Hajac Nominees Pty Ltd v Real Estate and Business Agents Supervisory Board - [1999] WADC 53

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: HAJAC NOMINEES PTY LTD & ORS -v- REAL ESTATE AND BUSINESS AGENTS SUPERVISORY BOARD [1999] WADC 53

CORAM: WISBEY DCJ

HEARD: 6 AUGUST 1999

DELIVERED : 1 SEPTEMBER 1999

FILE NO/S: CIV 5023 of 1998

BETWEEN: HAJAC NOMINEES PTY LTD (008 959 260)
First Plaintiff
DR GEOFFREY GILD
ELIZABETH GILD
Second Plaintiffs
AND
REAL ESTATE AND BUSINESS AGENTS SUPERVISORY BOARD
Defendant

Catchwords:

Real estate and business agents - Defalcation by officer or servant of licensee - Whether defalcation by licensee, in the course of the business of the licensee - Right of client to indemnity from Fidelity Fund

Legislation:

Real Estate & Business Agents Act 1978, ss4, 68, 84, 107, 110, 116 and 117

Result:

Judgment for plaintiffs for $100,000 and costs to be taxed

Representation:

Counsel:

First Plaintiff                :     Mr P J Hannan
Second Plaintiffs           :     Mr P J Hannan
Defendant:     Mr R L Hooker

Solicitors:

First Plaintiff                :     Hammond King Touyz
Second Plaintiffs           :     Hammond King Touyz
Defendant:     Lynette Magro

Case(s) referred to in judgment(s):

Australian & New Zealand Banking Group Ltd v Law Society of NSW (1976) 1 NSWLR 686
Daly v Sydney Stock Exchange (1982) 2 NSWLR 421
Real Estate & Business Agents Supervisory Board; ex parte Cohen (1999) WASCA 47

Case(s) also cited:

Armagas Ltd v Mundogas SA [1986] 1 AC 717
Baker v Law Institute of Victoria [1974] VR 388
Cohns Industries Pty Ltd v DFCT (1979) 24 ALR 658
Diamond v Bank of London & Montreal Ltd [1979] 1 QB 333
Hellier v Hinton [1998] WASCA 332
Heraudeau v Law Institute of Victoria [1991] 2 VR 518
Hungerfords v Walker (1989) 171 CLR 125
Law Institute of Victoria v Baker (1974) 48 ALJR 160
Lumsden v Auctioneers & Agents Committee, unreported; SCt of Qld; Shepherdson J; 20 August 1998
Orsi v Legal Contribution Trust [1976] WAR 74

WISBEY DCJ: This action was commenced by the plaintiffs against the Real Estate and Business Agents Supervisory Board by writ of summons filed 23 December 1998. The statement of claim was filed on 6 January 1999 and a defence thereto filed on 3 February 1999. The defence admits the allegations in paras 4, 5, 30, 31 and 32 of the statement of claim, namely that the defendant is a body corporate established by s6(2)(a) of the Real Estate & Business Agents Act 1978; that the defendant administers the Real Estate & Business Agents Fidelity Guarantee Fund pursuant to s107 of the Act; that on 31 March 1998 the plaintiffs made a claim for $101,000 upon the fund pursuant to s117 of the Act; and that the defendant refused the claim. The defence otherwise puts the plaintiff to the proof of the allegations contained in the claim. A consent order pursuant to O43 r16 made 17 March 1999 provided inter alia that the trial of the action be on affidavit, although in the event oral evidence was also given.
Rather than analyse the pleadings, I propose to summarise the principal affidavit of Geoffrey Michael Gild (Gild) sworn 1 April 1999 to identify the issue or issues before the Court. The affidavit relevantly provides that:
(i)The firstnamed plaintiff is the trustee of the Geoffrey Gild Family Trust, the firstnamed second plaintiff being a director thereof, and the secondnamed second plaintiff being the firstnamed second plaintiff's wife.
(ii)In or about the middle of 1997 Gild met one Bridget Paterson (Paterson) who advised him that she was a real estate agent with a real estate agency Ideal Realty of 300 Fitzgerald Street, North Perth. Gild saw Paterson on a number of other occasions.
(iii)As a result of discussions with Paterson, Gild became interested in a property at Cornwall Street, Dianella belonging to the Freemasons (the property). It was Gild's intention to join with others in purchasing the property, which was then to be onsold, hopefully producing a quick profit. As the scheme developed it was Gild's understanding that one Roy Young would acquire a 50% interest, Paterson a 25% interest, and Gild the remaining 25% interest.
(iv)Gild understood that the purchase price of the property was in the vicinity of $4 million.
(v)Having inspected the property Gild agreed to pay Paterson the sum of $100,000 being his share of the deposit, and understood that the money was to be paid into the account of a company Wavelock Pty Ltd to be held in trust pending the purchase. He understood that the Wavelock holding account was operated by Ideal Realty.
(vi)Gild claimed in his affidavit to have signed an offer and acceptance in respect of the property, although when cross‑examined before me, accepted that to be an error. He acknowledged that the purchaser named on the offer and acceptance was Cityform Corpn Pty Ltd, his understanding being that each of the proposed investors would hold shares in that company proportionate to their respective investments.
(vii)On or about 22 June 1997 Gild handed Paterson three cheques payable to Wavelock; $28,000 drawn on the account of the first plaintiff, $10,000 drawn on the account of the Rose Family Trust, and $12,000 drawn on an account held by the second plaintiffs with Macquarie Investment Management Limited. On 24 June 1997 he handed Paterson a further cheque in the sum of $50,000 drawn on the account of the Rose Family Trust, that money having been borrowed from the Rose Family Trust by the first plaintiff.
(viii)Paterson provided Gild at his request with photocopies of deposit slips to acknowledge receipt of the sum of $100,000, and with a letter on a letterhead Glendower House Pty Ltd which relevantly reads: "Received from Hajac Nominees Pty Ltd C/o Dr G Gild, 9 Mirrabooka Avenue, Nollamara, the sum of $100,000 being 25% share of deposit payment to be made with the offer to purchase the parcel of land known as 101 Cornwall Street, Dianella, for the sum of $4.1 million".
(ix)Gild became concerned as to the progress of the transaction and a meeting was arranged between Paterson, Young (the other purchaser), Ellis (representing the vendor) and Gild. Young did not attend the meeting, but it served to reassure Gild that the purchase was being appropriately addressed.
(x)In late December 1997 Gild provided Paterson with a further cheque for $1,000 drawn on the account of the first plaintiff, being a contribution towards the costs of incorporating the purchasing company Cityform.
(xi)Shortly after providing the cheque referred to in the preceding paragraph, Gild became aware of an article in the West Australian newspaper suggesting that Paterson had embezzled a considerable sum of money from another person. Gild immediately demanded a return of the moneys paid to Paterson, and instructed solicitors to institute recovery proceedings. In the result those proceedings were unsuccessful.
In a further affidavit sworn 25 April 1999 Gild annexed notes he had made at the time of his discussions with Paterson, which indicate his understanding of the transaction. He also annexed a company extract for Ideal Realty Pty Ltd which records that Paterson was a director and secretary thereof from 20 November 1988 until it was delisted on 24 June 1997. She was also a shareholder of the company at all relevant times.
In an affidavit sworn 31 March 1999 Patricia Mary Kelly deposed to the fact that she met Paterson in about 1987 and commenced working at Ideal Realty in 1990. She understood that the business was controlled by Paterson and one Studman, and they worked in conjunction with a licensee. The day to day business operations of Ideal Realty were controlled by Paterson and Studman until the death of Studman in December 1995, from which time Paterson was in sole control of the day to day running of the agency. Ms Kelly recalled Gild attending the agency to meet with Paterson on a number of occasions in 1997. Her evidence confirmed that business cards, correspondence, and the general conduct of the agency, necessarily lead to the inference that Paterson was directly involved in its real estate activities.
Anthony Ellis, who was at the relevant time Chief Executive Officer of the Grand Lodge of Freemasons of Western Australia, swore an affidavit on 31 March 1999 in which he indicated that in 1997 he had dealings with Paterson, on his understanding in her capacity as a representative of Ideal Realty, that understanding being based on her activities generally and his dealing with her. He received an approach from Paterson concerning the Dianella property and in due course she presented an offer made by a company Cityform Pty Ltd to purchase the property. He also confirmed that he attended a luncheon meeting at the Hyatt Hotel with Paterson and Gild, and that one Young, who was expected to be present, did not attend. He deposed to the fact that although Paterson presented the Cityform offer, it was not accepted.
In an affidavit sworn 1 April 1999 Henry Roy Young, a company director, stated that he had dealings with Paterson as early as 1996 concerning a proposed purchase of Goundrey Winery in Mount Barker. Paterson introduced herself as a real estate agent from Ideal Realty. In 1997 he was contacted by Paterson concerning a proposed purchase of land in Cornwall Street, Dianella, belonging to the Freemasons, and he inspected the property with Paterson. He subsequently had discussions with her at the offices of Ideal Realty in connection with the proposed purchase, and gained the impression that Paterson was the only person associated with the agency. In the event Young declined to proceed further.
Notwithstanding that the defendant essentially puts the plaintiffs to the proof of their claim and consequently does not have the right to put forward a positive evidentiary case, it filed an affidavit of Kirsty Dale Blum sworn 4 June 1999. The plaintiffs did not object thereto, and in fact the affidavit simply confirms that on 3 April 1998 the defendant received notice of the plaintiffs' claim against the fidelity guarantee fund in an amount of $101,000 and legal costs of $5,000. The defendant disallowed the claim on 31 July 1998 and its reason for so doing is articulated in a letter dated 19 August 1998 as follows:
"The Board formed the view that in the absence of an authority from the vendor to effect the sale of the property, the defalcation appeared to be that of Ms Paterson. Although Ms Paterson was a registered sales representative for Ideal Realty Pty Ltd there is no evidence to indicate that the principal of Ideal Realty Pty Ltd was employed or had knowledge of the dealings between your client and Ms Paterson. The Board was satisfied that the defalcation occurred in Ms Paterson's personal capacity and not in the course of her employment with the licensee Ideal Realty Pty Ltd."
In the result the controversy between the parties is one of law and of fact.
The defendant's position, which identifies the issues for resolution is set out in its outline of submissions dated 5 August 1999 as follows:
"7.As a real estate agent (as defined in s4(1)) it was the business of Ideal Realty to, in essence, act as agent for consideration in money or monies worth, as commission from a reward or remuneration, in respect of real estate transactions (as defined in s4(1)). Accordingly, the fundamental question which arises in these proceedings, and upon which the Plaintiffs bear the onus of proof, is whether the relevant criminal or fraudulent conduct perpetrated by Ms Paterson towards the Plaintiffs can be said to have occurred 'in the course of' the real estate business of the licensee Ideal Realty. (cf approach of Miller J in Hellier v Hinton [1998] WASCA 332 at 10, in context of determining whether a defendant/respondent had on the evidence truly performed 'real estate transactions' and was thereby guilty of breaches of s26 of the Act)."
Essentially the defendant accepts that there was a defalcation by Paterson, and that there was consequential loss, but claims that the defalcation was by Paterson in a personal sense and cannot be categorised as a "defalcation by a licensee".
The provisions of the Act essentially relevant to a consideration of the issues are as follows:
The Fidelity Guarantee Fund is established by s107 of the Act.
Section 110 relevantly provides that there shall from time to time be charged to the Fidelity Fund:
"(a)The amount of all claims, including costs, allowed or established against the Fidelity Fund;
(b)All legal expenses incurred in defending claims made against the Fidelity Fund, or otherwise incurred in relation to the Fidelity Fund."
Section 116(1) provides that:
”The Fidelity Fund shall be held and applied for the purpose of reimbursing persons who may suffer pecuniary loss or loss of property by reason of any defalcation by a licensee during any period when he was the holder of a current triennial certificate, but reimbursing only to the extent of the defalcation of the licensee."
The term "licensee" is defined in s4 as "a person licensed under this Act".
The term "defalcation by a licensee" is defined in s4 as "includes criminal or fraudulent conduct:
(a)of a licensee;
(b)of any one or more of the servants or agents of the licensee;
(c)of a person who is a partner in the business of the licensee; or
(d)where the licensee is a firm and a body corporate is a partner in the firm or where the licensee is a body corporate, of any one or more of the directors, officers, servants, or agents of the body corporate,
in the course of the business of the licensee and from which arises pecuniary loss or loss of property to any other person."
Section 117(1) provides that the Board may receive and settle any claim against the Fidelity Fund at any time after the defalcation in respect of which the claim arose or has occurred, and no person is entitled without leave to commence any action in relation to the Fidelity Fund unless the Board has disallowed the claim, and unless and until the claimant has exhausted all relevant rights of action and other legal remedies available against the defaulting licensee or any other person in respect of the loss suffered by the claimant.
Subsection (2) provides that a person is not entitled to recover from the Fidelity Fund an amount greater than the balance of the loss suffered by him after deducting from the total amount of his loss, the amount or value of any money or other benefits received or receivable by him from any source other than the fund.
Subsection (3) provides that there can be no claim for interest against the fund.
The defendant states that it has a statutory responsibility under the Act to lawfully administer the fund, and to see that moneys therefrom are only applied for the purposes envisaged by the Act.
"Accordingly the Board does not seek to mount an affirmative case against the plaintiffs (as is apparent from its defence) but puts the plaintiffs to proof of each and every element necessary at law to establish an entitlement to relief in this action."
The defendant raises the following matters for consideration by the Court and/or makes the following submissions:
1.It is necessary to establish defalcation by a licensee in s4(1) - that is that the requisite criminal or fraudulent conduct was that of one or more of the persons stipulated in paras (a) to (d) of the definition and in the course of business of the licensee.
2.A licensee means a person licensed as a real estate agent as opposed to a real estate representative. In order to lawfully carry on business a real estate agent must be licensed under the Act and hold a current triennial certificate in respect of the licence.
3.The defendant accepts (and indeed it cannot be suggested otherwise) that Paterson relevantly engaged in criminal or fraudulent conduct.
4.There is no evidence that Paterson was a licensee although the defendant concedes that it is common ground that the firm Ideal Realty, the trading name of Ideal Realty Pty Ltd, was at the relevant time licensed as a real estate agent under the Act, and held a current triennial certificate.
5.The defendant contends that the fundamental question arising in these proceedings is whether the defalcation perpetrated by Paterson occurred "in the course of the real estate business of the licensee Ideal Realty".
6.The defendant suggests that there is no direct evidence of Ideal Realty selling or negotiating the sale of the property as part of its real estate business and the evidence does not suggest or imply that Paterson "acted as agent for consideration as commission, reward or remuneration, in respect of a real estate transaction" (see definition of real estate agent in s4(1)).
7.The defendant points to Gild's commercial naivety, and failure to take appropriate steps for his own financial security. (That overlooks the fact that he placed trust in Paterson as the ostensible representative of Ideal Realty).
8.Paterson engaged in the transaction in a personal capacity.
9.The subjective belief of Gild as to the capacity in which Paterson was dealing with him, is not determinative of any issue before the Court.
Having regard to the fact that the plaintiffs carry the burden of proof according to the civil standard it is perhaps unusual to first deal with the defendant's submissions, but by so doing the contentious issues are properly identified.
In their submissions the plaintiffs identify the elements they must establish to succeed in the action as follows:
(a)There must be defalcation.
(b)The defalcation must be by the licensee of the real estate agency or a servant or agent of that licensee.
(c)The defalcation must occur in the business of the licensee.
(d)The defalcation must result in pecuniary loss to the claimant.
(e)The Board must first have disallowed a claim on the fund.
(f)The claimant must have exhausted all other rights of recovery.
On the evidence before me and the concessions rightly made by the defendant, there can be no doubt that the plaintiffs have established (e) and (f). I will therefore consider each of the issues arising from subparas (a) to (d).
(a) Was there a defalcation?
I have already referred to the definition of defalcation which is essentially "criminal or fraudulent conduct". The term "defalcation" was addressed by Samuels JA in Daly v Sydney Stock Exchange (1982) 2 NSWLR 421 at 428 when his Honour relevantly said:
"The Oxford English Dictionary defines 'defalcation' as 'a fraudulent deficiency in money matters', and Webster as 'misappropriation of money: embezzlement'. Apart from these definitions I consider, alike with Powell J, that the ordinary meaning of the word essentially involves the presence of fraudulent or dishonest dealing."
Section 68(1) of the Act requires that every agent holding a current triennial certificate is required to maintain a trust account with an authorised financial institution into which the agent is required to pay, as soon as practicable, all moneys received by the agent for or on behalf of any person in respect of a transaction. The term "transaction" is defined in s4(1) of the Act as "transaction means a real estate transaction or a business transaction or both a real estate transaction and a business transaction". In the present case if the moneys paid by Gild to Paterson were paid to and received by her in her capacity as the representative of Ideal Realty, that money was required to be placed into and remain in the firm's trust account until the object of the payment was achieved. Clearly that has not been the case, and that breach, by virtue of the provisions of s84 of the Act, would constitute criminal conduct and amount to a defalcation. The money was received by Paterson in the capacity aforesaid. In any event, the evidence establishes that Paterson misappropriated the money, and there can be no doubt that conduct constituted a defalcation.
(b) Was the defalcation by a licensee?

A licensee is a person licensed under the Act, and the person required to be licensed under the Act is relevantly a real estate agent, being a person whose business either alone or as part of or in connection with any other business, is to act as agent for consideration in money or moneys worth, as commission, reward or remuneration, in respect of a real estate transaction (s4).
The term "real estate transaction" relevantly means a sale, exchange, or other disposal, and a purchase exchange or other acquisition of real estate, and includes an option to enter into a real estate transaction (s4).
Section 26 provides that a person shall not carry on business or hold himself or itself out as carrying on business as a real estate agent unless he or it is licensed as such under the Act and holds a current triennial certificate in respect of the licence. Licences may be granted to a firm (s28) and/or a body corporate (s29) and upon licensing, a triennial certificate issues (s31).
At all material times the company Ideal Realty Pty Ltd conducting the business Ideal Realty, was a licensee; that is was licensed as an agent under the Act, and that fact is evidenced by the triennial certificate which issued on 16 April 1997. That certificate issued as a consequence of an application for renewal of a triennial certificate for Ideal Realty Pty Ltd dated 11 April 1997 in which application one Robert Douglas Sterling declared himself as person in bona fide control of the business operated under the triennial certificate, and that Paterson, Studman and himself were directors of the company. (He asserted that the company had a net worth of $168,076, which would seem to have been a rather optimistic assessment.)
The term "defalcation by a licensee" includes criminal or fraudulent conduct of the licensee, a servant or agent of the licensee, a person who is the partner in the business of the licensee, or where the licensee is a firm and a body corporate is a partner in the firm, or where the licensee is a body corporate, an officer of the body corporate.
The evidence clearly establishes that at the relevant time Paterson was an officer of the body corporate Ideal Realty Pty Ltd which was the proprietor of the business Ideal Realty, and the holder of a triennial certificate. In the result it is clear that the defalcation was that of the licensee of the real estate agency.
(c) Did the defalcation occur in the course of the business of the licensee?
This essentially is the critical issue, and the gravamen of the controversy before the Court, the defendant having taken the view that in the absence of an authority to the licensee from the vendor to sell the property, the defalcation was that of Paterson, her activities being unconnected with the licensee and appropriately categorised as a frolic of her own. Essential to the defendant's position is the proposition that a real estate sales representative can only be acting in a real estate transaction for the licensee when the licensee holds a signed authority from the vendor of a property. Such a proposition lacks substance in fact and in law. It overlooks the fact that a real estate agent can be acting for a vendor or purchaser without holding a signed authority to act, the authority simply being a condition precedent to his right to claim a commission or other reward (s60).
As I have already indicated, the term real estate transaction refers to a purchase as well as a sale. The definition of real estate agent refers to business carried out in respect of a real estate transaction and the definition of real estate sales representative refers to a person who negotiates a real estate transaction. Section 4(3) relevantly provides that the collection by an agent for or on behalf of another person of moneys in respect of the consideration relating to a transaction is deemed to be a service rendered by the agent in his capacity as an agent, and those moneys are deemed to be moneys received by the agent, in the course of his business, for and on behalf of the other person in respect of the transaction, irrespective of whether or not the agent negotiated the transaction or participated in the negotiation thereof. See Real Estate & Business Agents Supervisory Board; ex parte Cohen(1999) WASCA 47 per Malcolm CJ at para 50‑52.
I have no hesitation in concluding that the receipt of moneys by Paterson from Gild cannot be categorised other than being the receipt of money in the course of the business of the licensee.
(d) Did the defalcation result in pecuniary loss to the plaintiff?
The loss referred to in the definition of "defalcation by a licensee" is a loss to any person. It follows that the right to seek redress under the Act is not limited to "clients". See Australian & New Zealand Banking Group Ltd v Law Society of NSW (1976) 1 NSWLR 686 at 693. The evidence establishes a relevant loss to the plaintiffs.
Findings
In the result I am satisfied in respect of the payment of what can loosely be described as the initial deposit, namely the sum of $100,000 by Gild on behalf of the plaintiffs, to Paterson on behalf of the Agency, that its subsequent treatment by Paterson had the legal consequence that the plaintiffs suffered pecuniary loss by reason of a defalcation by the licensee in the course of the business of the licensee during a period when it was the holder of a current triennial certificate.
Different considerations apply in respect of the cheque for $1,000 paid by Gild to Paterson in late November 1997. That cheque was drawn as a result of a representation made by Paterson to Gild, and was paid by Gild to Paterson after the licensee had been delisted - that is when it did not legally exist. Although the receipt of the money and its use by Paterson constituted a defalcation causing pecuniary loss to Gild, it was not as the result "of any defalcation by a licensee during any period when he was the holder of a current triennial certificate".
The plaintiffs further seek reimbursement of moneys expended in pursuing recovery action against Paterson and certain associated companies.
Section 117(1) provides that no person is entitled, without the leave of the Board to commence an action in relation to the fund unless the Board has disallowed his claim and unless and until the claimant has exhausted all relevant rights of recovery against others "in respect of the loss suffered by the claimant".
Section 117(2) of the Act provides that a person is not entitled to recovery from the Fidelity Fund an amount greater than the balance of the loss suffered by him after deducting from the total amount of his loss, the amount or value of all money or other benefits received or receivable by him.
In my view "the loss" which a person is entitled to recover pursuant to subs2 has the same meaning as the term "the loss" which he has suffered as described in subs1. It is the primary loss suffered, and the term is not wide enough to cover and include costs incurred in pursuing recovery action against licensees or other persons directly responsible for the primary loss.
The plaintiffs' claim in this respect is not allowable.
The plaintiffs claim the cost of bringing these proceedings. Apart from the usual power in a court to award costs to the successful party in an action, s110 provides that there shall from time to time be charged to the Fidelity Fund, as required, the amount of all claims, including costs allowed or established against the fund. That clearly acknowledges that there may be an order for costs against the defendant if it is unsuccessful in an action such as this. The plaintiffs are entitled to the costs of the action to be taxed.