Glover v Blumer
[2008] ACTCA 1
•20 February 2008
GLOVER & ANOR v BLUMER & ANOR [2008]
ACTCA 1 (20 FEBRUARY 2008)
TRUST AND TRUSTEE – fiduciary relationship alleged by reason of contract – agreement by third party to act as agent for one of the parties – whether pleadings were sufficient in alleging that third party knowingly participated in dishonest and fraudulent design.
PRACTICE AND PROCEDURE – statement of claim struck out – sufficiency of pleadings – declaratory orders by consent that affected question of fiduciary relationship between principals – no identification in pleadings of breach of fiduciary duty – requirement for there to be knowing involvement in such breach.
Supreme Court Rules 1937 (ACT), O 23 r 28, O 29 r 4
Workers Compensation Regulation2002 (ACT)
Hospital Products Ltd v United States Surgical Corporation and Others (1985) 156 CLR 41
Breen v Williams (1996) 186 CLR 71
Glover and Sheils v Roche & Roche [2003] ACTSC 19 (4 April 2003)
Frame v Smith et al [1987] 42 DLR (4th) 81
Barnes v Addy (1874) 9 LR Ch App 244
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Selangor United Rubber Estates Ltd v Cradock [No 3] [1968] 1 WLR 1555
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 236 ALR 209
T G Youdan (Ed), Equity, Fiduciaries and Trusts, Carswell,1989
J D Heydon & M F Leeming, Jacobs’ Law of Trusts in Australia, 7th Ed, Butterworths, 2006
ON APPEAL FROM A SINGLE JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
No. ACTCA 10-2006
No. SC 175 of 2004
Judges: Gray P, Madgwick and Cowdroy JJ
Court of Appeal of the Australian Capital Territory
Date: 20 February 2008
IN THE SUPREME COURT OF THE ) No. ACTCA 10-2006
) No. SC 175 of 2004
AUSTRALIAN CAPITAL TERRITORY )
)
COURT OF APPEAL )
ON APPEAL FROM A SINGLE JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
BETWEEN:PETER RICHARD GLOVER
First Applicant
AND:PETER LENNOX SHEILS
Second Applicant
AND:NOORAINI BLUMER
First Respondent
AND:MARK BLUMER
Second Respondent
ORDER
Judges: Gray P, Madgwick and Cowdroy JJ
Date: 20 February 2008
Place: Canberra
THE COURT ORDERS THAT:
Leave to appeal be granted.
The appeal be dismissed with costs.
IN THE SUPREME COURT OF THE ) No. ACTCA 10-2006
) No. SC 175 of 2004
AUSTRALIAN CAPITAL TERRITORY )
)
COURT OF APPEAL )
ON APPEAL FROM A SINGLE JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
BETWEEN:PETER RICHARD GLOVER
First Applicant
AND:PETER LENNOX SHEILS
Second Applicant
AND:NOORAINI BLUMER
First Respondent
AND:MARK BLUMER
Second Respondent
Judges: Gray P, Madgwick and Cowdroy JJ
Date: 20 February 2008
Place: Canberra
REASONS FOR JUDGMENT
THE COURT
Peter Richard Glover and Peter Lennox Sheils (the applicants) seek leave to appeal from an order made by Connolly J on 29 March 2006 striking out the applicants’ second further amended statement of claim (statement of claim). At that time, the Supreme Court Rules 1937 (ACT) (the Rules) contained provision in O 23 r 28 that:
The court may, at any stage of the proceedings, order to be struck out or amended any matter in any indorsement or pleading which is unnecessary or scandalous, or may tend to prejudice, embarrass, or delay the fair trial of the action, and may in any such case, if it or he or she thinks fit, order the costs of the application to be paid as between solicitor and client.
Order 29 rule 4 provided:
The court may order any pleading to be struck out, on the ground that it discloses no reasonable cause of action or answer, and in any such cause, or in case of the action or defence being shown by the pleadings to be frivolous or vexatious, the court may order the action to be stayed or dismissed, or judgment to be entered accordingly, as is just.
In addition, the application relied upon the inherent power of the Supreme Court to strike out proceedings as an abuse of the process of the court.
In the result, Connolly J struck out the pleading as an abuse of process and also considered that the pleading was so defective in form as to warrant an order that it be struck out.
Background
The applicants, who with associated employer and owner companies which they controlled, conducted a legal practice specialising in personal injury litigation at 6 Geils Court, Deakin in the Australian Capital Territory known as Scott Shiels & Glover. By agreement made on 6 July 1998 (the sale agreement) the applicants agreed to sell the assets of the practice to the partners of another legal practice known as Watling Roche, a practice conducted by Christopher Roche and Barry Roche (the Roches). One of the conditions of the sale required the Roches, as purchasers, to account to the applicants, as vendors, for work in progress. Detailed provisions were included in Clause 5 of the sale agreement which acknowledged that Watling Roche would be entitled to the full benefit of work in progress and would assume responsibility for it but would pay the applicants’ outstanding fees and disbursements in respect of that work in the manner set out in the sale agreement.
In respect of work in progress which was completed by judgment or settlement, the amounts recoverable were to be allocated in accordance with the provisions of the sale agreement, namely, in payment of the disbursements incurred by the applicants, then in payment of the Watling Roche’s disbursements reasonably incurred in relation to that work in progress, then the balance was to be paid “pro rata to Shiels & Glover and Watling Roche on the basis of the proportion that their respective fees bears to the aggregate of the Fees and the Watling Roche fees”. The fees in respect of work in progress were set out in Schedule 7 to the agreement but were not copied for the purposes of this appeal. They are referred to as the “Schedule 7 fees”. In addition to the Roches’ personal obligation to pay the Schedule 7 fees in the manner set out in the sale agreement the Roches gave undertakings in their capacity as solicitors to pay the amounts owing.
The fees and disbursements in relation to work in progress matters were to be paid on the earlier to occur of 60 days from the receipt of the judgment or settlement monies paid to any relevant matter or the fourth anniversary of a date specified in the agreement. That specified date was 3 August 1998. The fourth anniversary of that date was 3 August 2002. In other words, the obligation to pay for the applicants’ interest in the work in progress crystallised on that date.
The sale agreement contained a provision that the obligations and liabilities would be binding on the parties “and each of their respective successors in title, legal personal representatives and permitted assigns”.
By separate deed, a fixed charge was given by the partners of Watling Roche to secure the rights of the applicants in respect of the work in progress. The charge provided for the appointment of a receiver upon default. It also provided that the Roches were not to dispose of, create any interest in, or part with possession of the property secured by the charge without the consent of the applicants.
Over two years later, on 31 October 2000, Barry Joseph Roche, as trustee for the Watling Roche Practice Trust, entered into a deed of agreement described as an agency agreement with the respondents (the Blumers) in respect of the legal practice conducted by the Roches in the name Watling Roche. Barry Joseph Roche, as trustee for the Watling Roche Practice Trust, is described in that agreement as “the Principal”.
There is no explanation in the agency agreement as to how the practice came to be run by the Watling Roche Practice Trust but the agreement recites the entitlement or obligation on the part of the Principal to record on behalf of the applicants monies due from clients. The agreement also entitled the Blumers to undertake work on the legal matters relating to the firm’s clients subject to payment to the Principal of the amounts recovered from the clients that relate to the applicants’ work and the amounts recovered that relate to the Principal’s work. The conditions for recovery of fees and disbursements are substantially the same as in the sale agreement. A particular provision is an obligation that the Blumers “will honour the commitments and obligations binding on the Principal arising from the Agreements between Chris Roche and Barry Roche, Peter Sheils and Peter Glover and associated entities”. This may be taken as a specific reference to the sale agreement. The agency agreement, however, requires the Blumers to pay to Barry Roche the fees and disbursements chargeable in respect of the client files and to which Barry Roche and Christopher Roche were obligated to the applicants under the sale agreement. These monies were to be paid within 60 days of settlement or judgment or, in any event, by 1 November 2004.
On 3 August 2002, the aggregate of the amounts due under the sale agreement became due and payable by the Roches to the applicants. The Roches did not make any payment. By action in the Supreme Court, the applicants, on 4 April 2003, obtained judgment for $423,487.94 plus interest against the Roches. That judgment remains unsatisfied.
It is alleged that at a time after this event, the Blumers entered into a loan agreement with Pia Services Ltd which is said to be a company controlled by the Roches. The amount of the loan to the Blumers was $844,180.08 to be repaid to Pia Services Ltd by 26 monthly instalments of $40,000.00 and a final instalment of $274.91. It is further alleged that the sum of $844,180.08 was paid by the Blumers to the Principal under the agency agreement in release of all obligations to pay any further monies under the agency agreement.
The pleadings
The original statement of claim claimed that by entering into the agency agreement, the Blumers, in effect, became the successors and assigns of the Roches and the alleged or approved transfer effected by the agency agreement was an act of default under the charge agreement between the applicants and the Roches. Alternatively, it was claimed that the agency agreement caused the Blumers to assume fiduciary obligations to the applicants.
An amended statement of claim claimed that the Blumers held the settlement or judgment monies in each of the Schedule 7 matters on trust for or under a fiduciary obligation to the applicants. A further claim was made that the Roches held the monies on trust for or under a fiduciary obligation to the applicants and that the Blumers knowingly participated in the Roches’ breaches of trust or fiduciary duty.
By a further amended statement of claim it was expressly pleaded that from 1 November 2004 (the date when the Blumers’ obligations under the agency agreement were to be discharged by payment to Barry Roche) the Blumers owed a fiduciary obligation to the applicants to pay the sum of $448,897.21 (the judgment sum and interest) or to hold that amount subject to the charge agreement.
On 4 November 2005, the Blumers filed an application seeking to strike out the amended statement of claim (even though the further amended statement of claim had been filed at that state). That application did not come on for hearing until 21 March 2006.
On the morning of the hearing of the strike out application before Connolly J, the applicants filed the second further amended statement of claim. That pleading abandoned the claim that had been expressly made in the further amended statement of claim that the Blumers owed a fiduciary obligation to the applicants. The applicants’ claim against the Blumers is now set out in [20]-[24] of that pleading. It alleges:
20.At all material times the Roches held any monies paid to them in relation to a schedule 7 matter on trust for the plaintiffs, or alternatively under a fiduciary obligation to the plaintiffs, to pay to the plaintiffs from that money the amount payable to them pursuant to the 6 July 1998 Agreement in relation to that matter.
21.At all material times after 3 August 2002 the defendants were aware of the trust, or alternatively fiduciary obligation, pleaded in paragraph 20.
PARTICULARS
(i)The first named defendant was the manager of the practice of Watling Roche until she and the second defendant took over control of the practice in the Territory on and from 1 November 2000. She was involved in numerous negotiations between the plaintiffs and the Roches in relation to the latter’s obligations under the 6 July 1998 Agreement from 3 August 1998.
(ii)The plaintiffs, the defendants and the Roches met at the defendants’ residence in Red Hill in the ACT in July 2000 to discuss the proposal that the defendants might buy the Canberra practice of Watling Roche. In the course of the discussions the contents of the 6 July 1998 Agreement and the collateral deed of charge were extensively canvassed.
(iii)Clause 27.1.4 of the 31 October 2000 Agreement obliged the defendants to “honour the commitments and obligations binding on the Principal, (Barry Roche) arising from the Agreements between Chris Roche and Barry Roche, Peter Shields and Peter Glover and associated entities…”. By clause 24.1.1 (sic) the defendants warranted that they had entered into the agreement “…after satisfactory inspection and investigation and with full knowledge of the affairs of the Canberra Office of Watling Roche…”.
(iv)The contents of the letter from the first named plaintiff to the defendants on 11 September 2001 about the matter of Winters.
22.After 3 August 2002 the Roches engaged in a course of dishonest and/or fraudulent conduct designed to avoid their obligations as trustees or alternatively as fiduciaries, as pleaded above.
PARTICULARS
(i)The Roches refused to pay any further sum to the plaintiffs notwithstanding that the defendants were paying to the Roches $40,000 per month derived, in part, from completed schedule 7 matters;
(ii)The Roches kept their whereabouts secret and on or about 7 January 2003 Barry Roche left Australia to reside in Vanuatu.
(iii)The plaintiffs refer to the matters pleaded in paragraph 14 above. These transactions occurred in circumstances where Pia Services Ltd was a company controlled by the Roches.
23.The defendants participated in the Roches’ breaches of trust or breaches of fiduciary duties in the knowledge, or alternatively with reckless indifference to the likelihood, that those breaches were designed to defraud the plaintiffs of the payments due to them pursuant to the 6 July 1998 Agreement.
PARTICULARS
(i)The defendants were aware by September/October 2002 that the Roches had not paid to the plaintiffs the sum due under the 6 July 1998 Agreement on 3 August 2002 and that the Roches were avoiding the plaintiffs. This was notified to the defendants –
(a)in a telephone conversation between Lynne Crossman and the first named defendant in early October 2002;
(b)by letter from the second named plaintiff to the defendants dated 14 October 2002;
(c)by letter from the firstnamed plaintiff to the defendants dated 25 October 2002.
(ii)The defendants were advised by letter dated 11 April 2003 that the plaintiffs had commenced proceedings against the Roches and had obtained judgement against them in those proceedings.
(iii)The defendants were aware that Pia Services Ltd was a company controlled by the Roches by reason that they had been paying the sums which fell due under the 31 October 2000 Agreement to that company from August 2002 to May 2003 at the request of the Roches.
(iv)The defendants were notified in the letter from the first named plaintiff dated 11 April 2003 that the plaintiffs intended to bankrupt the Roches should they fail to pay the judgment date then due.
(v)The only reasonable inference which could be drawn from the nature of the Pia Services transaction was that it was intended to convert that which would have been an asset of the Roches which may have been available to any trustee in bankruptcy to an asset of Pia Services Ltd a company which was apparently at arm’s length from the Roches, but which in fact was controlled by them.
24.As a consequence of the matters pleaded above no payments due to the plaintiffs pursuant to the 6 July 1998 Agreement have been made since 17 October 2002 notwithstanding that settlements, judgement and costs and disbursements have been recovered by the defendants in schedule 7 matters since that date.
In summary, the pleadings now seek to set up the existence of a fiduciary relationship between the applicants and the Roches, a breach of duty by the Roches arising from that relationship and the knowing participation of the Blumers in the fraudulent conduct of the Roches in effectuating that breach of duty.
The declarations
Although no reference is made to it in the pleading, the applicants had earlier sought from this court certain declarations in respect of the construction of the sale agreement. They were obtained in proceedings brought by the applicants against the Roches in SC 453 of 2001. The application sought:
DECLARATORY ORDERS determining the following questions in the construction of a written agreement of 6 July 1998, to which each of the parties to this proceeding is a party, and to which there are no other parties:
(a)Does the aforesaid agreement constitute the First and Second Defendants the fiduciary agents of the First and Second Plaintiffs to earn inchoate fees under the aforesaid agreement on behalf of the First and Second Defendants?
(b)Does the aforesaid agreement treat the inchoate fees as a matter of rights sold and delivered, without fiduciary obligation?
(c)Does the aforesaid agreement mean that the First and Second Defendants are to be indebted to the First and Second Plaintiffs in a sum subject to certain allowances or does it impose an obligation on the First and Second Defendants to act as a fiduciary agent to collect inchoate fees as and when they become debts owing to the First and Second Plaintiffs by third persons?
(d)Does the aforesaid agreement impose any obligation on the First and Second Plaintiffs to make any charges on third persons on behalf of the First and Second Plaintiffs at all?
On 9 November 2001, Gray J made the following orders:
THE COURT DECLARES BY CONSENT THAT: Upon the true construction of the written agreement of 6th July 1998, to which each of the parties to this proceeding is a party and to which there are no other parties:
1.In answer to question (a) of the said Application, the aforesaid agreement does not constitute the First and Second Defendants the agents of the First and Second Plaintiffs to earn fees, being calculated with reference to transferred work in progress, becoming due from former clients of the Plaintiffs in the event of the successful conclusion.
2.In answer to question (b) of the said Application, the aforesaid agreement treats the aforesaid work in progress as a matter of rights sold and delivered by the Plaintiffs to the First and Second Defendants, or a price payable in certain events, without any obligation owing to the Plaintiffs on the part of the First and Second Defendants to seek fees from any retainer or charge fees respecting the work in progress or collect fees respecting the work in progress.
3.In answer to question (c), the aforesaid agreement means that the First and Second Defendants became indebted for the said price, referred to in paragraph 2 above, subject to certain allowances.
4.In answer to question (d), the aforesaid agreement imposes no obligation on the First and Second Plaintiffs to render an account to third persons, whether clients, former clients or otherwise, on behalf of the First and Second Plaintiffs.
The effect of these declarations on the sale agreement was the subject of comment by this court in proceedings brought by the applicants against the Roches. In Glover and Sheils v Roche & Roche [2003] ACTSC 19 (4 April 2003), the applicants obtained the summary judgment referred to in [9] above. In the course of those proceedings, it was argued that the Roches had an arguable defence, among other things, on the basis that the sale agreement required them to recover fees greater than the Workers Compensation Regulation2002 (ACT) permitted. Crispin J was of the view that this submission was inconsistent with the declarations set out in the preceding paragraph. He said (at [32]):
In the face of these declarations, the defendants are estopped from asserting that the contract embodied in the Deed required them to attempt to recover fees from clients, whether in breach of rule 59 of the Workers Compensation Rules or not. The declarations establish that the defendants rather incurred a debt based upon what was described as the price payable for the rights in respect of the work-in-progress that had been sold to them.
Judgment of Connolly J
The existence of the declarations also caused Connolly J to regard the pleadings by the applicants in this matter as an abuse of process, his Honour said at [18]-[20] of his judgment:
18.It seems to me that the present pleadings are premised on the assertion that the sale agreement of July 1998 established a trust or fiduciary obligation on the Roches in relation to fees flowing to the practice for work in progress, that the Roches, by failing to pay monies to the plaintiffs, were in breach of those obligations, and that the present defendants, due to their role in the former firm of Watling Roche, and as purchasers of that practice, were involved in participating in those breaches.
19.The underlying assertion, that the sale involved a trust of fiduciary obligation is, it seems to me clearly contrary to the declarations obtained by consent by the present plaintiffs in the proceedings before Gray J in 2001. Those declarations, it seems to me, are to the effect that the nature of the transaction was simply a sale of rights for a fee to be determined, and answers 1-4 are, in my view, entirely inconsistent with the assertion that the sale agreement established an ongoing trust or fiduciary obligation. Moreover, following the obtaining of declarations that the nature of the deed of sale was “a matter of rights sold and delivered by the Plaintiffs to the First and Second Defendants for a price payable in certain events”, the present plaintiffs brought a simple debt claim against the Roches, and sought summary judgment on that claim. They were successful in those proceedings, and successfully resisted an attempt by the Roches to set up a defence based on an ongoing fiduciary or trust relationship. Crispin J specifically rejected such a defence based on the plaintiffs argument that the defendants (the Roches) were estopped by reason of the declaratory relief previously obtained.
20.It seems to me that to now permit the plaintiffs to seek to assert that the sale deed did establish an ongoing fiduciary obligation or trust would, by being entirely contrary to a declaratory order of this court, and a judgement debt obtained in reliance on those orders, be an abuse of process of the court, and should not be permitted. I would accordingly order that the proceedings be struck out.
The applicants’ submission on abuse of process
The applicants contest this finding on the ground that the existence of a fiduciary relationship between the Roches and the applicants was not necessarily inconsistent with the declarations. It is said that the declarations should be narrowly construed and that it was still open to the applicants to argue that, in all the circumstances pleaded in the statement of claim, the Roches owed fiduciary obligations to the applicants in relation to the debts arising pursuant to the terms of the sale agreement. In particular, it is submitted that the applicants have an arguable case that the Roches, in the particular circumstances of the relationship, were required to act as fiduciaries in relation to monies recovered in the Schedule 7 matters.
It is true, as the applicants claim, that Connolly J seems to have adopted a broad approach to the effect of the consent declarations. It must also be said that those declarations are clearly not exhaustive of the circumstances which might permit a fiduciary relationship to exist between the Roches and the applicants.
What has happened in this case is a salutary lesson in courts becoming involved in making declarations by consent. It was the applicants in these proceedings who made the application. Both sets of parties to the application for declaration were experienced solicitors ostensibly wishing to clarify what appeared to be an arms length transaction. Accordingly, the declarations were made without any pleading of the background facts or explanation as to the purpose to be served by the declaration. In hindsight, in this case, this is regrettable. Parties generally might regard themselves on notice for at least those requirements of proper pleadings or background information being a pre-requisite to this court’s consideration of the making of consent declarations in like circumstances.
These considerations lead to an acceptance of the applicants’ submission that a narrow construction be given to the declarations and that their effect go no further than is absolutely necessary. Their existence does not justify the finding made by Connolly J that it would be necessarily contrary to those declarations to find a fiduciary relationship in the circumstances of this case.
The existence of a fiduciary relationship in the present case
As Connolly J noted, the applicants’ case is premised upon the existence of a fiduciary relationship between themselves and the Roches. That relationship is said to result from the sale agreement and the collateral charge and the applicants rely upon the special incidents which they identify as giving the relationship under those documents its fiduciary character. It is not a relationship that has been recognised in the authorities although that clearly is no bar to its existence. In Hospital Products Ltd v United States Surgical Corporation and Others (1985) 156 CLR 41 at 102, Mason J observed:
The categories of fiduciary relationships are infinitely varied and the duties of the fiduciary vary with the circumstances which generate the relationship. Fiduciary relationships range from the trustee to the errand boy, the celebrated example given by Fletcher Moulton LJ in his judgment in In re Coomber , in which, after referring to the danger of trusting to verbal formulae, he pointed out that the nature of the curial intervention which is justifiable will vary from case to case. In accordance with these comments it is now acknowledged generally that the scope of the fiduciary duty must be moulded according to the nature of the relationship and the facts of the case … [footnotes omitted]
In Breen v Williams (1996) 186 CLR 71 at 82, Brennan CJ also observed:
Fiduciary duties arise from either of two sources, which may be distinguished one from the other but which frequently overlaphttp:/ThomsonNXT4/links/Handler.aspx?tag=e8ce9182e5992b5bc32d7991c8a08cee&product=cl. One source is agencyhttp:/ThomsonNXT4/links/Handler.aspx?tag=87298103c1d130d2fee3190d51d6f6fc&product=cl; the other is a relationship of ascendancy or influence by one party over another, or dependence or trust on the part of that otherhttp:/ThomsonNXT4/links/Handler.aspx?tag=97cc3bf795ed499b999a7757a4ff4c3e&product=cl. Whichever be the source of the duty, it is necessary to identify “the subject matter over which the fiduciary obligations extend”http:/ThomsonNXT4/links/Handler.aspx?tag=87298103c1d130d2fee3190d51d6f6fc&product=cl. [footnotes omitted]
There is no single test that can be applied to the particular circumstance. A helpful exposition of what may be involved in the process of identifying what might be a fiduciary relationship is referred to in Hospital Products Ltd v United States Surgical Corporation and Others (supra at 96-97) by Mason J:
The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v. Boardman), viz, trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions “for”, “on behalf of”, and “in the interests of” signify that the fiduciary acts in a “representative” character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.
It is partly because the fiduciary’s exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed: see generally Weinrib, “The Fiduciary Obligation”, University of Toronto Law Journal, vol 25 (1975), pp 4-8. [footnotes omitted]
There are three general characteristics which may be taken from Mason J’s analysis. They are referred to by Wilson J in Frame v Smith et al [1987] 42 DLR (4th) 81 at 99:
(1)The fiduciary has scope for the exercise of some discretion or power.
(2)The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests.
(3)The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.
Her Honour goes on to remark as to the first characteristic that:
… unless such a discretion or power is present there is no need for a superadded obligation to restrict the damaging use of the discretion or power…
The circumstances of the present case may permit the exercise of a discretion or power in respect to the work in progress the subject of the sale agreement but that cannot be applied to the obligation on the Roches to pay in respect of the work in progress the amounts that were outstanding on 3 August 2002.
The fiduciary relationship which the applicants claim is that between the Roches and the applicants. The Blumers’ liability depends upon an extended application of the second part of the principle in Barnes v Addy (1874) 9 LR Ch App 244 at 252 stated by Lord Selborne LC:
Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
In Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, Gibbs J referred to this passage and went on to consider whether the principle applies to a liability on strangers who knowingly participate in a breach of fiduciary duty committed by a person who is not a trustee or is at most a constructive trustee. He referred to Selangor United Rubber Estates Ltd v Cradock [No 3] [1968] 1 WLR 1555 and concluded:
However, in my judgment, the principle under discussion extends to the case where a stranger has knowingly participated in a breach of fiduciary duty committed by a person who is not a trustee even though nothing that might properly be regarded as trust property — even property stamped with a constructive trust — has been received. The strict rule of equity that forbids a person in a fiduciary position to profit from his position appears to be designed to deter persons holding such a position from being swayed by interest rather than by duty (see Bray v Ford [1896] AC 44 at 51); it is “a rule to protect directors, trustees, and others against the fallibility of human nature”: Costa Rica Railway Co. Ltd. v. Forwood [1901] 1 Ch 746 at 761. If the maintenance of a very high standard of conduct on the part of fiduciaries is the purpose of the rule it would seem equally necessary to deter other persons from knowingly assisting those in a fiduciary position to violate their duty. If, on the other hand, the rule is to be explained simply because it would be contrary to equitable principles to allow a person to retain a benefit that he had gained from a breach of his fiduciary duty, it would appear equally inequitable that one who knowingly took part in the breach should retain a benefit that resulted therefrom. I therefore conclude, on principle, that a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation.
See also Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 236 ALR 209 at [159]-[163].
The pleading of the fiduciary relationship in the present case
The grounds given in the applicants’ written submissions for there being a fiduciary relationship are said to be:
(i)The fact that the applicants transferred possession of their practice to the Roches for nominal payment in a situation where the Roches would have effectively total control over the future conduct of that practice;
(ii)The fact that under the contracts made between them the applicants became reliant upon the Roches to progress the client matters to the point of recovery and then to account in each matter for the pre-assessed sum (or as reduced as per 4.7 of the statement of claim) representing the value of the applicants’ interest in the file as at 3 August 1998;
(iii)The fact that the applicants as a consequence of (i) and (ii) were vulnerable to abuse by the Roches of their position of control; and,
(iv)The specific undertaking given by the Roches in their capacity as solicitors to pay the amounts due under the agreement.
These grounds may be drawn from the matters pleaded and the particulars given. They put at the highest what the applicants plead as to the existence of a fiduciary relationship between the applicants and the Roches.
The applicants concede that the effect of the declarations:
… may well preclude the applicants from arguing that the Roches were fiduciaries based upon them being agents of the applicants for the purpose of earning fees in the schedule 7 matters so as to be able to pay those fees to the applicants. (Their emphasis)
That concession does not deal with what is declared by the declarations concerning the obligation to seek and collect fees. In fact, the effect of the declarations must extend to the Roches not being under any obligation to seek fees from any retainer or charge or collect fees in respect of the work in progress (see declaration 2 at [20] supra).
In fact, these aspects of the declarations take much of the force from circumstances upon which the applicants would wish to rely as evidencing the fiduciary relationship. The declarations seem to effectively remove those particular aspects of the principal and agent relationship that may otherwise have given rise to a fiduciary relationship. That means that for the pleadings to disclose a reasonable cause of action, there is a greater need to particularise and identify the circumstances which might be said to be the breach of the fiduciary obligation in respect of which the Blumers had allegedly participated.
What the pleadings do not do is to identify the nature of the obligation owed by the Roches to the applicants. Nor do the pleadings particularise in any way any purported breach of that obligation. For instance, if the nature of the duty was to prefer the applicants’ interests to those of the Roches, that might no doubt be established by instances of the Roches withholding Schedule 7 monies received by the Roches through the agency of the Blumers up to 3 August 2002. However, there is no allegation that occurred or that the Blumers knowingly participated or were fraudulently involved in any such occurrence.
The necessity and importance of being able to properly characterise the relationship from matters pleaded as the facts is emphasised by the comments of Professor P D Finn (now Finn J of the Federal Court) in T G Youdan (Ed), Equity, Fiduciaries and Trusts, Carswell,1989, at 38:
A fiduciary responsibility presupposes, at least, that the relationship authorises or requires a party to do an act or acts for the other’s benefit, though there is nothing necessarily fiduciary in this phenomenon alone. It is a characteristic common both to a trust and to a simple contract. And it is trite law that “a contract, in itself, does not impose fiduciary duties on contracting parties”. It is the epitome of the relationship designed to serve the several interests of the parties. This brings out the importance of the inquiry suggested by the trust. The matter of concern is not what a party can or must do for the other but the purpose or purposes of the relationship itself and of the parties in it: to further their several, their joint, one’s only interests or a combination of these if the relationship has discrete parts and purposes.
This poses a bare question of characterisation about which little can be said by way of elaboration. At the end of the day it asks no more than: whose interests does the relationship and the functions to be performed therein exist to serve.
Even if full effect is given to what the applicants say are the grounds for the existence of a fiduciary relationship, that can only be related to that aspect of the contract between the applicants and the Roches concerning the payment by the Roches to the applicants of the work in progress matters set out in Schedule 7 within 60 days of judgment or settlement. The receipt of those monies by the Roches could, perhaps, be said to create a trust (although the existence of the declarations makes that circumstance unlikely). The same cannot be said in respect of the contractual obligation to pay for the work in progress matters set out in Schedule 7 on 3 August 1998. That obligation arises on a basis irrespective of the Roches receiving Schedule 7 fees or disbursements. It cannot be characterised as anything other than a debt due by the Roches to the applicants on that date. A fundamental distinction is to be made between trust and debt in Jacobs’ Law of Trusts in Australia, 7th Ed, Butterworths, 2006 where the established principle is set out at [213]:
A debtor is not a trustee for the creditor since there is no identifiable fund which the latter is entitled to compel the former to apply for the creditor’s benefit. It may be difficult to tell whether a trust has been created or merely a debt incurred. The distinction is most important when any question arises of tracing the money into other property upon which it may have been spent. If there is only a debt, the creditor is limited to the common law remedy of action on that debt. If the money was paid on trust, the payer may trace the money into any other identifiable property which the payee may have purchased with it. The answer to the question whether a debt or trust was created in any particular case depends upon the intention of the parties. If the parties intended that the one receiving the money should hold that money for the benefit of the other or for the benefit of a third party, then it will be a trust because there is actual trust property. If the payee was entitled to use the money a his or her own, being under an obligation merely to repay the same amount of money at a future time, then the payer is merely a debtor.
It is the distinction that is made in the passage cited that is material in considering the allegations presently made in the second further amended statement of claim.
The allegations are all time framed, as far as the Blumers’ participation is concerned, to a period after 3 August 2002. It was a clear breach of the sale agreement for the Roches to not pay the monies for the works in progress payment which crystallised on 3 August 2002. However, it is difficult to see what superimposed obligation arising from any asserted fiduciary relationship can be placed on this contractual requirement, different from the contractual obligation to pay the sum due. Further, there is no allegation that the Blumers were involved in any failure to meet the contractual requirement at the time it arose even if that failure was in some unspecified way a fiduciary obligation undertaken by the Roches.
In Hospital Products (supra at 97), Mason J said:
That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.
The pleadings are directed towards what is said to be “a course of dishonest and/or fraudulent conduct designed to avoid” the Roches’ obligations as fiduciaries. That assertion does not go far enough so as to identify a breach of duty other than the contractual breach constituted by the non-payment of monies due under the contract. For this reason, it seems that the present pleadings are seriously deficient in that they fail to make out a reasonable cause of action of knowing involvement in a breach of fiduciary duty. They should have been struck out, not as an abuse of process, but under the Supreme Court Rules O 29 r 4 as disclosing no reasonable cause of action.
Defect in the form of the pleading
Connolly J was of the view that the pleadings were also defective in not pleading the capacity in which Barry Roche was acting in entering into the agency agreement with the Blumers. That agreement, it may be recalled, was between Barry Joseph Roche, as trustee for the Watling Roche Practice Trust, and the Blumers. The applicants took the view that the capacity in which Mr Roche purported to act was irrelevant to the applicants’ claim against the Blumers. That is not strictly so, but there appears to be no issue between the parties as to the Blumers, by the agency agreement, undertaking certain of the obligations owed by the Roches to the applicants under the sale agreement. The issue of whether Barry Roche was acting in a personal capacity or as trustee for a trust may be an important factor in Blumers’ payment of monies in the Pia Services transaction in light of Barry Roche’s bankruptcy but it is not essential to the applicants’ cause of action against the Blumers. The pleadings should not have been struck out on this basis.
Notice of contention
In the event that this court was minded to grant leave to appeal, the Blumers sought to file a notice of contention. That notice challenged the applicants’ claim in the second further amended statement of claim to “equitable compensation in the sum of $423,487.94 plus interest”. The claim is clearly referable to the judgment awarded to the applicants against the Roches by Crispin J on 4 April 2003. There is considerable force in what can be taken as the Blumers’ contention that the pleading does not make clear how the liquidated claim for equitable compensation relates to the breach of fiduciary duty upon which the applicants presumably rely.
Further, the Blumers complain by notice of contention that the prayers for relief in the second further amended statement of claim seek an inquiry into the Schedule 7 amounts received since 3 August 2002. However, again no breach of fiduciary duty is alleged before that date in respect of the Schedule 7 amounts. If there has been any breach, it is in respect of the amount due pursuant to the sale agreement as at that date. After that date, there is no obligation under the sale agreement to account for amounts received. These matters would seem to underline the defective nature of the pleadings which have been identified earlier.
In view of the fact that the pleading must be struck out, it is unnecessary to take any further the matters raised in the notice of contention.
Conclusion
Leave to appeal should be granted but the appeal against Connolly J’s order striking out the second further amended statement of claim should be dismissed with costs.
I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.
Associate:
Date: 20 February 2008
Counsel for the Applicants: Mr R L Crowe SC
Solicitor for the Applicants: United Legal
Counsel for the Respondents: Mr F J Purnell SC with Mr D J Mossop
Solicitor for the Respondents: Hill & Rummery
Date of hearing: 1 May 2007
Date of judgment: 20 February 2008
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