabled him to establish networking within the industry and to oversee the Cooee business. He described his role as ‘not minute by minute, my role was to be able to plan and to think, observe, think, plan and implement.’
It was submitted on behalf of Robert that Beccy Lee was the person who performed the most substantial marketing role during the relevant period, and that she was paid approximately $107,000 for that work in her capacity as an independent contractor. The amount of her fees is not in dispute. I accept that Ms Lee had a significant role in marketing the Cooee business, however her role was not limited to marketing. She was also involved in graphic design at relevant times. Ms Heaton gave evidence that, in her experience including her current role as assistant manager of a large city backpacker hostel, the graphic design role is a continuing and expensive aspect of marketing, even after logos and other branding have been established.
Ms Lee was not called to give evidence. Either party could have called her if they chose.
Taking the evidence as a whole, and placing particular reliance upon the evidence of Ms Heaton, I find that Erwin played a significant management role in the Cooee business, both before and during the relevant period. Although Ms Heaton was the principal hands-on manager of the day-to-day operations, she was subject to Erwin’s control and direction and obviously found his role valuable in turning the business around and becoming profitable. Her views as to the state of the business when the Westpac receivers were appointed should be given considerable weight, especially in circumstances where she continued to manage the Cooee business for about two years after the business was sold. Further, although unable to place a figure on the number of hours worked by Erwin in the business, Ms Heaton said that he ‘lived and breathed’ the business, was there every day and contactable by telephone or email at all times. This was in contrast to Robert who, even before the relevant period, had little involvement in the management of the Cooee business.
In reaching my conclusion, I have also taken into account the fact that, as the evidence shows, the Cooee business went from a loss-making enterprise at the commencement of the relevant period to a profitable and well-regarded business at the time of testimonial and the appointment of the Westpac receivers shortly afterwards.
In the absence of dispute between the brothers, Erwin’s management role would no doubt have been compensated for by drawings from the business.
Is Erwin entitled to any adjustment to compensate him for his management role?
The first issue for consideration is Erwin’s evidence that he and Robert orally agreed, in mid to late 2004, that he would be paid for his management role in the business:
Do the best you can. Tell me what it was. Who said what?---Basically we said someone is going to run the business and operate the business and, as I had the ability and the marketing skills - I'm not talking particularly in backpacking but in general - then I would be the most suited person to undertake and also operationally, meaning administratively and all the rest, to undertake that role.
When asked if he could recall anything else about the conversation, Erwin said:
That would then offer, allow the two of us an ability to have an extra - a capitalised project, basically have a property that can then increase in value with the proper business there, build up a goodwill and lend bank et cetera.
Erwin acknowledged that no agreement was reached by him with Robert as to the amount he would be paid.
I do not accept Erwin’s evidence of an agreement with Robert that he would be paid a wage. It is too vague to amount to an agreement and, in any event, was not directly put to Robert in cross-examination. It is also inconsistent with the prior dealings between the brothers, where drawings were taken on an equal basis as required from time to time. I note that Erwin said he and Robert drew salaries every week while they conducted the ‘International Fabrics’ business. No documentary evidence was put forward to support this evidence, Robert denied it, and in any event there is no suggestion that regular salaries were ever drawn from Cooee by either Robert or Erwin at any time.
The next issue, concerns the amount which, all things being equal, would amount to a reasonable remuneration for Erwin’s management role in the business during the relevant period. The accountant’s engaged by the parties gave evidence on this issue:
(1) On behalf of Robert, Mr Miller was of the opinion that a fair remuneration for Erwin’s management role would be no more than $66,170, which was the amount he was paid by the Cooee Trust as drawings in the financial year ended 30 June 2007. In his oral evidence, Mr Miller noted that, in reaching his opinion as to reasonable remuneration, he had taken into account that Erwin was overseas for about two months of the relevant period. The evidence does not enable any conclusion to be reached as to the extent that Erwin devoted time while overseas to attending trade shows or otherwise gaining knowledge of overseas practices in the backpacker hostel industry.
(2) On behalf of Erwin, Mr Lipson reviewed some industry statistics and gave the opinion that a reasonable compensation for Erwin’s management role during the relevant period was $85,338. In his oral evidence, Mr Lipson said that this amount was at the lower end of the range of annual salaries payable to general managers of similar businesses.
Taking the evidence on this issue as a whole, I find that a reasonable remuneration for Erwin’s management role during the relevant period was $85,000 in accordance with Mr Lipson’s opinion. I make this finding because of the significance of the management role which I have found Erwin undertook, the overall responsibility which he had for overseeing the management team and the resulting success in bringing the business from losses to profits. Erwin was involved in both the operational side of the business and the marketing side.
My finding as to the reasonable value of Erwin’s services does not mean that he is automatically entitled to an allowance in his favour for that amount. Nor does it mean that he is automatically entitled to an allowance for management fees for prior years.
The relevant legal principles may be summarised as follows:
(1) A defaulting fiduciary’s liability to account for benefits received is not penal: ‘equity does not … punish a fiduciary for misconduct by making him account for more than he actually received as a result of his breach of fiduciary duty’.[50]
[50]Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 109.
(2) The remedy to be ordered for breach of fiduciary duty ‘must be fashioned to fit the nature of the case and the particular facts.’[51]
[51]Warman International Ltd v Dwyer (1995) 182 CLR 544, 559.
(3) The liability of a defaulting fiduciary to account for benefits received from the trust ‘should not be transformed into a vehicle for the unjust enrichment of the plaintiff’.[52]
[52]Ibid, 561.
(4) ‘Whether it is appropriate to allow an errant fiduciary a proportion of profits or to make an allowance in respect of skill, expertise and other expenses is a matter of judgment which will depend on the facts of the given case.’[53]
[53]Ibid, 562.
(5) The assessment of the actual benefit derived by a defaulting beneficiary is an inexact one – ‘at best it can only result in some reasonable approximation of the profit for which the fiduciary must account’.[54] Accordingly, courts sometimes ‘short-circuit the apportionment enquiries by resort to the device of awarding “just allowances” to the fiduciary … for his or her own skill and exertion.’[55]
[54]Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, 517.
[55]Ibid, [529].
(6) The onus lies on the defaulting fiduciary to establish that it would inequitable for the whole of the benefits received in breach of fiduciary duty to be disgorged.[56]
[56]Warman International Ltd v Dwyer (1995) 182 CLR 544, 561-2.
(7) Just allowances are not made as a matter of course. Such allowances must be ‘practically just’. In determining whether an allowance is practically just in the circumstances of a particular case, relevant considerations include whether the fiduciary has acted honestly or dishonestly and whether denial of an allowance would leave the trust unjustly enriched.[57] In Phipps v Boardman,[58] Lord Denning MR said:
The gist of it is that the defendant has unjustly enriched himself, and it is against conscience that he should be allowed to keep the money. The claim for repayment cannot, however, be allowed to extend further than the justice of the case demands. If the defendant has done valuable work in making the profit, then the Court in its discretion may allow him a recompense. It depends on the circumstances. If the agent has been guilty of any dishonesty or bad faith, or surreptitious dealing, he might not be allowed any remuneration or reward. But when, as in this case, the agents acted openly and above board, but mistakenly, then it would only be just that they should be allowed remuneration.[59]
[57]Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, [531].
[58][1965] 1 Ch 992.
[59]Ibid, 1020-21.
It was submitted on behalf of Robert that the facts of this case are such that the Court should refuse to make any allowance for Erwin’s management role during the relevant period. It was contended that Erwin acted dishonestly, in bad faith or at least surreptitiously in many respects; and that the Cooee Trust would not be unjustly enriched if he was refused any allowance. Reliance was placed upon the following matters:
(1) The amount of the total misappropriations was large, approximating $400,000 for both personal expenses and the claimed management fees.
(2) Erwin concealed the fact that he was making unauthorised payments from Cooee’s assets for his personal benefit until ordered by the Court to produce the financial records of the Cooee business from April 2008. In late April 2008, Erwin instructed Mr Hotton to reclassify back-date drawings taken by him as management fees.
(3) On 10 June 2008, Erwin undertook to the Court that he would forthwith transfer all of Cooee’s funds under his control to the authorised account and would thereafter pay all moneys received by or on behalf of Cooee into the authorised account. Erwin deliberately breached these undertakings. He admitted in cross-examination that he made a conscious decision not to comply with the undertakings. He did so at a time when he knew Westpac was pressing Cooee for payment.
(4) After the Westpac receivers were appointed, Erwin failed to comply with their request that the moneys standing to the credit of the Studio 412 account be transferred to them. As a result, the Westpac receivers applied to the Federal Court and obtained orders requiring Erwin to transfer the moneys to them.
(5) Erwin’s evidence to the Federal Court was unsatisfactory in a number of material respects. Initial affidavits were false or incomplete.
(6) Erwin applied for and was granted ‘Cooee’ trademarks in the name of Studio 412, even though he admitted in cross-examination that the trademarks were an asset of Cooee. As a result, the receivers incurred further legal costs and were required to sell the Cooee business with only a limited licence to use the trademarks for a three month period. This was an example of Erwin acting dishonestly to benefit himself at the expense of the trust.
(7) Erwin took the law into his hands in a ‘high-handed’ fashion when he excluded Robert from the Cooee business.
(8) When taking the evidence as a whole, it was Erwin’s conduct which caused the Westpac receivers to be appointed. For the reasons given above, I accept that this is so. Were it not for Erwin’s conduct in: (1) locking Robert out of the business and ceasing to use the authorised account, thus causing Robert to commence the main proceeding; and, (2) following settlement of the main proceeding, refusing to perform the terms of settlement, the Westpac receivers would not have been appointed. Moreover, the further joint report of Mr Miller and Mr Lipson demonstrates that Cooee and 333 could have performed their financial obligations to Westpac if all of the Cooee receipts had been banked into the authorised account and Erwin had not misappropriated significant sums for his personal use.
It was contended on behalf of Erwin that his management role was a very significant one, which saw the Cooee business go from losses to profits during the course of the relevant period. He contends that it would be unjust to deprive him of some reasonable remuneration for the application of his work and skill leading to this result. However, he could provide no legal justification for his conduct which is catalogued in the previous sub-paragraphs. He does not contend that he was acting mistakenly, but bona fide pursuant to wrong legal advice. The only explanation which he put before the Court, which he acknowledged was not an excuse for his conduct, was that he locked Robert out of the Cooee business and took control of its cashflow because his dispute with Robert had reached the stage where he had no confidence that Robert would agree to him receiving any drawings from any of the trusts; and at the time Robert had other sources of income and he had none.
Following the Court raising a number of further issues, further submissions were made on 17 April 2012. During the course of those submissions, the Court noted that the dispute between the brothers justified Erwin (or indeed Robert) approaching the Court for the appointment of a new trustee, but in no circumstances justified Erwin locking Robert out of the business. Erwin informed the Court that he had received advice to this effect at the time, but chose not to accept it because Robert would not agree to an independent trustee. Even if that explanation is accepted, it does no credit to Erwin or his previous lawyers. His breaches of fiduciary duty were so obvious that they should never have been denied. Once proceedings were commenced, Erwin’s only responsible option as a fiduciary was to acknowledge his breaches and seek to have an independent person appointed by the Court to manage the trusts.
In all the circumstances, in the absence of the releases, I would not have been persuaded that Erwin discharged his onus to establish that it would be inequitable to order that he repay the whole amount of the unauthorised management fees to the Cooee Trust.
Nor would I have accepted Erwin’s contention that he is entitled to some allowance for management fees for his work prior to the lockout period. For the reasons given above, I have rejected his evidence that he and Robert agreed he would be paid a salary for working in the Cooee business. I find that they both performed significant roles in managing and conducting the business prior to the lockout. Neither was paid a wage. They took drawings from time to time as agreed.
What monetary relief should be ordered in the main proceeding?
For the reasons given above, having regard to my findings as to the scope of the releases, Erwin must repay the Cooee Trust $129,501.04 for misappropriation of trust funds for personal purposes; and a further amount, to be determined, for the management fees taken by him after 22 September 2008.
For the above reasons Erwin must pay Robert $315,000 for breach of the terms of settlement. Further, for the reasons given above, I have found that Robert elected to enforce the terms of settlement. Although he has not made a specific claim for it, he is entitled under the terms of settlement to one half of the net proceeds of sale of the trust assets following satisfaction of the statutory obligations of the trusts. This will require accounts to be taken once all properties have been sold.
The amount of any damages proved by the property trusts will be the subject of separate determination.
I will hear the parties as to interest on these amounts, and as to costs.
Should a new trustee be appointed to some or all of the trusts?
All parties now agree that a new and independent trustee should be appointed to all of the trusts. I will hear the parties as to when new trustees should be appointed, as to identity of the new trustee, and as to the form of necessary orders, including vesting orders.
Conclusion and orders
I will hear the parties as to the precise form of the Court’s judgment in the proceeding. As I am satisfied that Erwin’s breaches of the terms of settlement were not just contractual in nature, but involved him in serious breach of his fiduciary duties to the trusts, the Court is in those circumstances empowered to mould relief which is ‘practically just’ in all the circumstances.[60] In my view, the Court should endeavour to mould relief consistent with the terms of settlement and these reasons for judgment. The parties should be given an opportunity to consider these reasons for judgment, before called upon to make further submissions in that regard.
[60]For example, Warman International Ltd v Dwyer (1995) 182 CLR 544; Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102.
SCHEDULE OF PARTIES
| S CI 2008 05515 | |
| BETWEEN: | |
| ROBERT DEUTSCH | First Plaintiff |
| ALEXANDER DEUTSCH | Second Plaintiff |
| HELEN GOLDSCHMIEDT | Third Plaintiff |
| DAVID DEUTSCH | Fourth Plaintiff |
| GABRIEL DEUTSCH | Fifth Plaintiff |
| ISSAC DEUTSCH | Sixth Plaintiff |
| ABRAHAM DEUTSCH | Seventh Plaintiff |
| LEON DEUTSCH | Eighth Plaintiff |
| ELIZABETH DEUTSCH | Ninth Plaintiff |
| SCHMUL DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Tenth Plaintiff |
| ARYAA (Michael) DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Eleventh Plaintiff |
| DINA DEUTSCH (a minor, by her litigation guardian ALEXANDER DEUTSCH) | Twelfth Plaintiff |
| MEIR DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Thirteenth Plaintiff |
| ARI GOLDSCHMIEDT (a minor, by his litigation guardian HELEN GOLDSCHMIEDT) | Fourteenth Plaintiff |
| BENJAMIN GOLDSCHMIEDT (a minor, by his litigation guardian HELEN GOLDSCHMIEDT) | Fifteenth Plaintiff |
| FRIDA GOLDSCHMIEDT (a minor, by her litigation guardian HELEN GOLDSCHMIEDT) | Sixteenth Plaintiff |
| AVI DEUTSCH (a minor, by his litigation guardian DAVID DEUTSCH) | Seventeenth Plaintiff |
| ARI DEUTSCH (a minor, by his litigation guardian DAVID DEUTSCH) | Eighteenth Plaintiff |
| RAIZY DEUTSCH (a minor, by her litigation guardian GABRIEL DEUTSCH) | Nineteenth Plaintiff |
| SCHMUL (Schmuly) DEUTSCH (a minor, by his litigation guardian ISSAC DEUTSCH) | Twentieth Plaintiff |
| - and - | |
| ERWIN DEUTSCH | First Defendant |
| 333 ST KILDA ROAD PTY LTD | Second Defendant |
| COOEE ON ST KILDA ROAD PTY LTD | Third Defendant |
| 253 BAY STREET PTY LTD | Fourth Defendant |
| FASHION FABRIC CUTS PTY LTD | Fifth Defendant |
| PRYCROFT NINETY ONE PTY LTD | Sixth Defendant |
| INTERNATIONAL DEVELOPMENTS (VIC) PTY LTD | Seventh Defendant |
| STUDIO 412 PTY LTD | Eighth Defendant |
| TZIPORAH DEUTSCH | Ninth Defendant |
| ADAM DEUTSCH | Tenth Defendant |
| ANDREW DEUTSCH | Eleventh Defendant |
| JACQUELINE DEUTSCH | Twelfth Defendant |
| ARI DEUTSCH (a person under disability being a minor by his litigation guardian TZIPORAH DEUTSCH) | Thirteenth Defendant |
| SHIRA DEUTSCH (a person under disability being a minor by her litigation guardian TZIPORAH DEUTSCH) | Fourteenth Defendant |
| AKIVA DEUTSCH (a person under disability being a minor by his litigation guardian ADAM DEUTSCH) | Fifteenth Defendant |
| MORDECHAI DEUTSCH (a person under disability being a minor by his litigation guardian ANDREW DEUTSCH) | Sixteenth Defendant |
| AND BETWEEN: | |
| TZIPORAH DEUTSCH | Firstnamed Plaintiff by Counterclaim |
| ADAM DEUTSCH | Secondnamed Plaintiff by Counterclaim |
| ANDREW DEUTSCH | Thirdnamed Plaintiff by Counterclaim |
| JACQUELINE DEUTSCH | Fourthnamed Plaintiff by Counterclaim |
| ARI DEUTSCH (a person under disability being a minor by his litigation guardian TZIPORAH DEUTSCH) | Fifthnamed Plaintiff by Counterclaim |
| SHIRA DEUTSCH (a person under disability being a minor by her litigation guardian TZIPORAH DEUTSCH) | Sixthnamed Plaintiff by Counterclaim |
| AKIVA DEUTSCH (a person under disability being a minor by his litigation guardian ADAM DEUTSCH) | Seventhnamed Plaintiff by Counterclaim |
| MORDECHAI DEUTSCH (a person under disability being a minor by his litigation guardian ANDREW DEUTSCH) | Eightnamed Plaintiff by Counterclaim |
| - and - | |
| ROBERT DEUTSCH | Firstnamed Defendant by Counterclaim |
| ALEXANDER DEUTSCH | Secondnamed Defendant by Counterclaim |
| HELEN GOLDSCHMIEDT | Thirdnamed Defendant by Counterclaim |
| DAVID DEUTSCH | Fouthnamed Defendant by Counterclaim |
| GABRIEL DEUTSCH | Fifthnamed Defendant by Counterclaim |
| ISSAC DEUTSCH | Sixthnamed Defendant by Counterclaim |
| ABRAHAM DEUTSCH | Seventhnamed Defendant by Counterclaim |
| LEON DEUTSCH | Eighthnamed Defendant by Counterclaim |
| ELIZABETH DEUTSCH | Ninthnamed Defendant by Counterclaim |
| SCHMUL DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Tenthnamed Defendant by Counterclaim |
| ARYAA (Michael) DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Eleventhnamed Defendant by Counterclaim |
| DINA DEUTSCH (a minor, by her litigation guardian ALEXANDER DEUTSCH) | Twelfthnamed Defendant by Counterclaim |
| MEIR DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Thirteenthnamed Defendant by Counterclaim |
| ARI GOLDSCHMIEDT (a minor, by his litigation guardian HELEN GOLDSCHMIEDT) | Fourteenthnamed Defendant by Counterclaim |
| BENJAMIN GOLDSCHMIEDT (a minor, by his litigation guardian HELEN GOLDSCHMIEDT) | Fifteenthnamed Defendant by Counterclaim |
| FRIDA GOLDSCHMIEDT (a minor, by her litigation guardian HELEN GOLDSCHMIEDT) | Sixteenthnamed Defendant by Counterclaim |
| AVI DEUTSCH (a minor, by his litigation guardian DAVID DEUTSCH) | Seventeenthnamed Defendant by Counterclaim |
| ARI DEUTSCH (a minor, by his litigation guardian DAVID DEUTSCH) | Eighteenthnamed Defendant by Counterclaim |
| RAIZY DEUTSCH (a minor, by her litigation guardian GABRIEL DEUTSCH) | Nineteenthnamed Defendant by Counterclaim |
| SCHMUL (Schmuly) DEUTSCH (a minor, by his litigation guardian ISSAC DEUTSCH) | Twentiethnamed Defendant by Counterclaim |
17
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