Du v Georgiadis
[2020] VSCA 306
•30 November 2020
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S EAPCI 2020 0004
| HONG HONG DU | Applicant |
| v | |
| PAVLOS GEORGIADIS | Respondent |
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| JUDGES: | KYROU and McLEISH JJA and MACAULAY AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 21 October 2020 |
| DATE OF JUDGMENT: | 30 November 2020 |
| MEDIUM NEUTRAL CITATION: | [2020] VSCA 306 |
| JUDGMENT APPEALED FROM: | [2019] VCC 1911 (Judge Murphy) |
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LIMITATION OF ACTIONS – Breach of trust established by arbitral award – Claim for equitable compensation – Whether action to enforce award barred by s 5(1)(c) of Limitation of Actions Act 1958 – Whether leave required to enforce award under s 33 of Commercial Arbitration Act 1984 – Tridon Australia Pty Ltd v ACD Tridon Inc [2004] NSWCA 146, considered – Award established trust but did not provide for equitable relief for breach – Claim for equitable compensation not action to enforce award – Limitation of Actions Act 1958 ss 5(1)(a), 5(1)(c), Commercial Arbitration Act 1984, s 33.
LIMITATION OF ACTIONS – Claim for equitable compensation in respect of conversion of trust property – Whether action in respect of breach of trust barred by s 21(2) of Limitation of Actions Act 1958 – Action in respect of breach of trust to which s 21(2) prima facie applies – Whether exception in s 21(1)(b) of Limitation of Actions Act 1958 engaged – Whether action by beneficiary under trust – Nolan v Nolan [2004] VSCA 109, applied – Whether action for recovery of trust property – In re Timmis, Nixon v Smith [1902] 1 Ch 176, JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467, Burnden Holdings (UK) Ltd v Fielding [2016] EWCA Civ 557, Burnden Holdings (UK) Ltd v Fielding [2018] AC 857, considered – Exception extends to action for equitable compensation in respect of conversion of trust property – Limitation of Actions Act 1958 s 21 – Appeal dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr M O’Connor | Ryan Solicitors |
| For the Respondent | Mr T Messer with Mr A Silver | Madgwicks Lawyers |
KYROU JA
McLEISH JA
MACAULAY AJA:
Introduction
This case raises the question whether certain claims arising from an alleged breach of a trust created under an arbitral award were able to be brought more than six years after the alleged breach in question.
The applicant, Mr Du, and the respondent, Mr Georgiadis, were business partners. After agreeing to dissolve the partnership, they empowered an arbitrator to determine the manner of dissolution. The arbitrator determined that Mr Du would buy out the interest of Mr Georgiadis. The arbitral award provided that, after a certain date, Mr Du would hold the partnership ‘interests and activities’ on trust for both himself and Mr Georgiadis. It was ordered that the net assets be valued, and that Mr Du pay Mr Georgiadis half of the valued amount as a part of the payment to buy out Mr Georgiadis (‘the remaining assets amount’). Mr Du took over the business and made other payments due under the award, but did not pay the remaining assets amount.
Nearly eight years later, Mr Georgiadis brought a proceeding in the County Court, in which he successfully claimed equitable compensation from Mr Du for breach of the trust created by the award.[1] The judge rejected Mr Du’s defences relying on various provisions of the Limitation of Actions Act 1958 (‘Limitation Act’) and the equitable doctrine of laches.
[1]Georgiadis v Du [2019] VCC 1911 (Judge Murphy) (‘Reasons’).
Mr Du seeks leave to appeal from that decision. For the reasons that follow, leave to appeal should be granted, but the appeal should be dismissed.
Factual background
From about 1996 to May 2009, Mr Du and Mr Georgiadis were partners in a business that traded as ‘The Diggers Rest Furniture Company’. The business imported timber components and manufactured and sold household furniture. There was no partnership agreement. The partnership assets were either jointly owned or separately registered to the partners. Mr Du and Mr Georgiadis jointly owned a factory at 1 Azalea St, Vermont, and leased retail premises in Nunawading. They each had business vehicles registered in their own names.
In 2008, Mr Du and Mr Georgiadis decided to sell the business, retaining Macquarie Business Brokers (‘Macquarie’) to assist with the sale.
In February 2009, Mr Du and Mr Georgiadis executed an agreement to dissolve their partnership. The agreement did not provide for a date of dissolution, nor did it provide for the manner of dissolution. Instead, it provided for the parties to execute a further signed agreement as to the manner of the dissolution following a valuation by Macquarie of the Vermont factory freehold, along with the business goods and chattels.
On 5 May 2009, Mr Du and Mr Georgiadis agreed upon a further document, which specified a method for the valuation of the partnership assets.
The award
On 23 May 2009, Mr Du and Mr Georgiadis executed an arbitration agreement under the Commercial Arbitration Act 1984 (‘Arbitration Act’). The arbitration agreement identified the following issues for resolution:
1 Dissolution of partnership;
2 Total cessation of trading altogether;
3 Division of all assets - agreed (or determined) basis;
…
On the same day, the appointed arbitrator issued an arbitral award, signed by the parties. After setting out relevant background, the award identified three options for the manner of dissolution.
The first option was for one partner to buy out the other’s interests. Only Mr Du was prepared to make an offer for such a purchase. His offer was to buy Mr Georgiadis’ interest for the sum of: (a) an agreed amount representing half of the value of the factory (‘the factory amount’); and (b) the remaining assets amount, which represented half of the value of the business’ other assets and liabilities, the value of which was to be calculated using the method prescribed by the 5 May 2009 document. This would yield an estimated total payment to Mr Georgiadis of $431,500, comprising the agreed factory amount of $321,500 and an estimated remaining assets amount of $110,000. The award recorded this offer as follows:
[Mr Du to] take over all of [Mr Georgiadis’] interests in the partnership:
50% value of factory 1 Azalea (agreed)
50% value of:
stock
cash & debtors
other assets
liabilities
(to be valued per agreement 5 May 2009)
$321,500
(approx) $110,000
Total
(estimated) $[431,500]
The second dissolution option was for the partnership assets and interests to be split between the partners on an agreed basis. The third option was to realise the assets of the partnership and split the realised amount between the partners.
The award then set out the arbitrator’s ‘decision’ as to the appropriate option. The arbitrator began by finding that there was no agreement between the partners as to the future of the partnership, and that the partners were ‘dysfunctional as a partnership and unable to continue working together constructively’.
The arbitrator then made an ‘order’ for Mr Du to buy Mr Georgiadis’ interest in the business on the basis of Mr Du’s ‘first option’ offer, plus an additional uplift of $50,000 in respect of the business goodwill. The ‘order’ provided:
I order:(a) Valuation of the assets, per Agreement 5 May 2009, by 30 May 2009.
(b) [Mr Du] is to pay a deposit of $5,000 to [Mr Georgiadis] today to confirm the deal.
(c) [Mr Du] is to formalise this offer by arranging for payment in full within 30 days and actual payment by 30 June 2009.
(d) In the event [Mr Du] cannot obtain finance within 30 days, unless [Mr Georgiadis] agrees to an extension of time,
[Mr Georgiadis] is ordered to commence an orderly realisation of all business assets, with a full accounting to [Mr Du]. The net proceeds of realisation to be shared equally between
[Mr Du] and [Mr Georgiadis], after deduction of any reasonable and necessary expenses.
(e) The partnership is terminated, by Order and agreement, as of 5.00pm on 23 May 2009. All liabilities incurred to date of separation are to be shared equally. From 5.01pm on 23 May 2009 all partnership interests and activities will be operated by [Mr Du] as trustee for [Mr Georgiadis’] interest in 50% of the old partnership, until full payment has been made for said interest.
(f) Upon payment being received, [Mr Georgiadis] will transfer his interest in [the factory] at 1 Azalea to [Mr Du], or his nominee. Until that time, the partners will continue as joint owners of the property.
(g)The costs of doing whatever needs to be done to effect the foregoing measures will fall where they are incurred, and both parties are ordered to ensure that they do not unfairly prejudice, or threaten, or encumber the interest of the other through these or associated actions.[2]
[2]Paragraph numbering and emphasis added.
It is the operation and effect of clause (e) which is central to the parties’ dispute.
On the following day, Mr Georgiadis attended the factory and retail premises and made a video recording of the stock and equipment at each. In the same week he also conducted a stocktake at each site and provided the results to Mr Du.
The arbitrator’s ‘order’ was only partially complied with. Mr Du paid Mr Georgiadis the $5,000 deposit. Later, Mr Du paid Mr Georgiadis the $321,500 factory amount. Title to the factory transferred to Mr Du on 26 March 2010.
But the remaining assets were not valued, and Mr Du did not pay to Mr Georgiadis the remaining assets amount, nor the prescribed $50,000 uplift in respect of business goodwill.
Meanwhile, Mr Du continued to operate the business, transferring the business name registration to his own name and operating it on his own account.
On 4 May 2010, Mr Georgiadis’ solicitors wrote to Mr Du, demanding that he: (a) co-operate in undertaking a valuation of the business’ remaining assets, so that the remaining assets amount could be calculated; and (b) pay the $50,000 goodwill uplift plus interest. The letter relevantly stated:
Although we note that you have paid our client an amount in respect of the real property at 1 Azalea Street, Vermont, there has still not been a valuation of the remaining assets because you have failed to cooperate with our client in undertaking that valuation. We urge you to immediately cooperate with our client in undertaking the valuation.
Mr Du replied on 11 May 2010, stating that he was unwilling to pay the $50,000 goodwill uplift until Mr Georgiadis provided ‘evidence and documentation’ as to business financials, including details of drawings made by Mr Georgiadis from the business which Mr Du believed to exceed $50,000.
Meanwhile, on an unknown date, the matter was referred back to the arbitrator, who produced an undated and unsigned document entitled ‘Correction to the Arbitration Award’. That document, said to have been prepared because the original award lacked the requisite clarity and certainty for court enforcement, relevantly provided:
I order that:
1. The Partnership was dissolved on 23 May 2009.
2. [Mr Du] holds all assets of the Partnership as existed as at 23 May 2009 on trust for [Mr Georgiadis’] 50% interest in the Partnership assets as at 23 May 2009.
3.[Mr Du] is to pay [Mr Georgiadis] $50,000 no later than 31 August 2010 on account of [Mr Georgiadis’] share of the goodwill in the Partnership.
4.An independent valuer be appointed jointly by [the parties], no later than 31 August 2010, to value the remaining assets of the Partnership, including stock, cash and debtors and other assets.
5.[Mr Du] is to pay [Mr Georgiadis] 50% of the valuation within 14 days after receiving a copy of the valuation.
6.In the event that [the parties] cannot agree on an independent valuer then [Mr Georgiadis] appoint a Receiver to the Partnership, no later than 15 September 2010.
7. The Receiver, so appointed, is to realize all of the remaining assets of the Partnership and distribute the net proceeds, after payment of the Receiver’s expenses, equally to each of [the parties].
Notwithstanding the ‘corrected’ award produced by the arbitrator, no further action was taken by Mr Du or Mr Georgiadis to comply with the award in either its original or ‘corrected’ form. There was no valuation to calculate the remaining assets amount. Nor was a receiver appointed to realise the remaining assets and equally distribute the proceeds. In any event, neither party relied on the ‘corrected’ award at trial and it may largely be put to one side.
On 16 May 2017, nearly eight years after the dissolution of the partnership, Mr Georgiadis commenced the present proceeding. In the interim, the business had ceased operation and many of the remaining assets had been sold.
Limitation provisions
The length of time between the relevant events and the initiation of the proceeding raises the applicability of statutory limitation periods. The Limitation Act relevantly provides for a six year limitation period in respect of actions founded on contract, to enforce an award, or for an account. Subject to certain relevant exceptions, it also provides for a six year limitation period in respect of actions by a beneficiary to recover trust property or in respect of any breach of trust.
Section 5 of the Limitation Act, entitled ‘Contracts and torts’, relevantly provides:
(1)The following actions shall not be brought after the expiration of six years from the date on which the cause of action accrued—
(a) Subject to subsections (1AAA), (1AA) and (1A), actions founded on simple contract (including contract implied in law) or actions founded on tort including actions for damages for breach of a statutory duty;
…
(c) Actions to enforce an award, where the submission is not by an instrument under seal;
…
(2)An action for an account shall not be brought in respect of any matter which arose more than six years before the commencement of the action.
…
(8)This section shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any provision thereof may be applied by the Court by analogy in like manner as the enactment corresponding to that provision was applied before the repeal of that enactment by the Limitation of Actions Act 1955.
Section 21 of the Limitation Act, entitled ‘Limitation of actions in respect of trust property’, relevantly provides:
(1)No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b)to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.
(2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued:
Provided that the right of action shall not be deemed to have accrued to any beneficiary entitled to a future interest in the trust property until the interest fell into possession.[3]
[3]Emphasis added.
The County Court proceeding
The pleaded case
By his further amended statement of claim, Mr Georgiadis raised two alternate claims. The first was for breach of the award. Mr Du was said to have breached the award by failing to pay $400,004.90, apparently representing a remaining asset amount of $355,004.40 plus the $50,000 goodwill uplift (less the $5,000 deposit).[4] The second was a claim for breach of the trust created by the award. Mr Georgiadis variously sought repayment of the $400,004.90, declaratory relief as to the assets of the partnership as at 23 May 2009, including the business and any proceeds of sale, an account of profits of the business, damages, and transfer to Mr Georgiadis of the assets held on trust for him.
[4]The further amended statement of claim made reference to the ‘corrected award’, but as noted, that document was not ultimately relied upon.
As to the first claim, Mr Du, by his defence, denied that there was a breach of contract. He denied that he had breached the award by failing to pay the remaining assets amount, pointing to the absence of the requisite valuation. As to the second claim, Mr Du denied that there had been a breach of trust. He conceded the existence of the trust, accepting that, pursuant to the award, he held the partnership assets on trust for himself and Mr Georgiadis from 23 May 2009. However, he alleged that the trust came to an end on 15 September 2010, the deadline under the corrected award for Mr Georgiadis to appoint a receiver, failing joint appointment of a valuer. (As noted below, the case evolved, and Mr Du also alleged that the trust came to an end for other reasons.)
In addition, Mr Du contested the Court’s jurisdiction, and invoked various limitation defences. He contended that:
(a) the County Court lacked jurisdiction, by reason of s 28 of the Arbitration Act which provides for the finality of awards; and, in any event,
(b) the claims were time-barred by reason of:
(i) s 5(1)(a) of the Limitation Act, in respect of any claim in contract or tort;
(ii) s 5(2) of the Limitation Act, in respect of any action for account;
(iii) s 21 of the Limitation Act, in respect of any action to recover trust property or any breach of trust;
(iv) s 5(8) of the Limitation Act, in respect of equitable relief, applying by analogy; or
(v) the equitable doctrine of laches.
The case ultimately presented
At trial, the case narrowed considerably. Mr Georgiadis ultimately pursued only his breach of trust claim, in respect of which he sought a remedy which had not been pleaded: equitable compensation in the amount of $226,497.60. This amount, lower than the amount initially claimed, reflected the deduction of what he accepted as his share of the partnership liabilities as at 23 May 2009.
It is necessary to be more precise about the relief that Mr Georgiadis sought and which the trial judge awarded. Counsel for Mr Georgiadis described the claim as one for equitable compensation and cited authorities relevant to the availability of that remedy for breach of fiduciary duty.[5] In that connection, he submitted that courts including the High Court had used the word ‘damages’ when meaning equitable compensation.[6] On that basis, he submitted that the pleaded claim for damages was not confined to damages at common law but extended to equitable compensation. However, he also observed that a claim for specific performance enlivened the Court’s jurisdiction to award equitable damages pursuant to s 38 of the Supreme Court Act 1986, referring to the jurisdiction sometimes referred to as arising under Lord Cairns’ Act.[7] Counsel characterised the pleaded claim for an order that Mr Georgiadis transfer half the assets of the partnership, including the business, and any proceeds of sale thereof, as a claim for specific performance. He submitted that Mr Georgiadis was entitled to elect instead to claim damages under s 38 of the Supreme Court Act.
[5] Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484, 500–1 [38]–[40] (Gleeson CJ, McHugh, Gummow, Kirby and Hayne JJ); Target Holdings Ltd v Redferns [1996] AC 421, 435 (Lord Browne-Wilkinson); GM & AM Pearce & Co Pty Ltd v Australian Tallow Producers [2005] VSCA 113 [53], [56], [65] (Warren CJ, Chernov JA relevantly agreeing at [87], Dodds-Streeton AJA agreeing at [95]); see also Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165, 201 [85] (McHugh, Gummow, Hayne and Callinan JJ).
[6]Counsel referred to Elder’s Trustee and Executor Co Ltd v Higgins (1963) 113 CLR 426, 448 (Dixon CJ, McTiernan and Windeyer JJ) and Warman International Ltd v Dwyer (1995) 182 CLR 544, 552 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ), where ‘equitable damages’ was the term used by the trial judge.
[7]Chancery Amendment Act 1858 (Imp) 21 & 22 Vict c 27, s 2.
It is therefore apparent that Mr Georgiadis advanced his claim to equitable relief on two alternative bases: (a) equitable compensation for breach of fiduciary duty and (b) equitable damages in lieu of specific performance under s 38 of the Supreme Court Act. On the former basis, Mr Georgiadis sought a financial award reflecting the loss caused to him as a result of Mr Du, having failed to pay the remaining assets amount for his half share of the partnership, retaining the trust property for his own use. On the latter basis, he appears to have sought specific performance of an obligation to hold the relevant property on trust, and elected instead to claim equitable damages. That basis was not further developed at trial. It suffers from the difficulty that specific performance is a remedy in contract. Lord Cairns’ Act damages are, unlike equitable compensation, awarded by way of enforcement of legal rather than equitable rights.[8] The claim was not one for specific enforcement of the obligation in the award to pay the remaining assets amount. It focused on breach of the trust obligations. But performance of the trust imposed by the award was not the subject of any contractual obligation. It is therefore not at all clear how the claim for equitable damages was advanced.
[8]Maguire v Makaronis (1997) 188 CLR 449, 469 n 79 (Brennan CJ, Gaudron, McHugh and Gummow JJ).
Since the primary form of relief was properly described as a claim for equitable compensation, and since no alternate claim for equitable damages in lieu of specific performance was mentioned in the judgment, it is apparent that the claim that was upheld was the primary claim for equitable compensation (albeit that the judge used the descriptor ‘equitable damages’).[9]
[9]The descriptor ‘equitable compensation’ was used in the catchwords but not the reasons.
Mr Du’s defence also evolved. By closing submissions, he had:
(a) introduced a further jurisdictional defence — that the matter was governed by the Partnership Act 1958;[10]
[10]Reasons [25].
(b) resiled from the pleaded concession that the trust existed, arguing instead that the award created no more than a temporary security interest or custodianship for the purposes of the award, which ceased on payment of the factory amount, or because of Mr Georgiadis’ failure to comply with aspects of the award or corrected award;[11] and
[11]Ibid [26].
(c) no longer relied on s 5(2) of the Limitation Act, arguing instead that any claim to enforce the award, including by seeking an account of profits, was contractual and statute-barred by s 5(1)(a) of the Limitation Act;[12]
[12]Ibid [27].
(d) also no longer pursued a limitation period operating by analogy pursuant to s 5(8) of the Limitation Act; and
(e) introduced s 5(1)(c) of the Limitation Act (applicable to actions to enforce an award) as an additional basis on which the claim was said to be statute-barred.
Judge’s reasons
After rejecting Mr Du’s jurisdictional defence based on the Partnership Act, which is not pressed on appeal, the judge turned to his contention that the claim was barred by s 5(1)(c) of the Limitation Act. The judge held that the claim was based on breach of the trust said to have been created by clause (e) of the award and was not a claim for enforcement of the award.[13] By implication, the claim was also not one for breach of contract.[14]
[13]In so deciding, the judge appeared to also implicitly reject Mr Du’s pleaded jurisdictional defence based on the finality of awards made under the Arbitration Act.
[14]Reasons [27].
Next, the judge turned to Mr Du’s argument that the claim was barred by s 21 of the Limitation Act. He considered the critical issue for determination to be whether the claim fell within the exception provided by s 21(1)(b) of the Limitation Act, namely that no limitation period applies to an action by a beneficiary under a trust to ‘recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.’ The judge held that the claim fell within that exception. He characterised the claim as one by a beneficiary against a trustee, being a claim for ‘equitable damages’ consequent upon breach of trust by Mr Du.[15] The judge held that Mr Georgiadis was a beneficiary and Mr Du a trustee because clause (e) of the award created a trust prior to the alleged breach.[16] The judge rejected Mr Du’s submission that the trust ceased on payment of the factory amount, or by reason of non-compliance with other aspects of the award.
[15]Ibid [53], [59], [60], applying Nolan v Nolan [2004] VSCA 109 [62], [63] (Ormiston JA, Chernov and Eames JJA relevantly agreeing at [83]).
[16]Reasons [53], [59].
The judge then considered laches. He held that the elements of the doctrine had not been established — in particular, Mr Du had suffered no real prejudice by Mr Georgiadis’ delay.[17] The judge rejected Mr Du’s submission that there was prejudice after the passage of more than seven years, so that there was no longer any ability to identify the remaining assets at the relevant time. He considered that there was a contemporaneous record of the assets, in the form of the video recording made by Mr Georgiadis the day after the making of the award and the stocktake lists made at around that time.[18]
[17]Ibid [79].
[18]Ibid [96]–[98].
Finally, the judge turned to the question of quantum. Subject to some minor adjustments, the judge accepted Mr Georgiadis’ estimation of the remaining assets amount, based on the application of the 5 May 2009 valuation formula to the list of remaining business assets produced by Mr Georgiadis’ contemporaneous stocktake. After deducting amounts Mr Georgiadis agreed as business liabilities as at 23 May 2009, and leaving the goodwill uplift amount out of account as it was not pursued, this yielded $210,057.57. The judge awarded Mr Georgiadis judgment in that amount, plus interest.
Proposed grounds
Mr Du advances the following eight proposed grounds of appeal:
1. The Trial Judge erred in determining the respondent’s claim was not time barred by sections 5(1)(a) and/or, 5(1)(c) and/or 21(2) of the Limitation of Actions Act 1958.
2. The Trial Judge erred in determining the respondent’s claim was not time barred by laches.
3. The Trial Judge did not provide the [applicant] with natural justice.
4. The Trial Judge erred in construing the terms of the award and the [applicant’s] trustee obligation over the partnership interests and activities to secure the [respondent’s] interest in 50% of the old partnership created pursuant to the award.
5. The Trial Judge erred in determining the respondent’s relief/remedy.
6. The Trial Judge erred in ignoring the finality of the arbitration award pursuant to section 28 [of the Arbitration Act] and wrongly and as an abuse of process permitting the [respondent] to relitigate the arbitration award and the interpretation and enforcement [of] its terms rather than, as required, enforce the award pursuant to section 33 of the Act.
7. The Trial Judge erred in failing to give adequate reasons with respect to grounds 1-6.
8. The Trial Judge erred in awarding costs in favour of the respondent.
In his oral submissions, counsel for Mr Du grouped the proposed grounds under the following issues:
(a) the proper operation of the Limitation Act (and the Arbitration Act) in the circumstances and, to the extent relevant, the adequacy of the judge’s reasons on that issue (proposed grounds 1, 6 and 7);
(b) the proper construction of the terms of the arbitration award (proposed ground 4);
(c) laches and natural justice (proposed grounds 2 and 3);
(d) the appropriate relief (proposed ground 5).[19]
[19]Proposed ground 8, relating to costs, was consequential on the other grounds and was deferred until after their determination.
It is convenient to adopt that grouping for the purposes of these reasons.
First issue – proposed grounds 1, 6 and 7 (Limitation Act and Arbitration Act)
Parties’ submissions
Mr Du’s principal submission was that Mr Georgiadis’ claim was a claim to enforce the award, barred by s 5(1)(a) or 5(1)(c) of the Limitation Act. Mr Du conceded, as pleaded at trial, that clause (e) of the award created a trust. He also adopted the judge’s characterisation of Mr Georgiadis’ ultimate claim as one for equitable relief based on breach of a trust established by the award. Nonetheless, such a claim, Mr Du contended, amounted to enforcement of the award. He submitted that the obligation to pay was separate from the trust and failure to pay amounted only to breach of the award. Because a clause of the award was the very basis for the trust, an action based on breach of that trust was properly characterised as an action for enforcement of the award.
A related aspect of Mr Du’s submission was that enforcement of the award could only have taken place in accordance with s 33 of the Arbitration Act, which conditioned enforcement of the award on obtaining leave of the Court. This also required proceeding in the Supreme Court by way of originating motion, or in the County Court with appropriate procedural modification.[20] Mr Georgiadis’ failure to bring proceedings in accordance with these requirements was said to have deprived the Court of jurisdiction.
[20]Supreme Court (Miscellaneous Civil Proceedings) Rules 2008, r 9.03(1); County Court Act 1958, s 78(5).
Mr Du’s alternative submission was that, even characterising the action as one by a beneficiary in respect of a breach of trust, it was barred by s 21 of the Limitation Act. He contended that the exception in s 21(1)(b) relied on by the judge was not engaged because the action was not one to recover trust property or proceeds, but rather an action for equitable compensation.[21] While the pleaded case had sought recovery of converted trust assets, no finding of conversion of trust property was made and the equitable compensation claimed was measured by the application of the agreed valuation formula to the remaining assets at the time the trust came into existence rather than by reference to their value when the trust was breached. Accordingly, whichever way the action was characterised, it was statute-barred.
[21]While argument at this point was couched in the language of equitable damages used by the judge, it is convenient, for the reasons given earlier, and to avoid confusion, to adopt the terminology of ‘equitable compensation’ .
Mr Du further submitted, in general terms, that the judge failed to provide adequate reasons as to the inapplicability of the statutory limitation periods.
Mr Georgiadis submitted that the action was not statute-barred because it was not an action founded on contract or to enforce an award within the meaning of ss 5(1)(a) or 5(1)(c) of the Limitation Act. For the same reason, it was also not an action to which the procedural requirements of the Arbitration Act applied. Rather it was, as pleaded, an action to recover trust property converted at some indeterminate point after 30 June 2009 by Mr Du. It therefore engaged the exception in s 21(1)(b) of the Limitation Act. The fact that the relief sought was equitable compensation was said not to detract from that characterisation of the action. The equitable compensation was determined by reference to the value of the converted property, such that the action was properly seen as one for the recovery of converted trust property. Mr Georgiadis further submitted that the judge’s reasons dealt adequately with the substantial points which were raised.
Consideration
Counsel for Mr Du characterised the action as one to enforce an award on the basis of a passage in Russell on Arbitration, in the following terms:
There are two principal methods of enforcement of an award available in England. The first method is to obtain permission or ‘leave’ of the court to enforce the award, ‘in the same manner as a judgment or order of the court to the same effect’ … Judgment may also be entered in terms of the award where that would make enforcement easier. The second method of enforcement is to bring an action on the award and then to seek a judgment from the court for the same relief as is granted by the award.[22]
Emphasis was placed on the second method of enforcement identified in this passage.
[22]David St John Sutton, Judith Gill and Matthew Gearing, Russell on Arbitration (Sweet & Maxwell, 23rd edition, 2007) 450–1 [8–002] (citations omitted).
It was submitted that the applicability of this analysis in Australia was supported by the decision of the New South Wales Court of Appeal in Tridon Australia Pty Ltd v ACD Tridon Inc.[23] In that case, an arbitrator had made an award in the form of declarations as to whether certain conduct was in breach of an agreement between the parties and whether a purported termination of that agreement was effective. A judge refused to make an order granting leave under the equivalent of s 33 of the Arbitration Act, on the basis that there was no utility in granting leave to enforce the declarations. The Court of Appeal refused leave to appeal from that decision.
[23][2004] NSWCA 146 (‘Tridon’).
It should first be noted that, while the Court referred to Russell on Arbitration, it neither referred to nor adopted the paragraph upon which counsel for Mr Du now relies. Instead, it referred to an adjacent paragraph, in an earlier edition, concerning the nature of the discretion under s 33.[24] However, the Court did explain a limitation on the scope of ‘enforcement’ under s 33:
Enforcement is a plain word, and means something quite different from a restatement of the effect of the award in the form of a judgment. The summary procedure provided by s 33 of the Act is a procedure with a purpose, the purpose of enabling the victorious party in an arbitration to obtain the material benefit of the award in its favour in an easier manner than having to sue on the award. There has been nothing put forward in this case to suggest any occasion for enforcement of the declarations made in the interim award. They are binding on the parties, and bind them for the balance of the arbitration and beyond that.[25]
[25]Ibid [11].
This passage reveals the practical focus of s 33. It also shows that an order that merely restates a declaration in an award is unlikely to constitute ‘enforcement’ of that award. It would follow that, to the extent that Mr Georgiadis initially sought a judicial declaration reflecting the terms of the trust provided for by the award, this would seem unlikely to have amounted to an action to enforce the award.[26]
[26]See [28] above.
It is not necessary to pursue this line of argument further, however, because Mr Georgiadis ultimately framed his claim as one for equitable compensation.[27] Tridon is not of assistance in deciding whether such a claim, where the source of the equitable obligations relied upon is an award, amounts to a claim to enforce that award. Nor is the passage from Russell on Arbitration upon which reliance was placed of assistance. The second method of enforcement there identified is to ‘seek a judgment from the court for the same relief as is granted by the award’. This is not what Mr Georgiadis was seeking to do either. The award did not provide for equitable relief flowing from breach of the trust it created. It was logically impossible for it do so, because the trust did not exist until the award created it. If Mr Georgiadis had sought to enforce that part of the award that required Mr Du to pay him the remaining assets amount, the position would have been different. But he did not.
[27]See [34] above.
The action in this case was therefore not one for enforcement of the award within the meaning of s 33 of the Arbitration Act.
For similar reasons, it was also not an action to enforce an award within the meaning of s 5(1)(c) of the Limitation Act, or an action founded on contract under s 5(1)(a). Doubtless with an eye to these provisions, Mr Georgiadis framed his case around breach of equitable obligations flowing from the award. We therefore turn to consider the Limitation Act provisions governing such claims.
Section 21 raises two questions for present purposes. The first, addressed somewhat counterintuitively in sub-s (2), is whether the six year limitation period prima facie applies. The question is whether the action is one by a beneficiary ‘to recover trust property or in respect of any breach of trust’. The parties did not address substantive argument to that question, but an argument advanced by Mr Du, shortly to be considered, might have borne on it. It suffices for present purposes to say that, for the reasons that follow, it is not in doubt that this condition is met, if for no other reason than that the claim for equitable compensation rests on an alleged breach of the trust created by the award.
Argument concentrated on the second question, which concerns the exception to subs (2) found in subs (1)(b). The issue is whether the action is ‘by a beneficiary under a trust, being an action … to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use’.
It is first necessary to note an argument advanced by Mr Du which tied in to the earlier argument about enforcing the award. It was submitted that the action was not one by a beneficiary under a trust at all, because Mr Du was not an ‘institutional’ trustee who had taken on and then breached trust obligations. Reliance was placed on Nolan v Nolan,[28] in which this Court held that a plaintiff who made a claim for tortious conversion of a painting was not a ‘beneficiary under a trust’ for the purposes of s 21(1)(b) of the Limitation Act 1980 (UK), which is substantially the same as s 21(1)(b) of the Limitation Act.[29] The effect of this argument might be, not only to make the exception in s 21(1)(b) inapplicable, but to deny the operation of the limitation period in s 21(2) altogether. Mr Du therefore also relied on the argument in aid of his contention that the claim was really one to enforce the award. But in any event, the argument is misconceived.
[28][2004] VSCA 109 (‘Nolan’).
[29]Ibid [13]. Ormiston JA noted that the similarity of the provisions made the fact that English law applied of little consequence.
In Nolan, Ormiston JA explained, in the course of reviewing the relevant case law:
A considerable number of statutory amendments in the late nineteenth and early twentieth century saw specific limits being imposed on suits in equity, but those, such as s 21, directed to breaches of duty by trustees must be understood as intended to apply to trusts properly so described and, by extension, to constructive trusts properly so described.
Consequently, it may be added, the words of s 21(1)(b) look to a claim by a ‘beneficiary under a trust’, i.e. a pre-existing trust, and to the recovery of ‘trust property’, i.e. that which is already subjected to a trust, from a person who is already a trustee. In the case of conversion the trust property must have been ‘previously received by the trustee’ and ‘[scil. thereafter] converted to his use’ — language clearly not apt to describe the recovery of property which a party may have later to disgorge or deal with as a ‘trustee’ by virtue only of some fraud or other breach of duty.[30]
[30]Ibid [62]–[63].
It is plain from this passage that s 21(1)(b) operates in respect of a claim by a person who is a beneficiary under a trust before the claim is made, rather than a claim which, if successful, will result in the claimant being recognised as a beneficiary. This is not really a matter of distinguishing between ‘institutional’ and ‘remedial’ constructive trusts.[31] It is not in doubt that s 21 extends to claims for breach of certain constructive trusts.[32] But it is the timing that is critical. Ormiston JA explained, by reference to the facts in that case:
There is no basis in English law, as I would understand it, for holding that a remedial constructive trust should have been applied at the relevant time to impose the alleged trust, nor to establish that the general provisions of ss 21 and 22 of the Limitation Act do not apply so as to bar the appellant’s claim. Section 21 assumes that there is a trust already in existence which is affected by the activities of the person alleged to have wrongly dealt with the goods or other property. Nothing in the materials would import a trust of the requisite kind … There being no trust at the relevant time, the appellant’s right to sue has not been preserved by the statute.[33]
[31]See McNab v Graham (2017) 54 VR 311, 349–351 [115]–[124] (Tate JA, Santamaria JA agreeing at 355 [140], Keogh AJA agreeing at 356 [141]), in respect of s 21(1)(b) of the Limitation Act.
[32]Ibid 355 [139].
[33]Nolan [2004] VSCA 109 [80] (citations omitted).
The present case is quite different. The trust arose by virtue of the award and pre-existed the events said to constitute its breach. It follows that the claim was one by a beneficiary under a trust within the meaning of s 21(1). Equally, the claim was one in respect of a breach of trust so as to satisfy the terms of s 21(2).
We can now turn to the critical issue, which is whether the words of s 21(1)(b) apply to take the case outside the limitation period for which s 21(2) provides. Section 21(1)(b) requires that the action be one ‘to recover’ ‘trust property or the proceeds thereof’ either ‘in the possession of the trustee’ (‘the first limb’) or, alternatively, ‘previously received by the trustee and converted to his use’ (‘the second limb’).
As mentioned, Mr Georgiadis submitted that s 21(1)(b) applied because, even though the relief ultimately sought was equitable compensation, he had pleaded loss and damage arising from conversion of partnership assets as at 23 May 2009 to Mr Du’s own use, and the determination of the remaining assets amount represented the measure of that loss. Essentially, Mr Georgiadis was alleging that Mr Du had breached the trust by keeping the partnership property for himself and carrying on the business on his own, when he ought to have paid Mr Georgiadis the remaining assets amount.
This submission was not expressed in the language of s 21(1)(b), especially its reference to ‘recovery’ of trust property or proceeds. But it is necessary to consider whether that provision none the less embraces the case as so conceived.
In terms of the first limb, the action was not in terms one to recover trust property or proceeds ‘in the possession of the trustee’. Mr Georgiadis did not ultimately seek delivery of his half of the remaining assets in Mr Du’s possession. Nor did he seek the proceeds of their sale. Although an entitlement to account was pleaded, the eventual relief claimed was confined to equitable compensation, on a basis that was indifferent to whether or not the assets or their proceeds were in Mr Du’s possession.[34]
[34]See [28] and [31] above.
This leaves the second limb, and the expression ‘to recover from the trustee trust property or the proceeds thereof … previously received by the trustee and converted to his use’. If the notion of ‘recover’ is read literally, this limb would seem to add little, if anything, to the first limb, namely ‘to recover from the trustee trust property or the proceeds thereof in the possession of the trustee’. That is because, taken literally, something can only be recovered from a person if it is in that person’s possession. If it was previously received by the person but is no longer in the person’s possession, then ‘recovery’ in this sense would need to be sought from the person who subsequently acquired possession. But this would not be recovery ‘from the trustee’.
The text of s 21(1)(b), taken alone, is therefore not supportive of Mr Georgiadis’ construction. The question is therefore whether s 21(1)(b) is to be construed more broadly, as extending to a claim for equitable compensation as a result of conversion of trust property.
Turning to context, one indication likewise does not assist Mr Georgiadis. It is apparent that the legislature did not regard all actions in respect of breach of trust as capable of attracting the s 21(1)(b) exception — only those falling within the scope of actions to recover trust property or its proceeds. That is because s 21(2) uses the two descriptions — recovery of trust property and breach of trust — as alternative grounds for attracting the limitation period. Section 21(1)(b) then carves out an exception confined to actions to recover trust property, or its proceeds. This indicates that not all actions for breach of trust are to be regarded as actions to recover trust property.
On the other hand, subsection (1), being an exception to a provision denying an action outside the limitation period in respect of breaches of trust, is shown to have importance, at least, by the unusual drafting by which the exception is expressed before the rule which it qualifies. The preservation of the exception is thus made to appear to be the principal purpose of the section as a whole.
This brings us to the purpose of s 21(1)(b). By its terms, the exception addresses two classes of case, both involving wrongful conduct of a trustee which extends beyond breach of trust alone. The first class, described by s 21(1)(a), involves fraudulent conduct to which the trustee was a party or privy. The second, described by s 21(1)(b), involves a trustee who either wrongfully retains trust property or has previously received it, or its proceeds, and converted it or them to the trustee’s own use. The common theme reveals that it is the purpose of s 21(1) to permit an action outside the ordinary limitation period in respect of breaches of trust involving wrongful conduct on the part of the trustee.
At this point it is convenient to return to the text. The first limb of s 21(1)(b), primarily dealing with property in the possession of the trustee, also extends to the recovery of proceeds of trust property which are in the possession of the trustee. That would include any trust property or proceeds held by a trustee in breach of trust, including where the property or proceeds have been converted to the trustee’s use.
What then is added by the second limb, dealing with property or proceeds previously received by the trustee and converted to the trustee’s use? The second limb appears to address only the recovery from the trustee of proceeds of trust property previously received by the trustee and converted to the trustee’s use. This is because, although the limb extends to both property and its proceeds no longer in the possession of the trustee, there could not, as explained above, be an action to recover such property from the trustee.
Again, if the proceeds addressed by the second limb were in the possession of the trustee, then the second limb of s 21(1)(b) would add nothing to the first. The second limb therefore must contemplate an action to recover from a trustee the proceeds of trust property previously received by the trustee and converted to the trustee’s use but which are not in the trustee’s possession. Significantly, this indicates that an action ‘to recover … proceeds’ from the trustee has a meaning beyond literal recovery of specified proceeds, because such proceeds would be in the trustee’s possession and therefore within the first limb. This suggests that the second limb might be read broadly, as extending to actions to recover equitable compensation in respect of the conversion of trust property by a trustee.
Such a reading of s 21(1)(b) preserves for beneficiaries the ability to sue not only to recover trust property or its proceeds following conversion by the trustee, but also for compensation in respect of the loss of trust property or its proceeds in those circumstances. Indeed, it is difficult to see, as a matter of policy, why the legislature would have permitted the former but not the latter. Both kinds of action vindicate a beneficiary’s entitlement to have trust property dealt with by a trustee in accordance with the terms of the trust and the trustee’s fiduciary obligations. This construction therefore gives better effect to the purpose of the subsection identified above.
Moreover, as counsel for Mr Georgiadis pointed out, a literal reading of ‘recover … proceeds’ would disadvantage a beneficiary in a case where a trustee wrongfully sold trust property at an undervalue, by confining that beneficiary to an action for the diminished proceeds, rather than for compensation in respect of the wrongful treatment of the trust property.
After the oral hearing in the present matter, the Court invited the parties to file written submissions in relation to a number of English cases concerning the equivalent provision in the United Kingdom legislation, the Limitation Act 1980 (UK), which have given a wide meaning to the language of s 21(1)(b). Mr Du submitted that the cases should not be followed. Mr Georgiadis urged us to follow them unless persuaded they are plainly wrong. It is necessary to consider these authorities.
In JJ Harrison (Properties) Ltd v Harrison,[35] a breach of trust was claimed on the basis that land was purchased from the claimant company by its director in breach of duties of disclosure. The director on-sold the property. The company sought the proceeds of sale, or alternatively an account of profits, or equitable compensation. The primary judge, holding that there had been a breach of trust, considered the available remedies to be an account of profits or equitable compensation. The company elected for an account of profits.[36] On appeal, the director contended that the judge should have held the claim time-barred by s 21(3) of the Limitation Act 1980 (UK) (the equivalent of s 21(2) of the Limitation Act).
[35][2001] EWCA Civ 1467 (‘JJ Harrison’).
[36]Ibid [21].
Rejecting this contention, the Court of Appeal accepted that the action was one by ‘a beneficiary to recover trust property or in respect of any breach of trust’ but held that the s 21(1)(b) exception applied. [37] Chadwick LJ explained:
[37]Ibid [31], [39].
The present action is not an action ‘to recover trust property or the proceeds of trust property in the possession of the trustee’. That is because the development land is no longer vested in Mr Harrison; and there is no claim to trace the proceeds of the sales off in 1988 and 1992. But the action is an action ‘to recover trust property or the proceeds of trust property previously received by the trustee and converted to his use’. The effect of the provisions now found in section 21 of the [1980] Act was put succinctly by Mr Justice Kekewich in In re Timmis, Nixon v Smith [1902] 1 Ch 176, 186:
The intention of the statute was to give a trustee the benefit of the lapse of time when, although he had done something legally or technically wrong, he had done nothing morally wrong or dishonest, but it was not intended to protect him where, if he pleaded the statute, he would come off with something he ought not to have, i.e. money of the trust received by him and converted to his own use.
I accept, therefore, that Mr Harrison is a person within section 21 of the
1980 Act. But if he were permitted to rely on the period of limitation prescribed by section 21(3) of that Act, he would, indeed, be a person who ‘would come off with something he ought not to have’; that is to say, he would retain, to the exclusion of the company, the benefit of the moneys which he received on the sale off of the Development Land in 1988 and 1992. It is to prevent that result that section 21(1)(b) of the Act contains the saving provisions which it does.[38]
[38]Ibid [40]–[41] (emphasis in original).
Next, in Burnden Holdings (UK) Ltd v Fielding,[39] the facts were similar to JJ Harrison. The claimant company alleged that distributions of a shareholding in another company to the benefit of directors were in breach of directors’ duties. The shares were on-sold by the directors. The claimant company sought an account of profits, or equitable compensation. Before the Court of Appeal it was argued that those remedies were not within s 21(1)(b) and that the claim was statute-barred. This argument was rejected, at least to the extent it applied to equitable compensation. David Richards LJ stated:
Mr Chivers also objected that an account of profits is not within section 21(1)(b). I am inclined to agree, but the remedies sought by the claimant include equitable compensation and that appears to me to be an appropriate remedy falling within section 21(1)(b), particularly where, as in the case of Mrs Fielding, the trustee’s indirect interest in the trust asset has been converted to the use of the trustee.[40]
[39][2016] EWCA Civ 557 (‘Burnden Holdings’).
[40]Ibid [38] (Tomlinson LJ and Arden LJ agreeing at [57] and [58]).
On appeal to the Supreme Court, this aspect of the Court of Appeal’s decision was not challenged.[41] It was also accepted by the Supreme Court that the starting point in construing s 21(1)(b) is to pay attention to its purpose, as identified in JJ Harrison in the cited passage of Kekewich J’s reasons in In re Timmis, Nixon v Smith.[42] It may be noted in passing that this is not the appropriate starting point under the Australian approach to statutory construction, but that does not deny the importance of statutory purpose in that exercise.[43] What is significant for present purposes is that the Supreme Court confirmed that the purpose of s 21 was as stated by Kekewich J, namely ‘to give a trustee the benefit of the lapse of time when, although he had done something legally or technically wrong, he had done nothing morally wrong or dishonest’, but not to protect a trustee where, ‘if he pleaded the statute, he would come off with something he ought not to have’.
[41]Burnden Holdings (UK) Ltd v Fielding [2018] AC 857, 864–5 [13] (Lord Briggs JSC, Lords Kerr, Sumption, Carnwath and Lloyd-Jones JJSC agreeing).
[42]Ibid 866 [17], citing In re Timmis, Nixon v Smith [1902] 1 Ch 176, 186.
[43]Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27, 46–7 [47] (Hayne, Heydon, Crennan and Kiefel JJ).
Subsequent cases have confirmed that s 21(1)(b) extends to claims by way of equitable compensation when trust property has been received by a trustee and converted to the trustee’s own use. In Bhullar v Bhullar,[44] Davies J accepted on the basis of the Court of Appeal’s decision in Burnden Holdings that a claim against a director for equitable compensation following a misuse of company money amounting to a conversion of trust property was within the scope of s 21(1)(b).[45] Similarly, in Mander v Watts,[46] Mr Registrar Jones applied the same authority in another case involving equitable compensation for breach of directors’ duties.
[44][2017] EWHC 407 (Ch).
[45]Ibid [127], [146].
[46][2017] EWHC 7879 (Ch) [119].
Mr Du submits that these decisions relate to the unique legal obligations of directors as fiduciaries. That may be so, but the observations made about the purpose of s 21 in general, and s 21(1)(b) in particular, have general application. In our view, we should be slow to depart from the high, albeit not binding, authority of those observations.[47]
[47]We also note, as Mr Georgiadis submitted, that the distinction between innocent and wrongful breaches of trust in this context has been endorsed by Underwood J in the Supreme Court of Tasmania: Stilbo Pty Ltd v MCC Pty Ltd (in liq) (2003) 11 Tas R 63, 105–6 [89].
Mr Du points out, with some justification, that it is unclear why in Burnden Holdings Chadwick LJ was inclined to exclude an account of profits from s 21(1)(b) but considered that equitable compensation fell within its scope. On the other hand, the cases do not decide, just as we need not decide, whether an account of profits falls within the provision. Moreover, Mr Georgiadis draws attention to the following passage from the speech of Lord Browne-Wilkinson in Target Holdings Ltd v Redferns,[48] cited with approval by Brennan CJ, Gaudron, McHugh and Gummow JJ in Maguire v Makaronis,[49] which offers a rationale for including equitable compensation within the scope of s 21(1)(b):
The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries’ rights can be protected is to restore to the trust fund what ought to be there. In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate … If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed.[50]
[48][1996] 1 AC 421.
[49](1997) 188 CLR 449, 469–70.
[50]Target Holdings Ltd v Redferns [1996] 1 AC 421, 434.
This suggests that, because equitable compensation is an alternative remedy where the trust estate cannot be restored or ‘recovered’, the rationale for permitting claims for recovery of trust property extends equally to claims for equitable compensation following conversion of trust property. An action for account, in contrast, serves a different purpose. However, it is not necessary to decide whether s 21(1)(b) extends to actions for account.
In our opinion, the English authorities serve to confirm that s 21(1)(b) is to be construed as extending to actions to recover equitable compensation in respect of the conversion of trust property by a trustee. The notion of recovery of trust property or its proceeds is to be read broadly to give the provision that operation.
It will be recalled that Mr Du submitted that the trial judge made no finding of conversion.[51] In terms, that is correct. However, the judge did state, in the context of dealing with the laches argument, that Mr Du had ‘enjoyed the fruits of the entire business to the detriment of the plaintiff’ and had ‘had the benefit of the use of the business assets over the period until the business was ultimately wound up’.[52] These findings amount to a finding that the assets of the business were converted to Mr Du’s own use.
[51]See [45] above.
[52]Reasons [80], [81].
For these reasons, although s 21(2) of the Limitation Act provided for a six year limitation period in respect of Mr Georgiadis’ claim for equitable compensation, the operation of that provision was excluded by s 21(1)(b).
While leave should be granted in respect of proposed grounds 1 and 6, they should not be upheld.
As far as proposed ground 7 is concerned, it was only faintly argued. In the circumstances, it is not necessary to say more than that, while the substance of the limitation issues was more fully argued in this Court, we consider that the trial judge’s reasons sufficiently expose his path of reasoning, enabling both the Court and the parties to understand his decision and the reasons for it.[53] Nor do we think there is any substance in other criticisms made of the judge’s reasons, which do little more than repeat submissions made under other grounds.
[53] Assad v Eliana Construction & Developing Group Pty Ltd [2015] VSCA 53 [30]–[38] (Redlich, Kyrou and McLeish JJA).
We would not grant leave in respect of proposed ground 7.
Second issue – proposed ground 4 (construction of award)
Parties’ submissions
Mr Du submitted that clause (e) of the award, while creating a trust, did not create a trust of the kind claimed by Mr Georgiadis and accepted by the judge. Properly construed, clause (e) of the award, it was said, did not create a trust over the remaining assets to be divided equally between the parties. Instead, it created a trust over the partnership business as a whole, encompassing not only the remaining assets, but also cash in the hands of Mr Georgiadis, partnership liabilities and adjustments for uneven distributions.
Further, Mr Du submitted that any trust created by the award was ‘temporary’, ceasing either on 30 June 2009 or on transfer of the factory to Mr Du. On this submission, the trust served the time-limited purpose of providing additional security (that is, in addition to the factory) for the total amount owed by Mr Du under the award. That purpose was spent, and the trust ceased, either on
30 June 2009 (when, absent payment, the award provided for the realisation of partnership assets and a winding-up) or on transfer of the factory to Mr Du.
Mr Georgiadis contended that the judge had correctly identified the nature of the trust created by the award. He further submitted that Mr Du’s argument that any trust was over the business, including its liabilities, sat uneasily with the case advanced by Mr Du below, which involved no claim in respect of business liabilities (even though Mr Georgiadis had ultimately conceded that some reduction for liabilities was appropriate). Finally, Mr Georgiadis submitted that Mr Du’s argument that any trust was temporary was foreclosed by the case advanced, and evidenced adduced, by Mr Du below.
Consideration
This ground may be shortly disposed of. Although not clearly expressed, the trust for which the award provided was over ‘all partnership interests and activities’ and it was to subsist ‘until full payment has been made for the said interest’. The payment that was required was one which took account of the value of stock, cash and debtors, other assets, liabilities and goodwill. But the trust was, by the terms of the award, more limited. It was a trust over the ongoing partnership assets and business. That would extend to liabilities, in the sense that the trust property would be available to indemnify Mr Du for ongoing business expenses of the trust, but it did not extend to any right of indemnity in respect of prior existing liabilities. They were instead the subject of the discrete payment obligation, of an amount calculated as at the ‘date of separation’ when the trust commenced. Nothing in the terms of the award suggested that Mr Du could have recourse to the trust property to claim his share of prior liabilities connected with the business. The same applies to any imbalance in partners’ distributions.
It also plainly emerges from the award that the trust subsisted beyond the date when payment of the remaining assets amount was due, and beyond the date of payment for the interest in the factory, if the remaining assets amount remained unpaid at either of those times. The language of the award is unequivocal: ‘until full payment has been made’. In a real sense, therefore, the trust acted as a kind of security for that payment, but not with the consequences for which Mr Du contends.
Leave should be refused with respect to this ground.
Third issue – proposed grounds 2 and 3 (laches and natural justice)
Parties’ submissions
As to laches, Mr Du submitted that the necessary element of prejudice arose because he was now statute-barred from bringing an action for set-off against Mr Georgiadis, to recover business liabilities or unequal distributions. As to the related natural justice ground, Mr Du submitted that the judge denied him the opportunity to adduce relevant evidence as to business cash holdings, liabilities and unequal partnership distributions. This prevented him from establishing that the proper quantification of Mr Georgiadis’ partnership share was nil.
Mr Georgiadis submitted that there was not sufficient prejudice to establish laches. Mr Du had not been denied the opportunity to bring an action or raise a set‑off, or to recover liabilities or unequal distributions. Rather, Mr Du had abandoned such claims, an element of which had appeared in an early iteration of his defence. Mr Georgiadis submitted that there was only the usual, inferred prejudice of delay, but that any prejudice arising from the delay was, as the judge held, largely alleviated by the contemporaneous recorded stocktake. As to the related natural justice ground, Mr Georgiadis submitted that the evidence which Mr Du complains he was denied the opportunity to adduce was not relevant on the pleadings, which did not canvass business cash holdings, liabilities and unequal distributions. Mr Georgiadis denied that the question of liabilities — ultimately addressed to an extent in the calculation of equitable compensation — was inherent in the nature of the relief sought.
Consideration
It is convenient first to deal with the equitable defence of laches. Laches requires a defendant to establish that the plaintiff has so delayed prosecuting an equitable claim as to permit a situation to arise which it would be unjust to disturb.[54] That may, but need not, involve the defendant having altered their position in reasonable reliance on the plaintiff’s acceptance of that situation. As the judge in the present matter recognised, delay of itself is insufficient to establish laches.
[54]JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane’s Equity Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015) 1085.
There is no substance in Mr Du’s claim of laches, for two connected reasons. The first is that, even if it is accepted that a result of the delay on the part of Mr Georgiadis was that the time within which Mr Du could have advanced a counterclaim or equitable set-off had passed,[55] the matters upon which Mr Du submitted he would have relied — namely, partnership cash reserves said to be held by Mr Georgiadis, liabilities of the business and unequal partnership distributions — were all matters that could have been sought to be raised as part of the assessment of equitable compensation, rather than by set-off. The operation of the Limitation Act in respect of these matters therefore did not constitute relevant prejudice. Mr Du did not establish any prejudice specific to proof of these matters beyond the presumptive prejudice associated with delay, which is not sufficient without more to establish laches.
[55]Limitation Act, s 30.
Secondly, to the extent that Mr Du had claims of the kind asserted, and refrained from pursuing them by reason of Mr Georgiadis’ own delay, it does not follow that it would be unjust or inequitable now to permit Mr Georgiadis to proceed. Instead, Mr Du simply refrained from pressing the matters in question, which were said to reduce his liability to Mr Georgiadis to nil, in the absence of a claim for which he might be liable. Once there was such a claim, he could have argued its quantification on these grounds. No injustice has been shown to arise from that prospect.
Accordingly, Mr Du has not established any want of equity in Mr Georgiadis now prosecuting his claim for breach of trust. We would grant leave to appeal in respect of proposed ground 2, but would dismiss the appeal on that ground.
The related claim of denial of procedural fairness concerns the judge’s refusal to permit the adducing of documentary evidence, including as to business liabilities, even though the judge ultimately made an allowance for such liabilities based on evidence led by Mr Georgiadis. It is also said that the judge refused to allow evidence of business cash holdings or excessive partnership drawings.
The short answer to this claim is that Mr Du did not plead any of the matters in question. The judge ruled against admitting the evidence on the basis that the trust pleaded by Mr Georgiadis was over the assets of the business and no account was therefore to be taken of the other matters Mr Du sought to raise. That reasoning could not have been sustained if Mr Du had put matters other than the partnership assets in issue by his pleadings. But he did not. Moreover, an earlier version of the defence had pleaded unequal partnership drawings on the part of Mr Georgiadis, but this allegation was abandoned in Mr Du’s final pleading.
Leave to appeal should be refused in respect of proposed ground 3.
Fourth issue – proposed ground 5 (relief)
Parties’ submissions
Finally, Mr Du submitted that the judge did not award an appropriate remedy. There were two separate strands to this argument.
First, Mr Du submitted that avoiding the statutory limitation periods in the circumstances demanded a particular type of action, an action by a beneficiary for the recovery of trust property or the proceeds that falls within s 21(1)(b) of the Limitation Act. That is a type of action which, in turn, dictates particular relief: the recovery of trust property. The judge therefore erred by instead granting different relief.
Mr Georgiadis submitted that the remedy awarded was appropriate in the circumstances. As part of his submission, Mr Georgiadis disputed that s 21(1)(b) dictates a particular form of relief, arguing that recovery of converted trust assets may be practically achieved, as here, by an award of equitable compensation.
Secondly, Mr Du submitted that the quantification undertaken by the judge in reliance on the valuation methodology specified in the 5 May 2009 document was flawed. It was submitted that the document was not a contract needing to be interpreted or enforced, but a document merely intended to produce a consensual valuation process. Since the parties had different understandings of its meaning, no consensual valuation process occurred and the judge ought not to have relied on it. Even if the document was appropriately used to assess equitable compensation, the amount awarded by the judge was inconsistent with the $110,000 remaining assets estimate in the award and an amount of $31,127 for current assets specified in the 2009 partnership return. The award was also said to require regard to be had to liabilities, cash assets and uneven partner drawings. Mr Du submitted that the assessment should have proceeded by expert evidence.
Mr Georgiadis submitted that the 5 May 2009 document was signed by both parties and the judge was entitled to rely on it to value the goods and equipment in question. Mr Du had given evidence of his own estimates of value based upon the document. Further, the figures of $110,000 and $31,127 were inconsistent with each other, and there was unchallenged evidence that the latter figure was disputed.
Consideration
For the reasons given in respect of proposed ground 1, to which these arguments are closely related, the first strand of the argument under this proposed ground also fails.
As to the second strand, Mr Du’s submissions in this context are substantially premised on the assumption that Mr Georgiadis sought to enforce the award, rather than to claim for breach of the trust over partnership assets which he contended was created by the award. When the claim is understood in that light, the provision made in the award regarding liabilities, like the approximate figure of $100,000 for half the value of stock, cash and debtors, other assets and liabilities, is of diminished relevance. Similarly, the status of the 5 May 2009 document as a contract or otherwise was beside the point. The judge was entitled to have recourse to that document, not only because it represented the approach the parties themselves envisaged taking to the valuation question, but more importantly because the award endorsed it, relevantly, as a means of valuing partnership assets. Once that is accepted, the fact that the 2009 partnership return, itself in dispute, yielded a different figure is irrelevant.
Conclusion
Leave to appeal should be granted in respect of proposed grounds 1, 2, 5 and 6, but otherwise refused.[56] The appeal should be dismissed.
[56]Proposed ground 8 (costs) was dependent on the appeal being successful.
St John Sutton, John Kendall and Judith Gill, Russell on Arbitration (Sweet & Maxwell,
21st edition, 1997) 395 [8–003].
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