Othman v Stanley
[2012] VSC 211
•22 May 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2011 01717
| IBRAHIM BIN OTHMAN | Plaintiff |
| – and – | |
| PETER RUSSELL STANLEY AND ORS | Defendants |
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JUDGE: | MUKHTAR AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 17 May 2012 | |
DATE OF JUDGMENT: | 22 May 2012 | |
CASE MAY BE CITED AS: | Othman v Stanley and ors | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 211 | |
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PRACTICE AND PROCEDURE – Pleading – Allegation of being knowingly concerned in a breach of trust and fiduciary duty – Elements of the cause of action – Whether adequately pleaded – Multiple attempts at amendment – Court’s approach to advancing litigation – Conditional leave granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A. Flower | F.C.G. Legal Pty Ltd |
| For the Third Defendant | Ms R. Kaye | Lewenberg & Lewenberg |
| For the Fourth Defendant | Mr L. Hawas | Pryles & Co |
HIS HONOUR:
About 125 years ago, this was an English lawyer’s writing on the topic of “How to Treat a Bad or Imperfect Plea”:[1]
In this world one great object of teaching is to reform the bad, and make the good better. In law, however, you should attempt nothing of the kind with an opponent’s plea. I am quite aware that this is against the usual practice, but what would be the use of writing, if I were merely to say do what is usually done. The doctor generally changes your diet, and starts you upon a new regime. In lieu of the exhilarating draught, he may prescribe tonics; instead of excitement, quiet. If your opponent has drawn a plea which does not cover your claim, unless you can get judgment, which, by the way, is not very likely, why should you set the bells ringing? Let me prescribe quiet. Is it your business to draw his pleas for him? Perhaps you are embarrassed: if so, it may be necessary to make a few chips, so as to bring out the shape of his work more closely.
[1]Richard Harris QC, Before Trial – What Should be Done by Client, Solicitor & Counsel.
The author then gave this piece of advice with an astringent ending which would not be to everyone’s liking:
Pleadings nowadays may be carelessly, inartistically drawn. I assume that your own will be perfect. Look well after their perfections, and don’t have too keen an eye for the imperfections of your neighbours. Exercise a little charity, which will cover a multitude of his deficiencies, until the trial, and then you can expose him to the scorn and ridicule of a pitiless world.
I shall not recite the relevant procedural history, but the plaintiff seeks the Court’s leave to amend what is the fifth version of his statement of claim. The pleading is a rewrite. The alleged facts of the matter are not elaborate. The problem, or at least the feature of the case that has attracted serious opposition to leave being granted, is a case sought to be pleaded against the fourth defendant that he instigated or facilitated a breach of trust or a breach of fiduciary obligation by the third defendant, his son. This is commonly referred to as a Barnes v Addy type claim.[2] The principle is (and I have emphasised that which is called the second limb of the principle):
Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son torte, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. [my emphasis]
[2](1874) 9 Ch App 244.
Under the original formulation of the principle, a necessary ingredient of liability for a knowing involvement of a breach of trust under the second limb was the existence of fraud and dishonesty. Adopting for convenience how the authors of Jacobs’ Law of Trusts in Australia[3] describe it, the elements of liability may be stipulated as follows:
(a)the existence of a fiduciary duty (as trustee or otherwise);
(b)a dishonest and fraudulent design by the fiduciary;
(c)the assistance by the third party in that design; and
(d)with knowledge.
[3](7th ed) at [1339].
The High Court of Australia in Farah Constructions Pty Ltd v Say‑Dee Pty Ltd[4] encapsulated the second limb by saying it made a defendant liable if that defendant assists the trustee or fiduciary with knowledge of a dishonest or fraudulent design on the part of the trustee or fiduciary. The Court decided that under the law of Australia knowledge could be categorised as: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such enquiries as an honest and reasonable would make; and, (iv) knowledge of circumstances which would indicate the fact to an honest and reasonable person. “Dishonesty” in the context of this principle of accessorial liability means not acting as an honest person would in the circumstances. It is to be equated with conscious impropriety: see Royal Brunei Airlines.[5] In the trust context “an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries”.[6]
[4](2007) 230 CLR 89 at 163..
[5][1995] 2 AC 378 at 389 per Lord Nicholls.
[6]Royal Brunei Airlines at 106d.
The Court in Farah Constructions also recognised, without more, a pre Barnes v Addy line of authority that made liable a person who induced a trustee to commit a breach; where there was no dishonest design by the fiduciary:
… there was a line of cases in which it was accepted that a third party might be treated as a participant in a breach of trust where the third party had knowingly induced or immediately procured breaches of duty by a trustee where the trustee had acted with no improper purpose; these were not cases of a third party assisting the trustee in any dishonest and fraudulent design on the part of the trustee.
I think it correct as Mr Hawas counsel for the fourth defendant submitted that the underlying rationale for a “knowing inducement” liability was the same as the underlying rationale for the common law tortious cause of action for inducing a breach of contract. In general terms, the tort is committed when the defendant intentionally induces a third part to breach a contract between the third party and the plaintiff.[7] As trusts are equitable, an analogous cause of action had to develop to deal with instances where the third party had induced a breach of trust. Although, as Mr Hawas submitted, there is no modern formulation or revisitation of this basis of liability, it is safe to say that consonant with the elements of the common law cause of action, it would need to be pleaded that the wrongdoer (i) had knowledge of the trust and its terms; (ii) perpetrated acts of inducement with the intention of procuring a breach of trust; and (iii) the inducement caused the breach: see Royal Brunei Airlines Sdn Bhd v Tan.[8]
[7]See generally Balkin and Davis, The Law of Torts at [21.5]
[8](1995) 2 AC 378 at 386.
I commence with these principles at the outset because they were largely the basis of Mr Hawas’ able submission that the pleading against the fourth defendant failed to properly state the material facts to show how it was being alleged that the fourth defendant was a knowing participant in a dishonest and fraudulent design by the trustee or fiduciary. This is “an allegation the seriousness of which means that it ought to have been pleaded and particularised, and the assessment required by Briginshaw v Briginshaw (1938) 60 CLR 336 kept in mind”.[9] Nor, it was said, for a knowing inducement case, does the proposed pleading stipulate (beyond a conclusion) how and what way the fourth defendant knowingly induced or procured breaches of duty by a trustee. There was more to the impeachment, but that was largely the jurisprudential attack on the integrity of the pleading.
[9]Farrah Constructions at 170.
It is apparent that the plaintiff’s lawyers are experiencing great difficulty in formulating with clarity and particularity the plaintiff’s cause of action. It has been remarked that sometimes that gives an indication that the plaintiff does not have a cause of action.[10] Yet one can see over the various attempts that on the face of it ― and I say no more than that ― a foundation exists to allege a wrongdoing against the third and fourth defendants. The facts from the proposed pleading are not elaborate and are clear enough. They can be articulated in this way:
(a)the plaintiff is a Malaysian national who is resident in Malaysia;
(b)the fourth defendant is the father of the third defendant;
(c)the fourth defendant came up with an idea. He told the plaintiff he had friends who wanted to sell some land in South Yarra for $511 000 including chattels. He said there was no need to appoint a real estate agent. He would not purchase the land as trustee but would have his son purchase the land for the plaintiff and be the trustee of the land. To formalise the trust he would then hire a solicitor to prepare to effect the purchase and prepare a trust deed. The plaintiff asked the fourth defendant to put the arrangement in place.
(d)Subsequently, to carry out the arrangement the plaintiff paid $60 000 to the fourth defendant’s bank account, $451 000 to the third defendant’s bank account and $30 000 into the fourth defendant’s bank account for legal fees and stamp duty;
(e)the third defendant as purchaser made a contract of sale to buy the land. The vendors received payment of $551 000. The vendors and purchaser signed a transfer. The third defendant obtained a duplicate Certificate of Title. He lodged a caveat as purchaser.
[10]See Tran v University of Sydney (1989) 34 IR 466 per Gleeson CJ.
So who did what to whom? The plaintiff alleges:
(a)the third defendant has not, or will not, register the transfer and become registered proprietor of the land. He has the duplicate certificate of title. The transfer has not been stamped for duty even though the plaintiff gave the third or fourth defendants funds to pay for the stamp duty.
(b)The third defendant has not or will not execute a trust deed.
(c)The fourth defendant holds the money (provided by the plaintiff), to pay for the stamp duty, and will either not hand it over or the third plaintiff will not ask the fourth plaintiff for the money.
(d)The plaintiff has asked for the duplicate certificate of title and the transfer but the third defendant will not hand them over.
(e)Now, the third defendant has threatened to sell the land and has excluded the plaintiff from access to the land.
I have put the alleged facts as a narrative to expose the factual elements of the case. Although the pleading can be criticised for being expressed in conclusionary terms and lacking particularisation of certain allegations of mixed fact and law, the essential facts are certainly pleaded before one gets to the allegations of breach of fiduciary duty and the Barnes v Addy claim which is how the plaintiff’s lawyers have seen fit to put the case. That is important I think because the case can at least advance by calling for a response to those allegations of fact. The real dispute in this case concerns the attack on the pleading when it comes to the formulation of the legal cause of action. I can see that plaintiff has as a matter of formulation given expression to the elements of accessorial liability. The complaint from the fourth defendant is that the claim does not plead the facts to show how or in what way there was a dishonest design and the accessorial facts to further that dishonest design. It is one thing to allege that the fourth defendant withheld money for the stamp duty and to allege a legal wrong from that; but if the plaintiff chooses to make it a Barnes v Addy wrong or a “wrongful procurement” wrong (pre Barnes v Addy) then the requisite facts ought be alleged. “Where is the fraud?” the fourth defendant expostulates.
It is here I must distinguish between the cases as against the son (as alleged trustee and fiduciary) and the father (as alleged intermeddler).
As against the son, the case is that he owed the plaintiff fiduciary duties in carrying out the arrangement (paragraphs 17 and 18). It is alleged (paragraph 19) that having agreed to the arrangement, the son was at the outset under a duty to carry it out by becoming registered proprietor of the land and pay the stamp duty. But the plaintiff says the son has not done so, and still refuses to do so. There is then, expectably, an allegation that the son holds the land on constructive trust for the plaintiff (paragraph 22) and a claim made for a declaration to that effect and a claim for an order in the nature of specific performance requiring the son to become registered and put the land in the name of the plaintiff.
Pausing there, whilst there are compositional features of the case that might be criticised, the case as pleaded against the son is clear and intelligible enough. The third defendant cannot say that it is embarrassing. He cannot say he cannot meaningfully plead to it. Let him respond, I say, with a defence dealing with the facts of the arrangement and explaining why he has not become registered and why it is he regards himself as not bound to become registered and how he justifies the alleged threat to deal with the land inconsistent with the arrangement. That will advance the case and, so the theory of pleading goes, help expose or attenuate the issues for determination.
There is an allegation against the third defendant in paragraph 21 which states provocatively: “the breaches of the fiduciary duties and trustee’s duties by the third defendant were dishonest.” The particulars say that the third defendant acted in “reckless disregard of the plaintiff’s rights and his interests as beneficiary under the express trust”. As was said in argument this seems to import Derry v Peek notions of fraud in cases of deceitful misrepresentations, which is questionable in the present context, but not on a pleading summons.
The function of particulars is to give meaning to a broad allegation of principal fact and more pertinently to confine the plaintiff’s case. The plaintiff is really saying there was a flagrant refusal by the son to carry out the arrangement. The fact that he did not leads the plaintiff to allege that there was by that fact alone dishonesty. All of that may be challenged ultimately at trial but I am not persuaded that the allegation is embarrassing or that it prejudices the fair and efficient conduct of the case. How the third defendant will respond to such an allegation as is made in paragraph 21 will depend on how he responds to the allegations of fact concerning the arrangement to buy the land, and his subsequent acts and omissions. His defence must put an answering case on those facts, from which it will, I expect, be argued there was no dishonesty and no fraudulent design under Barnes v Addy. Therefore, as against the third defendant, I would allow leave to amend. The allegation of dishonesty against the third defendant is designed obviously as the first stepping stone to then introduce the liability of the fourth defendant under the second limb of Barnes v Addy.
The case against the fourth defendant starts from paragraph 24. Again, I recognise I am providing a narrative but rather than copiously recite the pleading, this is what is being alleged:
(a)the fourth defendant conceived of this arrangement and therefore knew of all the facts concerning the third defendant’s conduct of the purchase transaction;
(b)the fourth defendant, having conceived of the arrangement, certainly knew that the third defendant, by dint of the arrangement, was a trustee or fiduciary of the plaintiff that is bound to act in his interests and not his own;
(c)the plaintiff deposited the moneys for the stamp duty on the transfer with the fourth defendant for the purpose of enabling the duty to be paid;
(d)the fourth defendant has retained those moneys and that has caused the third defendant (the trustee and fiduciary) to be unable to register the transfer and obtain title to the land as trustee for the plaintiff under the arrangement;
(e)the father and son are complicit in the fraudulent design to deprive the plaintiff of the land.
From there, there is what Mr Hawas correctly criticises as a rolled up plea in paragraph 33 that there are two legal wrongs. First, by holding back the money, the fourth defendant has procured his son to breach his fiduciary duties to the plaintiff. That is because he has prevented his son the trustee to take steps to become registered proprietor of the land. That cause of action is the pre Barnes v Addy type of liability which does not call for a demonstration of a dishonest design by the trustee. But it does call for a demonstration that there was a knowing inducement and actual knowledge of the breach of the terms of trust. Secondly, the case is put squarely on the second limb of Barnes v Addy that by holding back the money he knowingly assisted the trustee in a dishonest breach of fiduciary duty. Again, the provocative allegation of dishonesty which the law requires to be properly particularised is confined to saying that dishonesty is to be inferred because of the “great importance of the transaction to the plaintiff” and because the fourth defendant acted in “reckless disregard” of the plaintiff’s rights as beneficiary.
There is no doubt that it is necessary to plead as material facts the fact of knowledge of the dishonest and fraudulent design: see Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Limited[11] and New Cap Reinsurance v General Cologne Re Australia Limited.[12] But I think the attacks on this pleading really are going to the sustainability of the claim, rather than its formulation. There is the criticism that the allegation of dishonest and fraudulent design is merely conclusionary and the pleading is bereft of facts to show how and what way there was such a design. The plaintiff’s pleading, as I interpret it, makes a case not of fraudulent design aforethought but in effect is saying the facts speak for themselves. Putting it in plain terms, it is saying the father who conceived of this arrangement has together with the son self-evidently decided to not carry out the arrangement and deprive the plaintiff of the benefits. Or the fact that they resiled bespeaks dishonesty. The primary duty lay upon the son as trustee to carry out the arrangement and he has wilfully chosen not to do so – so it is alleged. From there, it is alleged albeit exiguously that it was the father who held the funds, and refused to hand them over, who has knowingly assisted the delinquent trustee. That is the plaintiff’s case which I think is apparent from the proposed pleading.
[11][2004] NSWSC 1136 at [75].
[12][2004] NSWSC 781.
There is force in Mr Hawas’ submission about the composition of this pleading. And of course all that has been said about the proper function of pleadings has to be accepted. A bad or imperfect pleading leads to instability in litigation which can carry through to interlocutory processes (especially discovery of documents) and moreover the conduct of the case at trial. However, I have come to the view that it cannot be said that the struggle here with the pleading is due to the inherent absence of a case to be conceived. As I say, one can see a case to be made, the merits of which depend so much on what the defendant is going to say in response to the facts of the case. The fourth defendant can see how the case of dishonest assistance is being put. It may not be sustainable or it may be; but that is the case being put. A response to the facts of the case will, I think, heavily inform the legal analysis concerning the availability of the causes of action as pleaded.
Secondly, one frequently hears, or senses of a pleading being “let through” by a Court. The court makes a judgment if there is sufficient in the pleading to enable a defendant (not captious) to know the case being put. That is a basic requirement of procedural justice. There are cases, and I believe this is one of them, where a defendant is well-advised to use the opportunity of pleading to state its defence affirmatively and persuasively by putting forward opposing facts or additional facts or counter allegations which the defendant will say at trial establish that the plaintiff’s case or the conception of the legal cause of action is not made out. That is how I see this case. If, as I think, there is a case being put forward in good faith (putting aside its merits) then I think it will only add to more delay, cost and friction if I refuse leave and require the plaintiff to make another attempt. I do not think this pleading is unfair to the fair conduct of litigation. Subject to what follows, I think the fourth defendant and certainly the third defendant can responsibly and meaningfully plead to it.
However I am not willing to grant unconditional leave to amend. There are a number of shortcomings in this pleading which I think require the Court’s intervention in aid of minimising any further delay in this case. Some of these were acknowledged by the plaintiff’s counsel. I shall identify them in the orders.
Those orders are not intended to preclude the defendants from administering any other request for further particulars. I propose the following orders:
1.Subject to the following orders, the plaintiff has leave to amend his statement of claim substantially in the form of the proposed pleading as produced to the Court on 16 May 2012.
2.The plaintiff shall provide proper particulars of the conversations as alleged in paragraph 3 of the proposed pleading, and likewise, the particulars of the plaintiff’s agreement as allegedly made in paragraph 4.
3.The plaintiff shall recompose paragraph 21 so as to allege as principal facts (that is, not as particulars) all the facts and circumstances by which the plaintiff alleges the third defendant acted dishonestly.
4.The plaintiff shall recompose paragraph 24 so as to allege as principal facts all the facts and circumstances by which it alleges the fourth defendant “knew or ought to have known”.
5.The plaintiff shall recompose paragraph 27 so as to allege as principal facts all the facts and circumstances by which it alleges the fourth defendant “knew or ought to have known”.
6.The plaintiff shall recompose paragraph 33(f) by specifying which of the breaches as are alleged in paragraph 20 are alleged to be encompassed by paragraph 33(f).
7.The plaintiff shall recompose paragraph 34 so as to allege as principal facts (that is, not as particulars) all the facts and circumstances by which the plaintiff alleges the third defendant acted dishonestly.
8.The plaintiff shall recompose paragraphs 36, 37 and 38 so as to allege the legal foundation for the restitutionary claim.
9.The amended pleading shall be filed and served within 14 days.
10.The plaintiff shall pay the costs of the application[13] and costs thrown away by reason of the amendment.
[13]Which I believe to be by summons filed 27 March 2012, but I would ask the parties to check.
As there is a subsisting summons for directions, I would also ask the parties to reach agreement on a timetable for subsequent pleadings and interlocutory steps such as discovery. A draft consent order may be submitted for the Court’s authentication.
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