Emanuel MGT Pty Ltd v Emanuele; Cowell & Ors No. Scgrg-96-1763 Judgment No. S6924
[1998] SASC 6924
•26 October 1998
EMANUEL MANAGEMENT PTY LTD v EMANUELE; COWELL AND OTHERS (INTERVENERS)
[1998] SASC 6924
Chamber Application
BLEBY J. These are applications for immediate relief by the plaintiff and for summary judgment by the defendant and the interveners.
Background
The plaintiff is a company which was ordered to be wound up by the Federal Court of Australia on 30 August 1995. At all material times it was a member of a group of companies known as “the Emanuel Group”. The plaintiff was the management company for the Emanuel Group.
From 12 July 1977 until 10 March 1995 the defendant was a director of the plaintiff and was the Chief Executive Officer. On 28 November 1985 he was charged on information with a breach of s73(3) of the Crimes Act 1914 (Cth). The trial took place in the Magistrates Court of the ACT. On 4 November 1993 the Chief Magistrate found the defendant guilty, but a conviction was not recorded until 4 February 1994, when the defendant was also sentenced. He appealed against his conviction and sentence, and by order dated 16 March 1995 the Supreme Court of the ACT allowed the appeal and set aside the conviction and sentence. There was a further appeal by the Commonwealth DPP to the Full Court of the Federal Court of Australia. That appeal was dismissed by the Full Court on 4 December 1995.
The defendant, at all stages of the litigation, was represented by solicitors and counsel. There were also accommodation costs and other expenses associated with the defence of the proceedings. Between 19 July 1986 and 21 April 1994 these expenses, which amounted in all to about $1.6m, were paid by cheques drawn on the bank account of the plaintiff.
The interveners were at all material times the partners in a firm of solicitors who had performed legal work for the defendant and his sons. This was work not connected with the defence of the proceedings in the Magistrates Court. On 11 March 1996 they entered into what is described as a “loan agreement” with the defendant whereby it was recorded that the outstanding costs owing to the firm at that time amounted to $83,125.99, and the parties agreed upon terms upon which that and any future costs payable to the firm for services performed for the defendant or his sons would be paid. One of the special conditions of the agreement was that the defendant granted in favour of the interveners “a first charge over his interest in monies that are owing to him on account of costs orders he has obtained in his favour” in relation to the proceedings in the Magistrates Court, the ACT Supreme Court and the Federal Court. That was a misdescription, because no orders at that stage had been obtained, although all appeals had been finalised. However, by order dated 1 August 1996 the ACT Supreme Court ordered that the Director of Public Prosecutions pay the defendant’s costs of the trial in the Magistrates Court fixed at $600,000. It also ordered that the Director of Public Prosecutions pay the defendant’s costs of the Supreme Court Appeal to be taxed or agreed. The sum of $600,000 was duly paid into the trust account of another firm of solicitors, and apart from some payments therefrom which the parties to these proceedings have agreed should be made, the entitlement to the balance of that sum is in dispute and is the subject of these proceedings. On the one hand, the plaintiff claims an entitlement to the fund by virtue (inter alia) of its having indemnified the defendant for his costs. On the other hand, the interveners claim a charge on the fund pursuant to the loan agreement for all costs presently outstanding to them, and the defendant claims the balance.
For the purposes of s237 of the Companies Code, which applied until 1 January 1991, the defendant was an officer of the plaintiff. That section relevantly read as follows:
“237(1) [Certain provisions void] Any provision, whether contained in the articles or in a contract with a company or otherwise, for exempting any officer or auditor of the company from, or indemnifying him against, any liability that by law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company is void.
237(2) [Legal costs] Notwithstanding anything in this section, a company may, pursuant to its articles or otherwise, indemnify an officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application in relation to any such proceedings in which relief is under this Code granted to him by the Court.”
Similar provisions took effect by s241 of the Corporations Law as from 1 January 1991.
In pursuance of the power granted by s237(2) of the Code, the articles of the plaintiff contained the following provision:
“118.......... Every director managing director agent auditor secretary and other officer for the time being of the Company shall be indemnified out of the assets of the Company against any liability incurred by him in defending any proceedings whether civil or criminal in which judgment is given in his favour or in which he is acquitted or in connection with any application under the Code in which relief is granted to him by the Court in respect of any negligence default breach of duty or breach of trust.”
The former pleadings and the applications
By its amended more explicit statement of claim as it was when the hearing before me commenced, the primary allegation of the plaintiff was that, by procuring the payment of his costs by the plaintiff, the defendant was in breach of his statutory or fiduciary duties to the plaintiff, and hence it sought a declaration that the defendant held any monies received by him pursuant to the order of the Supreme Court of the ACT on a constructive trust for the company. In the alternative to the claim for constructive trust, it sought a declaration that the company had a lien or charge over the amount of costs paid, and sought an order to enforce that lien or charge. By way of alternative it sought a declaration that the company was entitled to be subrogated to the rights of the defendant in respect of the costs paid. It was pleaded that that was simply by reason of the payments made by the plaintiff or, if the payment of the monies were proper payments pursuant to Article 118 (which was denied) pursuant to that indemnity. It was alleged that any monies recovered by the defendant were held on trust for or subject to a lien or charge in favour of the plaintiff. By way of further alternative the plaintiff claimed a lien or charge by way of subrogation to that of the solicitors before they were paid, and the final alternative was a claim for a resulting trust. More detail of each of those claims appears below.
By his defence the defendant denied any breach of statutory or fiduciary duty to the plaintiff. He denied that the plaintiff was entitled to be subrogated to the defendant but pleaded that payment of the monies was properly made pursuant to the articles of association of the plaintiff. He denied that the plaintiff was entitled to any relief. The interveners in their points of claim generally did not plead to the factual issues joined between the plaintiff and defendant but took no issue with the defendant’s pleas, generally aligning themselves with the defendant, and pleading their loan agreement and charge.
Pursuant to Rule 25.02 and Rule 25.03 of the Supreme Court Rules 1987, the plaintiff applied for immediate relief. It filed extensive affidavit material to prove the payments made by the plaintiff in respect of the defence of the proceedings in the ACT Magistrates Court. The material included an assertion (not denied by the defendant) that the defendant had never asserted to the liquidator’s office (i.e. the office of the liquidator of the plaintiff) that he or any other person, except the plaintiff, paid any of the costs of the Magistrates Court trial. It was also acknowledged before me that the defendant had entered into an arrangement with his creditors pursuant to Part X of the Bankruptcy Act 1966, and that at a meeting held on 30 January 1989 a special resolution was passed by the creditors of the defendant to the effect that his proposal for a composition under Part X be accepted, and that Anthony Christopher Matthews had been appointed as the controlling trustee of the defendant’s estate. I note, however, that since the hearing that composition has been set aside by order of von Doussa J in the Federal Court of Australia on 30th September 1998, and a sequestration order made against the estate of the defendant. In either case, I imagine that the only prospect that the plaintiff has of any significant recovery is by being able to establish a proprietary interest in the fund rather than as an unsecured creditor of the defendant. The defendant and the interveners both applied to strike out the statement of claim and for summary judgment in their favour, on the ground that the Statement of Claim disclosed no reasonable cause of action.
All applications were listed for hearing before me, and I directed (inter alia) the filing and exchange of outlines of argument in respect of the various claims.
The plaintiff’s written outline in support of its application for immediate relief was based solely on its claim to be subrogated to the defendant as a result of its having indemnified the defendant. However, the plaintiff, by its oral submissions, also argued by way of alternative that if there was not a payment by way of indemnity, there had to be a breach of fiduciary duty by the defendant in procuring the payment of his costs, and that any monies recovered were held on trust for the plaintiff.
The defendant and the interveners claimed that the plaintiff had nailed its colours to the mast by limiting its argument to the question of indemnity and rights of subrogation. Not only had it done that, but it had turned the statement of claim on its head by arguing the third alternative as its primary contention, but also, as it were, having a bet both ways by arguing its first alternative, which would require conflicting factual findings.
Having completed its argument and the above points having been taken by the defendant and the interveners, the plaintiff then sought and was granted leave further to amend its statement of claim, as a result of which the issues were presented in a somewhat different light.
The present pleadings
The plaintiff’s principal claim is now contained in paragraphs 25A and 25B of the Statement of Claim. It is said that the plaintiff’s entitlement to subrogation to the rights of the defendant against the Director of Public Prosecutions in respect of the $600,000 arose on the date of each of the payments by the plaintiff, or in the alternative on 16 March 1995, being the date on which the defendant was acquitted. It is said that the plaintiff’s entitlement to the fund now arises by reason of each of the following:
The payments made by the plaintiff of the defendant’s costs;
Article 118 itself, constituting the obligation to indemnify;
The payment being made in respect of the liability incurred by the defendant in defending criminal proceedings;
Section 237 of the Companies Code until 31 December 1990 and s241 of the Corporations Law from 1 January 1991 precluding payment of a director’s legal fees other than pursuant to an indemnity within the terms of those sections; and
The defendant obtaining the order for the payment of costs on 1 August 1996.
It makes similar claims in respect of amounts yet to be quantified and paid in respect of other costs orders of the ACT Supreme Court and the Federal Court made in the appeal proceedings in favour of the defendant. I will refer to this compendiously as the “subrogation claim”.
By way of alternative (paragraphs 22-24) are pleaded the allegations of breaches of fiduciary and statutory duty by the defendant, as a result of which it is said that since the date of each of the payments by the plaintiff, both the monies paid and the amount of costs recovered were held by the defendant on a constructive trust for the plaintiff arising on the date of each payment. In the alternative to the constructive trust it is pleaded that the amount recovered has been the subject of a lien or charge in favour of the plaintiff by reason of the fiduciary relationship between the plaintiff and the defendant and that it would be unconscionable for the defendant to retain or dispose of the amount recovered (paragraph 25). I will refer to these claims compendiously as the “constructive trust/lien claim”.
A further alternative claim (paragraphs 26 and 26A) to the claim for subrogation is that in respect of monies paid to solicitors, immediately before the payments were made, the solicitors were entitled to a lien over any amounts recovered, and that by reason of the payments by the plaintiff, the plaintiff is subrogated to the rights of the solicitors and to their lien. I will refer to this alternative as the “solicitor’s lien subrogation claim”.
The final claim (paragraphs 26B and 26C) by way of alternative to all the others is a claim for a resulting trust whereby it is alleged that the payments were made for the purpose of funding the defendant’s costs to no greater extent than the difference between the costs incurred and the costs recovered, and to fund the difference in the meantime; that it never disposed of the beneficial interest in the monies paid, and that the money recovered is held on a resulting trust for the plaintiff. I shall refer to this alternative as the “resulting trust claim”.
The defendant, by his further amended defence, maintains the denials to which I have referred, but instead of alleging that the monies were a proper payment made pursuant to the articles of association of the plaintiff, now alleges that the monies paid on behalf of the defendant were payments made “for the benefit of the plaintiff”.
The interveners maintain their former position but now seek a declaration that the plaintiff does not have a proprietary interest in the entitlement to recovery by the defendant of the costs or of the amount actually paid. They continue to assert their priority in equity by way of the charge contained in the loan agreement, with the further qualification that they seek an order that the loan agreement be rectified to reflect what is alleged to be the final and common intention of the defendant and the interveners, namely that the charge should cover the defendant’s interest in monies owing to him “on account of costs orders to be obtained”, rather than “on account of cost order he has obtained”. I have not been asked to rule on the interveners’ claims for final relief and it would be inappropriate to do so.
Against that background, the defendant and the interveners argued on a number of grounds that this was an inappropriate case for immediate relief.
The claim for immediate relief
In the first place, as now pleaded, the sole source of the plaintiff’s obligation to indemnify, and hence of the subrogation claim, was Article 118. For the purposes of their argument, the defendant and the interveners were prepared to concede the plaintiff’s argument that a payment by way of indemnity pursuant to Article 118 was a payment pursuant to a contract of indemnity, which in turn gave rise to a right of subrogation and a beneficial equitable interest in the funds to which the plaintiff claimed he was otherwise entitled. Their argument was that the facts pleaded could not possibly justify a payment by way of indemnity pursuant to Article 118. All the payments were made long before it was known that the defendant would be acquitted of the charges. At the time when the payments were made it could not possibly have been known whether the defendant would become entitled to indemnity under Article 118. The obligation to indemnify could not arise until the acquittal had occurred. At the time when the payments were made that event had not occurred. It was a condition precedent to the exercise of the right of subrogation that the payment had been made pursuant to the obligation to indemnify. I will return to this argument when dealing with the defendant’s and the interveners’ application to strike out the statement of claim.
In the second place, it was said that the constructive trust/lien claim, the solicitor’s lien subrogation claim and the resulting trust claim were all inconsistent with the subrogation claim as now formulated, and would require inconsistent findings of fact to be made. An application for summary judgment should only be entertained when the facts are clear and beyond argument.
In the third place, the core issue facing the Court and the parties related to the circumstances in which the plaintiff made the payments on account of the costs in question. Evidence presently available to the defendant and the interveners, by way of a working document from the company’s auditors and the company’s 1988 taxation return suggests, they submitted, that the plaintiff may well have paid the monies out of its own funds for its own benefit for the reason that the allegations against the defendant reflected on the integrity of the person responsible for conducting the plaintiff’s business, and that that alleged conduct in turn reflected on the plaintiff and its reputation. The plaintiff’s contention to the Commissioner of Taxation at that time was that in view of the decision of the Federal Court of Australia in Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation 80 ATC 4,542 and other cases the expenditure on the costs of representation and advice was deductible pursuant to s51(1) of the Income Tax Assessment Act 1936, and that was a yet further possible factual justification for the payment. Furthermore, it was said that the process of discovery was not complete, and certain additional auditors’ files had not been discovered.
The Court has a general discretion to determine whether a matter should be disposed of summarily: Wicklow v Doysal (1985) 124 LSJS 225. Absent questions of urgency, it should not be used where there are complex questions of law and fact to be resolved and which cannot readily be disposed of by affidavit: Wicklow v Doysal (supra); Taylor v District Council of Munno Para (1984) 115 LSJS 33. In my opinion, not only are there difficulties for the plaintiff in some of its claims as presently pleaded (to which I refer below), but there are factual questions which require resolution which go well beyond the scope appropriate to an application for summary judgment. On the plaintiff’s own case there are serious factual issues to be tried, and as will be seen, even during the course of this hearing the plaintiff’s position has changed quite significantly, opening up further possible factual inquiries. For these reasons it would be inappropriate to determine the plaintiff’s claim on application for summary judgment, and the plaintiff’s application must therefore be refused.
Applications to strike out the Statement of Claim
I turn to the applications to strike out the plaintiff’s statement of claim. The defendant and the interveners must show that the revised statement of claim discloses no reasonable cause of action. I must deal with these arguments as they relate to the pleadings now before me and whether those pleadings can stand. I am not concerned at this stage with the question of whether the plaintiff might be able to formulate some alternative claim by way of amendment of its pleading, although I will need to return to this question. For the purpose of these applications I must assume that the plaintiff can establish all the factual matters alleged in the statement of claim and I must determine whether, on that assumption, the plaintiff can make out an entitlement to the various alternative claims pleaded.
The subrogation claim
I deal first with the plaintiff’s subrogation claim. I have already mentioned in outline the argument of the defendant and the interveners. The right of subrogation is a natural corollary of the giving of an indemnity: Castellain v Preston (1883) 11 QBD 380 per Bowen LJ at 401. The indemnifier stands in the shoes of the indemnified, and is entitled to the benefit of the rights and remedies which the person indemnified may have against a third party in respect of the loss or liability for which the indemnity is given. A condition precedent to the exercise of the right of subrogation is that payment has been made pursuant to the obligation to indemnify. In a claim for indemnity based on contract (which this is), without both the obligation and the payment pursuant to that obligation, there can be no subrogation.
Where a payment is made not pursuant to a valid contract of indemnity but pursuant to some other arrangement, subrogation will not arise. For example, in John Edwards & Co v Motor Union Insurance Co Ltd [1922] 2 KB 249 a payment was made under a marine insurance policy which was held to be void under s4 of the Marine Insurance Act of 1906, because it was a contract by way of gaming or wagering. In those circumstances the insurer was not subrogated to the rights of the insured in respect of any loss recovered from a third party. Having reviewed the origins of the doctrine of subrogation, McCardie J said at pp254-255:
“It will be observed that the whole basis of the subrogative doctrine is founded on a binding and operative contract of indemnity, and that it is from such a contract only that the equitable results and rights as indicated above derive their origin.
At this stage I ought to notice a contention raised by the counsel for the defendants. They submitted that the right of subrogation rested not so much on the original contract of insurance but upon the payment made by the insurer under a contract apparently of that character. They referred to several dicta: I need only mention two. Thus in Simpson v. Thomson (1877) 3 App Cas 279, 284 Lord Cairns said: ‘I know of no foundation for the right of underwriters, except the well known principle of law, that where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss.’ So, too, in Castellain v. Preston 11 Q.B.D. 380, 389 Brett L.J. said: ‘But he cannot be subrogated into a right of action until he has paid the sum insured and made good the loss.’ These dicta, however, are capable of just explanation by the theory that the principle of subrogation is ever a latent and inherent ingredient of the contract of indemnity, but that it does not become operative or enforceable until actual payment be made by the insurer. It derives its life from the original contract. It gains its operative force from payment under that contract. Not till payment is made does the equity, hitherto held in suspense, grasp and operate upon the assured’s choses in action. In my view the essence of the matter is that subrogation springs not from payment only but from actual payment conjointly with the fact that it is made pursuant to the basic and original contract of indemnity.”
Likewise, when there exists a contract of indemnity but no payment has been made under it, the right to subrogation does not arise: Santos Ltd v American Home Assurance Co (1987) 4 ANZ Insurance Cases ¶ 60‑795.
The sole basis of the right to indemnity relied on by the plaintiff in this case is Article 118. That article provides for an obligation on the plaintiff to indemnify the defendant only upon certain conditions. The relevant condition in this case was that the defendant be acquitted of the charges in respect of which he had incurred the liability in defending the proceedings. All the relevant payments were made by the plaintiff on or before 21 April 1994 - before the right to indemnity arose. At the time when the payments were made, they could not have been made pursuant to the contract of indemnity because the condition precedent to the indemnity (acquittal of the charge) had not occurred. The plaintiff’s obligation to indemnify did not arise until 16 March 1995, when the conviction was set aside. No relevant payments were made after that date. I therefore agree with the submission of the interveners and of the defendant that a right of subrogation, in those circumstances, did not arise pursuant to the operation of Article 118, and that paragraphs 25A and 25B of the present statement of claim disclose no reasonable cause of action.
It is conceivable that the plaintiff might have made the payments in the first instance by way of loan to the defendant, and at some time after 16 March 1995 could either have forgiven the loan as a result of its obligation to indemnify or could have entered into an arrangement whereby a payment was made by way of indemnity to enable the defendant to repay the loan. However, that is not pleaded, and there is nothing in the information before me to suggest that in fact that occurred. It is pleaded that the plaintiff’s entitlement to subrogation arose on the date of each of the payments made by the plaintiff, or in the alternative on 16 March 1995. For reasons I have given, subrogation could not have arisen on the dates of payment. It did not arise on 16 March 1995, because no payment was made on or after that date. What arose on 16 March 1995 was the obligation on the part of the plaintiff to indemnify the defendant if called upon to do so.
Mr Blue, counsel for the plaintiff, argued that the acquittal of the charge should be treated as a condition subsequent and that accordingly the payments were properly made by way of indemnity subject to the condition that if the defendant was not acquitted, he could not rely on the indemnity. Presumably, at that point, the payment ceases to be authorised by Article 118. In my opinion that is contrary to the sense and intention of Article 118, and would allow a party to profit by his own wrongdoing. It would require treating the payments as being authorised when made subject, in effect, to an obligation to repay if the condition were not fulfilled. It would be tantamount to rewriting the article to provide that a director shall be indemnified against liability incurred by him in defending any proceedings subject to the condition that such indemnity shall cease and any monies paid by way of indemnity shall be repaid if judgment is given against the director or if he is convicted, in the case of a criminal offence.
Mr Blue further relies on King v Victoria Insurance Co Ltd [1896] AC 250. The respondent in that case was the insurer of some wool which was destroyed or damaged in transit. The owner claimed and was paid under the policy. The insurer then brought an action against the appellant as nominee of the State of Queensland, whose negligence was said to have caused the loss. It was argued by the appellant, in reliance on some primary findings of the trial judge, that the amount of the loss was outside the terms of the policy. In that case, it was said, that the insurer stood in the position of a stranger, making a voluntary payment to the owner, and could not rely on subrogation. The Privy Council dismissed that claim. It was pointed out in the judgment that it was not alleged that there was anything but perfect good faith in the claim made by the owner and satisfied by the insurer. Their Lordships were nevertheless prepared to assume that the owner could not, by the terms of the policy, have compelled the insurer to indemnify it. The judgment continues (at p255):
“Still if, on a claim being made, the insurers treat it as within the contract, by what right can a stranger say that it is not so? The payment would not be made if no policy existed; and it seems to their Lordships an extravagant thing to say that a payment made under such circumstances is a voluntary payment made by a stranger, and that it would be at least an excess of refinement to hold that it is not a payment on the policy, carrying with it the legal incidents of such a payment. Such settlements of claims between the parties concerned ought not to be reopened for a by‑purpose at the instance of parties not concerned. To hold otherwise would convert rules of law framed for the purpose of checking speculations in law‑suits into instruments for promoting law‑suits which the parties interested are wise enough to avoid by agreement.”
The distinction between that case and this is obvious. There is no suggestion on the pleadings that the defendant ever made a claim under Article 118 or that Article 118 was in fact ever considered by the plaintiff to be the justification for the payment. Even if that had been suggested at the time, it is quite plain that Article 118 did not justify the payments at the time they were made. Some other justification would have to have been found.
That leads conveniently to Mr Blue’s third argument, namely that the law of subrogation is not dependent upon contract at all but upon principles of unjust enrichment. In Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In liquidation) (1978) 141 CLR 335 at 348, Gibbs ACJ, with whom Jacobs and Murphy JJ concurred said of the doctrine:
“It was said by Lord Eldon that a right of subrogation arises by force of ‘that equity, upon which it is considered against conscience, that the holder of the securities should use them to the prejudice of the surety; and therefore there is nothing hard in the act of the Court, placing the surety exactly in the situation of the creditor’: Aldrich v. Cooper (1803) 8 Ves. Jun. 382, at p389 [32 E.R. 402, at p405]. The principle underlying the doctrine is that it would be inequitable for a creditor, by choosing not to resort to remedies in his power, to cast the whole of the obligation on the surety: see Rowlatt, op. Cit., p.205; Goff & Jones, Law of Restitution (1966), p.376; Halsbury’s Laws of England, 4th ed., vol. 20, par. 194. As the statement of Lord Eldon indicates, and as is well settled, a surety who has paid the debt due to the creditor is entitled to stand in the creditor’s shoes; he has the creditor’s right, but only those rights.”
The plaintiff also points to the well‑known passage of Lord Diplock in Orakpo v Manson Investments Ltd [1978] AC 95 at 104:
“My Lords, there is no general doctrine of unjust enrichment recognised in English law. What it does is to provide specific remedies in particular cases of what might be classified as unjust enrichment in a legal system that is based upon the civil law. There are some circumstances in which the remedy takes the form of ‘subrogation’, but this expression embraces more than a single concept in English law. It is a convenient way of describing a transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place by operation of law in a whole variety of widely different circumstances. Some rights by subrogation are contractual in their origin, as in the case of contracts of insurance. Others, such as the right of an innocent lender to recover from a company moneys borrowed ultra vires to the extent that these have been expended on discharging the company’s lawful debts, are in no way based on contract and appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment.
This makes particularly perilous any attempt to rely upon analogy to justify applying to one set of circumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in another and different set of circumstances.”
In the same case Lord Edmund‑Davies said at p112:
“Apart from specific agreement and certain well‑established cases, it is conjectural how far the right of subrogation will be granted though in principle there is no reason why it should be confined to the hitherto‑recognised categories (Goff and Jones, The Law of Restitution (1966), pp.376-377). The basis of the doctrine is well exemplified by Marlow v. Pitfield (1719) 1 P.Wms. 558, 559, where Jekyll M.R. said:
‘...if one lends money to an infant to pay a debt for necessaries, and in consequence thereof the infant does pay the debt, here although he may not be liable at law, he must nevertheless be so in equity; because in this case the lender of the money stands in the place of the person paid, viz. the creditor for necessaries, and shall recover in equity, as the other should have done at law.’”
The nature of the doctrine of subrogation has recently been subjected to close scrutiny from the House of Lords in Banque Financière de la Cité v Parc (Battersea) Ltd [1998] 2 WLR 475. Lord Hoffmann warned of the dangers of importing contractual requirements into all situations of subrogation. He said at p483:
“Subrogation in this sense is a contractual arrangement for the transfer of rights against third parties and is founded upon the common intention of the parties. But the term is also used to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived. The fact that contractual subrogation and subrogation to prevent unjust enrichment both involve transfers of rights or something resembling transfers of rights should not be allowed to obscure the fact that one is dealing with radically different institutions. One is part of the law of contract and the other part of the law of restitution. Unless this distinction is borne clearly in mind, there is a danger that the contractual requirement of mutual consent will be imported into the conditions for the grant of the restitutionary remedy or that the absence of such a requirement will be disguised by references to a presumed intention which is wholly fictitious.”
It may well be that the plaintiff is able to establish some factual circumstances in which it may be argued that a right to subrogation arises by operation of law and beyond the circumstances postulated by Article 118. In that respect Mr Blue was arguing a case which is not pleaded. The plaintiff here relies on a lawful and contractual payment as the sole foundation for its claim. In my opinion, the circumstances as pleaded do not allow it to do so. If it is to succeed by way of subrogation it will need to plead some other basis of the payment, whether lawful or unlawful, which nevertheless gives rise to a right of subrogation in the plaintiff. It may be able to allege that the right arises by operation of law because the defendant unlawfully procured the payments to his own advantage in circumstances giving rise to a right of subrogation. It may be able to allege a payment lawfully made in the interest of the company which nevertheless gives rise to the right. It is not for me to say whether the facts would justify such a plea or whether such a plea would necessarily succeed. At the moment, however, no such circumstances are pleaded. All I can say is that reliance on Article 118 in the circumstances presently pleaded cannot give rise to a right of subrogation on the part of the plaintiff, and that that part of its statement of claim must be struck out unless application is made to amend it. It will be for the plaintiff to make an application, if so advised, for leave to amend its pleadings in a manner which either does or may give rise to what is an obviously flexible remedy.
In the circumstances, it is not necessary to address an argument of Mr Clayton QC for the defendant that upon a proper construction of Article 118 the right to indemnity only extends to a case in which relief is granted to a director etc by the Court in respect of any negligence or breach of duty or breach of trust. His argument was that as the defendant was only charged with a breach of the general criminal law the right to indemnity did not arise. In the circumstances, it is sufficient to say that I do not accept the argument. The word “or” second occurring in the Article is disjunctive and postulates two generic types of proceedings in which the right to indemnity may arise.
The Constructive Trust/Lien Claim
In the constructive trust/lien claim the plaintiff’s allegation is that as a result of the breach of statutory and fiduciary duty by the defendant, both the monies paid by the plaintiff by way of legal costs and both the entitlement to recover and the amount recovered pursuant to that entitlement have been held by the defendant upon a constructive trust for the plaintiff since the date of the payments, that is between 19 February 1986 and 21 April 1994. It is not alleged that a constructive trust arose on either 1 August 1996 (the date of the order for the payment of costs) or on 19 August 1996 (the date of payment of the $600,000). Central to the argument of the defendant and the interveners is the plaintiff’s own assertion that the trust was created prior to 21 April 1994. The defendant and the interveners point to the four well‑known and essential elements required to be present in every form of trust, namely that there be a trustee, property or an interest in property capable of being held on trust, a beneficiary or purpose and a personal obligation annexed to the property. See, for example, Jacobs’ “Law of Trusts in Australia” (6th Edition) Paragraphs [104-[110]] inclusive. These four elements apply equally to a constructive trust: Muschinski v Dodds (1985) 160 CLR 583 per Deane J at 614.
The argument is that in the circumstances of this case, after payment of the monies by the plaintiff, there was no property to which a constructive trust could attach at the time alleged in the statement of claim.
In my opinion, Mr Morcombe QC for the plaintiff must be correct in so far as the statement of claim alleges that the constructive trust or lien arose at the time when the payments were made by the plaintiff. To that extent, the statement of claim is defective. However, a constructive trust, as pointed out by Deane J in Muschinski v Dodds (supra) in his helpful discussion of the topic at pp612-615, is essentially remedial in origin and arises by operation of law, regardless of the intention of the parties. If a fiduciary or other obligation arises whereby the defendant’s conscience is bound in respect of future acquired property, that property may nevertheless become impressed with a trust. Such is the case in respect of the assignment of future acquired property: Palette Shoes Pty Ltd v Krohn (1937) 58 CLR 1 per Dixon J at 27. It will also be the case where a breach of fiduciary duty gives rise to the creation in law of a constructive trust: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 per Mason J at 107-108:
“Any profit or benefit obtained by a fiduciary in either of the two situations already described is held by him as a constructive trustee: Keith Henry & Co. Pty. Ltd. V. Stuart Walker & Co. Pty. Ltd. (1958) 100 C.L.R. 342, at p.350. Neither principle nor authority provide any support for the proposition that relief by way of constructive trust is available only in the case where a profit or benefit obtained by the fiduciary was one which it was an incident of his duty to obtain for the person to whom he owed the fiduciary duty. Once it is established that the fiduciary is liable to account for a profit or benefit which he has obtained there can be no objection to his being held to account as a constructive trustee of that profit or benefit. It can make no difference that it was not his duty to obtain the profit or benefit for the person to whom the duty was owed. What is important is that the advantage has accrued to him in breach of his fiduciary duty or by his misuse of his fiduciary position. The consequence is that he must account for it and in equity the appropriate remedy is by means of a constructive trust.”
Mason J, with whom Deane J agreed on this point, was in dissent in holding that a fiduciary relationship existed between the relevant parties, but the principle to which he there refers is nevertheless valid.
So it is in this case, that if the plaintiff is able on the evidence to establish the existence of a fiduciary duty on the part of the defendant and a breach of that duty, in circumstances where the defendant is liable to account to the plaintiff for the money he receives, such that he holds the money or the relevant property as a constructive trustee for the plaintiff, the trust may not arise until the property comes into existence. However, that does not mean that there must be a continuous existence of the property in question from the time of the breach until the time when the trust may be enforced. It was unnecessary for Mr Blue to argue, as he did, that in some way the defendant, from the moment of payment, had a right to claim costs in the Magistrates Court, and that that was the proprietary right under which the constructive trust or lien arose. It can hardly be said that the defendant had a right to litigate (in the sense of applying for an order for costs) at that time. Some of the payments were no doubt made before the trial even began. In my opinion, the defendant had no right to apply for costs until his conviction was set aside on 16 March 1995. He may well thereafter have had an assignable proprietary right. Cf Compania Colombiana De Seguros v Pacific Steam Navigation Co [1965] 1 QB 101. That proprietary right might well also become the subject of a constructive trust or lien if the antecedent circumstances surrounding the payment of the costs by the plaintiff gave rise to a constructive trust or lien when the property came into the defendant’s hands. It is not for me to determine those issues on this application, and the answer may well determine priorities as between the plaintiff and the interveners. It is sufficient to hold that, as presently pleaded, the statement of claim cannot give rise to a finding of a constructive trust or lien, based on breach of statutory or fiduciary duty, arising at the time pleaded in respect of any rights said to exist at that time.
As in the case of the subrogation claim, however, that is not to say that the plaintiff cannot by amendment to the statement of claim allege a set of circumstances which, if proved, will nevertheless give rise to a constructive trust or lien in respect of either the costs recovered or the right to recover them, or both, at the time when they came into the defendant’s hands.
The solicitors’ lien/subrogation claim
I turn to the solicitors’ lien/subrogation claim. This too involves a claim by way of subrogation, but subrogation to what would otherwise have been the rights of the solicitors to payment of their costs out of the monies ordered to be paid by the Supreme Court of the ACT. It is necessary in this context to consider the nature of the solicitor’s lien as explained by Jordan CJ in Ex parte Patience; Makinson v The Minister (1940) 40 SR (NSW) 96 at 100-101:
“A solicitor has no lien for his costs over any property which has not come into his possession. If, however, as the result of legal proceedings in which the solicitor has acted for the client, the client obtains a judgment or award or compromise for the payment of money, although the solicitor acquires no common law title to his client’s right to receive the money or to any part of that right, he acquires a right to have his costs paid out of the money, which is analogous to the right which would be created by an equitable assignment of a corresponding part of the money by the client to the solicitor. That is to say, the solicitor has an equitable right to be paid his costs out of the money; and if he gives notice of his right to the person who is liable to pay it, only the solicitor and not the client can give a good discharge to that person for an amount of the money equivalent to the solicitor’s costs: Welsh v. Hole 1 Doug. 238. If the person liable to pay refuses, after notice, to pay the costs of the solicitor, the solicitor may obtain a rule of Court directing that the amount of his costs be paid to him and not to the client; and payment by the judgment debtor to the client after notice of the solicitor’s claim is no answer to an application for such a rule: Read v. Dupper 6 T.R. 361; Ormerod v. Tate 1 East 464; Ross v. Buxton 42 Ch. D. 190. Further, if the client and a judgment debtor make a collusive arrangement for the purpose of defeating the solicitor’s right, the Court will enforce that right against the judgment debtor notwithstanding the arrangement and notwithstanding that no notice of the solicitor’s claim had been given to the judgment debtor prior to the arrangement: Ross v. Buxton 42 Ch. D. 190. These special rights have no resemblance to a solicitor’s general possessory lien, although they are sometimes miscalled liens: Bozon v. Holland 4 My. & Cr. 354. In Barker v. St. Quinton 12 M. & W. 441 at 451 Parke B. said that ‘the lien which an attorney is said to have on a judgment (which is, perhaps, an incorrect expression) is merely a claim to the equitable interference of the Court to have that judgment held as security for his debt,’ a remark which is reproduced in Chitty’s Archbold, and has been repeated in many later authorities: cf. also Smedley v. Philpot 3 M. & W. 573 at 585-7; North v. Stewart 15 App. Cas. 452 at 463. In practice, however, the solicitor has always been treated as possessing equitable rights in the judgment independently of any declaration of those rights, and the Court’s assistance is invoked not to create the rights but to enforce them: Lord v. Colvin 2 Drew. & Sm. 82 at 92-3; Haymes v. Cooper 33 Beav. 431 at 433. The rights are assignable: Briscoe v. Briscoe [1892] 3 Ch. 543.”
That explanation was accepted and acted on by this Court in Kison v Papasian (1993) 61 SASR 567.
The plaintiff’s argument is that the solicitors had such a lien or right in respect of any unpaid costs between the date of their invoice and the date of payment. As the authorities suggest, that right is capable of assignment. The plaintiff argues that by virtue of the fact that the plaintiff paid the respective amounts invoiced by the solicitors, the plaintiff can stand in the solicitors’ shoes by way of subrogation to the rights to payment that the solicitor had out of the proceeds of any costs order. In my opinion, it is at least arguable that that is one of the circumstances in which the law would recognise rights of subrogation, and I would not be prepared to strike out that part of the plaintiff’s statement of claim. As the right or lien is one which is peculiar to a solicitor, it can only apply, if at all, in respect of payments made to the solicitors and not the payments made to other parties in connection with the costs of the defence. The precise amount involved, whether it relates only to costs paid to the solicitors or includes amounts paid direct to counsel (if such were the case), would need to be the subject of further investigation at the trial.
The Resulting Trust Claim
The argument to support the resulting trust claim requires an inference to be drawn from the facts that in paying the money to the various payees in respect of the costs of the defence of the prosecution, the plaintiff was in reality paying the monies to or at the direction of the defendant upon trust for the specific purpose of paying only so much of his costs as he did not eventually recover from the DPP, and that in the meantime the fund could be used for the purpose of meeting all the defendant’s legal expenses associated with the defence. The fund, although fully spent, was still impressed with a resulting trust in favour of the plaintiff to the extent that the payments were surplus to the discharge of the ultimate trust.
Although it may require more evidence than is presently before me in order to justify such an arrangement, I cannot say that such a claim is impossible to justify or that the pleading discloses no reasonable cause of action in that regard. I would therefore not be prepared to strike out that aspect of the plaintiff’s statement of claim.
Conclusion
The result is that I am not prepared to grant the plaintiff immediate relief in the terms set out in the statement of claim. I am also not prepared to grant the application of the defendant and the interveners to strike out the statement of claim and dismiss the proceedings. There are certain parts of the statement of claim which in my opinion do not disclose a cause of action and which I would be prepared to strike out in the event that no application is brought for leave to amend the statement of claim. It will be for the plaintiff to determine whether and in what terms it seeks leave to amend. I propose to adjourn these proceedings to a date to be determined after hearing further from counsel as to that date. I indicate that if by then the plaintiff has not made application for leave to amend the statement of claim, I propose to direct that those parts of the statement of claim which at present disclose no reasonable cause of action (paragraphs 25A, 25B and 22-24) be struck out. I will also hear argument as to the costs of this application and of any further application for leave to amend at that time.
0
5
0