Heperu Pty Limited & Ors v Perpetual Trustees Australia Ltd
[2010] HCATrans 127
[2010] HCATrans 127
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S105 of 2009
No S26 of 2010
B e t w e e n -
HEPERU PTY LIMITED (ACN 001 517 719)
First Appellant/First Applicant
KIRISI HOLDINGS PTY LIMITED (ACN 003 010 106)
Second Appellant/Second Applicant
BARRY SAMUEL LANDA
Third Appellant/Third Applicant
DRUMMOYNE ADMINISTRATIVE SERVICES PTY LTD
Fourth Appellant/Fourth Applicant
and
PERPETUAL TRUSTEES AUSTRALIA LTD (ACN 000 431 827)
Respondent
FRENCH CJ
GUMMOW J
HAYNE J
HEYDON J
KIEFEL J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 26 MAY 2010, AT 10.22 AM
Copyright in the High Court of Australia
__________________
MR G.J. DIGBY, QC: If the Court pleases, I appear with MR G.K. BURTON, SC and MR A.J. HOURIGAN for the appellant. (instructed by Wilsons Solicitors Attorneys & Conveyancers)
MR B.W. WALKER, SC: May it please the Court, I appear with my learned friends, MR R.E. DUBLER, SC and MR J.S. EMMETT for the respondent. (instructed by TressCox Lawyers)
MR DIGBY: Your Honours, we communicated a letter to the Court on Monday outlining a proposed division of argument which we understand is acceptable to the Court.
FRENCH CJ: Yes, it is. Thank you, Mr Digby.
MR DIGBY: Mr Burton will deal with the matters referred for special leave, which include the issue of apparent authority which in turn is a crucial assumption for the restitutionary submission, if your Honours please.
FRENCH CJ: Yes, Mr Burton.
MR BURTON: May it please the Court, without seeking to do otherwise than rely on our written submissions, what I wish to do is highlight aspects in oral argument, the detail of which is referred to in the written submissions, and take you to some of that detail. The first matter is in relation to the facts of the case. These are set out quite fully in the written submissions. If I could take your Honours to what we regard as the essential features from which the legal characterisation and the claims for relief flow. Firstly, there was no investment product as represented.
GUMMOW J: Just a minute. Am I right in thinking Mr Walker’s client was a trustee company within the meaning of the Trustee Companies Act (NSW), Schedule 3?
MR BURTON: As the case was run in the court, yes.
GUMMOW J: It appears in the face of the statute, does it not?
MR BURTON: Yes.
GUMMOW J: Was there another Perpetual company involved?
MR BURTON: Yes, there was, but not in relation to the way the case was conducted at the trial. There was a company known as Perpetual Investment Management Limited who ‑ ‑ ‑
GUMMOW J: Does the evidence disclose what its connection is with the respondent?
MR BURTON: There is no reference expressly to Perpetual Investment Management Limited in the pleadings or in the way that the judgment was written. There is a reference to PIML, as it has been called by its acronym, in the deposit forms. On the pleadings the respondent admitted that it received the cheques and processed them. Indeed, it appears that some of the bank accounts into which the cheques were banked were in the name of the respondent, as opposed to PIML. However – I hope I am answering your Honour’s question – PIML appears to have been, under the trust deeds, the responsible entity and there appears to have been another company as custodian. On the pleadings, it was admitted receipt, admitted dealing with the cheques by the respondent.
GUMMOW J: There was what was described as a holding account with the National Australia Bank.
MR BURTON: Yes.
GUMMOW J: Then there is another account –a Perpetual account, to use that expression – with the ANZ Bank.
MR BURTON: Yes. The flows of funds - and I believe this is in a folder which we have served on my friends, but I am not sure if those copies – I think they are to hand up to your Honours this morning with some supplementary materials in them - was from the NAB applications account into that account. It was then from that account into the suspense account, which was with the ANZ ‑ ‑ ‑
GUMMOW J: The suspense account?
MR BURTON: Yes, and then into the – I am sorry, that account could operate as a suspense account, but it also was where the pool of funds was invested, and that was in the name of a custodian. Then there was, if the moneys were to be redeemed – I have forgotten one step. In the ANZ account the moneys were then unitised, as we have said in our outline of facts.
GUMMOW J: What do you mean by that?
MR BURTON: I am sorry. The fund in question, your Honour, was a ‑ ‑ ‑
GUMMOW J: You know much more about this than I do.
MR BURTON: Well, it was a cash management trust and – this is not an authorised deposit‑taking institution, so it does not have a banking licence or an ADI licence.
GUMMOW J: That is what I was wondering.
MR BURTON: Hence, there are no statutory defences under the Cheques Act. The moneys were held for individual investors in a pooled fund, but by way of units and the units were issued by way of certificates to the investor who appeared on ‑ ‑ ‑
FRENCH CJ: That is what you mean by “unitised”?
MR BURTON: Yes, that is correct, your Honour. Those units were the item that represented the record of the investment. There was no individual account for each of the unit holders, the moneys were pooled, and, indeed, it is referred to, albeit we now know incorrectly, by the Court of Appeal as a common fund, but that was the way the parties conducted the case at hearing, that the respondent received the moneys and dealt with them.
FRENCH CJ: Was there a document describing rights attached to the units?
MR BURTON: Yes, there was a trust deed, which is not in evidence before the Court. On the way the case was conducted at trial, that was not a matter in issue. There were compliance plans and rules relating to the operation of the account. The matter was the subject of a fresh evidence application on Quade principles before the Court of Appeal some six months, I think it was. Mr Digby conducted that. I am not familiar with that aspect of it. After the judgment was delivered in April 2009, the Court of Appeal refused that on the grounds of some preliminary questions. It was brought here on a special leave application and your Honours refused special leave on that matter.
GUMMOW J: That is right.
MR BURTON: Now, there is one further account in the process that your Honour Justice Gummow has referred to. When a unit holder applied to redeem units effectively to get their money out of the fund, all or part, the money was transferred representing the redemption of the units into an NAB redemptions account and from there the cheque was drawn. But I come back to where I started, that on the pleadings and the way the case was conducted at the hearing, which is the subject of the appeal before your Honours, the current respondent admitted receipt, admitted dealing with the cheques.
GUMMOW J: What was the point of receipt?
MR BURTON: The point of receipt would be at the time physically when the cheque plus application form was handed over by, in this case, the rogue to the relevant officer of the respondent. There is an affidavit in the appeal books in which a supervisor in that department, a Ms Janelle McCoy, describes what happens after that point by way of dealing with the cheques and effectively she describes going through the accounts that I have mentioned.
GUMMOW J: When did the right to immediate possession of these cheques by your client begin and when did it end?
MR BURTON: It is common ground ‑ ‑ ‑
GUMMOW J: Which is vital for your conversion, I think.
MR BURTON: Yes. It is common ground and it is the subject of Court of Appeal finding that has not been challenged, that up to any point at which the cheque was handed over to the relevant officer of the respondent, my client could have recovered the cheque.
GUMMOW J: Your client obtain an injunction against presentation?
MR BURTON: Yes, or used a fishhook to take it back or whatever, yes. I think that analogy, the fishhook, is used in some of the cases.
HEYDON J: But could it not have got an injunction even after that point? Was not the conversion, strictly speaking, when the process of collection began when NAB and ANZ come into it?
MR BURTON: Yes. I was going on to deal with that, your Honour. The right to immediate possession on our case continued through till the current day. We say we are the true owners of the cheque and are therefore entitled to recover.
GUMMOW J: But the cheque has lost its character as a negotiable instrument.
MR BURTON: Three of them were never negotiable instruments. There were three personal cheques and they were negotiable instruments because they were not properly crossed. They were crossed parallel lines with “bank” written in it, not “not negotiable”. The three bank cheques which were the subject of finance from Perpetual Trustees Victoria were crossed properly “not negotiable”. There is a “not negotiable” crossing appearing on the three personal cheques, but that, it is common ground, was placed on by Perpetual at some point in the collection process.
GUMMOW J: What is your answer to Justice Heydon’s question?
MR BURTON: The matter which Justice Heydon has raised is that the interference with our immediate right to possession occurred and continued at the time the cheque was collected, the proceeds placed in the NAB, applications account transferred to the other account with ANZ, which could operate as a suspense account as well, and units issued.
GUMMOW J: A series of steps?
MR BURTON: Yes, all of those acts constituted an interference with our right to immediate possession of the cheque.
GUMMOW J: You could have got an injunction at one or more of those stages?
MR BURTON: We respectfully submit, on our case as true owner, yes. Indeed, we could have got an injunction through till the proceeds of the cheques were redeemed from the account because then, of course, there was no longer any money in the account to injunct.
HEYDON J: Up to the time when Mrs Cincotta‑ ‑ ‑
MR BURTON: Mr Cincotta.
HEYDON J: When Mr Cincotta removed the money from his wife’s account.
MR BURTON: Yes, because so far as Perpetual and, of course, everyone else knew at the time, Mr Cincotta had operating authority on that account and it was him who made the telephone redemptions. Our submission is and was that, effectively, he was paying himself. On the classic authorities, starting with Morison, Huggins’ Case, London & County Banking, right through to Midland Bank v Reckitt, Lloyds v Chartered Bank through to Midland Bank v Marfani, where a rogue abuses his actual authority and pays himself, we respectfully submit that we remain the true owner of the cheque. Some of those cases we have not put in the current bundle. They are in the supplementary bundle. We have referred to the principles and they are referred to the cases in the bundle, but we thought it would be of assistance to give your Honours the actual cases as well.
HAYNE J: But the notion of the rogue paying himself is a notion that must accommodate the intermediate acts, if I can use that as a entirely neutral expression.
MR BURTON: Yes.
HAYNE J: The intermediate acts of Perpetual.
MR BURTON: I am not sure I quite understand your Honour’s question.
HAYNE J: Because the instruments in question, personal cheques and bank cheques, were payable in favour of Perpetual, were they not?
MR BURTON: They were.
HAYNE J: They were collected by Perpetual’s banker in the ordinary course.
MR BURTON: Yes.
HAYNE J: You asserted earlier that injunction would have been available to your client up to a point where Mr Cincotta procured repayment of an amount standing with Perpetual to the credit of his wife’s name. After Perpetual had put the cheques into the banking system and recovered their proceeds, what would you have enjoined? What Act or Acts would have been prohibited?
MR BURTON: The holding of the moneys on account notionally of Mrs Cincotta on whose account Mr Cincotta had operating authority.
HAYNE J: I can understand the assertion, be it right or wrong, that you could restrain a dealing with the paper up to perhaps the point where it is put into the banking system for collection, perhaps, perhaps not, a point once it has gone into the system for collection, but it seems to me the rights that you thereafter assert, or the remedy that you say you would have been entitled to obtain thereafter, would be of a different kind, is that right?
MR BURTON: May I answer that in several ways. The first one is the injunction would also attach to our claim in money had and received, which I am not addressing directly at the moment. Secondly, your Honour is quite correct in relation to the piece of paper, but the rights in conversion, as with most of these cases, the cheque has been collected and the proceeds gone, so there is no injunction available in that sense, but there is the right to damages for the face value of the cheque. If your Honour is pointing out to me a need to refine my submission, I accept that.
HAYNE J: But critical to your submission on the conversion case is that at or immediately after the handing of the paper to the clerk at Perpetual, you would have been entitled to enjoin Perpetual named as payee of the paper in each case from dealing with the paper by seeking its collection through the banking system.
MR BURTON: Yes. That is for the reasons we have developed in writing but, effectively, the first of those reasons is that Perpetual by the nature of its business had to hold this cheque for someone other than itself. It is a trustee company, as is common ground. It is not like cases where, as in Midland Bank and Brown Shipley and many cases, back to Clutton v Attenborough and Vinden v Hughes, where the person who draws the cheque is, by the fraud of the rogue, led to believe that that person owes money to the named payee and intends the named payee to receive the money beneficially.
As the Court of Appeal pointed out and gave a long string of authority, a stable book of authority in relation to that in about paragraph 59, I think it is, of the reasons, that is the principle when the payee is intended to receive the money beneficially. Here it is very different. The face of the cheque cannot convey the intention of the drawer about who is entitled to the piece of paper and what it represents on its own, even if it is a negotiable instrument for that very reason, because it is intrinsic in the transaction and in the nature of the business of this respondent that the cheque and its proceeds must be held for someone else.
GUMMOW J: That is why it becomes perhaps important, and maybe one cannot pursue it, but it becomes important to know the relationship between the Perpetual company itself and this other entity. It is not a trustee. It is separately incorporated for some good reason.
MR BURTON: Yes. On the way the case was conducted on the admissions on the pleadings of Perpetual’s defence, it was just Perpetual. Perpetual admitted it received and dealt with the cheque and therefore if we remained the true owner under a tort of strict liability ‑ ‑ ‑
GUMMOW J: As trustee for whom on what terms?
MR BURTON: As, effectively, trustee for in this case Mrs Cincotta, on whom Mr Cincotta had operating authority. We say, in effect, that means that the rogue was the person who received the cheque and the benefit of the proceeds.
GUMMOW J: If Perpetual had been simply the drawee with none of these additional characteristics, what would be the situation?
MR BURTON: If we had been a trader and Mr Cincotta had misrepresented to us that we owed money to Perpetual for maybe management services that it provided and it was beneficially entitled to that money because it provided in a business and we issued a cheque in their favour, the title would pass but it would be voidable – subject to avoidance. Then we get to the dispute about what “conversion by relation back” means, which is one of our appeal grounds in the alternative.
GUMMOW J: Yes; we saw that. But assume you are not right about that, how would it work in ordinary commerce? It seems to me once you get out of the situation where Perpetual is a trustee and – you will be looking at simply ordinary trading relations, your submissions would throw some sand in the operation of the Bills of Exchange Act and now the Cheques Act.
MR BURTON: We do not disagree with the situation that that is the situation where there is a beneficial interest and entitlement and an intention to benefit the ‑ ‑ ‑
GUMMOW J: The whole point is, Mr Burton, that notions of beneficial ownership do not intrude in the ordinary operation of these negotiable instruments.
MR BURTON: Maybe I should go back one stage, your Honour. In the common law as the case law appears to have developed, the intention of the drawer is said, in relation to a negotiable instrument, to be shown by the named payee on the cheque.
GUMMOW J: Exactly.
MR BURTON: We do not say that that is an issue when the payee is intended to receive the money beneficially, that is for themselves, but here they hold the cheque by the nature of their business for someone else. They might receive the legal title, but the name of the payee on the cheque does not tell them anything in itself about the someone else for whom the money is being paid. Therefore the intention of the drawer cannot be demonstrated purely by the rules that otherwise apply, that the payee’s name is the end of it. That is the short submission. That is a legal submission.
GUMMOW J: Yes, you may get some strength from the “money had and received” aspect of the case – maybe on the other branch, too – on the stipulation in the prospectus that the identification of the drawee be accompanied by a designation of which particular beneficiary it was to go to.
MR BURTON: Which was spectacularly ignored.
GUMMOW J: Yes, that may be significant for the change of position or on the faith of the regularity of observance by Perpetual of its own requirements, which do not seem to have been met.
MR BURTON: Indeed, one of the matters which is in this supplementary folder of material is the special leave transcript for Swiss Bank, in which ironically the learned trial judge in this case appeared for the unsuccessful party in the special leave. We would respectfully submit that your Honour is correct in that regard because the point at issue was that the payer generates the information on which the payee must act. There the nub of the point was that there was no connection between what the payer communicated and what the payee did.
HAYNE J: But if attention is confined to the tort of conversion and its intersection with the law relating to negotiable instruments, the grit in the workings of commerce to which Justice Gummow referred may either be absent or less irritating if the transaction is one in which there are features of the transaction which take it away from notions of the kind ordinarily encapsulated as ordinary course of business, regular on its face, transactions standing no way different from the ordinary course, et cetera.
MR BURTON: We would respectfully submit that that supports our case here because the ordinary course of business for this respondent was a trustee. It had to know that the money was for someone else, not itself. It had to apply it in a particular way. Without making any inquiries one of the common facts here – and may I stress Mr Digby will go into this in more detail, but I have given the references in the submissions – on its own expert’s evidence on the personal cheques there should have been an inquiry of the drawer on the conversion case.
On our witness’ evidence that was the case as well. They agreed on that. On the bank cheques Mr Evans would not go so far, the Perpetual expert. He would say it simply be referred to legal counsel. Our expert, Mr Worcester, said that you would make a discrete inquiry of the issuer of the bank cheque and you would hold the money in a suspense account, accruing interest for whoever it was entitled to, of course.
HAYNE J: But reference to legal counsel presupposes that there is something about the transaction which takes it apart from a course of business, whether this is ordinary course of business, but a course of business in which the cheque is simply taken and dealt with.
MR BURTON: That is the case, we would respectfully submit, in this line of authority that begins with Huggins’ Case, where the money is paid into an account. If there was an ordinary course of business for the particular bank who were successfully sued in conversion there it would be to simply process the cheques. They were still required to inquire.
In this situation we say the ordinary course of business for this trustee is it has to know who they are held for and is not sufficient to deal with just the face of the cheque as if you were a supplier of goods because that is not their ordinary course of business. Therefore, it would not be any sand in the wheels of commerce, and we deal with this in principle and policy matters at the end of the submissions, because this trustee – and you will note this from the prospectus – contemplates that there will be financial intermediaries. It says you can deliver the cheque in the application form either directly or via your financial adviser.
GUMMOW J: Can you just take us to that?
MR BURTON: Yes. I am sorry, I did not put the exact page reference for that particular matter in the submissions.
GUMMOW J: That is all right.
MR BURTON: There are two prospectuses that cover the period. The first is found, for the one between August 2001and December 2002, the prospectus is operative in the period 19 May 2001 to 10 June 2002 and that is in the first appeal book commencing at page 563. There are several references but the first of them appears at page 571, to which I have given your Honours a reference. In column A at point 6, it is about point 35 in the numbers on the edge of the page:
If you would like to add to your investment, you will need to complete an application form from a current prospectus, and return it together with your cheque to your financial adviser, or directly to Perpetual.
Then that is repeated or the same concept is used ‑ ‑ ‑
HAYNE J: It starts at the head of the column at page 571, first column against line 20, that is the initial ‑ ‑ ‑
MR BURTON: The initial words, yes, thank you, are the same. Then going over to where the forms are at page 580 in column B at about point 18 on the page:
For Perpetual’s Cash Management –
which is this fund –
you can lodge your completed application form and cheque with your financial adviser or at Perpetual’s Sydney Office –
Then, as your Honours have remarked already, at 582 there is the reference at about point 15 on the page to “Please make cheque payable to”.
GUMMOW J: Where do we see this? At page 582?
MR BURTON: At about point 15 on the page under the heading “Investment” which is not very clear.
GUMMOW J: Insert name of applicant.
HAYNE J: See also page 579, line 35, item 3 in the first column. Is that applicable to this kind of transaction?
MR BURTON: Yes. The submission was made in the court below – I do not think it is made here by the respondent – that because when you are adding to an existing investment under the terms of the prospectuses you did not need to complete an application form, therefore that flowed through to weaken the direction about the form of the cheque. His Honour in paragraph 150 of his reasons at trial rejected that. Unfortunately, that was the one paragraph that the Court of Appeal did not reproduce from his Honour’s reasons.
GUMMOW J: His Honour said:
I think the reader would understand that all cheques for investment, whether for original or additional investments, were to be made out ‑ ‑ ‑
MR BURTON: Yes. That has not been the subject of challenge. Indeed, it appears on the face of the prospectus at the page references that your Honours have seen, that the cheque is dealt with in a mandatory way which is different from the application form. Whatever the application form position is, if there is an option there, there is not an option in relation to the cheques. The second prospectus ‑ ‑ ‑
HAYNE J: Just before you come to that detail, can I just understand. The prospectus is issued, is it, because it is a managed investment scheme?
MR BURTON: Yes.
HAYNE J: The Perpetual Trustee Company, which is the respondent, occupies what role in that Corporations Act scheme of regulation?
MR BURTON: On the understanding we now have, it is the parent – I withdraw that. It is ‑ ‑ ‑
GUMMOW J: Look at 564, Mr Burton:
Perpetual’s Income Series offers you the opportunity to invest in a range of income funds managed by Perpetual Investments (Perpetual).
MR BURTON: Yes. On the pleadings ‑ ‑ ‑
GUMMOW J: That seems to be another company.
FRENCH CJ: At the bottom – sorry, while we are still on 564 – Perpetual Investment Management Limited is said to be “the Responsible Entity for the Funds”.
MR BURTON: Yes. It says at line 45, or point 45, they are managed investment schemes, and Perpetual is a division of the Perpetual Group. But the case was conducted on the basis that it was the respondent on its admissions that received and dealt with the cheques and the proceeds.
FRENCH CJ: The term “Perpetual Investments” at the top of page 564 at about line 18, is that a kind of divisional title, or is it a reference to a company? It does not seem to be explained.
MR BURTON: At an early stage, Perpetual Investments was a division of this company and then became a separate company. By the time of these cheques, it was a separate company.
FRENCH CJ: I see.
MR BURTON: My understanding, which I stand to be corrected on, it was wholly owned or related, but can I say to your Honours that there is one paragraph in the supplementary application book – I will have to find your Honours the reference where Mr Digby, in the submissions before the Court of Appeal in November last year – and Perpetual replied to those, accepting responsibility for the operations of this cash management account - that is the current respondent – and did so so as to not add a further party who was under their umbrella effectively. I am giving your Honours that derivatively but I will need to find the page reference.
HEYDON J: Where is PIFS, do we know that?
MR BURTON: I am not sure.
HEYDON J: The cheque was to be made payable to PIML‑PIFS.
MR BURTON: It may be the Perpetual Income Management Series or something like that. PIML is the name of the company, PIMS, and then the name of the investor. The focus was on the fact that the payee field was to contain the name of the investor, your Honour. That was the focus of the way the case was conducted at trial and on appeal.
GUMMOW J: Somewhere or other in this instrument, in this prospectus, there will be a definition of PIFS. It is just a question of ‑ ‑ ‑
HAYNE J: Investors will be adequately informed if they read it.
GUMMOW J: Hopefully.
MR BURTON: Can I give your Honours the reference in the supplementary appeal book, page 359. The submissions start at 358. Your Honours will see that Perpetual was the appellant in the court below, “Appellant’s Reply Submissions on Separate Question for Hearing on 12 November 2009”. That was in relation to the preliminary questions on the fresh evidence motion. If your Honours go to 359 at line 40, paragraphs 9 and 10, going over to the top of the page:
The so‑called admissions referred to in [9]-[11] and [17] of the Respondents’ Submissions rise no higher than admissions that PTAL –
that is this respondent –
gave instructions to defend the case on the basis on which it had been pleaded.
That is reference to the admissions that it received and dealt with the cheques –
That, in effect, was that if the Respondents made out their claims in respect of the cheques (and they succeeded in doing so at trial), then PTAL would be liable. There is nothing irregular or improper in PTAL giving those instructions.
Then there is a distinction from another case. As I said, I am not familiar with the background beyond those submissions on this fresh evidence application.
GUMMOW J: Somewhere in this instrument, in this prospectus, I should say, there will be a definition of PIFS. Your junior can busy himself with that task.
MR BURTON: Yes. Can I take your Honours to paragraph 11 as well, at 360, line 18:
None of the cases referred to suggest that a defendant, which openly admits that it will assume for all purposes any liability for any acts that may otherwise be the liability of its subsidiary, is improperly conducting litigation.
Can I just give your Honours the reference to where “financial adviser” appears in the other prospectus. That was the prospectus operative from May 2002 to 7 June 2003. That is found in the third appeal book commencing at page 1157.
HEYDON J: It seems to be at page 1229 as well, “Jayne’s copy”.
MR BURTON: Yes. There is a similarity in the content and preparation of the prospectuses.
GUMMOW J: They are different dates, though. Page 1157 is at 8 May 2002, from the bottom of the first page.
MR BURTON: Yes. One seems to follow – they appear to have issued a new prospectus annually.
GUMMOW J: The other is 20 May 2003.
MR BURTON: It is a little unclear. The prospectus is dated, I think, 8 May and it is not clear on what date it actually commenced to be operative, but it was some point in May 2002. For the purposes of this case, the date was not critical because the cheque was in August.
GUMMOW J: Are there three relevant prospectuses?
MR BURTON: Just two, those two, your Honour.
GUMMOW J: Do we disregard the one at 1229?
MR BURTON: I think that may be the one that succeeds that. Yes, that is. The equivalent is in the prospectus that goes between 1157 and 1201. If your Honours, for instance, go to 1185 in column A – and this is what I was referring to in similarity of text and presentation – the same paragraph that your Honours have seen in the first prospectus reappears. At about point 20:
you can lodge your completed Application Form and cheque with your financial adviser or at Perpetual’s Sydney office ‑
Then again at point 32. Then when one goes to the forms, the page references refer to where the cheque must contain the name of the payee, and an example of that is at 1190 at about point 28 and again at 1197 at about point 35. If your Honours go to 1198, at about point 25:
Forward your completed form and cheque to your financial adviser or deliver to Perpetual’s Sydney office –
So the submission developing and fleshing out the submission on policy, that this is a distinct policy and ordinary course of business from other areas of the law and that is why the Court of Appeal erred in principle in this regard, is that here it is clearly contemplated that there is a financial intermediary often and that is provided for. Here there is a requirement that the money be paid by cheque and here the cheque is to be held for someone else at all times. Any internal accounting or processing does not mean that Perpetual holds the cheque for itself at any time.
HEYDON J: Mr Burton, can I just correct, I hope for good reason, something you said earlier. You said that there was a trust for Mrs Cincotta. That may have been the way Perpetual saw it, but the actual trusts of these six items of property were declared by Dr Lander and the beneficiary would have been Dr Lander or the relevant Lander company.
MR BURTON: Yes, and, indeed, on the authority in Robb v Evans v European Bank, which was applied in MBF v Malouf, which is in the books and quotes Robb Evans, and this Court refused special leave from the Court of Appeal, as to the decision, there would be a resulting trust of the proceeds because of the theft of the cheque, effectively. It was not characterised that way in the pleadings. The Court of Appeal in paragraph 113 of its reasons said that that was not the pleaded case for a direct claim for relief, but it does become relevant on the change of position argument which of course is a live issue on pleadings, because if there is a proprietary interest in the payer of the moneys, if the moneys are effectively defrauded or stolen ‑ ‑ ‑
GUMMOW J: Sorry, say that again.
MR BURTON: I am sorry.
GUMMOW J: You are getting away from the microphone.
MR BURTON: I apologise.
GUMMOW J: You will perplex the transcript team.
MR BURTON: If there is a proprietary interest in the moneys by reason of a resulting trust because the moneys have been the subject of a fraud or theft, then the articles – it is not settled. It is a matter which this Court is to settle, effectively, for Australia, that by Mr Fox or Dr Fox and Ms Vant, to the effect that “change of position” should be much more narrowly construed, if it is available at all, in that circumstance. I am departing from my part of the case, I understand, but it seems to flow from the fact that you are dealing with property and the fundamental principles, which we have set out in our submissions, are you do not lose your property in any of these intentional torts of strict liability, tangible personal property, unless you have done something that justifies you losing your prima facie entitlement. The currency of money does not make a difference in that regard, be it in money had and received or in conversion trespass ‑ ‑ ‑
GUMMOW J: Well, another way of looking at it is if it is an action for money had and received and that is resisted on the basis that there has been some “change of position” by the recipient, you are really asking yourself what is it in the change of position that makes it inequitable to deny your client’s claim. Now, if your client has a resulting trust in its favour, it can hardly be inequitable to deny its common law claim on the footing that there has been some totally unmeritorious change of position on the part of the putative resulting trustee.
MR BURTON: We would respectfully submit that follows, yes.
GUMMOW J: That would be the way in which it got into the debate, the question of the resulting trust got into the debate, at the time of your looking at the equities of allowing this change of position defence.
MR BURTON: Yes, and Dr Fox and Ms Vant, I think, traced that history. This is in Ms Vant’s book.
GUMMOW J: Yes, I know. It is influenced by recent English developments which do not necessarily attract me particularly.
MR BURTON: Your Honour would be aware that in that regard we would be in furious agreement from where we sit on that because this Court has, starting with ‑ ‑ ‑
GUMMOW J: I prefer to start with Lord Mansfield.
MR BURTON: Yes, and it ex aequo et bono and any consideration of equity in that regard does not import per se and we said this in our submission an equitable remedy ‑ ‑ ‑
GUMMOW J: No, no.
MR BURTON: ‑ ‑ ‑ unconscionability to a common law action. The concept that informs that has to be defined otherwise it becomes an ill‑defined rubric which this Court has inveighed against in Muschinski v Dodds in equity and also of course in Pavey and Matthews v Paul. You have to give content. You then move to what has been said in ANZ v Westpac and David Securities about that content and the content focuses as one would expect if one is having harmony and match between torts of strict liability and this area of the law on the conduct of the payer. So that fact of the receipt is not sufficient, it must be on faith and it must not simply be a mere consequential link ‑ ‑ ‑
GUMMOW J: Well, faith means good faith, I suspect.
MR BURTON: Yes, but it must be related to something that the payer does is our primary position, or does not do if approached by the payee.
Here, there was no approach by ‑ ‑ ‑
GUMMOW J: It may be it cannot be in good faith if the faith goes against the position of the resulting trustee.
MR BURTON: Yes, and just finally to finish the development of that line, as this Court has said in Farah v Say-Dee and Lumbers v Cook, this type of defence does not trump classical principles and we would respectfully say in the area of tort, unless you introduce a broad change of position defence to the intentional torts, which has never been contemplated except in academic writing, as far as, I think we can see, there would be a complete mismatch between the approach in conversion and the approach in money had and received. That, we respectfully submit, appears to be the danger into which United States and Canadian authorities have already fallen and the English Courts appear to be falling.
GUMMOW J: You would have to elect – assume that you were successful and Mr Digby is successful ‑ ‑ ‑
MR BURTON: Yes.
GUMMOW J: You cannot have both, can you?
MR BURTON: We cannot take both conversion and restitution, here on United Australia v Barclays and Ciavarella v Balmer, but we would be in a position where the remedy in each case – in this case, we would respectfully submit, would be the same in terms of outcome of money. It would be the amount of the cheque plus interest, which is what the learned trial judge ordered.
FRENCH CJ: The pleading was in the alternative.
MR BURTON: Yes, your Honour. I was dealing with the basic facts, and I think I have probably been through most of those but the important matters, if I could just summarise, are that, as we submit, there was no investment product as represented to the plaintiffs, now appellants. It was a total illusion from the very beginning, as the learned trial judge found. But that does not mean that there cannot be a binding contract. If someone promises, as the learned trial judge found, that the promise was made, and if I can quote McRae v Commonwealth Disposals in that regard, one can have an enforceable contract about something which does not exist, a fortiori if one side to that contract knows it does not exist, but promises objectively that it does. That is in our submissions, it is McRae v Commonwealth Disposals Commission at 408 to 410 in volume 84 of the ‑ ‑ ‑
GUMMOW J: Mr Burton, I am sorry to interrupt and take you back off your course, but have you got a citation of Robb in the Court of Appeal?
MR BURTON: Yes, your Honour, I do. It is actually in MBF v Malouf. Could I find that ‑ ‑ ‑
GUMMOW J: Come back to it, if you would.
MR BURTON: Yes, thank you, your Honour.
HEYDON J: It is MBF Australia Ltd v Malouf [2008] NSWCA 214. That is what the Court of Appeal said it was, anyway.
MR BURTON: Yes, thank you, your Honour. We would respectfully submit that one can find, as the learned trial judge did, and there has been no challenge to this, that there was a contract between the relevant plaintiffs and Morgan Brooks because they were held responsible for the rogue’s conduct, Dominic Cincotta’s conduct, which produces a particular outcome in contract. That does not affect the position vis-à-vis as between the plaintiffs, on the one hand, and the relevant plaintiff who is the drawer of the cheque, and Perpetual on the other, being the contract on the cheque.
We have respectfully submitted and are now getting into the law, I understand – I will return to this – that the authority does not flow from the overarching investment contract. Indeed, even if it did, it would still not give authority here because it was authority in relation to an illusory product, as the learned trial judge found.
The first fact is, from which all of that flows, there was no investment product as represented, and that is common ground. The second one is, so far as the respondent was concerned, this drawer of the cheque was different from the person handing over the cheque, who appeared to have no apparent personal interest in the cheque, and it was invested for that person who had complete operating authority, so far as the respondent was aware, on the notional investment holder, the wife.
Thirdly is, the respondent by the nature of its business held funds for someone else, it never held them for itself and, therefore, the name on the face of the cheque could not be determinative of the intention of the drawer or questions of estoppel or apparent authority. Related to that is that the respondent effectively recognised that position by its own requirements that we have taken your Honours to in the prospectuses, that the name of the investor appear in the payee name on the cheque. Ms McCoy, quite frankly in her affidavit, said that when the cheque came in with the application form it was separated from the application form. So unless you had the name of the payee on the name of the cheque, you did not have an identification on the cheque itself.
HAYNE J: Well, that is to be understood also against a background provided by the regulation of responsible entities of managed investment schemes, one aspect of which, at least as the law stood in 2002, was section 601FC(2):
The responsible entity holds scheme property on trust for scheme members.
MR BURTON: Thank you, your Honour, yes.
HAYNE J: That is the Corporations Act section 601FC(2). Now, they were changing Corporations Act regulation of managed investment schemes at about the time of these transactions. So which version of the Act is apposite, I am not quite sure.
MR BURTON: We did, in fact, in the misleading conduct case, which is not pleaded before your Honours, refer in the pleading to all the alternative provisions in relation to misleading conduct. In the course of that we asked the question whether Perpetual had opted in, as institutions are entitled to do, as your Honour is aware, from 11 March 2002 to the FSRA, Financial Services Reform Amendments, or whether they left it until the end, which was 11 March 2004. There was a two‑year transition. The answer to that question was, and it is recorded on the transcript, 11 March 2004. So your Honour is correct in relation to the section.
FRENCH CJ: In this case that was the subsidiary, but any action of the subsidiary is assumed to be that of the respondent for purposes of this litigation?
MR BURTON: The respondent has assumed responsibility for it, yes. Thank you, your Honour. I think, your Honour Justice Heydon mentioned [2004] NSWCA 82, I think. That was the Robb Evans ‑ ‑ ‑
GUMMOW J: 61 NSWLR 75.
MR BURTON: Yes. The relevant passage cited by the Court of Appeal in Malouf was at paragraphs 111 to 116 of Robb Evans. It was agreed by the expert evidence that on the personal cheques, the experts agreed, that the respondent should have done more. It should have inquired. On the bank cheques that was the position of the drawer’s – the plaintiff’s expert – the respondent’s expert said he would have referred the matter to legal counsel and held it in suspense until that answer was given.
It was common ground that Perpetual made no – and this is set out in paragraph 5(a) to (c) of our submissions, written in‑chief – that Perpetual knew nothing about Dominic Cincotta’s apparent authority beyond the face of the cheques. That was all they had. They made no communication with the drawer of the cheques or with Mrs Cincotta or anyone else. They made no inquiry. They knew nothing about the alleged investment contract, which his Honour found, between the appellants and Morgan Brooks by Dominic Cincotta. We set out the references to the expert evidence there. Can I give your Honours ‑ ‑ ‑
GUMMOW J: Was the respondent to seek to challenge your paragraph 5, in the respondent’s submission?
MR BURTON: Not as I am aware of in the submissions, no, your Honour, and it appeared to be common ground at trial. Can I add some references to the cross‑examination which, I am sorry, were omitted in 5(c). Mr Worcester’s evidence in cross‑examination in which he maintained the position in his report on inquiry was on bank cheques, is found in appeal book 1 at page 296, point 38 to point 48.
HEYDON J: What were those lines again?
MR BURTON: This is at the foot of page 6 of the written submission as part of paragraph 5(c).
HEYDON J: Yes, I have that, but what were the lines on page 296?
MR BURTON: Page 296, point 38 to point 48, 303, point 35 to point 47 and then generally, because the cross‑examination ran for quite a while, between pages 305 and 323. We have given the reference to Mr Evans’ cross‑examination. The other person who gave some evidence on this was ‑ ‑ ‑
GUMMOW J: Who was Mr Worcester?
MR BURTON: Mr Worcester was our expert. Mr Evans was the respondent’s expert. Ms McCoy, who was the respondent’s supervisor in the compliance area, at appeal book 1, page 335, point 15 to point 21. That situation, we point out at the top of page 7 of our written submissions, assisted after there was a suspect transaction query issued in respect of the account. The word “report” is used in the sense of “query” in the evidence. It was never a report to AUSTRAC because it was resolved by Perpetual internally, but there was no need for a report. The experts agreed, and we have given the references to this, that that report was inadequately undertaken, the investigation was inadequately undertaken, and Mr Evans agreed in cross‑examination that it meant it would have been appropriate to have made discrete inquiries of third party drawers of cheques. There was no distinction between bank cheques and personal cheques in that comment.
Can I give your Honours, the reference to Ms Gyton’s cross‑examination on this matter which, I am sorry, also did not make the list. Next to her affidavit if your Honours could write appeal book 1, pages 246, point 35 to point 42, and 242, point 28 and point 31 to point 36, and 243, point 1 to point 28, and 246, point 33 to 251, point 39. I have mentioned the non‑compliance with the respondent’s own protocols which is also apparent in that paragraph.
We summarise those facts in paragraph 6 of our written submissions. Accordingly, the respondent, whose is the named payee who had to hold money for someone else, received from a financial intermediary with no apparent personal interest cheques made out to it by a drawer with no apparent connection with the investment holder, who was the wife of the financial intermediary, where the financial intermediary had full and independent operating authority, so far as the respondent knew, on the investment.
It was that concept that motivated, as far as one can tell, what is said by Dr Tyree, formerly Professor Tyree, in the note which is attached to our written submissions and is in the bundles at tab 31 where Dr Tyree points to the distinction between those facts and the cases on which the Court of Appeal, with respect, relied, such as Watson v Russell where there was a clear business connection between the person who had the cheque in their hand, who was obliged to pay some money to the recipient for a charter and the ‑ ‑ ‑
GUMMOW J: Whereabouts in Professor Tyree’s article?
MR BURTON: Yes, if I can take your Honours to that. Watson v Russell is dealt with in the facts set out on page 342 and then Dr Tyree starts by dealing with the problem or the distinction from Watson v Russell at the top of page 343, “Let’s change the facts of Watson v Russell”. He then goes through what the Court of Appeal found. He then draws, on page 344, the distinction between the issue of a cheque of which this is not for negotiation and the test for good faith in relation to negotiation and holders in due course which is different to the test for the issue of the cheque, and deals with those cases. We have now given your Honours copies of those, or will during the course of the morning. Then goes back to the difference from Watson v Russell, given that higher test on the issue of a cheque of a duty to inquire set out in those cases at the heading “The Result” at page 345, “Is there anything which excites the suspicion”, the paragraph there, and the one underneath it.
HEYDON J: These points made at the bottom of page 6 and the top of page 7, apart from their relevance to the change of position defence, go to the apparent authority question which was the only point on which you lost in the Court of Appeal in relation to conversion, is that not so?
MR BURTON: Yes, they go directly to that point. There are three distinct errors, we say, the Court of Appeal made. Sorry, four, if one includes conversion by relation back. The first three deal with us being the true owner and never ceasing to be the true owner. The first is that there is a distinction of principle for good reason and the way one approaches how one determines the intention of the drawer when the cheque must be held for someone other than the payee, by the payee.
The second is, the one that Professor Tyree points to in particular, that there is a higher duty to establish apparent authority in relation to even negotiable instruments than the mere intention of the drawee when an issue of a cheque as opposed to the negotiation of a cheque is involved. Here the Court of Appeal made three sub-errors, we respectfully submit. Firstly, that there was no appreciation, with great respect, that there were three negotiable and three non-negotiable instruments, they were just lumped together. Secondly, there was no appreciation that this was the issue of a cheque as opposed to the negotiation of a cheque and the distinction that section 35 and section 40 of the Cheques Act makes in that regard.
Thirdly, that the requirements for an estoppel which, of course, overlaps with the question of apparent authority was not, with great respect, appreciated because the elements from an estoppel, particularly of the type involved when there is a higher duty to inquire, were not made out. All Perpetual had was the cheque, that was all. They made no inquiries beyond that. It was not as if they said something ‑ ‑ ‑
GUMMOW J: They had an application form, did they not?
MR BURTON: They had the application form, yes, but that showed the money was being paid to, effectively, the person who had the operating authority who was presenting the cheque who was ‑ ‑ ‑
GUMMOW J: Say that again, that showed what?
MR BURTON: Sorry, the application form showed that the money was being invested notionally in the wife’s name, of the person handing the cheque over, on whom he had complete operating authority and, in fact, as time went on they could see the money went out the next day after the money had gone in, in some cases. Indeed, until the very end if someone had put their hand up and made an inquiry there would have been money in that account to pay all the cheques to that point. Thirdly, that this person was not the drawer of the personal cheques.
GUMMOW J: You said there were four Court of Appeal errors. You gave one and you gave the second one and you gave A, B and C sub‑errors.
MR BURTON: A, B and C, yes. If I could just finish that one. In Tina Motors one gets the contrast, and this is in our authorities, where the person who ‑ ‑ ‑
GUMMOW J: What is the citation of that case?
MR BURTON: I am sorry, your Honour.
GUMMOW J: What is the citation?
MR BURTON: I will need to find it. It is in our authorities.
GUMMOW J: Yes, I know, but we would like to read the transcript.
MR BURTON: It is tab 22 and it is [1977] VR 205.
GUMMOW J: [1977] VR 205 with Justice Crockett.
MR BURTON: The whole authority is extracted in our bundle. In that case an inquiry was made and was met with silence and that was sufficient to constitute an estoppel in the circumstances, but no inquiry was made here of the drawer, of Mrs Cincotta, of the bank who issued the bank cheques.
GUMMOW J: So, is this the third of the fourth point?
MR BURTON: No, there were three subsets to the second error. The third error was that the Court of Appeal conflated the overarching investment contract with the contract on the cheque. We respectfully submit that that was what the learned trial judge did not do. It appears as one of his primary reasons for his finding that there was a fraudulent illusion from the very beginning because ‑ ‑ ‑
FRENCH CJ: Why there was not a contract?
MR BURTON: There was no concluded contract on the cheque. If there was, it was for an illusory or failed consideration, because Perpetual is not a party to the overarching investment contract and even if it did confer some authority to deliver, as the Court of Appeal found and we disagree with that and have submitted to that effect, it was authority to deliver for something for which you got nothing because this product – the money was being paid by Dr Landa to obtain a particular investment that just did not exist. So that, we respectfully submit ‑ ‑ ‑
FRENCH CJ: It was just pieces of paper as far as you are concerned?
MR BURTON: Yes, and that is where we respectfully submit the Court of Appeal erred in conflating the two contracts.
GUMMOW J: When you say they conflated them ‑ ‑ ‑
MR BURTON: They said that authority to deliver derived from the overarching investment contract on which we had sued to judgment and that that was sufficient of itself; that was the end of the inquiry. They then said there was no actual authority, that was abused, and up till now that has been common ground, I think. Certainly it is a finding of the Court of Appeal. They then went on to deal with it on the basis of apparent authority.
GUMMOW J: Who are the parties to this so‑called overarching contract?
MR BURTON: Dr Landa and the other plaintiffs, now appellants, and Morgan Brooks, as the learned trial judge found.
GUMMOW J: What were the terms of that contract?
MR BURTON: I should add, because they were responsible for Dominic Cincotta, that is, Morgan Brooks. The terms of the contract were not set out on a piece of paper, I shall invest it for you. The way the matter was pleaded was the way it was proved, that there was a contract between the relevant plaintiff and Morgan Brooks to invest the money in these Perpetual products and guarantee what was effectively an unsecured 12 per cent return, being eight per cent plus the delivery of shares. There was no specification in whose name the investment was to be made with Perpetual.
HEYDON J: Was there some term that if anything more was made, it was to the account of Morgan Brooks and not the Landa interests?
MR BURTON: I missed the first part of your Honour’s question.
HEYDON J: Was there some additional term that if more money was made than the eight per cent plus the four per cent, it could be kept by Morgan Brooks?
MR BURTON: There was no term on the particular contract as pleaded, but my friend, Mr Dubler, in cross‑examination – I need to check this – I think elicited from Dr Landa that if they made more money, that was not part of the contract that he would obtain that money.
HEYDON J: I am desperate to get the overall picture. That was the third error. What is the fourth error?
MR BURTON: Yes. That is the third one. The fourth one is conversion by relation back. We respectfully submit that if the Court is against us on our submissions that this title never moved from us, because the title was void for one of those three reasons, nevertheless the Court of Appeal, with great respect, conflated – I think I say that correctly in this case – the ab initio nature of recission with the discretionary grounds on which one can refuse an equitable remedy such as recission. We would respectfully submit that – recission means “from the start” – the real issue is not as the Court of Appeal found, but it means from the time of conversion and that the Court of Appeal in Papandony, the obiter there was wrong in that regard.
The real issue is, does the defence apply? Here it cannot apply, we respectfully submit, because there is no genuine third party who gave value without notice. The money was redeemed by the rogue to the rogue. It was as simple as that. This is in paragraph 36 of our written submission in‑chief. The position is that, effectively, the rogue put the money in, the rogue took the money out, it was always effectively held for the rogue. We respectfully submit that in that regard we would fall within one of the two of the three characterisations of this type of putative transaction which Justice Hodgson developed in paragraphs 65 to 68 of his reasons in Citibank v Papandony, which is not reported, your Honour, but it is in tab 9 of our bundle.
HEYDON J: Justice Gummow and I will suffer a brainstorm if this goes on much longer. You have to imagine us sitting in our chambers reading the transcript and when you say Citibank v Papandony, we like to reach for something and it is not going to be tab 22 of the folder. We need to know that it is [2002] NSWSC 388.
MR BURTON: Thank you, your Honour, yes. I apologise, your Honour.
HEYDON J: It is lying somewhere on the floor hidden by other pieces of paper.
MR BURTON: Justice Gzell, at first instance, is [2002] NSWSC 388 and the Court of Appeal is [2002] NSWCA 375. So if I can just deal with Justice Hodgson’s obiter on which your Honour Justice Heydon reserved your Honour’s position until the appropriate vehicle which, we submit, this would be if one reached this point, which we say you should not but have to. If you look at the first and third categories, the first one is that there was never a concluded contract.
GUMMOW J: Paragraph?
MR BURTON: This is at paragraphs 65 to 68.
HEYDON J: You say this case is what he was talking about in paragraph 64?
MR BURTON: Yes. It was either a void consideration or it is within the third category. In 65 we are in the first category, “there was no concluded contract”.
HAYNE J: Mr Burton, can I take you back a stage because I am at least a furlong behind the pack at the moment? Why are we worried, in this case, about the relationship, be it contractual or otherwise, with Morgan Brooks?
MR BURTON: Well, we say you should not ‑ ‑ ‑
HAYNE J: What do you say that the Court of Appeal did with that relationship which is wrong and which is the subject of your present attack?
MR BURTON: The Court of Appeal said that we would sue to judgment on the overarching investment contract, that that gave us a remedy and it also was the source of authority for the plaintiffs to deliver the cheques to Perpetual via Mr Cincotta.
FRENCH CJ: It is the latter part that is the relevant part to your submissions, is it not?
MR BURTON: Correct. We would respectfully submit, at this point, yes.
The third category, if I can just finish ‑ ‑ ‑
HAYNE J: The notion, what, that it gave Cincotta authority to deliver the cheques to Perpetual on what terms?
MR BURTON: Pursuant.
HAYNE J: So Perpetual would hold the money – the proceeds of the cheques – in favour of Mrs Cincotta, with Mr Cincotta having access to it?
MR BURTON: No, definitely not, and that is our case, your Honour.
HAYNE J: I did rather think it was, but ‑ ‑ ‑
FRENCH CJ: You are trying to characterise a reasoning of the Court of Appeal there.
MR BURTON: Yes, I was trying to characterise the reasoning of the Court of Appeal.
GUMMOW J: And maybe the submissions of your opponents, too? They seem to be trying to make something out of this overarching comment.
MR BURTON: Yes, the Court of Appeal effectively accepted the respondent’s submission, whereas the learned trial judge had rejected it. But, the third category, if I can just briefly finish in Justice Hodgson, was when the payee ‑ ‑ ‑
GUMMOW J: Well, you have dealt with the four matters that you ‑ ‑ ‑
MR BURTON: Yes, I have. The payee deals with those. The money goes to effectively, the rogue, in which case the true owner of the cheque, whoever it is, could sue the payee, in any event, because they participated in the conversion. That is a category which we are in, in any event, for the reasons that I have already mentioned to your Honours. So whether it is the first or the third category in Justice Hodgson, even if your Honours accept that analysis, we would come within those categories.
The next matter I would like to go to in terms of setting the framework of how the undoubted fraud operates to effect questions of property – we accept that is what the case is about one way or the other – is to note what our learned friends argue in writing in paragraph 22 of their written submissions. This was referred to obliquely today, first so as to reinforce by repetition that this is the position they take, and second by sweeping it to one side as being of no moment.
You will notice in the middle of that paragraph the acceptance that the investment contact – and your Honours, I assure you I have now taken you to it, that is all you find:
The investment contract did not prescribe how the investment was to be made (eg, how the cheque or other payment mechanism was to be delivered or made payable). The investment contract was part performed by provision of investment funds -
That means by Dr Landa ‑
and partial repayment of $1 million in early 2003 -
and that means, in effect, by the rogue. As the Chief Justice has asked, what are the findings? What is available concerning what I will call the inception of the fraud. It seems not to have been important or critical to the way in which the plaintiffs presented their case to identify when it was that Mr Cincotta went bad in relation to him.
FRENCH CJ: They did not plead a fraudulent action on his part as part of their statement of claim.
MR WALKER: Yes, they did, in a sense. I am going to take you to paragraph 39 in just a moment. We, of course, are not able – there are no findings, except the hindsight finding that this man unquestionably engaged in criminal fraud. It does not matter for my argument whether he was determined on fraud from the outset or simply eventually noticed how much money there was here and that it would be a pity for him not to take some of it for himself later. But, I stress, what was induced by fraud certainly included upfront mainly the setting-up of this so‑called investment contract which out of one side of their mouths my friend says is illusory and fictitious and is about nothing and concerning something impossible and otherwise, of course, for which they sue Morgan Brooks to judgment for damages.
In our submission, those are not positions which can be as easily reconciled as the way in which our learned friends sought to put it this morning. Could I now take you to the pleadings so as to better answer the question the Chief Justice has asked me.
GUMMOW J: Is there any case run at trial if there had been an adoption of the contract by pursuing a judgment on it?
MR WALKER: Yes, and the Court of Appeal reasons refers to the fact that the contract was they elected to affirm it. It is part of the Court of Appeal’s reasoning against the present appellants.
GUMMOW J: What reasoning against them?
MR WALKER: That they got the benefit of the contract with Morgan Brooks. They chose to take the benefit of the contract with Morgan Brooks. That was a contract which involved the investments in the manner in which they were carried out – part performed, it is said in the written submission here. In our submission, the position taken, and with respect, correctly taken, that the fraud rendered that contract voidable but not void without any election, is one which does inform other questions in the case, as it happens, particularly including agency authority, because as your Honours appreciate from the way in which the argument was put today, and we not merely accept but actually assert that we needed ‑ ‑ ‑
GUMMOW J: Does it affect the action for money had and received?
MR WALKER: No, we think not. There is another election as between obviously conversion and money had and received.
GUMMOW J: I know.
MR WALKER: I am not talking about the investment contract ‑ ‑ ‑
GUMMOW J: Does the adoption of the fraudulent contract, does that affect the viability of the action for money had and received?
MR WALKER: Yes, it does.
GUMMOW J: How?
MR WALKER: Because it cannot be said that it has been had and received to their use. They declare in, in the most solemn form possible, that they paid the money in part performance of the investment contract.
GUMMOW J: Is this pleaded at some stage?
MR WALKER: Your Honour, I cannot answer that off the top of my head. It is certainly argued.
HAYNE J: At least for my part, you are going to need to articulate it with much greater precision, Mr Walker.
MR WALKER: Yes, your Honour.
HAYNE J: To speak in terms of “the contract”, “being enforced”, “sued on to judgment” at least encompasses the notion you, Morgan Brooks, promised you would provide me with a very large profit. You have not. I will have my profit. Nothing against also then saying against Perpetual and what is more, you have converted. Alternatively, you have had and received to my use the money which the fraudster was going to use to procure the profit.
MR WALKER: No, I accept that, there are more steps in my argument in order to make use ‑ ‑ ‑
HAYNE J: Just a few.
GUMMOW J: We are hoping they will be disclosed.
MR WALKER: I am so sorry, your Honour.
GUMMOW J: We are hoping they will be disclosed.
MR WALKER: Yes, quite.
HAYNE J: With some precision, soon.
MR WALKER: As much as I can muster, your Honours. Could I take you to page 16 of volume 1 of the appeal book in the so‑called particulars which we think should be read as pleaded allegations under paragraph 39. Now, this is in relation to the money had and received count and you will see that mistake is alleged in item (1), see line 23 or thereabouts, and you will see that fraud, misrepresentations and what is called misappropriation is alleged in item (3), about line 42 or thereabouts.
In each case the mistake in item, the fraud, et cetera, in item (3), in each case they are framed in the same way. They are framed in a way which, as the Court of Appeal held and as the evidence required, was not made out at trial. The plaintiffs failed to prove that that was the mistake or that was the false state of affairs. In relation to fraud, I draw to attention, also on page 17 of the first volume, item (4) under paragraph 39 about
line 19 on the page where there is the reference to the said fraud, et cetera, obviously relating back to that which has been spelt out in item (3).
FRENCH CJ: Now, is the fraud meant to be – it is not clear whether it is asserting an intentionally broken promise or the absence of the requisite implied state of mind at the time a promise was made. It is not fleshed out in the way one would expect in the ordinary case.
MR WALKER: It is not. We think it is probably the first of the possibilities, although it may not exclude the others, that the Chief Justice has raised because of the language that you find ‑ ‑ ‑
FRENCH CJ: I mean, an intentionally broken promise ordinarily would not be fraud, it would be a question ‑ ‑ ‑
MR WALKER: No, you have to add you represented your intention to do X ‑ ‑ ‑
FRENCH CJ: And you did not have that intention.
MR WALKER: ‑ ‑ ‑ and there and then at the time you had no such intention.
HAYNE J: But do I read (1), (3) and (4) as saying, in effect, though in different words, “You said you would transact with Perpetual on my account. Not in my name, but on my account”?
MR WALKER: No, and that is the distinction that is important for us because of the need we have to grapple with of agency and authority. This is not a case where on the findings, as opposed to the pleaded case in the evidence in‑chief, this is not a case where on the findings Dr Landa could say, “Look, the deal was you would invest on my account in the sense of in my name or in names I direct.” To the contrary, as paragraph 20 of the Court of Appeal’s reasons, not challenged, makes clear, the deal contemplated that Mr Cincotta could use any name and, I go this far, could use Mrs Cincotta’s name, could have used Heperu’s name.
GUMMOW J: As a trustee?
MR WALKER: And it would be, then if I may tomorrow come rapidly to the framework that is thus laid out, not all of which was either litigated or is now available for litigation in this Court, involving a number of different trusts and one of them is the one that Justice Gummow, with respect, has just named. Is that a convenient time?
FRENCH CJ: Yes, thank you. The Court will adjourn until 9.30 tomorrow for pronouncement of orders and 10.00 am for the resumption of this matter.
AT 4.17 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 27 MAY 2010
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