Lurgi Australia Pty Ltd v Culvert Constructions Pty Ltd

[2000] VSC 279

SUPREME COURT OF VICTORIA
COMMERCIAL AND EQUITY DIVISION	Not Restricted

No. 6802 of 1995

LURGI (AUSTRALIA) PTY LTD (ACN 004 658 708) and LUCON (AUSTRALIA) PTY LTD (ACN 008 228 100)	Plaintiffs
v
P.R.S. ENGINEERING PTY LTD (ACN 060 158 554) and others	Defendants

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No. 6884 of 1995

LURGI (AUSTRALIA) PTY LTD (ACN 004 658 708) and LUCON (AUSTRALIA) PTY Ltd (ACN 008 228 100)	Plaintiffs
v
CULVERT CONSTRUCTIONS PTY LTD (ACN 005 644 404)	First Defendant
- and -
CULVERT EXCAVATIONS PTY LTD (ACN 006 795 097)	Second Defendant

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JUDGE:	Byrne J
WHERE HELD:	Melbourne
DATES OF HEARING:	1, 2, 3, 4, 8, 9, 10, 11, 15, 16, 17, 18, 22, 23, 24 and 25 May 2000
DATE OF JUDGMENT:	4 August 2000
CASE MAY BE CITED AS:	Lurgi Australia Pty Ltd v Culvert Constructions Pty Ltd
MEDIUM NEUTRAL CITATION:	[2000] VSC 279

Trust – constructive trust – money dishonestly obtained - knowingly assisting in fraud – Rule in Barnes v Addy

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr M Colbran QC with Mr JP Carney	Blake Dawson Waldron
For the Defendant(s)	No Appearance

Table of Contents

THE PARTICIPANTS IN THE PROCEEDINGS  2

Culvert Constructions Pty Ltd  4

Culvert Excavations Pty Ltd  4

P.R.S. Engineering Pty Ltd (“PRS”)  4

THE PROCEEDING  4

Proceeding No. 6456 of 1995  4

Proceeding No. 6802 of 1995  4

Proceeding No. 6803 of 1995  5

Proceeding No. 6804 of 1995  5

Proceeding No. 6884 of 1995  5

Proceeding No. 5122 of 1997  6

THE CULVERT RECEIPTS  6

HIS HONOUR:

1. On 18 September 1998 Gert Juergen Gratz, having pleaded guilty to one count of theft, four counts of false accounting and one count of making a false statement, was sentenced in this Court to a term of imprisonment for seven years.  He consented on that date also to the making of an order against him for compensation under which he was ordered to pay $6.7M to the plaintiffs, Lurgi (Australia) Pty Ltd (“Lurgi”) and Lucon (Australia) Pty Ltd (“Lucon”).  These proceedings concern the frauds committed by him and by Herbert Dietrich, upon their employers, Lurgi and Lucon.  They represent the efforts of Lurgi and Lucon to recover sums lost from various persons who are said to be civilly liable to them.  

1. At all material times Lurgi, a company incorporated in Victoria, was an engineering design consultant whose business it was to obtain contracts in Australia and in the South East Asian region for the design and construction of major engineering projects.  Its subsidiary, Lucon, was typically engaged by Lurgi to perform the construction work for these projects.  Lurgi itself is a subsidiary of a German company, Lurgi AG, which is, in turn, a subsidiary of Metallgesellschaft AG, both of which companies are based in Frankfurt. 

1. Mr Dietrich commenced working for the Lurgi organisation in Frankfurt in 1956.  He was sent to Australia from 1982 to 1987 and, on a more permanent basis, in June 1989.  He was from 1 June 1989 the joint managing director and later the sole managing director of Lucon.  He became a member of the board of Lucon on 1 August 1989 and of Lurgi of 1 April 1991. He retained these positions until his retirement and return to Germany in March 1995.  Mr Dietrich had the overall responsibility for all of Lucon’s activities and he had the authority to approve invoices and sign cheques on behalf of Lurgi.

1. Mr Gratz commenced with the Lurgi organisation in Germany in 1970.  In October 1980 he was sent to Australia as the commercial and financial coordinator of Lurgi in this country.  In June 1988 he, too, became a director of Lucon.  In March 1995 he was appointed managing director of Lucon, in succession to Mr Dietrich, and a director of Lurgi.  Mr Gratz was also company secretary for Lucon from 1 June 1988 and for Lurgi from 22 December 1989. He relinquished all of these positions when he was summarily dismissed for misconduct on 28 April 1995.

1. As commercial and financial co-ordinator of Lurgi Mr Gratz was the chief financial officer of the company.  He was directly responsible for all of its commercial and financial operations and for the various commercial officers and commercial managers who worked with project managers to implement its projects.  He was in charge of commercial operations associated with the tendering and negotiating and formulating of contracts, with the procurement of equipment and in charge of its accounting and banking operations.  He had authority to sign invoices, cheques and purchase orders on behalf of Lurgi and Lucon.

1. In broad terms, what was alleged before me was that Mr Gratz and Mr Dietrich contrived to defraud Lurgi and Lucon in a number of ways:

(a)        By having sub-contractors and suppliers perform work or supply materials for them personally and charging the cost to Lurgi and Lucon.

(b)        By causing sub-contractors and suppliers to submit claims to Lurgi and Lucon for work on Lurgi projects which work was never done.  The payments received by them or part of those payments were paid directly or indirectly to Mr Gratz or Mr Dietrich or to persons or companies on their behalf. 

(c)        By causing sub-contractors and suppliers to submit spurious claims for cost escalation.  The extra payments received by them or part of those payments were paid to Mr Gratz or Mr Dietrich or to persons or companies on their behalf.

The Participants in the Proceedings

1. There are no less than five proceedings before the court arising out of these frauds.  They have been brought by Lurgi and Lucon against twelve defendants.  On 1 May 2000, I ordered that all of them be heard together and that the evidence in each be evidence in each other proceeding.  The proceedings are no. 6456 of 1995, no. 6802 of 1995, no. 6803 of 1995, no. 6884 of 1995 and no. 5122 of 1997.  A sixth proceeding, no. 6804 of 1995, in which Lurgi alone is plaintiff and Stable Engineering (Australia) Pty Ltd is defendant has been settled.  I have, nevertheless, determined to deliver separate judgments dealing collectively only with those proceedings where there was a common interest in the defendants; the reason for my adopting this course is that some of the evidence led in one proceeding had a different value in others.

1. A feature of the trial was the failure of most of the twelve defendants to participate.  Three of them are companies controlled by Mr Gratz or Mr Dietrich which have been deregistered and the proceedings against them were struck out.  The proceeding against Mr Gratz who is still in gaol has been discontinued, presumably because of the compensation order made against him.  Mr Dietrich and Jellwick Court Pty Ltd had been represented by a firm of solicitors until a few days before the trial commenced.  On 26 April 2000 I gave leave to the solicitors for those parties to file Notices of Ceasing to Act and no new solicitors have been appointed.  Likewise, on 1 May 2000 I gave leave to the solicitor on the record for Culvert Excavations Pty Ltd and Culvert Constructions Pty Ltd to file Notices of Ceasing to Act and no new solicitors have been appointed.  I was told at the commencement of the trial that the claims against Ruth Jillian Hedrick and Stable Engineering (Australia) Pty Ltd had been settled in principle.  They did not appear at the trial and, on day 16, I was told that the settlements had now been achieved and orders were then made by consent.  It followed from this that, of the twelve defendants in all proceedings, only Ritzer Gallagher Morgan Pty Ltd and Pearse Joseph Morgan were represented throughout the trial.  Petra Gratz, the former wife of Mr Gratz, with my concurrence, was represented only on those occasions when her interests were directly the subject of evidence or argument.

1. Finally in this introductory part, I shall now introduce a number of companies which were mentioned in the evidence. 

Culvert Constructions Pty Ltd

Culvert Excavations Pty Ltd

1. These companies were sub-contractors which performed work for Lurgi and Lucon.  A principal of these companies was James William Dean, who gave evidence at the trial.  They are both defendants in proceeding no. 6884 of 1995 and Culvert Excavations is a defendant in proceeding no. 6802 of 1995. 

P.R.S. Engineering Pty Ltd (“PRS”)

1. PRS, now deregistered, was a defendant in proceeding no. 6802 of 1995.  It was incorporated in 1993 on instructions from Mr Gratz and Mr Dietrich.  It was said to be controlled by them and a vehicle through which they passed money for their own benefit.  Its directors were Peter James Hedrick and his wife, Ruth Jillian Hedrick, who is herself a defendant in proceeding no. 6802 of 1995.  Both Mr and Mrs Hedrick were friends of Mr Gratz who were made directors because he himself could not hold that office because of his conflict of interest. 

The Proceeding

Proceeding No. 6456 of 1995

1. In this proceeding Lurgi and Lucon are plaintiffs; the defendants are Mr Dietrich (secondnamed defendant) and Mrs Gratz (thirdnamed defendant).  The proceeding against the firstnamed defendant, Mr Gratz, has been discontinued.  This proceeding is the subject of separate judgment.

Proceeding No. 6802 of 1995

1. In this proceeding Lurgi and Lucon are plaintiffs.  There were four defendants.  The firstnamed defendant, PRS, and the secondnamed defendant, Consetra Pty Ltd, have been deregistered and the claims against them have been struck out.  The claim against the thirdnamed defendant, Mrs Hedrick, was settled and on day 16 of the trial the claim against her was, by consent, dismissed.  The fourthnamed defendant, Culvert Excavations, was unrepresented. 

1. The allegations against Culvert Excavations are contained in the further amended statement of claim filed on 29 September 1997.  In paragraph 33 it is alleged that Culvert Excavations received from PRS on 3 April 1995 $75,000 and on 11 April 1995 $115,000 which sums were part of the proceeds of the PRS frauds on Lurgi and Lucon.  It is alleged that Culvert Excavations received those moneys knowingly and, accordingly, held the same on constructive trust for Lurgi and Lucon.  In its defence filed on 16 June 1999 Culvert Excavations denies these allegations. 

Proceeding No. 6803 of 1995

1. In this proceeding Lurgi and Lucon are plaintiffs.  There are three defendants.  The first defendant, Sandess, and has been deregistered and the claim against it was struck out.  The secondnamed defendant is Mrs Gratz and the third defendant is Jellwick Court, which company was unrepresented.  This proceeding is the subject of a separate judgment.

Proceeding No. 6804 of 1995

1. This proceeding brought by Lurgi against Stable Engineering (Australia) Pty Ltd was, by consent, struck out with a right of reinstatement on day 16 of the trial.

Proceeding No. 6884 of 1995

1. In this proceeding Lurgi and Lucon are plaintiffs.  There are two defendants, neither of which was represented at the trial.  They are Culvert Excavations and Culvert Constructions. 

1. In their amended statement of claim filed on 29 September 1997, Lurgi and Lucon seek to recover payments which they made, and which one or other of the Culvert companies received, in response to fraudulently false invoices submitted by them.  They may be summarised as follows:  fifteen Culvert Construction invoices raised on Lurgi to a value of $1,701,977, in response to which Lurgi paid $1,616,906; three Culvert Construction invoices raised on Lucon to a value of $430,000, in response to which Lucon paid $408,500;  five Culvert Excavation invoices raised on Lurgi to a value of $466,620, in response to which Lurgi paid $443,289; and three Culvert Excavation invoices raised on Lucon to a value of $112,213, in response to which Lucon paid $106,603.  There is an alternative claim for the same sums based on an allegation that the payments were made as a consequence of the fraud and breach of fiduciary duty of Mr Gratz and Mr Dietrich and that Culvert Constructions and Culvert Excavations were knowing participants in this dishonesty.  In their defence filed on 16 June 1999 Culvert Constructions and Culvert Excavations deny these allegations.

Proceeding No. 5122 of 1997

1. In this proceeding Lurgi and Lucon are plaintiffs.  The defendants are RGM and Mr Morgan.  The claim against the thirdnamed defendant, Moreseast Pty Ltd, has been remitted to the County Court.  The remainder of this proceeding is the subject of a separate judgment.

The Culvert Receipts

1. These transactions were established by the invoices and banking documents introduced in evidence and verified by the oral evidence of Mr Dean of Culvert Constructions and Culvert Excavations. 

1. The two payments to Culvert Excavations, the subject matter of proceeding no. 6802 of 1995, were each made by cheque drawn on the PRS cheque account.  The first cheque dated 3 April 1995 and banked on that day, was for $75,000.  The second, dated 11 April 1995 and banked on 2 May 1995, was for $115,000.

1. Mr Dean in his statement to the police made on 2 May 1996, which he verified in the witness box, said of these two payments that the first was paid to him by Mr Gratz for work done on Mr Gratz’s house at Apollo Bay.  The second cheque was given to him just before Easter 1995 for similar work at Apollo Bay.  Mr Gratz asked him not to bank the second cheque because there were no funds to cover it.  The PRS bank statements suggest that Mr Gratz was not being frank about this because on 12 April 1995 the account balance stood at $190,000.  In any event, Mr Dean banked the cheque and it and others were able to be cleared following the deposit in the PRS account on 18 April 1995 of a cheque for $157,000 drawn by Lucon.  This Lucon cheque is dated 12 April 1995 and is marked for special clearance.  The funds were fraudulently obtained by PRS from Lucon by spurious PRS invoices 44 and 45 which are the subject of transaction 12, to adopt the analysis of the plaintiffs.

1. In his oral evidence, Mr Dean was not asked about his state of mind as to the provenance of these two payments.  In opening, counsel for Lurgi and Lucon said that Culvert Excavations at the time of receipt knew that it had no entitlement to these payments and further it knew that PRS itself had no entitlement to them.  It is certainly true to say that Mr Dean, who for present purposes was the mind of Culvert Excavations, knew that Mr Gratz was dishonest and that he used PRS for dishonest purposes.  It cannot, however, be said that Culvert Excavations was not entitled to the money which Mr Dean said was due for work done on Mr Gratz’s property.  To my mind, the mere fact that the payment was by Mr Gratz’s company rather than from his own bank account does not give rise to the inference suggested.  Nor can it arise from the fact that Mr Dean knew that Mr Gratz was a dishonest rogue and that he used PRS for dishonest purposes.  It does not follow from this that I should infer that Mr Dean knew that any money from that source was tainted or that a reasonable man in his position would draw that inference.  I reject the claim insofar as it concerns those two payments. 

1. There were twenty-six invoices the subject of proceeding no. 6884 of 1995.  Their details and the sums paid, net of PPS Tax, in response to them appear from the following table:

Culvert Constructions Invoices

Trs No.	Invoice No.	Invoicee	Invoice Date	Invoice Amount	Paid	Total Paid
33	713	Lurgi	3/93	27,500	26,125
31	48	Lurgi	4/3/93	55,000	52,250
32	48	Lurgi	4/3/93	85,000	80,750
35	49	Lurgi	4/3/93	350,000	332,500
36	750	Lurgi	29/4/93	200,000	190,000
37	718	Lurgi	6/5/93	73,000	69,350
42	198 698 854	Lurgi	5/8/93 25/11/93 2/12/93	50,000 11,210 57,290	112,602
39	700	Lurgi	14/9/93	150,000	142,500
40	680	Lurgi	30/9/93	108,500	103,075
41	807	Lurgi	10/93	210,000	199,500
43	805	Lurgi	10/11/93	124,210	118,000
34	602 603	Lurgi	31/5/94 31/5/94	20,677 79,589	95,254	1,521,906
38	676	Lucon	8/93	100,000	95,000
46	802	Lucon	8/93	391,000	114,000
47	162,450
45	300	Lucon	27/7/94	84,000	79,800
44	1000	Lucon	3/8/95	105,000	52,250	503,500
$2,025,406

Culvert Excavations Invoices

Trs No.	Invoice No.	Invoicee	Invoice Date	Invoice Amount	Paid	Total Paid
50	51	Lurgi	10/8/94	130,000	123,500
51	52	Lurgi	5/10/94	135,000	128,250
49	37	Lurgi	2/3/95	125,000	118,750
52	38	Lurgi	2/3/95	49,340	46,873
48	41	Lurgi	23/3/95	27,280	25,916	443,289
53	8	Lucon	15/11/94	38,942	36,995
54	50	Lucon	15/11/94	11,271	10,708
55	36	Lucon	1/3/95	62,000	58,900	106,603
$549,892

1. Mr Dean explained how the practice developed of charging Lurgi and Lucon for work which was not in fact done for those companies; the work was in fact done for Mr Gratz and Mr Dietrich.  He said that this was done at the request of Mr Gratz and Mr Dietrich and that his companies retained the moneys so received.

1. He said as to his state of mind at the time he did this that he did not realise what he was doing was illegal but that, at some point of time, which he did not identify, the “penny dropped”.  I do not accept this disingenuous statement.  I am satisfied that what Mr Dean and his companies were doing was dishonest and that he knew it at the time.  They were knowing participants and knowing receives within the meaning of both limbs of the rules in Barnes v Addy[1] .  They must account to Lurgi and Lucon for their payments.

   [1](1874) LR 9 Ch App 244.

1. The losses as I find them are as follows:

Lurgi Losses
Culvert Constructions	1,521,906
Culvert Excavations	443,289
$1,965,195

Lucon Losses
Culvert Constructions	503,500
Culvert Excavations	106,603
$610,103

1. I will hear counsel further as to the orders that should be made to give effect to these conclusions.

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