Mavaddat v Lee

[2007] WASCA 141

MAVADDAT -v- LEE [2007] WASCA 141

Reported Decision:	(2007) 34 WAR 67
Jurisdiction:	SUPREME COURT OF WESTERN AUSTRALIA	Citation No:	[2007] WASCA 141
Court:	THE COURT OF APPEAL (WA)
Case No:	CACV:87/2005	Heard:	21 FEBRUARY 2007
Coram:	STEYTLER P McLURE JA PULLIN JA	Delivered:	4/07/07
No of pages:	51	Judgment Part:	1 of 1
Result:	Appeal allowed in part
Category:	A
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Parties:	MICHAEL MOOJAN MAVADDAT KYUNG HEE LEE
Catchwords:	Equity Fiduciary obligations Partnership Breaches of fiduciary obligations, misrepresentations, unconscionable conduct and breach of contract by one party Terms of partnership agreement Turns on own facts Form of relief Whether just allowance should be made in relation to property purchased by fiduciary partly by use of partnership funds and partly by fiduciary's own funds Costs
Legislation:	Supreme Court Act 1935 (WA), s 167(1)(ba) Supreme Court (Court of Appeal) Rules 2003 (WA), r 47(3)
Case References:	Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 Beatty v Guggenheim Exploration Co (1919) 225 NY 380 Brady v Stapleton (1952) 88 CLR 322 Foskett v McKeown [2001] 1 AC 102 Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 Giumelli v Giumelli (1999) 196 CLR 101 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 In the Marriage of Wagstaff: Gruber (Intervener) (1990) 14 Fam LR 78 Lee v Mavaddat [2005] WASC 68 Lee v Mavaddat [2005] WASC 68 (S) Lee v St George Bank Ltd [2006] WASC 221 Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440 Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 Scott v Scott (1963) 109 CLR 649 Scott v Scott [1964] VR 300 Soulos v Korkontzilas [1997] 2 SCR 217 United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 Vyse v Foster (1872) LR 8 Ch App 309

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA TITLE OF COURT : THE COURT OF APPEAL (WA) CITATION : MAVADDAT -v- LEE [2007] WASCA 141 CORAM : STEYTLER P

McLURE JA
PULLIN JA

HEARD : 21 FEBRUARY 2007 DELIVERED : 4 JULY 2007 FILE NO/S : CACV 87 of 2005 BETWEEN : MICHAEL MOOJAN MAVADDAT

Appellant

AND

KYUNG HEE LEE
Respondent

ON APPEAL FROM:

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Coram : ROBERTS-SMITH J

Citation : LEE -v- MAVADDAT [2005] WASC 68

File No : CIV 1862 of 2001, CIV 1824 of 2001

(Page 2)

Catchwords:

Equity - Fiduciary obligations - Partnership - Breaches of fiduciary obligations, misrepresentations, unconscionable conduct and breach of contract by one party - Terms of partnership agreement - Turns on own facts - Form of relief - Whether just allowance should be made in relation to property purchased by fiduciary partly by use of partnership funds and partly by fiduciary's own funds - Costs

Legislation:

Supreme Court Act 1935 (WA), s 167(1)(ba)

Supreme Court (Court of Appeal) Rules 2003 (WA), r 47(3)

Result:

Appeal allowed in part

Category: A

Representation:

Counsel:

Appellant : Mr R E Birmingham QC & Mr S Penglis
Respondent : Mr D R Williams QC & Mr S M Davies

Solicitors:

Appellant : Freehills
Respondent : Stables Scott

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

Australian Postal Corporation v Lutak (1991) 21 NSWLR 584
Beatty v Guggenheim Exploration Co (1919) 225 NY 380
Brady v Stapleton (1952) 88 CLR 322
Foskett v McKeown [2001] 1 AC 102
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118

(Page 3)

Giumelli v Giumelli (1999) 196 CLR 101
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
In the Marriage of Wagstaff: Gruber (Intervener) (1990) 14 Fam LR 78
Lee v Mavaddat [2005] WASC 68
Lee v Mavaddat [2005] WASC 68 (S)
Lee v St George Bank Ltd [2006] WASC 221
Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449
Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440
Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165
Scott v Scott (1963) 109 CLR 649
Scott v Scott [1964] VR 300
Soulos v Korkontzilas [1997] 2 SCR 217
United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157
Vyse v Foster (1872) LR 8 Ch App 309


(Page 4)

1 STEYTLER P: I have had the advantage of reading the judgment of Pullin JA. It is consequently unnecessary for me to recite all of the facts and circumstances giving rise to this appeal against the judgment of the primary Judge (Lee v Mavaddat [2005] WASC 68).

Ground 1 - Discharge of the respondent's onus

2 The critical facts found by the trial Judge, as they bear on ground 1 of the grounds of appeal, are these:

(1) In about August 1999, the parties agreed with each other, as partners, to acquire, develop and ultimately sell real property with a view to profiting from the sale (this was common cause: par 4(a)(ii) of the defence).

(2) The parties agreed to incorporate a company as the vehicle for the acquisition, development and sale of the real property, that each of them would hold 50 per cent of the issued shares in the company and be the directors of it and that they would jointly borrow the funds necessary to acquire and develop the property (this, too, was common cause; see also the finding of the trial Judge at [417]).

(3) It was a term of the agreement reached between the parties that each would give security for the borrowing over their own properties (reasons [417]).

(4) The company incorporated for the purposes of the agreement was Ark Securities Pty Ltd ("Ark").

(5) The property acquired for development and sale was one in Subiaco ("Subiaco property") . An offer and acceptance was signed in respect of it in August 1999. The purchase price was $843,000.

(6) The appellant undertook, exclusively, the task of arranging to borrow the necessary funds. One of the banks with which he dealt in that respect was St George Bank Ltd ("bank"). The respondent had no dealings with any representative of the bank.

(7) The appellant consistently represented to the respondent, and to her husband, Mr Johnson Lee, that the bank loan was being made to the appellant and the respondent jointly and that it would be "secured equally by them both over their own properties" (reasons [458] and [464]).

(Page 5)

(8) In January 2000 the appellant obtained from the bank a written offer to lend $1,625,000. Unlike previous offers (which had been made to Ark), this offer was made to the respondent, on the basis that she would be the sole borrower and that she would provide security over her home in South Perth ("South Perth property"). No security was required from the appellant.

(9) The respondent "had little comprehension of what was going on" (reasons [462]). She accepted the bank's offer and executed a mortgage over the South Perth property in the belief that the funds were being jointly borrowed and jointly secured. She did not then have "a sufficiently good understanding of written or spoken English to be able to fully comprehend matters outside daily routine or daily experience, without the benefit of an interpreter" (reasons [335]). Her husband's facility with written and spoken English was also not good and he had little comprehension of the formal bank correspondence and documents presented to him (reasons [462]). He did not appreciate, and the appellant did not explain to him, that the appellant would not be giving security over his home (reasons [463]).

(10) Were it not for the respondent's reliance upon the appellant's misrepresentations concerning the joint nature of the loan and the joint provision of security, the "transaction would not have proceeded at all" (reasons [472] and see also [458]).

3 The appellant contends, by ground 1, that the trial Judge erred in concluding that the respondent had discharged her onus of proving that the parties had reached an agreement that each of them would provide security to borrow funds to acquire and develop the Subiaco property. The particulars to this ground rely upon the following circumstances:

"(a) no finding was made or able to be made as to any detailed terms or date of such an agreement as there was no evidence consistent with such an agreement;

(b) there was no written agreement to that effect;

(c) there was no notice or memorandum in writing evidencing such an agreement or an agreement to that effect;

(Page 6)

(d) there was no other written evidence whatsoever to support such a finding;

(e) contrary to the respondent (plaintiff)'s pleaded case and contrary to her evidence, the agreement was not found to have been entered into in May 1999 but in August 1999;

(f) contrary to the respondent (plaintiff)'s pleaded case and contrary to her evidence, it was not the case that the agreement was for the acquisition and development of a Subiaco property at a sum of $1,650,000.00 but rather it was found that they agreed to borrow the sum of $650,000.00;

(g) such a finding was against the weight of the evidence in that the only written evidence before the learned trial judge was contrary to such a finding and contrary to the respondent (plaintiff)'s case; -

(h) the respondent's (plaintiff's) evidence generally was unreliable."

4 Pullin JA has dealt with each of these particulars and has concluded that there is no substance to any of them. I agree with what he has said in that regard. However, I wish to add some comments of my own.

5 The appellant's contentions essentially come down to the proposition that the finding made by the trial Judge was against the weight of the evidence. That proposition is said to be supported principally by the following subsidiary propositions:

(1) The fact that the respondent was wrong about the date upon which the agreement was made. She initially said that the agreement was made in May 1999 and also that, at the time, the appellant sent a copy of a newspaper article to her husband. However, in the course of cross-examination she accepted that the agreement was made in August 1999. Also, the newspaper article to which she referred was shown to have been sent to her husband on 6 December 1999.

(2) The respondent was wrong about the amount of money to be borrowed.

(Page 7)

(3) Documents tendered at the trial revealed that the appellant initially sought to have the loan secured by the Subiaco property itself (the parties having proposed to borrow only enough, at that stage, to purchase the property). This is said to be inconsistent with an agreement that each would provide security for the loan.

(4) The correspondence with the bank is consistent with the rejection, by the bank, of the initial proposal and with a suggested change of approach.

(5) The documents tendered at the trial, especially a letter dated 6 December 1999 that was sent by the appellant to Johnson Lee, are generally consistent with the appellant's version of events.

(6) There were so many errors and inconsistencies in the respondent's evidence that her evidence could not be relied upon in any respect.

6 The fact that the respondent was initially wrong about the date of the agreement seems to me to be a matter of no great significance. As I have said, there is no dispute that an agreement was made. The only dispute concerned the question whether or not it encompassed an obligation that both parties should furnish security. The contention that this, and other errors and shortcomings in the respondent's evidence, reflected upon her overall credibility was carefully assessed by the trial Judge. He took the errors and shortcomings into account but was nonetheless prepared to accept the respondent's evidence on the critical issues. He did so in circumstances in which he concluded that the appellant was neither honest nor credible. He was not prepared to accept the appellant's testimony on any significant issue and, in the absence of independent evidence, would not accept the genuineness or truthfulness of any document generated by him or at his instigation (at [383]). He found (also at [383]) that the appellant had "demonstrated himself to be deceitful and to manipulate others almost as a matter of course". The trial Judge found (at [341]) that there was "a quite extraordinary amount of evidence of lies, deceit and dishonesty on his part". There is no challenge to the findings concerning the appellant's lack of credibility, with the consequence that the respondent's evidence stands effectively uncontradicted by him.

7 I have examined the various errors and shortcomings that are said to be apparent in the respondent's evidence. Nothing has been identified which, in my opinion, would entitle this court to interfere with the assessment made by the trial Judge, bearing in mind that some allowance

(Page 8)

should be made for the advantage that he had in having seen and heard the witnesses: Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 at [25]. Also, the trial Judge made his credibility finding after a careful assessment of the documentary evidence (none of which seems to me to lend unambiguous support to the appellant's contentions) and taking into account the apparent logic of events: as to which see Fox (at [31]). He said (at [458]) in this last respect (rightly, in my respectful opinion) that the respondent would not have entered into an agreement with the appellant which gave him a 50 per cent share in the benefits but which provided, in effect, that she was to carry all of the risk, as the sole borrower of the loan funds and as the sole provider of security.

8 The respondent's evidence was clear in its effect. She said (par 61 of her statement tendered at trial) that the loan was to be in both names and that each would put their home "into the bank" by way of security. She was cross-examined in this last respect and maintained that, from "the beginning", the appellant told her that they would "mortgage both [their] houses and … do the business together" (transcript 232). Given:

(a) the clarity of her evidence in this respect;

(b) its relevantly uncontradicted character;

(c) the fact that the documents tendered at the trial (which were the product of the appellant's exclusive dealings with the bank) were not obviously inconsistent with the respondent's understanding of the arrangements (bearing in mind the trial Judge's finding that she and her husband had a limited capacity with the English language other than in everyday respects); and

(d) the apparent logic of events,

no basis has been shown for upsetting the findings made by the trial Judge.

9 Ground 1 consequently fails.

Ground 4 - Canning Highway property

10 The respondent contended in her statement of claim (par 40.5) that the appellant applied, or caused Ark to apply, partnership funds to the purchase, in his own name, of a property at 817 Canning Highway in Applecross ("Canning Highway property"). She alleged that on about 1 May 2000 the appellant transferred $150,000 from Ark's bank account to one of his own accounts and that, on the same day, he instructed the

(Page 9)

bank to transfer $71,567.89 of that sum to the purchase of the Canning Highway property. In his defence (par 40(e)) the appellant admitted that he "caused [Ark], from its funds, to advance to [him] $150,000 … which funds were used by … [him] as part of the consideration paid … [for the] acquisition of 817 Canning Highway, Applecross".

11 It was not in dispute at the trial that the purchase price of the Canning Highway property was $320,000. The appellant's evidence was that he borrowed the balance of $170,000 from the bank in order to acquire the property (transcript 979). This appears not to have been in dispute at the trial. The trial Judge found that the acquisition of the Canning Highway property "had nothing to do with Ark … nor the partnership agreement" and that the appellant was not authorised to use Ark's funds in that way (at [509]). He found that the sum of $150,000 had been used by the appellant in breach of the partnership agreement and also in breach of fiduciary duties owed by him to the respondent (also at [509]).

12 As Pullin JA has pointed out, after the judgment of the trial Judge was published, further submissions were made concerning the form of orders which should be made in relation to the Canning Highway property. In supplementary reasons (Lee v Mavaddat [2005] WASC 68 (S)) the trial Judge mentioned (at [10]) that the appellant had submitted that "the highest the [appellant's] case could be put is that the partnership had a 46.875 per cent interest in the property (reflecting the $150,000)" and that the substance of the objection "was that a declaration that the [appellant] holds the whole of the property by way of constructive trust on behalf of the partnership ought not to be made". Then, after referring to what he considered to be the relevant authorities, the trial Judge said (at [12]):

"As I have found, what occurred here, is that the [appellant] took advantage of the partnership assets and used them to purchase a property in his own name. The primary position therefore is that the property should be regarded as being held on trust by him for the benefit of the partnership. This is not a case in which the [appellant] ran a case to the effect that just allowances should be made to him in relation to this prayer for relief. The case was not pleaded in that way and no evidence was led with respect to it … "

He went on to say (also at [12]) that he had consequently reached the conclusion that the proper order was a declaration that the appellant held

(Page 10)

the Canning Highway property on trust for the partnership. The appellant considers that he erred in doing so.

13 There are, with respect, some difficulties with the reasoning of the trial Judge. The first is that, amongst the authorities referred to and relied upon by him, is the following extract from R P Meagher & W M C Gummow Jacobs' Law of Trusts in Australia (6th ed, 1997):

"Where the gain [achieved by a fiduciary in breach of duty] is an asset to which the defendant has himself contributed, the court may by charge or severance distinguish the respective interests therein, but where the court is unable to make the distinction, the trust will extend to the whole asset lest the fiduciary take advantage of his own wrong and the plaintiff lose all (United States Surgical Corp v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 238 - 42; Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 at 499)."

It is unclear why the trial Judge should have cited that extract. This was not, on the pleadings at least, a case in which the court could not distinguish between the trust interest and that of the appellant. The respondent's case was initially that only $71,567.89 of partnership funds had been appropriated to the purchase of the Canning Highway property. Her contention at the trial was that $150,000 of partnership funds had been so appropriated and she relied, in that respect, on what had been pleaded by the appellant in par 40(e) of the defence.

14 Next, there was in these circumstances no need for the appellant to run a case to the effect "that just allowances should be made to him". The respondent was not asserting that the whole of the property was purchased with partnership funds. There was no dispute concerning the contribution made by the appellant.

15 Counsel for the respondent endeavoured to support the decision of the trial Judge to declare a trust over the whole of the property acquired by reference to the proposition that a defaulting fiduciary should not be able to profit from his or her own misdeeds (as to which see Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 107 per Mason J). He submitted that this proposition was applicable to this case merely because the appellant could not have acquired the Canning Highway property without the contribution effected by way of the partnership funds. However, that submission, if I have understood it correctly, seems to me to overstate the position. It is settled that, where a

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trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary has the option of claiming a proportionate share of the asset or enforcing a lien upon it to secure his or her claim to the misapplied money. That is so whether the trustee mixed the trust money with his own before using it to acquire the asset or made separate payments from the two funds in order to acquire it: Foskett v McKeown [2001] 1 AC 102 at 131 per Lord Millett.

16 What should happen when a profit is achieved from the mixed use of trust moneys and personal moneys of the defaulting trustee raises greater difficulty. This issue was discussed by the High Court in Scott v Scott (1963) 109 CLR 649 at 662. There, McTiernan, Taylor and Owen JJ took, as an example, the case of a trustee who, in breach of trust, purchased shares for £2000 by the use of £1000 of trust moneys together with £1000 of his own. They went on to say:

"There is no doubt that the beneficiaries might elect, either, to take one-half of the shares or, alternatively, to claim a lien on the shares for £1,000. But they may not know of the purchase and do neither. Then suppose that prior to any election by the beneficiaries the trustee sells the shares for £3,000 and retains the proceeds in his hands. Is it to be thought that the right of the beneficiaries at this stage will be limited to a claim on those moneys for the specific sum of £1,000? The case, of course, would be one where the beneficiaries had never become entitled to any proprietary interest in the shares and where the proceeds of sale were not attributable in any measure to the sale of property to which they had become beneficially entitled. But there can be no doubt that they would be entitled not only to have the sum originally misapplied made good but also to obtain one-half of the resultant profit. We think the same conclusion must inevitably follow even if the property purchased with the mixed fund is property which is not 'specifically severable' and that the argument to the contrary must be rejected."

17 However, the beneficiary will not always take only a proportionate share of the profit. In Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440 the court recognised the general principle that, where a property is acquired in breach of fiduciary duty with mixed trust and personal money, the remedy in an appropriate case will be to restrict the profit or gain to be accounted for to a proportionate part of the total profit or gain. However, it went on to say that whether the principle is
(Page 12)

appropriate to a particular case depends upon the circumstances of the acquisition of the property, including the source from which the personal contribution was made and the nature of any profit to be gained by its acquisition. The court was there concerned with a case in which the fiduciaries had not used their own money but, having used trust money to provide the deposit and/or part of the purchase money so as to acquire an interest in property, provided the balance by way of a mortgage loan on the security of the property. Moffitt P said (at 448) that:

" … the [general] principle [should] not [be] applied where the fiduciary does not provide his own money, but, having used trust money to provide the deposit and/or part of the purchase money so as to acquire an equitable interest in the property provides the balance by a mortgage loan on the security of the property. This is the view expressed by Scott on Trusts 3rd ed (1967) vol 5 at 3618. The provision of this money itself depends on the gain flowing from the breach of trust."

18 In the same case Hutley JA said (at 450):

"When the contract for the purchase of [the property] came into existence, the respondents became the equitable owners of that property and, simultaneously, became the trustees of the property for the appellant. In mortgaging the property - even for the purpose of completing the contract of sale - without the consent of the appellant, they committed another breach of trust and it would appear to me to be inconsistent with any principle that resources which a trustee gained by further breach of trust can be treated as provided from his own resources for the purpose of the rule that profits are to be apportioned between the trustee and the trust estate in accordance with their respective contribution.

The respondents contended that as they provided a personal covenant in addition to the trust property, they are entitled to treat the mortgage moneys as provided from their own resources. If this is right, every time a trustee raises money on security of the trust property for the purposes of the trust, he is mingling his own resources with those of the trust property. This is clearly unsound."

He went on (at 451) to conclude that the whole of the profits to be realised from the sale of the property belonged to the appellant unless it could be

(Page 13)

shown "that the respondents contributed their own money, that is, money which was neither derived from the appellant, nor from the mortgage of [the property], to the cost of the enterprise".

19 The third judge, Mahoney JA, applied a similar process of reasoning (at 458 - 459). He concluded (at 459) that even if the respondents had a proprietary interest in the profits proportionate to the amount of the bank loan, they were required to account to the appellant for it, subject to their right to be indemnified against, amongst other things, their liability to the bank in respect of the loan. He went on to say (also at 459):

"Before his Honour and before this Court, the defendants [respondents] relied upon the fact that, in the obtaining of the bank loan moneys, they undertook and still have personal liability for the repayment of them. The bank would not, I assume, have lent the moneys if they had not undertaken such liability. The fact of such liability is, of course, relevant in determining whether, for the purposes of the tracing principle, the bank loan moneys were the defendants' moneys. But that fact does not, I think, prevent the application of the profit principle. It would, I think, not be unusual to find in cases where a trustee or a fiduciary has been held liable to account for a profit, that, in deriving the profit, the company or fiduciary undertook some form of personal liability to a third party. Counsel were not able to refer the Court to any case in which liability under a mortgage had been incurred nor was reference made to other forms of personal liability. But the existence of, for example, personal liability under a contract to purchase assets: cf Phipps v Boardman [1967] 2 AC 46, at 56, 59; [1964] 1 WLR 993, at 1001, 1004; [1964] 2 All ER 187, at 195, 198, does not differ for this purpose from personal liability for repayment of a loan. I do not think that the fact that the defendants undertook personal liability of this account should render them immune from the profit principle."

20 Davies has since been applied in Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 (and see also In the Marriage of Wagstaff: Gruber (Intervener) (1990) 14 Fam LR 78). In that case a house was purchased by using $20,000, the proceeds of sale of stolen stamps, and $70,000, which was borrowed on security of an unregistered bank mortgage over the house. The property was then sold for $110,000. It was held that the purchasers of the house were constructive trustees of the money derived from the stolen stamps. The Australian Postal Corporation
(Page 14)

(from whom the stamps had been stolen) was held to be entitled to a charge on the house for the $20,000 which it could trace into it. Also, the money borrowed from the bank and contributed towards acquisition of the property was repayable to the constructive trustees, and hence to the bank, out of the proceeds of the sale before the amount of divisible profits was ascertained. Importantly for present purposes, the court (Bryson J) held (at 597) that, because the contribution towards acquisition of the property by the constructive trustees was raised by mortgaging the property acquired, the constructive trustees had no right to a share in the profits based on their contribution, and the whole of the profit ultimately obtained should go to the Australian Postal Corporation.

21 In the present case, the only evidence concerning the use to which the sum of $150,000 was put was that given by the appellant, apart from some evidence given by the respondent concerning the fact that the appellant had been using the partnership money to renovate his offices in the Canning Highway property. While it is unclear from the trial Judge's findings just how much of the sum of $150,000 was spent on the acquisition and refurbishment of the Canning Highway property, the trial Judge appears to have treated the whole of that sum as having been spent on the acquisition, or at least for the benefit, of that property and the parties appeared to be content to accept that finding for the purposes of the appeal. I have said that it was admitted in the defence that $150,000 of partnership funds was used by the appellant as part of the consideration paid for the Canning Highway property.

22 It seems from the evidence at trial (exhibit P24) that the loan obtained by the appellant from the bank to finance the balance of the purchase price was secured by a mortgage over the property. However, no reliance was placed upon this for the purposes of the appeal and, indeed, we were not referred to any evidence in that respect. Nor, did the respondent ever advance her case at the trial upon the basis that the trust property had been used to secure the balance of the purchase price (and nor was the appellant said to have acted fraudulently: United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 241). As I have said, the respondent pleaded only that the appellant appropriated $71,567.89 of trust funds to the acquisition of the property and it was on this basis alone that she sought, in her pleading, a declaration that the appellant held the whole of the property on trust for the partnership. It also seems plain, from the supplementary judgment of the trial Judge, that no submission of the kind accepted in Davies was put to him. Indeed, he appears not to have been referred to that case, which was also not relied upon or even referred to for the purposes of the appeal.

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Finally, I should mention that there was (and still is) no suggestion from anyone that the bank (which was not a party to the action, and was not heard in respect of the respondent's claim) would be prejudiced by a declaration that the appellant's interest in the Canning Highway property was held by him on a constructive trust for the partnership.

23 In these rather unsatisfactory circumstances, it seems to me that this court is left with no option other than to deal with the issue in the way that it has been dealt with by the parties. That is to say, it should be assumed, upon the basis of the pleadings and the trial Judge's unchallenged finding, that the sum of $150,000 was appropriated from trust funds for the purposes of acquisition of the Canning Highway property and that the balance of the purchase price was provided by the appellant from funds borrowed from the bank in circumstances in which there was not, and is not, any contention that these funds, too, were obtained only through the misuse of trust property, whether by way of mortgage or otherwise. I should add that there is no notice of contention supporting the judgment of the trial Judge on any other basis than that expressed by him.

24 As will be apparent, the respondent's contention that she is entitled to a declaration of trust over the whole of the Canning Highway property depends only upon her assertion that, without the use of the partnership funds, the appellant would not have been able to buy the property. She contends that it made no difference that some of the purchase price was provided by way of the borrowed funds because these could not have been borrowed but for the use of the partnership funds. She contends that this provides the necessary causal connection between the breach of fiduciary duty in respect of the misused funds and the profit obtained by means of the borrowed funds: see, in this respect, Australian Postal Corporation at 594 per Bryson J; and cp Davies at 458 per Mahoney JA. However, as I have said, no case was pleaded or run by the respondent that the appellant could not have acquired the Canning Highway property without using partnership funds. As I have stressed, her pleaded case was only that the appellant applied or caused Ark to apply partnership funds towards the purchase of the Canning Highway property. The appellant has consequently not been given any opportunity to address any evidence to the issue whether, without the use of partnership funds, he would have been able to purchase the Canning Highway property.

25 In all of the circumstances, most especially the way in which the case was pleaded and run at the trial, there seems to me to have been no basis for the declaration made by the trial Judge. Consequently, and given the dearth of relevant evidence enabling the trial court, or this court, to

(Page 16)

formulate any more suitable determination, it seems to me to be appropriate to apply the general principle in Scott and to declare that the appellant holds his interest in the Canning Highway property on trust for the partnership only to the extent of its proportionate contribution (accepted by the parties to be 46.875 per cent of its value). I would hear further from the parties as to the form of any orders that should be made to give effect to this conclusion.

Ground 5 - Indemnity costs

26 As to ground 5, I agree with Pullin JA and do not wish to add anything to what he has said.

Ground 6 - Paragraph 1 of the judgment of the trial Judge

27 The background to ground 6 has been set out in the judgment of Pullin JA. I will not repeat it, save for those aspects that are critical to an understanding of the ground.

28 The causes of action that were found to have been proved against the appellant encompassed such matters as breach of fiduciary duty, unjust enrichment, unconscionable conduct, breach of s 10 of the Fair Trading Act 1987 (WA) and breach of contract. As the trial Judge pointed out (at [547]), a number of the claims were brought in the alternative and there was also considerable overlap between them. However, the orders that were ultimately made were, relevantly, only that:

"1. The Defendant pay the Plaintiff the sum of $2,246,467.98.

2. If the Plaintiff recovers any sum from the liquidator of Ark Securities Pty Ltd then the Plaintiff is not to enforce this judgment to the extent of any such recovery.

3. If the Plaintiff recovers any further sum from the liquidator of Ark Securities Pty Ltd when the Plaintiff has already recovered the full extent of the judgment sum, interest and costs, then such amount be held by the Plaintiff on trust for the Defendant and delivered to him.

…

6. The Defendant holds the property at 817 Canning Highway, Applecross … on trust for the Partnership between the Plaintiff and the Defendant, to perform the

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agreement between them for the acquisition, development and sale of … [the Subiaco] property …

… "

29 The sum of $2,246,467.98 was arrived at by agreement between the parties ([2] of the supplementary reasons). The respondent, by her then counsel, quantified her loss as being "the full amount of her current indebtedness to St George Bank". The parties agreed that the amount of this indebtedness was $2,246,467.98 as at the date of judgment, being 22 June 2005. This agreement was reached notwithstanding that, prior to the trial, the respondent had commenced an action against the bank in which she sought a declaration that the mortgage over her South Perth property ("mortgage") and the loan agreement on which her indebtedness depended ("loan agreement") were void and the pleadings in that action had been made available to the appellant.

30 Since the entry of judgment against the appellant, the respondent has continued to assert, in her action against the bank, that the mortgage and loan agreement are void. Also, as Pullin JA has pointed out, the respondent has since succeeded in defending an application, brought by the bank, for a permanent stay of her claim against it and for summary judgment on the bank's counter-claim for payment of what is owing by the appellant under the loan agreement and for an order that she deliver up vacant possession of her South Perth property: Lee v St George Bank Ltd [2006] WASC 221. That judgment, given by Master Newnes, is currently under appeal.

31 Subsequent to the making of oral submissions on the appeal in the present proceedings, the respondent filed an affidavit sworn by her solicitor, Nicholas Timoney, which annexes, amongst things, a copy of the written submissions made on behalf of the respondent in the course of the bank's application for a stay and for summary judgment in the proceedings between it and the respondent. The bank had asserted, in that application, that the respondent's action against it was an abuse of process, given the position that she had adopted in the trial of the action against the appellant. Paragraphs 24 and 25 of the submissions lodged on behalf of the respondent in that application read as follows:

"The issues which are to be determined in the present litigation are not the same issues as in the Mavaddat litigation. True it is that in the Mavaddat action it was common ground that the Loan Agreement was enforceable and that more than $2 million

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including interest was due thereunder. However the question of the enforceability of the Loan Agreement under the various heads of claim in this action, was not litigated. The relevant relief to be provided in that respect was never considered.

Accordingly, 'the full amount of her current indebtedness to St George's [sic] Bank'(Lee v Mavaddat [2005] WASC 68 at [484]) was but a then accurate particular of the damages suffered by the respondent."

32 Against this background, the appellant contends that the order made by the trial Judge should be set aside and that there should, instead, be an order requiring the appellant to indemnify the respondent in respect of whatever sum she is liable to pay to the bank. He contends by his counsel that, had the trial Judge known that the respondent would continue to contend that the loan agreement and mortgage were void, he would not, and could not properly, have made an order in the terms of par 1 of the orders made by him.

33 The respondent opposes the application for leave to amend the grounds of appeal by the addition of ground 6 upon a number of bases. The first of these is that there is nothing to suggest that the appellant and his solicitors were unaware, at the time of the trial, of the relief sought by the respondent in her action against the bank. I have said, in this respect, that the appellant's solicitor had a copy of the statement of claim in that action prior to the trial in these proceedings. The second proposition is that neither the appellant nor his solicitor has deposed to the fact that a money judgment was permitted to be entered in the belief that the respondent proposed to discontinue her action against the bank or to consent to judgment in respect of the bank's counter-claim. The third (which overlaps the first two propositions) is that the only arguably fresh evidence is the respondent's successful defence of the summary judgment application and that this is of no consequence given the first two propositions. The fourth is that, absent the order being left as it is, or at least being replaced by one providing equivalent security, the respondent will be left in a precarious situation in which she is effectively forced to test the bank's claim against her.

34 The respondent also submits that the appellant's motion to add the proposed ground of appeal should be stood over until the appeal against the judgment of Master Newnes has been heard. That is because, if the Court of Appeal should uphold that appeal and accept the submissions of the bank, the respondent would not oppose the substitution of an order for

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indemnity, subject to her entitlement to money judgments on claims that are unaffected by and in addition to that for an indemnity.

35 It seems to me that the order made by the trial Judge was inappropriate having regard to what is now known. Had he known that the respondent intended to maintain her contentions that the mortgage and loan agreement were void, the trial Judge could not have made an order in the terms that he did. While it is true that the solicitors for the appellant appear to have been aware of the action taken by the respondent against the bank, they, and the trial Judge, were entitled to assume, given the unequivocal statement made by her counsel at the trial, that, notwithstanding that action, the respondent was in fact liable to the bank in the amount specified and would acknowledge this if a judgment for that amount was obtained against the appellant. The transcript of the trial reveals that the parties had been attempting to reach agreement as regards the quantum of the amount then owed by the respondent to the bank (transcript 721 - 722). As I have said, the agreement in respect of that amount was plainly arrived at upon the basis that the amount of $2,246,467.98 (based on information provided by the bank's solicitors) represented "the full amount of her current indebtedness to St George Bank": par 62 of the respondent's outline of submissions dated 17 January 2005 and lodged with the trial Judge on that day. In circumstances in which the respondent's case against the bank was that the loan agreement and mortgage were void, and not voidable, this could not have been understood to mean that this was the amount of her indebtedness unless and until the court avoided those agreements.

36 In these circumstances, it seems to me that it cannot be said that it is too late, now, for the appellant to challenge order 1. I would consequently allow the amendment by way of the addition of ground 6. It also seems to me to follow from what I have said that the evidence of the position subsequently taken up by the respondent is admissible under r 47(3)(d) of the Supreme Court (Court of Appeal) Rules 2005 (WA). Finally, it follows that ground 6 should be upheld and that order 1 made by the trial Judge should be set aside. However the parties have not sufficiently addressed the question of what orders should be substituted for that order. That question has been touched upon in oral submissions and in written submissions filed subsequently, but this has not been done in any comprehensive way. I consequently agree with Pullin JA that it is appropriate to hear further from the parties before making any orders in this respect.

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Conclusion

37 It follows that I would uphold grounds 4 and 6 of the grounds of appeal and that I would dismiss grounds 1 and 5. I would hear further from the parties as to the consequential orders that are now required.

38 McLURE JA: I agree with the reasons for judgment of Steytler P in relation to grounds 1 and 6, the orders he proposes and the reasons for judgment of Pullin JA in relation to ground 5. I propose to state my own reasons in relation to ground 4.

Ground 4

39 The respondent sought and obtained a declaration that the appellant holds the Canning Highway property on trust for the partnership. Her claim, both as pleaded and presented at trial, relied solely upon the fact that $150,000 of partnership funds were improperly applied by the appellant towards the purchase for $320,000 of the Canning Highway property in the name of the appellant. It was common cause that the balance of the purchase price of $170,000 was borrowed by the appellant from a bank. What did not figure in the argument below or in the appeal was the unacknowledged but proven fact (exhibit P24) that the amount borrowed by the appellant was secured by a first registered mortgage in favour of the lender, St George Bank Limited ("the Bank").

40 The impact of a constructive trust on third parties is a relevant consideration in determining the appropriateness of such a remedy: Giumelli v Giumelli (1999) 196 CLR 101 at [10]; Soulos v Korkontzilas [1997] 2 SCR 217 at 236, 241, 243. The Bank was not a party to the action and was not heard on the respondent's claim. I infer from this that the respondent (and the appellant) accept that the Bank is not prejudiced by the constructive trust claim because it has priority under its registered mortgage. That being the case, the respondent's claim was in effect for a declaration that the appellant hold his interest in the Canning Highway property on trust for the partnership. I will proceed on that basis.

41 The mortgage was not in evidence nor was there any evidence as to the amount secured by the mortgage at the time of trial, the value of the Canning Highway property or the appellant's equity in it.

42 The appellant appears to accept that the partnership was entitled to a proportionate share in the Canning Highway property, being the proportion the partnership funds bore to the total purchase price, a figure of 46.875 per cent. This covers in effect the amount of the partnership's

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capital contribution ($150,000) and its proportionate share of the profit, being the increase in value of the property. This is in accordance with what is known as the principle in Scott v Scott [1964] VR 300. In that case a trustee, in breach of trust, borrowed funds from the estate he was administering which were mixed with other funds to purchase land. The borrowed trust funds were later repaid. The only issue in the case concerned the estate's claim to a proportionate share of the profit, being the proven increase in value of the land. The primary Judge held that the estate was entitled to share in the increase in value in the same proportion to the total increase as the amount of the funds acquired in breach of duty and contributed to the purchase price bore to the total price.

43 The decision went on appeal to the High Court: Scott v Scott (1963) 109 CLR 649. The issue determined by the High Court was whether the estate was entitled to anything more than an equitable lien on the property for the precise amount which had been misapplied. The High Court said (at 660):

"What must be borne in mind in the case is that the order appealed from rests upon a twofold basis … It rests upon the liability of [the trustee] to make good a breach of trust and also upon his liability to account for a profit which accrued to him, or to his estate, as the result of his misuse of trust funds. These are two different and distinct notions. A trustee's liability to account for profits accruing to him may arise without any positive breach of trust; on the other hand, a trustee may become liable to make good a misapplication of trust moneys with interest even though he has made no profit by the misapplication. But where the expenditure of moneys constitutes a breach of trust the remedies may overlap for the beneficiaries may have both a proprietary and personal remedy and, of course, if they choose to pursue the former this will be the full measure of the relief available to them."

44 A separate question considered but not determined by the High Court in Scott was whether, if (as in the case of land) the property was not severable, equity provided the estate with a right to claim a proportionate (proprietary) interest in the property rather than just a lien or a charge. The distinction is between the amount of a personal claim secured by a lien, in which event the amount secured is fixed, or a proprietary interest in the property itself so the claimant takes the risk of a rise or fall in the value of the property. Although the High Court did not determine the issue, it indicated tentative approval of United States decisions to the
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effect that where trust moneys are mixed with moneys of the trustee to acquire property which is not specifically severable, the beneficiaries are entitled to claim a proportionate interest in the property.

45 The English position is consistent with the American position as explained by Lord Millett in Foskett v McKeown [2001] 1 AC 102 at 131. Lord Millett said:

"Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim … for the amount of the misapplied money."

46 In the absence of any personal claim such as an account of the partnership moneys misapplied and of the profits, I infer the respondent's claim was for an interest in the Canning Highway property. As there is no challenge to the nature of the claim, it is unnecessary to determine the issue left open by the High Court in Scott.

47 The respondent's claim was not confined to the initial capital contribution of partnership funds to the purchase of the Canning Highway property together with a share of the profits proportionate to the capital contribution. Her claim extended to the appellant's proportionate share of the profits together with the appellant's initial capital contribution (or any remaining capital contribution that is not exhausted by the mortgagee's entitlement).

48 It is the case that where a court cannot distinguish the fiduciary's property from that acquired in breach of fiduciary duty, the constructive trust can extend to the whole of the asset acquired with the mixed fund: Brady v Stapleton (1952) 88 CLR 322. However, that is not this case.

49 Further, it may be that the owner of the misapplied funds is entitled to retain all, rather than a proportionate share, of the profit where the fiduciary has been fraudulent: United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 241. The respondent did not plead or rely on fraud for her constructive trust claim.

50 Finally, there are cases where the owner of the misapplied funds was entitled to all the profit arising out of the purchase of an asset with mixed funds where the defaulting fiduciary's contribution to the purchase price came from borrowed funds secured by a mortgage over the entire

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property: Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440; Australian Postal Corporation v Lutak (1991) 21 NSWLR 584; In the Marriage of Wagstaff: Gruber (Intervener) (1990) 14 Fam LR 78.

51 The facts of Davies are quite unusual. The respondents entered into a terms contract to purchase land and an associated business, paying a deposit with funds obtained in breach of their fiduciary duty. Completion of the sale was deferred until a later date. The respondents went into occupation and conducted the business. Three years later, the respondents completed the purchase from borrowed funds which were secured by a registered mortgage over the whole of the land. The land had significantly increased in value between the time of the payment of the deposit and the completion of the sale. Four months elapsed between the completion of the sale and judgment at first instance. The trial Judge applied the Scott principle and limited the constructive trust to a percentage interest in the property and business based on the ratio which the moneys used in breach of fiduciary duty for the deposit bore to the moneys used to complete the purchase. The Court of Appeal held that the claimant was entitled to all the profits. The evidence established that most, if not all, of the increase in value of the property occurred prior to the application of the borrowed funds to complete the sale. As the respondent in the present case did not rely on the mortgage in support of her constructive trust claim, it is unnecessary to consider the reasoning in any detail. It is sufficient for present purposes to note that Bryson J in Australian Postal Corporation (at 594) concluded that Davies was authority for the proposition that money borrowed by a defaulting fiduciary on the security of the whole of the property is excluded from consideration when calculating the entitlement to shares in profits by reference to capital contributions. The consequence was that the claimant in that case was entitled to all the profit arising from the purchase of a property. A similar approach was taken in Wagstaff.

52 In her support of the decision of the primary Judge the respondent did not rely on, nor indeed refer to, the established exceptions to the principle in Scott supported by the authorities. Rather, she relied on the statements of general principle in the reasons for judgment of Mason J in Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 107 - 108. He was considering the law relating to the liability of a fiduciary to account for profits obtained by reason of a breach of fiduciary duty arising from a conflict of interest or from taking advantage of opportunity or knowledge derived in consequence of the fiduciary position. I accept that the general principles also apply when the

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breach of fiduciary duty arises from misuse of the claimant's funds. The general principles are as follows: (1) a fiduciary cannot be permitted to retain a profit or benefit which has been obtained by reason of a breach of fiduciary duty; (2) any profit or benefit obtained by a fiduciary is held by the fiduciary as a constructive trustee; (3) a court of equity in decreeing a constructive trust is bound by no unyielding formula, the equity of the transaction shaping the measure of relief (citing Cardozo J in Beatty v Guggenheim Exploration Co (1919) 225 NY 380 at 386); (4) the nature and scope of the relief is closely associated with the answers to two questions, being what is the breach of fiduciary duty and what is the profit or benefit which the fiduciary has made in consequence of that breach.

53 The respondent contended that it was proper to hold the appellant liable to account for the profit or benefit arising from the appellant's financial contribution to the purchase of the Canning Highway property which (leaving aside issues relating to the mortgage which are not relied on) does not itself give rise to any breach of fiduciary duty. The respondent says she is entitled to the profit attributable to the appellant's capital contribution because she asserts that, but for the use of the partnership funds, the appellant would not have been able to obtain finance to purchase the Canning Highway property. On that basis there is a causal connection between the breach of fiduciary duty in relation to the use of partnership funds and the profit attributable to the borrowed funds.

54 As noted by Mahoney JA in Davies (at 458), an advantage of that nature has not conventionally been seen as rendering the defaulting fiduciary liable to account to the claimant for the profit proportionate to the fiduciary's interest in the property. On the other hand, Bryson J in Australian Postal Corporation (at 594) concluded that a defaulting fiduciary could not retain the profit attributable to his or her contribution if that profit could not have been made without misusing the claimant's funds. This view is consistent with Mason J's statement of general principle that a defaulting trustee cannot retain a profit obtained "by reason of" the breach. However, Bryson J went further and would place the onus on the defaulting fiduciary to prove that he would have made the proportionate part of the profit by investing his (or borrowed) moneys even if he had not misapplied the partnership funds. The respondent did not contend that the appellant bore the onus of proving causation and I am not persuaded such a position is consistent with the decision of Mason J in Hospital Products (at 112). However, it is unnecessary to determine these issues in this case. The question whether or not the appellant could have acquired the Canning Highway property without using the partnership funds was not pleaded or litigated at trial. Even if findings

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made in other contexts arguably provide a foundation for such a finding, the appellant has been denied the opportunity to adduce evidence to address the specific issue.

55 Further, and in any event, it would be inequitable and inappropriate to make the order sought by the respondent. Even if causation had been pleaded and proved the respondent could only be entitled to (1) trace the misapplied funds to the Canning Highway property; (2) a proportionate share of the profits attributable to her contribution to the purchase price; and (3) the profit attributable to the appellant's capital contribution to the purchase price. On the evidence adduced at trial there is no arguable basis for depriving the appellant of his capital contribution to the purchase price. The position might have been different if there was evidence that the appellant's capital contribution was in effect offset by the priority amount owing under the mortgage and secured against the property.

56 If the respondent was entitled to all the profit from the purchase of the Canning Highway property, it would have been open to order that the appellant hold his entire interest in the Canning Highway property on constructive trust for the partnership but equity would require the appellant's entitlement in relation to his capital contribution to be addressed by way of an allowance and that is not a matter on which the appellant bears any onus. However, having regard to the issues litigated at trial and the almost complete lack of relevant evidence necessary to make a determination as to how to do equity between the parties, the appropriate course is to apply the general principle in Scott and to declare that the appellant holds his interest in the Canning Highway property on trust for the partnership to the extent of its proportionate contribution to the purchase price being 46.875 per cent.

57 PULLIN JA: This is an appeal against the judgment of Roberts-Smith J (as he then was) who, inter alia, ordered the appellant to pay the respondent the sum of $2,246,467.98, and declared that a property at Canning Highway, which had been purchase by the appellant, should be held on trust for the partnership (of which the parties were partners). His Honour ordered that the appellant pay costs to be taxed on an indemnity basis.

The trial Judge's findings

58 The respondent is a South Korean woman. She grew up and worked in South Korea until 1978 when, at 26 years old, she married a Chinese businessman. She then lived with her husband in Hong Kong until about 1987 or 1988. In 1988 she began living in Western Australia. The trial

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Judge found that the respondent did not have a sufficiently good understanding of written or spoken English to be able to fully comprehend matters, outside routine or daily experience, without the benefit of an interpreter.

59 The appellant carried on business as a real estate agent. The appellant met the respondent and her husband in 1988 in relation to a real estate transaction. After this the appellant, acting in his capacity as a real estate agent, facilitated the sale of a number of properties to the respondent or her husband. One of those properties was at 116 Forrest Street, South Perth, which became the respondent's home. In about 1993 the appellant formed his own real estate business known as Key West Realty.

60 The trial Judge found that in 1999 the respondent and the appellant entered into an agreement pursuant to which they entered into a partnership for the purpose of acquiring, developing and selling a property in Subiaco. The agreement was that the property was to be acquired and held by a company. The shares in the company were to be held by the appellant and respondent equally. The acquisition and development of the Subiaco property was to be funded by money to be borrowed by the appellant and respondent from a bank on security to be provided by each of them. The trial Judge made his finding about the agreement between the parties in the following terms at [417]:

"I find it was a partnership agreement to incorporate a company as a vehicle for the acquisition, development and sale of the Subiaco property, that the plaintiff and defendant would each hold 50 per cent of the issued shares in the company and be the directors of it and that they would jointly borrow and provide security for the funds necessary to acquire and develop the property."

61 At [420] his Honour again referred to the borrowing and security aspect of the agreement when he said:

"I further accept the agreement between the plaintiff and defendant was that the parties would be joint borrowers and each give security for the loan over their own properties."

62 The appellant admitted there was a partnership agreement. He pleaded in the defence, and gave evidence, that the business of the partnership was much more extensive than merely conducting a business in relation to the Subiaco property. That aspect may be ignored because
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the appellant's evidence was rejected by the trial Judge and there is no appeal against the rejection of his evidence.

63 The respondent pleaded that the partnership agreement was entered into in May 1999. The appellant pleaded that the partnership agreement was entered into in August 1999. The trial Judge found that the agreement was entered into in August 1999. That finding is not in dispute.

64 The appellant conducted negotiations with owners of the Subiaco property to purchase the property. A company, Ark Securities Pty Ltd, was incorporated in September 1999 as the entity to hold the title to the Subiaco property, and the appellant and respondent became the sole shareholders and directors of the company. The Subiaco property was made the subject of a written offer to purchase signed by the respondent on behalf of Courtza Pty Ltd (the respondent's company) and by the appellant on behalf of Keywest International Pty Ltd (the appellant's company) which offer was accepted. The purchase price was $843,000. Ark Securities Pty Ltd was subsequently nominated as purchaser and became the registered proprietor of the Subiaco property.

65 The appellant undertook the task of seeking finance. He approached Bankwest and St George Bank on behalf of Ark Securities Pty Ltd. Bankwest dropped out of the picture in December 1999 and the appellant continued to deal with St George Bank which eventually provided finance.

66 The respondent never spoke to any St George Bank officer about the loan for the acquisition and development of the Subiaco property. The appellant assumed the conduct of all dealings with the bank. The appellant deliberately excluded the respondent, telling her that there was no need for her to go to the bank and that the appellant told the bank officers he was handling the respondent's affairs. He caused all bank correspondence to be sent to his own address. The trial Judge found that, in his dealings with the bank, the appellant owed fiduciary duties to the respondent. In particular, the trial Judge said at [432]:

"On the facts as I have found them, the [appellant] owed to the [respondent] fiduciary duties, including a duty to act in good faith towards her as a partner and in carrying out the project, to refrain from preferring his personal interests to hers or those of the partnership and to refrain from securing for himself any

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benefit to the exclusion of the [respondent], in relation to the project."

67 The appellant's efforts elicited several varying offers of finance from the two banks between October 1999 and January 2000. Up until about mid-December 1999, the financial arrangements proposed always contemplated that both the appellant and the respondent should provide guarantees and indemnities. Until the end of December 1999, Ark Securities Pty Ltd was always proposed as the borrower. The trial Judge found that until the point was reached where loan documents were executed by the respondent, the discussion between the appellant and respondent about the loan and security was only in general terms and to the effect that they would both have equal shares in the partnership, be equally liable for repayment of the loan and equally commit assets as security for the loan. The trial Judge found that the appellant consistently represented to the respondent that he (the appellant) would bear equal liability for the loan and that both would provide security for the loan. It is important to note that there were two representations. One was that the appellant was arranging a loan with respect to which the appellant and respondent would both be liable. The second was that the appellant was arranging a loan in respect of which both would provide security to the bank.

68 In January 2000 the appellant finally elicited from St George Bank a written offer of finance in the amount of $1,625,000. However, the offer was not made to Ark Securities Pty Ltd, as all other offers had been in the preceding months. The offer was made to the respondent alone, and the offer elicited did not require the appellant to guarantee the loan. The offer required, as security for the loan, a mortgage over the respondent's home at South Perth. The offer did not require any security from the appellant. The first suggestion from a bank that the respondent's South Perth property should be offered as security occurred in December 1999. This was at the instigation of the appellant.

69 The appellant presented the loan agreement and the mortgage to the respondent in such a way as to represent to her that it was giving effect to their agreement, and that the funds would be jointly borrowed and jointly secured. It was in reliance upon that representation that the respondent accepted the St George Bank loan facility (by signing the bank's offer and by executing a mortgage in favour of the bank over her Forrest Street property).

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70 The trial Judge found that the respondent would never have entered into the partnership agreement with the appellant which gave the appellant a 50 per cent share of profits in circumstances where the respondent was the sole borrower and where the loan was secured only over the respondent's property. The appellant told the respondent's husband, Johnson Lee (who was at the relevant time in Hong Kong), about some aspects of the transaction. Johnson Lee communicated what he was told to the respondent. The appellant contends that in this way the respondent was kept fully informed of the details of the evolving finance arrangements. Whether that was so, that is, whether Johnson Lee was fully informed or not, will be covered when dealing with ground 1.

71 Once the respondent had signed the bank loan facility documents and executed the mortgage, the St George Bank credited the $1,625,000 (less bank fees) to an Ark Securities Pty Ltd account with St George Bank in accordance with a "loan proceeds disbursement authority", which had been signed by the respondent on the same day and time as the mortgage and loan agreement documents were signed. From the Ark Securities Pty Ltd account moneys were drawn to pay the purchase price of the Subiaco property.

72 Other moneys were drawn from the Ark Securities Pty Ltd account by the appellant. (He had arranged it so that only he was authorised to draw on the account). For example, the appellant drew from the account $487,000 to pay himself "project management fees" and other fees. He drew out $157,231.28 for share trading transactions. He drew $60,000 to cover the cost of a trip he made to China. He drew $150,000 which he used to make up part of the purchase price of a property at 817 Canning Highway. It is not in dispute that all of these (and some other withdrawals) were withdrawals not authorised by the respondent.

73 The terms of the St George Bank loan required the loan to be repaid by the respondent after one year. It was not in dispute that Ark Securities Pty Ltd did not repay the money it had obtained from the respondent, and it was not in dispute that on 29 January 2001 the respondent rolled over her debt by taking out a further loan from St George Bank for the amount she then owed ($1,745,000 which included interest) on or about 29 January 2002 and otherwise on the same terms and conditions as the original loan. The trial Judge found that since then the loan remained outstanding, the interest had been capitalised and that as at October 2004 the amount outstanding was $2,124,679.94.

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74 The appellant and the respondent could not agree on what was to be done in relation to the Subiaco property and, as a result, a provisional liquidator of Ark Securities Pty Ltd was appointed. The Subiaco property was sold at auction by the provisional liquidator for about $667,000.

75 The trial Judge found that the appellant's two representations to the respondent, firstly, that the St George Bank loan was to be a loan made to him and to the respondent jointly, and secondly, that it was to be secured by mortgages over both their properties, were false representations [464]. The trial Judge found (at [472]) that if the appellant had told the respondent that the borrowing was to be solely in her name and that he was giving no security for it, she would not have signed the St George Bank documents (ie the Bank's offer of the $1.65 million facility and the mortgage over her property). His Honour also upheld the plaintiff's allegation of breach of fiduciary duty. His Honour held that the appellant's conduct in causing the respondent to accept the loan, execute the mortgage and advance the funds to Ark Securities for the purposes of the partnership agreement, resulted in a detriment to the respondent in that she became solely liable for repayment of the loan and bore the whole risk in relation to it. His Honour also held that the appellant obtained a benefit for himself in that he arranged for sufficient funds to be advanced to Ark Securities for the partnership project at no cost and no liability to himself and was thereby able to benefit from the funds because of his right to participate as an equal partner.

76 His Honour then concluded at [465] that the appellant "… preferred his own interests to those of the [respondent] and so breached his fiduciary duty to her. The [respondent's] pleas of undue influence, unconscionable conduct and breach of contract in relation to the bank loan … have also been made out." The trial Judge concluded that the respondent was entitled to equitable compensation for breach of the appellant's fiduciary obligations, to damages under the Fair Trading Act 1987 (WA) as a result of the appellant's deceptive and misleading conduct and to damages for breach of contract.

77 The trial Judge also found that the respondent's indebtedness to St George Bank should be accepted as the measure of loss for which she was to receive equitable compensation and to be the measure of her damages under the Fair Trading Act. The prayer for relief in the respondent's statement of claim claimed equitable compensation, damages for breach of contract, damages pursuant to the Fair Trading Act and, in par 7, "an order for an indemnity … for the whole … of all amounts the [respondent] is liable to pay to St George Bank Ltd".

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The form of paragraph 1 of the judgment

78 Once the reasons for decision had been published, the parties then conferred about the form of the judgment. Following the conferral, judgment was entered, not in terms of par 7 of the prayer for relief, but instead in terms that the appellant should pay the respondent the sum of $2,246,467.98. How this came about requires a reference to some of the events leading up to the judgment. The statement of claim as it stood at the commencement of the trial in par 26.3 pleaded that, by reason of the fact that she had entered into the loan arrangement with St George Bank, the respondent had "incurred or will incur a liability to the Bank … of approximately $1,500,000 after recourse to [Ark Securities Pty Ltd] …" In opening the case, senior counsel for the respondent said that the respondent's loss was the full extent of her "present and continuing liability" to St George Bank Ltd. During the course of evidence, senior counsel for the respondent handed up to the trial Judge a schedule of the respondent's particulars of loss and damage and informed the court that:

"We are in the process … of attempting to reach agreement on a figure in relation to the amount presently owed by [the respondent] to St George Bank Ltd."

79 He said that he had spoken to senior counsel for the appellant who had advised that it was not necessary for the respondent to call anyone from the bank. As a result of agreement between the parties, the document entitled "Minute of Facts St George Bank Ltd" was then tendered and became exhibit P23. The minute of facts recorded the fact that "the amount due", ie the amount due by the respondent to St George Bank, was $2,124,679.94. A spreadsheet was attached showing how this was calculated and showing the interest rates applicable. Included within the exhibit was a copy of a letter from Mallesons Stephen Jaques, the solicitors for St George Bank to Stables Scott, the solicitors for the respondent, which letter referred to a telephone conversation between a solicitor in Mallesons' office to a person in Stables Scott's office, concerning the debt "owed by [the respondent] to St George Bank". The letter stated that St George Bank would make a bank officer available to verify in court that the amount set out in the statement and spreadsheet were correct. As a result of the agreement between the parties, that was not necessary.

80 In the respondent's written submissions at the close of the trial, par 62 stated that "[the respondent's] loss is the full amount of her current indebtedness to St George Bank". The form of judgment was the subject

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of submissions on 22 June 2005. Counsel for the respondent said that there had been "agreement and resolution about the [sum] that's due to St George Bank". As a result, judgment was entered in favour of the respondent against the appellant in the sum of $2,246,467.98, being the respondent's indebtedness to St George Bank on the date of judgment, ie 22 June 2005.

81 The liquidation of Ark Securities Pty Ltd had not been completed by that date and so the judgment in favour of the respondent was made subject to par 2 and par 3 of the judgment which read:

"2. If the [respondent] recovers any sum from the liquidator of Ark Securities Pty Ltd then the [respondent] is not to enforce this judgment to the extent of any such recovery.

3. If the [respondent] recovers any further sum from the liquidator of Ark Securities Pty Ltd when the [respondent] has already recovered the full extent of the judgment sum, interest and costs, then such amount to be held by the [respondent] on trust for the [appellant] and delivered to him."

The trial Judge's findings concerning 817 Canning Highway - paragraph 6 of the judgment

82 Already mentioned above is the fact that the Canning Highway property was purchased by the appellant, trading as Keywest Realty, and in relation to which the appellant drew funds from the Ark Securities account. The contract in relation to the sale of the property was $320,000, and $150,000 was drawn from the Ark Securities account to assist Keywest Realty to pay the vendor. The appellant provided from his own funds the balance of $170,000.

83 In the statement of claim, par 40.5, the respondent pleaded that the appellant applied, or alternatively caused Ark Securities to apply, funds of the partnership to purchase in his name the property at Canning Highway and that, on 1 May 2000, the appellant transferred, or caused the company to transfer, $150,000 from the Ark Securities bank account to a bank account held by the appellant styled "Keywest Realty General Office Account". In the defence (par 40) the appellant admitted:

"… that the [appellant], as a director of the Company, caused the Company, from its funds to … advance to the [appellant] $150,000 on funds payable to him from the Company which

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funds were used by Key West as part of the consideration paid by it in its acquisition of 817 Canning Highway, Applecross; … "

84 In his reasons for decision, the trial Judge noted the admission and noted the plea that the $150,000 was an advance payable to him from the company and the contention on behalf of the appellant that the respondent agreed to this advance. His Honour referred to the respondent's evidence that the acquisition was never discussed and that she never agreed to the appellant using the partnership funds for it. His Honour then found that the $150,000 payment had nothing to do with Ark Securities, or the partnership agreement. He found that the respondent did not otherwise agree, or authorise, the use of Ark Securities' funds in that way and that the use of the $150,000 by the appellant was in breach of the partnership agreement and his fiduciary duty to the respondent [409].

85 After the reasons for decision were published, further submissions were made about the form of orders and, in relation to the order concerning 817 Canning Highway, his Honour, in his supplementary reasons, noted submissions made on behalf of the appellant that "the highest the [respondent's] case could be put is that the partnership had a 46.875 per cent interest in the property (reflecting the $150,000) …" His Honour continued however, that"

"The substance of the objection was that a declaration that the defendant holds the whole of the property by way of constructive trust on behalf of the partnership ought not to be made because the partnership funds amounted to only some proportion of the total expenditure on the property." [10]

86 His Honour then referred to "Jacobs Law of Trusts in Australia", 6th ed, [208], and referred to what the authors said at [1331], namely that:

"Where the gain is an asset to which the defendant has himself contributed, the court may by charge or severance distinguish the respective interests therein, but where the court is unable to make the distinction, the trust will extend to the whole asset less the fiduciary take advantage of his own wrong and the plaintiff lose all (United States Surgical Corp v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 238-42; Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 at 499)."

87 His Honour then concluded at [12]:
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"As I have found, what occurred here, is that the [appellant] took advantage of the partnership assets and used them to purchase a property in his own name. The primary position therefore is that the property should be regarded as being held on trust by him for the benefit of the partnership. This is not a case in which the [appellant] ran a case to the effect that just allowances should be made to him in relation to this prayer for relief. The case was not pleaded in that way and no evidence was led with respect to it (as was the situation in Harrison v Schipp[2001] NSWCA 13 at 143 et seq). In these circumstances, I reached the conclusion that the proper order was for a declaration in the terms sought by the [respondent]."

88 The trial Judge's judgment in par 6 provides:

"The [appellant] holds the property at 817 Canning Highway, Applecross … on trust for the Partnership between the [respondent] and the [appellant], to perform the agreement between them for the acquisition, development and sale of a property situated at … Subiaco …"

Grounds of appeal

89 The grounds of appeal read:

"1. The learned trial judge erred in law and in fact in concluding [417-419] that the respondent (plaintiff) had discharged the onus of proving that the parties had reached an agreement to jointly provide security to borrow funds to acquire and develop a property at Subiaco in circumstances where -

(a) no finding was made or able to be made as to any detailed terms or date of such an agreement as there was no evidence consistent with such an agreement;

(b) there was no written agreement to the effect;

(c) there was no notice or memorandum in writing evidencing such an agreement or an agreement to that effect;

(d) there was no other written evidence whatsoever to support such a finding;

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(e) contrary to the respondent (plaintiff)'s pleaded case and contrary to her evidence, the agreement was not found to have been entered into in May 1999 but in August 1999;

(f) contrary to the respondent (plaintiff)'s pleaded case and contrary to her evidence, it was not the case that the agreement was for the acquisition and development of a Subiaco property at a sum of $1,650,000.00 but rather it was found that they agreed to borrow the sum of $650,000.00;

(g) such a finding was against the weight of the evidence in that the only written evidence before the learned trial judge was contrary to such a finding and contrary to the respondent (plaintiff)'s case;-

(h) the respondent's (plaintiff's) evidence generally was unreliable.

2. (Abandoned)

3. (Abandoned)

4. The learned trial judge erred in law in declaring in his Supplementary Reasons [12] that the entirety of the property acquired by the appellant (defendant) at Canning Highway rather than a portion of it should be held on Trust for the respondent (plaintiff) in that -


(a) Having correctly identified the law in paragraph 11 of the Supplementary Reasons for Decision, the learned trial judge failed to take into account that -

(i) the respondent (plaintiff) only alleged that $71,567.89 had been used for the purchase of the property in paragraph 40.5 of the Amended Statement of Claim;

(ii) at paragraph 40(e) of the Amended Defence, it was pleaded in response that -

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'The defendant, as a director of the company, caused the company, from its funds, to ... advance to the defendant $150,000 ... which funds were used by Key West as part of the consideration paid by it in its acquisition of 817 Canning Highway, Applecross'.

(iii) It was common cause (and evidence was adduced by consent with respect thereto) that the purchase price was $320,000.

(iv) The finding was that the appellant (defendant) used partnership funds 'to pay the deposit on the property and to undertake what were described as improvements to it'.

(v) Accordingly, where the respondent (plaintiff)'s case was that $71,567.89 was used in acquisition of property where the purchase price was $320,000, and the appellant (defendant) admitted that $150,000 was used by Key West as part of the consideration paid by it in its acquisition of 817 Canning Highway, Applecross, to hold that it was not possible to determine the respective contributions, either by reference to the pleadings or the evidence, was erroneous.

5. The learned trial judge, having erred in concluding that there was an agreement in the terms pleaded or in similar terms to those pleaded in paragraph 3 of the Amended Statement of Claim, ought not to have made any order in terms of paragraph 1 of the Judgment Orders , or have held (as he did) [S23]:-

(i) that this was a case in which the evidence of the defendant [appellant] and his whole defence to the claim was a deliberate concoction.

(ii) that the defendant [appellant] must, or ought to, have known at all material times that he had no

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chance of success in his defence of the claim or in his counterclaim

(iii) that the defendant's [appellant's] defence of the case and prosecution of the counterclaim must be presumed to have been continued for some ulterior motive or in wilful disregard of the known facts and the established law,

and thus had no proper basis for making an award of costs on an indemnity basis."

90 At the appeal the appellant applied to add a new ground which read:

"6. The learned Trial Judge [at 484] having found that the proper measures of Respondent's [Plaintiff's] damage was the full extent of her then current indebtedness to St George Bank and ordered that the Appellant [Defendant] pay to the Respondent [Plaintiff) $2,246,467.98 together with interest accruing thereon at the rate of 7.32% compounded daily or such higher rate as St George Bank charged the Respondent (Plaintiff), and the Respondent (Plaintiff) having subsequently maintained her denial of the or any indebtedness to the St George Bank in proceedings between them, the proper remedy to compensate the Respondent (Plaintiff) is an order that the Appellant (Defendant) indemnify the Respondent (Plaintiff) in respect of such sum as she is liable to pay to the St George Bank."

91 Leave to add this ground of appeal should be granted for reasons which appear in the discussion concerning ground 6 below.

Ground 1 - Agreement to jointly provide security

92 Particulars (a) and (d) to ground 1 contend that there was no evidence to support the findings made by the trial Judge about the fact that it was a term of the partnership agreement that the parties were to jointly provide security. If it can be shown that there was some evidence to support the finding, then these particulars of the ground of appeal must fail. There was some evidence. It is not necessary to do more than refer to the respondent's evidence-in-chief which was in the form of a written statement and in particular to par 60 to 68 which contains the evidence about this term of the partnership agreement. There is therefore no merit

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in particulars (a) and (d). The appellant's allegations concerning the date of the agreement and the details about when the St George loan was discussed are covered by particulars (e) and (f).

93 Particular (b) and (c) contend that there was no written agreement or no note or memorandum in writing. These particulars might at first suggest to a lawyer reading the grounds of appeal that the appellant was intending to rely on the State of Frauds as a defence. However, the written submissions and oral submission do not advance any such argument. The lack of a written agreement or note or memorandum is offered in support of the later contention in particulars (g) and (h) that the respondent's evidence was "generally was unreliable", or that the finding made by the trial Judge about the agreement between the parties was "against the weight of the evidence", which contention is dealt with below.

94 Grounds 1(e) and (f) point to the fact that before trial the respondent had sworn in an affidavit that the agreement was entered into in May 1999 and that when the parties first discussed the acquisition and development of the Subiaco property, they agreed that the sum to be borrowed was $1,650,000. As mentioned above, his Honour found that the agreement was not entered into in May 1999 but in August 1999. His Honour also found that the initial agreement was not an agreement to borrow $1.65 million, but rather an agreement in effect to borrow sufficient money to allow for the purchase and development of the Subiaco property. In her evidence-in-chief, the respondent did say the agreement was entered into in May and, that at that time, the parties agreed to borrow $1.65 million. However, just because his Honour found against the respondent on these two points, does not mean that the Judge was obliged to reject all of her evidence, which the appellant appears to suggest. It is trite law that the Judge is not obliged to reject all that a witness says just because the Judge does not accept some parts of the witness' evidence.

95 In this case there was a contest between the parties about the terms of the agreement. The trial Judge, justifiably, had a very jaundiced view of the appellant's evidence. The trial Judge set out in great detail the evidence which justified his conclusion that the appellant was not a truthful witness. It may be found in the trial Judge's reasons for decision between [340] and [382]. At [383] the trial Judge said:

"There are many other matters going to the [appellant's] credibility, some of which it will be necessary to consider later. In light of them and the matters set out above, I conclude the

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[appellant] is neither an honest nor a credible witness. I would not accept his testimony on any significant issue and without independent evidence I would not be prepared to accept the genuineness or truthfulness of any document generated by him or at his instigation. I further find that he has demonstrated himself to be deceitful and to manipulate others almost as a matter of course. One could have no confidence that what he told other people about anything, was true."

96 In light of the foregoing, his Honour was entitled to accept the evidence of the respondent about the terms of the oral agreement which was entered into between them, even if he did not accept the respondent's evidence about the date of the agreement and detail about when the amount to be borrowed was decided upon.

97 The appellant submitted that this Court must bear in mind what was said in Fox v Percy [2003] HCA 22 at [25]; (2003) 214 CLR 118 at 126 by Gleeson CJ, Gummow and Kirby JJ, which was that if error is shown then the court on appeal must conduct the appeal by way of rehearing and is not excused from the task of weighing conflicting evidence and drawing their own inferences and conclusions. The same Judges observed that it is necessary to bear in mind that an Appeal Court, not having seen or heard the witnesses, should make due allowance in this respect. Their Honours also noted by reference to other authority (at [30]; 129), that "an ounce of intrinsic merit or demerit in the evidence, that is to say, the value of the comparison of evidence with known facts, is worth pounds of demeanour," and that account should be taken of the "apparent logic of events" ([31]; 129).

98 What then did the "apparent logic" of the events in this case suggest? The appellant's case involves an acceptance of his claim that he was to share the profits of the partnership equally and yet undertake no liability for borrowing and provide no security, whereas the respondent was to undertake the whole liability for the borrowing and provide all security. The appellant perhaps contends that he was to do more work than the respondent, but the circumstances belie this claim, because he organised the first part of the work, that is the purchase of the Subiaco property, so that he disadvantaged the partnership and gained a commission for his efforts. Logic suggests that the agreement contended for by the appellant was unlikely and that the agreement contended for by the respondent was more likely. However, the fact that the agreement contended for by the respondent was the more likely in commercial terms is not determinative.

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99 The appellant contends that the respondent's account of the agreement should not be accepted because of the full disclosure which he says he made to the respondent's husband, Johnson Lee, who was in Hong Kong, and who communicated what he was told to his wife. Counsel for the appellant took the court to four facsimile communications sent by the appellant to Johnson Lee in September, October and December 1999, in an endeavour to show that full disclosure was made to Johnson Lee about what was proposed. As will emerge from the following detailed consideration of these documents, Johnson Lee was not fully informed about what the appellant was doing. The documents instead largely support and corroborate the respondent's evidence about the nature of the agreement and the trial Judge's conclusion concerning it. When examining the documents, it must be borne in mind that the issues at trial were, first, whether it was a term of the agreement that the parties were to be jointly liable for funds borrowed from the bank and, secondly, whether they were both to provide security.

100 The first facsimile pointed to by counsel for the appellant was a facsimile dated "09/01/99", which the court was informed is to be read as 1 September 1999. This facsimile was accompanied by a copy of the acceptance relating to the Subiaco property. These the documents reveal nothing about whether the money to be borrowed to finance the purchase was to be a joint borrowing and it says nothing at all about the security to be provided.

101 The second facsimile pointed to was a facsimile dated 11 October 1999. This facsimile attached a letter from Bankwest directed to the directors of Ark Securities Pty Ltd, stating that it was pleased to advise that after a preliminary investigation the bank was interested in considering "your funding request". A one page document headed "Credit Facilities" showed that the proposed borrower was to be "Ark Securities Pty Ltd as Trustee for the Lee Family Trust and as trustee for the Michael Mavaddat Family Trust". Another document sent with this facsimile was a copy of a letter from St George Bank to Ark Securities Pty Ltd dated 8 October 1999, offering two facilities, the first being for $590,000, the borrower to be once again Ark Securities Pty Ltd as trustee for the Lee Family Trust and for the Mavaddat Family Trust (described as "Borrower 1"). The offer proposed an "unlimited joint and several guarantee and indemnity" from both the appellant and the respondent and from Courtza Pty Ltd and Key West International Pty Ltd. All of this is consistent with the respondent's evidence that the parties were to be jointly liable for the repayment of any loan. The Bankwest letter also offered a second facility of $140,000, the proposed borrower being Ark

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Securities Pty Ltd as trustee for the "Lee Family Trust". No particular point was made of that by the appellant but, at least in that regard, that aspect of the Bankwest letter was consistent with the idea that the respondent alone would be responsible for the borrowing. Security was to be provided by registered charges in relation to each facility from "Borrower 1" which therefore contemplated the involvement of both parties. It also proposed a mortgage over two units owned by the respondent. There was no proposal that the appellant provide any property by way of security. This information was therefore consistent with the appellant's case. However, it provides very limited support, because the two facility proposal offered in the Bankwest letter was not proceeded with.

102 The next document the appellant points to is a facsimile dated 6 December 1999 from the appellant to Johnson Lee in Hong Kong. The full terms of this facsimile are set out in the trial Judge's reasons at [156] and his Honour, in careful detail, reviewed what the cross-examination of the appellant revealed concerning the truth of the contents of this facsimile. The appellant admitted in cross-examination that many statements within the facsimile were either lies or falsehoods. This makes it very difficult for the appellant to contend that Johnson Lee had a clear understanding of the transaction. However, one statement within the facsimile, false though it was, was very important in the context of the case. The facsimile purported to set out what the appellant had done to try and bring the "Subiaco deal" to a conclusion. He expressed concern about having "lost a lot of face" and about how the acquisition and development could be financed. During the course of the facsimile he made the statement that he had given "security of my other properties including my family home". In the same sentence he lamented that the Emerald Terrace hotel units, which belonged to the respondent, were not acceptable as security to the bank. Accompanying the facsimile were two letters from Bankwest addressed to Ark Securities Pty Ltd, one of which suggested for the first time that a residential property be placed as security for the loan request, "eg 116 Forrest Street, South Perth", so that the bank would be able to consider the full loan request of $830,000. Bankwest said in that case it would not require security over the Emerald Hotel units. Bankwest's suggestion about Forrest Street had been prompted by the appellant. The second letter from Bankwest accompanying the facsimile dated 6 December 1999 referred to the fact that the respondent's South Perth home had an estimated value of $3 million. Reading the facsimile and the accompanying letters gives rise to the impression is that the appellant has in contemplation a loan, which would be to Ark Securities
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Pty Ltd, and in terms similar to earlier proposals in the sense that the loan was still to be guaranteed by both the appellant and respondent. The suggestion that the respondent provide her home as security was made in circumstances where the appellant had represented that he had already given his "family home" and "other properties" as security. Understood in that way, this material is consistent with the respondent's evidence and inconsistent with the appellant's case.

103 The final facsimile referred to was a facsimile sent two days later by the appellant to Johnson Lee in Hong Kong. The facsimile was dated 8 December 1999 and it attached a letter from Bankwest offering $1.7 million. The copy of the Bankwest letter accompanying the fax still reveals an offer by Bankwest to Ark Securities Pty Ltd as trustee for the two family trusts. It still proposed a joint and several guarantee and indemnity by the appellant and the respondent and was thus still entirely consistent with the respondent's evidence that a term of the agreement was that there was to be joint liability for the loan. The other security proposed was a fixed and floating charge over the assets and undertakings of Ark Securities Pty Ltd as trustee for the family trusts of the appellant and respondent and a mortgage over 116 Forrest Street, South Perth.

104 The overall effect of this facsimile and documents sent with it was consistent with the respondent's evidence about the agreement that there be joint borrowing, but read alone was not consistent with the respondent's evidence that each was to provide security over their homes. However, the circumstances were constantly changing and this proposal did not proceed. There was no reason why Johnson Lee would not still have been under the influence of the false statement in the 6 December facsimile that the appellant had already given his house as security. This 8 December facsimile was followed by a half hour telephone call, but Johnson Lee could not recall the details of what was discussed.

105 Subsequently the appellant arranged for the offer of finance from St George Bank, addressed for the first time to the respondent, for the first time not requiring the appellant to guarantee repayment or to have any liability at all for repayment and, for the first time on the part of the St George Bank, proposing security only over the respondent's South Perth home. This offer was not sent to Johnson Lee. It was presented to the respondent and its content and effect misrepresented in the way the trial Judge found.

106 This close examination of the material sent to Johnson Lee leads to a conclusion that Johnson Lee was not fully informed about what was

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happening, that he was misled in the same way as the respondent was being misled in Perth, and confirms the correctness of the trial Judge's finding about the nature of the agreement between the parties.

107 The appellant in his written submissions also contended that the respondent's evidence "was wholly unreliable" by reason of matters set out in "Schedule 1" to the written submissions. Certain items in the schedule referred to the evidence relating to the respondent's denial that she dined alone with the appellant when there was evidence that she did, the respondent's denials that she regularly telephoned the appellant (when there was evidence that she did) and to the respondent's inconsistent evidence of her knowledge of the appellant's relationship with "Helen". The trial was remarkable for the painstaking attention given by the appellant to side issues of this kind. The appellant was evidently determined to disclose that the respondent was involved in a sexual affair with him and to disclose that, when the respondent became aware of the appellant's relationship with a woman called Helen, the affair came to an end. The appellant's determination to reveal this was perhaps with the object of explaining why he gained such favourable treatment in the agreement that he contended for, and with a view to demonstrating that jealousy or spite after the affair ended prompted the respondent to bring the action and to give evidence which he alleged was false. On the other side, the respondent denied there was any sexual affair and indeed accused the appellant of assaulting her. The trial Judge concluded that the relationship between them was closer than the respondent was prepared to admit, but he did not accept that it was an intimate sexual relationship [395].

108 Some of these side issues were dealt with by the trial Judge and some were not. It is unnecessary to consider them on this appeal because the weight of the documentary evidence overwhelmingly supports the respondent's case and contradicts the appellant's case. Schedule 1 to the written submissions also referred to the respondent's denial that she met a Mr Alvaro when Mr Alvaro said she did. This was relevant to a ground of appeal that was ultimately abandoned. Schedule 1 also refers to what seems to be a wholly insignificant denial by the respondent that a valuer instructed by St George Bank once attended at her premises when the valuer was called to say that he did. These latter points were dealt with by the trial Judge. The incidents are insignificant and do not affect the fact that the documentary evidence strongly corroborates the respondent's case.

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109 Too many side issues occupied the time of the court at first instance. The appellant did not seem to appreciate that there was very little in dispute between the parties on the pleadings concerning the terms of the agreement. There was only one issue left at the hearing of the appeal concerning those terms, and that was whether the trial Judge was correct to hold that it was a term of the agreement that each party was to provide their house as security for the St George Bank loan. The appellant had little prospect of success in relation to the sole remaining issue concerning the terms of the agreement, because the appellant had put in writing to Johnson Lee that he (the appellant) had provided his house as security. The appellant on appeal did not challenge the Judge's finding that it was a term of the agreement that the parties would jointly borrow the money, and that the appellant had arranged at the last moment for an offer to be made to the respondent so that the appellant accepted no liability at all, and then misrepresented what was in the offer. This latter finding alone was enough to sustain the judgment. The points dealt with in Schedule 1 make no difference to the outcome of the appeal.

110 The appellant also attached a Schedule 2 to the written submissions, containing observations about inconsistencies between Johnson Lee's written statement of evidence and his evidence at trial. The point is wholly insignificant. The appellant was keen to show what had been communicated to Johnson Lee. The court was taken to the documents sent to Johnson Lee by the appellant. There was no dispute that they were sent or received. The documents contained lies and falsehoods. Inconsistencies between Johnson Lee's oral evidence and his written statement of evidence is of little significance in the light of the undisputed documentary material.

111 Ground 1 should be dismissed.

Ground 6

112 This proposed ground was supported by an affidavit of Steven Penglis, solicitor for the appellant, exhibiting material which the appellant sought to adduce as additional evidence in the appeal. Section 167(1)(ba) of the Supreme Court Act 1935 (WA) provides that rules may be made conferring on a single Judge of Appeal, either generally or in particular cases, such of the jurisdiction and powers of the Court of Appeal as the rules specify. Rule 47(3) of the Supreme Court (Court of Appeal) Rules 2003 (WA) provides that a single Judge has jurisdiction to make an order relating to the admission of additional evidence, either before or at the hearing of the appeal by the Court of Appeal. By implication, the Court

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of Appeal therefore has authority to receive additional evidence at the hearing of an appeal. No issue was raised about the Court's power to order the admission of additional evidence in these proceedings.

113 The material exhibited in the affidavit of Steven Penglis included reasons for decision of Master Newnes dated 29 September 2006 in the matter of Lee v St George Bank Ltd [2006] WASC 221 ("the bank action"). The bank action had been commenced before the trial of the action the subject of this appeal. The Master's reasons reveal that in the bank action the respondent sought relief in the form of a declaration that the loan agreement she executed with the St George Bank and the mortgage were void or unenforceable against her, and in the form of an order that the bank execute a registered discharge of the mortgage. The respondent sought damages. By counterclaim in the bank action, the St George Bank sought payment of the sum owing to the bank and an order for possession of the respondent's home at Forrest Street, South Perth. (From evidence provided by the respondent's solicitors in this appeal, it is clear that the appellant knew about this litigation and about the pleadings before the trial of this action).

114 After judgment was entered by the trial Judge in this action, the bank in the bank action applied for a permanent stay of the respondent's claim and for judgment on its counterclaim.

115 Master Newnes at [48] - [49] noted the submissions on behalf of the St George Bank, which were:

" … [the respondent] cannot approbate and reprobate by asserting against [the appellant] that he is liable to pay damages on the basis of the amount of the [respondent's] liability to the Bank, and obtaining judgment on that basis, and then asserting against the Bank that the plaintiff has no such liability.

Secondly, it was submitted that the plaintiff's claim was an abuse of process. The jurisdiction of the Court to stay proceedings in order to prevent its procedures being abused extends to cases where the use of the Court's procedures would bring the administration of justice into disrepute, in the sense of converting them into instruments of injustice or unfairness or the scandal of conflicting decisions or by seeking to relitigate an issue that has already been disposed of by earlier proceedings."

116 The Master then continued in his reasons:
(Page 46)

"In the present case, the liability of the [respondent] to the Bank was not the subject of any finding in the Mavaddat action. It was pleaded by the [respondent] and accepted by [the appellant] that such a liability existed. The Court was not required to determine, therefore, whether or not such liability existed. The liability of the [respondent] to the Bank thus arises for consideration by the Court for the first time in this action.

The question remains, however, whether the [respondent], having proceeded in the Mavaddat action on the basis that she had a liability to the Bank, is entitled in this action to assert against the Bank that no such liability exists. I understood the Bank to put this aspect of its case on the basis that for the [respondent] to take such a course would be unconscionable and it would constitute an abuse of process by bringing the administration of justice into disrepute.

…

In the present case it is, in my view, important to bear in mind that the question of the liability of the [respondent] to the Bank was not put in issue in the Mavaddat action and was not the subject of any determination by the Court, but that that liability was common ground between the parties. The [respondent's] case in this action is not, therefore, in that respect at least, inconsistent with any finding by the Court in the Mavaddat action.

…

There may well have been good reason that the [respondent] took the course she did, although the efficient use of court resources and the ultimate costs of at least some of the parties might well have been better served had the two actions been heard together. That, however, in my view is a matter that ultimately is more appropriately treated as bearing upon the question of the costs of the action. What is more significant for present purposes is that the Mavaddat action did not involve a determination of the question of the [respondent's] liability to the Bank. Had it done so, I think it is clear that the current action would not be maintainable. But the fact that the Mavaddat action proceeded on the uncontested basis, or assumption, that the [respondent's] liability to the Bank existed

(Page 47)

is not sufficient, in my view, to constitute an abuse of process so as to warrant a stay of this action. It does not visit any prejudice or harm on the Bank and, in the absence of any findings of the Court in the Mavaddat action as to the plaintiff's liability to the Bank, in my view it cannot be said that it brings the administration of justice into disrepute to put that liability in issue in this action.

…

In the circumstances, I do not consider that the application for a stay has been made out and I would therefore dismiss the application. It was, I think, accepted by the Bank that in that event the application for summary judgment must also be dismissed."

117 The decision of Master Newnes is on appeal, and so the Court in this appeal should refrain from commenting on the decision.

118 The appellant submits that, for the respondent to agree with the appellant that her liability to the bank was the dollar amount for which judgment was entered, was to lead him to believe, notwithstanding that he knew the bank action was on foot, that the respondent intended to admit liability to the bank. If the respondent had stated that her position was that she would continue to maintain that she did not have any liability at all to St George Bank, but was prepared to agree what the bank claimed against her, then it is likely that the appellant would have then agreed only that he should indemnify the respondent for whatever the bank recovered against her, rather than agree to pay the amount which the bank claimed.

119 After Master Newnes' decision was delivered, and after the reasons for decision had come to the notice of the appellant, the appellant's solicitors wrote to the respondent's solicitors in the following terms:

"…

The case against our client proceeded on the basis, pleaded by your client against him, that your client has an undischarged liability to St George Bank Limited.

Your client's damages were claimed on that basis, and awarded on that basis.

(Page 48)

We acknowledge that no part of the damages award calculated by reference to that liability has been paid. What we seek, however, is a clear confirmation that any monies paid to your client in respect of damages calculated by reference to her liability to St George Bank Limited will in fact be paid by her to St George Bank Limited.

To make it clear, we consider it would be entirely improper for your client to receive such payment, but at the same time seek to avoid the very liability in respect of which such damages were awarded and paid.

Would you please inform us as to your client's position in this regard.

Would you also please confirm that you will inform us of any judgment or settlement between your client and St George Bank Limited, including the terms thereof.

Please note that we intend to raise this matter with the Court of Appeal if a satisfactory response is not forthcoming within 7 days."

120 There was no substantive response to this letter.

121 In the circumstances, there will be a miscarriage of justice if the judgment in this case for the fixed amount remains on foot in circumstances where the respondent is fighting the bank action, seeking to obtain relief which will result in her paying less to the bank than she recovers from the appellant.

122 The additional evidence in the form of the reasons for decision of Master Newnes and the correspondence between the solicitors should be admitted in the appeal as additional evidence, leave should be granted to amend the grounds of appeal by adding ground 6 and ground 6 should be upheld. Paragraph 1 of the judgment should be set aside.

123 Further submissions will be required from the parties concerning the form of the order which should be made in lieu.

Ground 4 - Canning Highway property

124 The paragraph in the judgment against which the appellant appeals reads:

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"The [appellant] holds the property at 817 Canning Highway, Applecross … on trust for the partnership between the [respondent] and [appellant], to perform the agreement between them for the acquisition, development and sale of a property situated at 237-241 Hay Street, Subiaco in the State of Western Australia."

125 This ground complains about one aspect of the relief granted concerning the Canning Highway property. By this ground the appellant merely seeks an adjustment to the declaration concerning that property. However, there is a question which arises even though it was not raised by the appellant, and that is whether there is any element of double recovery in ordering an indemnity with respect to the St George Bank loan and, at the same time, declaring that the appellant holds the property at 817 Canning Highway, Applecross, on trust for the partnership between the appellant and respondent. The hint of double recovery arises particularly if the appellant does fully indemnify the respondent with respect to the St George Bank loan. If that occurs, then the respondent will gain an interest in the Canning Highway property via the partnership without having made any contribution in relation to the purchase of that property. In fact, upon analysis, there is no double recovery because neither the order made by the trial Judge in par 1 of the judgment, nor the indemnity order which is contended for in ground 6, releases the respondent from liability to the St George Bank. Whether the appellant indemnifies the respondent or not, the respondent remains under an obligation to make repayment to the St George Bank. Indeed, if the appellant does not have the funds to indemnify the respondent, then the respondent continues to finance the partnership (which remains on foot) and therefore did in fact finance the partnership contribution to the purchase price of the Canning Highway property. At the time the Canning Highway property was purchased, the respondent had provided the funds via the St George Bank loan. Having made those observations, it is now necessary to consider the specific point raised by the appellant about the declaration made by the trial Judge in relation to the Canning Highway property.

126 The reasoning of the trial Judge leading to this part of the judgment has been set out above. His Honour said that the matter was not one in which the appellant ran a case to the effect that just allowances should be made to him in relation to the prayer for relief. However, the amount of the contribution by the appellant was not in doubt. It was $170,000.

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127 With respect, the trial Judge erred in applying authority which states that, where a court is unable to make a distinction between the contribution by the defaulting fiduciary or trustee and the contribution of the beneficiary or trust, then the trust will extend to the whole asset lest the fiduciary take advantage of his own wrong and the beneficiary lose all. See [11] of the trial Judge's supplementary reasons: Lee v Mavaddat [2005] WASC 68 (S). This was not a case of the appellant mixing funds to the extent where it was not possible to detect the precise contribution of the parties.

128 Equity would not in the circumstances refuse the appellant an allowance for his contribution. To require him to contribute to the partnership his own money which he used in the purchase of the Canning Highway property would be to punish him and not to compensate the partnership. In saying this I ignore for a moment the fact that the appellant may have obtained a loan from the bank secured by a mortgage over the property. A court of equity does not, by decreeing remedies of rescission, imposition of a constructive trust, equitable compensation or an account of profits, do so in order to punish the defaulting fiduciary. As Kirby J said in Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 at 496 "The purpose of equity's relief is not punishment". See also Pilmer v Duke Group Ltd (in liq) [2001] HCA 31 at [151]; (2001) 207 CLR 165 at 224 - 225. In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 109, Mason J referred to what was said in Vyse v Foster (1872) LR 8 Ch App 309 at 333 per James LJ, saying that the case was "authority for the proposition that equity does not assume jurisdiction to punish a fiduciary for misconduct by making him account for more than he actually received as a result of his breach of fiduciary duty". Having made those observations I then agree with what Steytler P has said about ground 4.

129 Ground 4 must be upheld.

Ground 5 - Indemnity costs

130 This ground is largely based upon the complaint that the respondent pleaded that the agreement was entered into in May when the Judge found it was entered into in August, and that the respondent pleaded that the initial agreement was to borrow $1,650,000 when in fact that figure was not known about when the agreement was entered into. These were not significant findings and the mere fact that the trial Judge did not accept the respondent's evidence on these facts does not mean that the trial Judge erred in ordering indemnity costs. In view of the conclusion set out above

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in relation to ground 1, the appellant's case was conducted in wilful disregard of the known facts. The trial Judge did not err in ordering indemnity costs.

131 Ground 5 should be dismissed.

Conclusion

132 The appeal should be allowed in part.

133 Paragraph 1 in the judgment should bet set aside. The parties should confer about the form of the order which should be made in lieu. If they cannot agree, the Court will hear further submissions.

134 Paragraph 6 in the judgment should be set aside and in lieu there should be a declaration that the appellant holds the Canning Highway property on trust for the partnership subject to the appellant being allowed credit for the $170,000 he contributed. The precise form of the declaration should be the subject of consideration by the parties. If the parties are unable to agree about the form of the order and declaration within 10 days, then the appellant's solicitor is directed to notify the Court so that the matter may be the subject of further submissions.

135 The appeal is otherwise dismissed.