Pilmer & Ors v The Duke Group

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Adelaide No A46 of 1999

B e t w e e n -
ANGUS CLAYMORE PILMER
First Appellant
ALAN ROBERT CRAWFORD
Second Appellant
DOMENIC VINCENT MARTINO
Third Appellant
PETER JOHN MESSER
Fourth Appellant
PETER LAWSON MUNACHEN
Fifth Appellant
PAMELA ANNE ROBINSON and JOHN RICHARD LANGFORD as executors of the estate of GEOFFREY JAMES STOKES deceased
Sixth Appellants
ROBERT JOHN GRAY
Seventh Appellant
and
THE DUKE GROUP LIMITED (IN LIQUIDATION)

First Respondent

FRANCIS ANTHONY QUILTY and KEITH DANIEL SINGLETON
Second Respondents
HAROLD ABBOTT
Third Respondent
KEVIN CLARENCE SOMES and SIR ERNEST LEE‑STEERE
Fourth Respondents
RONALD WILLIAM EDWARD ARNOLD and OTHERS (as per attached schedule)
Fifth Respondents
FRANCIS ANTHONY QUILTY and KEITH DANIEL SINGLETON
Sixth Respondents
HAROLD ABBOTT, KEVIN CLARENCE SOMES and SIR ERNEST LEE‑STEERE
Seventh Respondents

McHUGH J
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 23 NOVEMBER 2000, AT 11.38 AM

(Continued from 7/4/00)

___________________

MR A.J. MYERS, QC: May it please the Court, I appear with MR A.J. PAGONE, QC and MR P. ZAPPIA for the appellants. (instructed by Phillips Fox)

MR R.J. WHITINGTON, QC: May it please the Court, I appear with my learned friends, MR S.J. LIPMAN and MR S.J. DOYLE, for the first respondent. (instructed by Fisher Jeffries)

McHUGH J: There has been some communication between the Registrar and solicitors representing various respondents concerning their attendance here today. I do not think there is any need to read it on to the record. The fact is that the solicitors for the appellants have filed a notice of service of the written submissions on all the relevant parties and the solicitor for the first respondent has filed an affidavit of service deposing to the service of the first respondent’s written submissions upon the second and fourth respondents, so I think we just proceed, Mr Myers.

MR MYERS: Thank you, your Honour. Your Honours have, or should have, on behalf of the appellants the further written submissions and also a written reply.

McHUGH J: Yes.

MR MYERS: I just check in relation to the latter document. The submissions are, indeed, written submissions, not an outline and I do not wish to burden the Court with any repetition of what is in them. Your Honours, it is the appellants’ contention that the Full Court did err in finding that the appellants breached a fiduciary duty owed to Kia Ora.

GUMMOW J: Or that they had one, in the first place.

MR MYERS: There are two issued wrapped up in the first question. Your Honour is quite right. We say there was no duty and we say that, in any event, there was no breach. The way the Full Court approached it, after dealing with the question whether a fiduciary duty was pleaded, was very simple. The Full Court held that there was a duty, described as a fiduciary duty, not to accept the retainer. That is, in particular, to be found in paragraphs [782] to [785] of the judgment and again, in paragraph [880] of the judgment.

The fiduciary duty that was found was not, as the appellants said before the trial judge and before the Full Court, pleaded. The only words that constitute the plea of the fiduciary duty are found, for example, in paragraph [704] of the judgment and then in paragraph [707]. They are the same words, I believe.

At the end of a very long paragraph 64A, which ran, from recollection, for about 95 pages and is now in the supplementary appeal book, which was really like – it did not read in a coherent way would be the kindest way of describing it. In paragraph 64A.2(a) it was alleged “Nelson Wheeler breached the express term of the retainer to be independent.” and then 64A.2.2:

Nelson Wheeler breached the implied term of the retainer and the duty of care to be independent referred to in paragraph 19.7 of the statement of claim and were in breach of fiduciary duty owed to Kia Ora and its shareholders.

Those words that are italicised in the report are the only plea of fiduciary duty in about 350 pages of statement of claim, all of which your Honours have before you.

The Full Court below said that it was sufficient, and in paragraph [711] and [712] they deal with that issue. We still assert that there was no proper plea of fiduciary duty and one could not properly be expected to meet a claim based on a fiduciary duty on that basis.

Do your Honours have, may I respectfully inquire, a copy of the decision of the Full Court? Is that the difficulty?

McHUGH J: I should have. It is in volume 31 of the Australian Companies Security Report ‑ ‑ ‑

MR MYERS: Yes, it is.

McHUGH J: ‑ ‑ ‑ but it should be around somewhere, I do not know where.

CALLINAN J: Yes, you provided us with a photostated copy.

MR MYERS: Yes, it was supplied last time. There are paragraph numbers and I am going to refer to the paragraph numbers because I thought on the last occasion some of your Honours were looking at the Federal Law Reports and that is what I have brought along today.

McHUGH J: I have got it now, yes.

MR MYERS: But it is all paragraph numbers. Now, as I said, the way in which the fiduciary duty was ultimately found by the Full Court is in paragraphs 782 to 785, under the heading ‑ ‑ ‑

HAYNE J: At some point, Mr Myers, could you have somebody turn up and give me a reference in the supplementary appeal book to where in that I find the particular paragraph of the pleadings, paragraphs that are extracted.

MR MYERS: Yes, page 217, your Honour.

HAYNE J: Thank you.

MR MYERS: It is right at the bottom of the page. Those words, right at the bottom of page 217, if your Honour has got it.

HAYNE J: Yes.

MR MYERS: That is the full extent, and I do not exaggerate, 350 pages of pleading of the reference to fiduciary duty. In any event, the Full Court held that the duty was a duty not to accept the retainer.

GUMMOW J: Where do we actually see that? Where do they actually say that, paragraph?

MR MYERS: Yes, they do say that. It is paragraph [783], excuse me, no.

CALLINAN J: I think it is [786], is it not?

MR MYERS: Yes, I accept that is right, I am very sorry.

GUMMOW J: Yes, I see.

CALLINAN J: And at [787].

MR MYERS: They certainly say it in terms ‑ ‑ ‑

GUMMOW J: Paragraph [787].

MR MYERS: Yes, [787]. As I said, I do not want to repeat what we have put in written submissions, but just really to emphasise it. It is a remarkable conclusion because it follows from that and the decision of the court concerning causation and the assessment of damages that if Nelson Wheeler had written a perfectly correct and accurate report that something had gone wrong whereby the company had suffered a loss as a result of the take-over transaction, for example, because the stock market had decline and the directors had still decided to go ahead, Nelson Wheeler would have been responsible for the whole of that loss.

GUMMOW J: You get into a Canson v Boughton-type situation, I suppose.

MR MYERS: I am sorry, your Honour?

GUMMOW J: You would say you get into a Canson v Boughton type situation, which would cut that off

MR MYERS: Yes. Yes, at paragraph [830], for example, their Honours make that clear. They say:

The breach of fiduciary duty we have identified has nothing to do with the nature and content of the report supplied by NWP –

Nelson Wheeler –

although that will have a bearing on the quantification of any loss flowing from the breach –

The other remarkable thing about the decision is that, in truth, Nelson Wheeler could and should only be responsible for any loss which is caused in some relevant sense by their incompetence in preparing a report. That is a subject matter which is perfectly adequately dealt with by the law of contract and by the law of torts. There is no reason in policy whatsoever for the court to be imposing a fiduciary duty in these circumstances.

GUMMOW J: What was the conflict said to be?

MR MYERS: The conflict was said to be antecedent connections between members of Perth firm of Nelson Wheeler and some of the directors, which might have led them to be regarded as not fully independent. For example ‑ ‑ ‑

GUMMOW J: What does the word “independent” mean though?

MR MYERS: Well, it can only mean, in that context, liable to be swayed to write something that is incorrect. For example, Nelson Wheeler Perth maintained the share registry for Kia Ora. Some of the members of the partnership of Nelson Wheeler Perth had had business dealings with some of the directors of Kia Ora, Mr Stokes, in particular. Mr Stokes was the director of the company which had purchased the Marvel Loch Gold Mine for a large sum of money, about $80 million, which had put Kia Ora in receipt of this large amount of cash which it was claimed was lost through this transaction. So it is a question of some antecedent connections.

Your Honours, one also needs to consider the nature of the retainer. The nature of the retainer is made clear by a consideration of the terms of the listing rule itself, and the listing rule itself provides that the directors, in these sorts of circumstances, need to put before a meeting of shareholders, at which only unassociated shareholders can vote, any reports or valuations tending to show that the price which is to be paid in the takeover is fair. So Nelson Wheeler were engaged to write a report as to whether the proposed price, which had already been determined by the directors, was fair or not.

So their only task was to write a report which could be used by the directors to put before the unassociated shareholders meeting as to whether the price was fair. They were not engaged as advisers for the company. They had no role in the management of the company. When they wrote their report and handed it over, or put it in the mail, that was the end of their function. They had no right to attend the meeting. They did not even have a right to know whether the meeting was held or not. They were not advisers. They had no management role. They were not handling property.

The report itself was expressed, as your Honours will have seen, to be a report for use by the directors at a meeting of unassociated shareholders. It was not a report which Nelson Wheeler ought to have expected, in the circumstances, would be acted upon by any organ of the company, by the directors or by the shareholders in a general meeting. The meeting, at which the report was considered, was not a general meeting because not all shareholders could vote, and Article 56 of the articles required that.

Nelson Wheeler were not acting, in any sense, as the agent or representatives of either the company or the directors. Nelson Wheeler were not, in any sense, performing any of the fiduciary or management functions of the directors. They had no discretion as to the taking of any step. The meeting itself, at which the report was considered, was only an enabling meeting for the purposes of the stock exchange rules. The resolution that was put forward was expressed to be a resolution authorising the directors, for the purposes of the listing rules, to decide to proceed with the takeover.

Your Honours, we say, with respect, that there is not any indicium of fiduciary relationship present that could be the only subject matter of a fiduciary relationship. That is the report itself. The Full Court said that it is the whole engagement which is the subject of the fiduciary relationship.

McHUGH J: The Full Court said though, did it not, that there is more to this than simply the provision of a professional opinion as to the value of Western United? They listed a number of factors in paragraphs [739] through [745] and concluded that:

Both the company as an entity and the non‑associated shareholders relied on NWP’s expertise and independence in the sense that they knew that the takeover could not proceed without NWP expressing an opinion that the takeover price was fair.

That is the way they have put it.

MR MYERS: It is only in a very limited sense that the takeover could not proceed without the opinion. The listing rules required that there be a meeting at which unassociated shareholders and that the directors put before them reports, et cetera, which showed the price to be fair. As a practical matter, we would concede, as I did below, that, unless there was such a meeting and there was such a report, the takeover would not proceed. But it is only in that limited sense.

McHUGH J: What do you say about the sentence in paragraph [745]?

the circumstances were such that NWP were no longer merely undertaking a professional valuation, but a report, the circumstances giving rise to which made it perfectly obvious that there was a necessary expectation that NWP would act solely in the interests of Kia Ora as a whole in preparing the report.

That is about as close as ‑ ‑ ‑

MR MYERS: We say that they were merely undertaking a professional valuation. There was nothing else that they did. All they did was write a valuation report and provide that to the directors and then the directors chose to give it to the unassociated shareholders meeting. I will just come back to that. We urge your Honours to remember the timing of all this. The report is dated 9 October. The stock market crash occurs in Australia on 20 October. The meeting is later in that week, I think 22 October.

GUMMOW J: 26 October.

MR MYERS: 26 October, I am sorry. Even there one would have expected that the directors would have done something, but they just let the meeting go ahead. The directors put before the meeting a letter signed by Mr Quilty, which is in the Court book, which was extremely positive about this takeover. It contained a lot of puffery and so on. The directors then shortly after the 26th met and decided to go ahead with the takeover. They then got a report from Horwarth and Horwarth which showed that the value attributed to the shares in the takeover by Nelson Wheeler was too high and considered it and still went ahead with the takeover.

They then dispatch the takeover documents. They then on two occasions waive conditions which, if not satisfied, would have led to the takeover coming to an end. So they continued on and on and on after the meeting. That really emphasises ‑ and this is where I bring it back to that sentence, your Honours – Nelson Wheeler were not running the company. They were not making management decisions. They did not have the fiduciary responsibilities. They were just professional advisers. They did not even know any of these things.

McHUGH J: I appreciate that, but the way it is put against you is that Kia Ora put its trust and confidence in your clients to look after its interest and that it was vulnerable – and I think they actually used the term “vulnerable” at some stage – and therefore there was a fiduciary duty arising from that fact, that they put themselves in NWP’s hands, so to speak.

MR MYERS: We say to that, your Honour, with respect, that it is a very inexact and inaccurate way of describing what happened. Nelson Wheeler were commissioned to write a report as to the fairness of the consideration and they did so. Your Honours have got the report. It does nothing more than that and it sets out the reasons for it. In what sense, one asks, could Kia Ora put itself in the hands of Nelson Wheeler. It could only put itself in the hands of Nelson Wheeler in the sense of expecting Nelson Wheeler to write a competent report.

The directors were those in whose hands Kia Ora was. The directors had to make the original decision about the proposed takeover, instruct Nelson Wheeler about what price and terms there were of the takeover, so they expressed the view about whether the price was fair, not whether the takeover was fair but whether the price was fair, then the directors had to make a decision in the circumstances obtaining after 20 October about what to do. Nelson Wheeler had no access to information about the company after they had written their report. They had no management role. One asks, “In what sense was the company in their hands?” It was not in their hands at all.

HAYNE J: Was a report of fairness sine qua non to the transaction proceeding?

MR MYERS: In a practical sense, your Honour, not in a legal sense. But we would accept that if there was not a fairness report and it was not laid before a meeting of unassociated shareholders and the unassociated shareholders did not vote in accordance with the stock exchange rule, even though none of that was required by the articles, the takeover would not have gone ahead.

HAYNE J: If Nelson Wheeler had given a report that was negative, that is, “The price is unfair” would that report have had to be placed before the shareholders at the listing rule meeting?

MR MYERS: Well, one would say that the directors would have a fiduciary responsibility to do that, your Honour. If it is that sense in which your Honour is saying “would” the answer must be “yes”. Would these directors have done it? Well, it was found that they were acting fraudulently, in the end.

GUMMOW J: Well, they might have gone off and got another opinion.

MR MYERS: One suspects that they would have, but I am answering his Honour’s question on the two levels, I think, that it is asked and I would concede that ‑ ‑ ‑

HAYNE J: But had they obtained an expert who had given a favourable report as well as a report that was unfavourable, and if the directors had abided their duty, would they have been bound to place both reports before the meeting?

MR MYERS: Well, in my submission, as a matter of performance of their fiduciary duties, they would have been so bound. If used “bound” in the sense “would they have done” well, who knows, but, they were pretty ‑ ‑ ‑

HAYNE J: I understand that. Well, then, coming back to the passage which Justice McHugh took you to at para [745], the statement that Nelson Wheeler would act solely in the interests of Kia Ora, their Honours in the Full Court go on to say:

That immediately gave rise, in turn, to the duty avoid acting in their own interests or in the interests of any party that would be in conflict with –

Was any argument advanced, whether at trial or on appeal, which, as you understood it, identified an acting by Nelson Wheeler in their own interests or in the interests of a party in conflict with those of Kia Ora?

MR MYERS: No, your Honour. Now, this was, I should say, a hot matter through the trial because the plaintiffs’ case was predominantly a case in tort and/or contract. Then, later on, there was this long paragraph 64A that came in, which your Honours have seen the concluding words of.

From time to time, counsel on behalf of the plaintiffs said things which suggested that allegations beyond incompetence were being made against Nelson Wheeler and I believe that on every occasion there was an outcry by counsel acting on behalf of Nelson Wheeler to say, “Is there any allegation of impropriety, fraud?”. It was expressed in different ways at different times and always it was resolved on the basis, no.

HAYNE J: But do you understand then the Full Court to point, in its reasons for judgment, to an acting in own interests or an acting in the interests of a party in conflict with those of Kia Ora?

MR MYERS: What the Full Court said in this matter is at paragraph [775], your Honour. This is, admittedly, dealing with one memorandum:

It cannot be said that in the preparation of the 3J(3) report NWP was, on that account –

on account of the memorandum –

acting in its own interest.

HAYNE J: Perhaps my question, ultimately, has to be directed more to Mr Whitington than to you, Mr Myers, but if you were able to point to any passage in the judgment which went to this aspect of the matter it ‑ ‑ ‑

MR MYERS: Paragraph [790], I believe, goes to this aspect of the matter as well.

The breach of fiduciary duty in this case –

I am reading from the last sentence of [789] –

was in providing the report at all.

[790] Unlike many situations…..no dealings with any trust property…..They did not wrongly apply such property…..They did not mismanage property entrusted to them. They did not profit in any identifiable way from entering into the transaction they did, other than by being paid a fee.

I know it is not absolutely hitting the nail on the head as far as your Honour is concerned but ‑ ‑ ‑

HAYNE J: It is simply that on my reading of the judgment, which may be insufficient, I am not conscious of the Full Court taking up that amplification of the duty, which you get at the end of [745] and saying ‑ ‑ ‑

MR MYERS: I believe that is so, your Honour. I believe that is so, with respect. I would just like to make one point in addition, your Honour, and it is not a mere verbal quibble in this sentence:

NWP would act solely in the interests of Kia Ora as a whole in preparing the report.

Well, let us leave the final phrase “in preparing the report”. In what sense could Nelson Wheeler act in the interests of Kia Ora? The only way that they could act in the interests of Kia Ora was to prepare a report which gave a correct or fair assessment of the value of the consideration passed in the takeover.

HAYNE J: By performing the retainer that they were engaged in.

MR MYERS: By performing the retainer, and the law deals with these retainers. Now, there were lots of allegations of impropriety and, indeed, fraud against the directors and there was a tendency to try and associate these misdemeanours of the directors with Nelson Wheeler but, in fact, the case against Nelson Wheeler, which was pleaded and particularised and run, did not involve allegations of impropriety, did not.

GUMMOW J: It was not said, for example, that Nelson Wheeler was assisting, with knowledge, a breach by the directors.

MR MYERS: No, certainly not. Certainly not, that was never suggested. What was suggested was that Nelson Wheeler were too close to the directors and that might have affected the quality of their report.

HAYNE J: Well, that is flirting. At least flirting ‑ ‑ ‑

MR MYERS: Flirting. That is really as far as it went. Perhaps, with respect, your Honours, when Mr Whitington has said what he might say about this, there might be something to say by way of reply.

CALLINAN J: Mr Myers, on that point, I notice that the plaintiff pleaded, at page 11, the policy statement by the Commission ‑ ‑ ‑

MR MYERS: Yes, it did.

CALLINAN J: Which includes:

The value of the expert’s report will depend substantially on both the motivation of those who engage him and the professionalism and the objectivity which he displays: the expert’s performance can be influenced by who engages him –

It seems to me that that may go to negligence, but it may also go to the possibility of fiduciary duty. I do not know what bearing the policy statement can have on the matter but it does not seem to be a bad statement of the reasonable expectations that one might have of an independent professional adviser.

MR MYERS: One can have an expectation, perhaps, in general terms, that the person who writes this report will be independent, that is to say, independent of the directors. Is that sufficient, one asks, to convert the writing of the report into the subject matter of a fiduciary duty?

CALLINAN J: A 3J report is always going to be commissioned by the company, or by the directors of a company, which is involved in the takeover.

MR MYERS: It is.

CALLINAN J: There is just one thing you said before, if the expert’s report had not been obtained, the company would have been de-listed, would it not?

MR MYERS: Well, that would have been one sanction. Whether that would have happened, one does not know, but – well, listing rule 3J(3) is part of a contract between the company and the stock exchange. That is all one can say about it.

CALLINAN J: So it would be virtually inevitable that it would have been de-listed, quite apart from what other consequences would have flowed.

MR MYERS: From the practical point of view, one would expect that the takeover would not go ahead without the meeting and the 3J(3) report, and one can imagine that there would be a lot of complaint made if the directors had tried to do that and we concede that, in a practical sense, it is a sine qua non, as one of your Honours said before.

HAYNE J: Could I test the situation against a case where the expert retained has, in fact, a very significant parcel of shares in the target company? What analysis, if any, would one make of that circumstance, by reference to notions of fiduciary duty? There would be, plainly, a commercial interest in the outcome of the takeover.

MR MYERS: The farthest one could go in claiming a fiduciary duty would be to take from that person a profit he might have made in the takeover on the shares. That is the bottom line of my answer, your Honour.

HAYNE J: The language of the Full Court, if adopted and accurate, would seem to lead to the conclusion that in that kind of case, the expert could not properly accept the retainer ‑ ‑ ‑

MR MYERS: Yes, it would ‑ ‑ ‑

HAYNE J: And then there would be consequences ‑ ‑ ‑

MR MYERS: It would lead to that.

HAYNE J: - - - debatable consequences about what equitable compensation, if any, or other relief, would go. But does that shed any light on whether the characterisation of the relevant relationship is one which properly includes reference to fiduciary obligation?

MR MYERS: In my respectfully submission, it does not because one still gets back to this. If the report is competent, the lack of independence does not matter. If the report is incompetent, it is because someone has relied upon it and suffered a loss thereby which matters.

HAYNE J: But it may highlight the fact that competence reflects a range of outcomes, that is, a competent valuation might put the value of these shares at somewhere between X and Y. Fiduciary obligations expect – I was going to say expect rather more precise outcomes – they expect them ‑ ‑ ‑

MR MYERS: With respect, what your Honour says is correct, yes. May I say something about independence because it is important in the background here? Your Honours will have noticed that the Full Court held quite clearly that there was no implied contractual obligation of independence in these circumstances. Now, your Honours say, “Well, that stands at odds with the idea of a fiduciary duty”, but not when you consider the circumstances of the case. The Full Court was bound to so hold because the directors who engaged Nelson Wheeler knew of all the associations between themselves and Nelson Wheeler which were complained of.

CALLINAN J: Mr Myers, what about paragraph 9 on page 12? The paragraphs that follow 64A.1 allege ‑ ‑ ‑

MR MYERS: I am sorry to interrupt. Your Honour is looking at the pleadings?

CALLINAN J: Yes, at page 12, for the record.

MR MYERS: Yes.

CALLINAN J: The paragraphs that follow 64A.1 allege a number of associations.

MR MYERS: Yes, they do.

CALLINAN J: I have not gone into the detail of those, but it seemed to me that they looked as if they might well be associations of the kind to which the statement from the policy report which appears in paragraph 9 refers. It seems to me that they could well be associations of that kind. The policy statement apparently requires that they be disclosed. Were they disclosed? Am I right to say that ‑ ‑ ‑

MR MYERS: No, they were not disclosed in any sense. They could not be disclosed to the directors because the directors knew them and they were not disclosed ‑ ‑ ‑

CALLINAN J: No, but this is the point, disclosed in the report?

MR MYERS: No, they were not.

CALLINAN J: It says quite expressly, as a matter of policy, “The expert should disclose, in his report”, which would give the requirement some meaning. It would be pointless to disclose them to the directors; they knew. But the report would disclose them to all of the shareholders.

MR MYERS: No, your Honour, they were not. But, on the other hand, it is not alleged that Nelson Wheeler or any of its partners got anything out of this, except the fee of $19,500. It is not a case like Justice Hayne was putting by way of hypothesis before, or illustration, that one of the writers of the report had an undisclosed financial interest in the outcome of the ‑ ‑ ‑

CALLINAN J: But this paragraph does not require it, this policy statement, depending upon the effect you give to the policy statement. But it does not require it because obviously it contemplates that the benefits might be accruing in other areas and in other directions and those benefits, or the possibility of those benefits, might make the experts partial when they make their report and the fiduciary obligation not to be partial. I am only raising it as a possibility, Mr Myers, but I do not think you can ignore the policy statement entirely.

McHUGH J: No, and it applies in another way as well, does it not, because Nelson Wheeler had valued part of Western at an earlier stage?

MR MYERS: Yes. A Mr Crawford, one of the partners had, yes.

McHUGH J: Yes, one of the partners had. Maybe it is working backwards, in a way, but ‑ ‑ ‑

MR MYERS: A Mr Newman, an employee of Nelson Wheeler, actually wrote the report, and a Mr Pilmer, a partner, signed it – I think that is a fair enough way – reviewed it and signed it, but Mr Newman wrote the report. Now, Mr Newman gave evidence and was cross‑examined at great length and he did not know of Mr Crawford’s report. So it was not a question of dishonesty in concealing the existence of that report, but merely that it was overlooked by the author. There is a disharmony between the two reports, that is certainly true. As part of the entire valuation of Western United, the stockbroking business was given a higher valuation in the 3J(3) report than it was in the earlier report.

McHUGH J: So is your answer that the relevant arm of NWP did not know of this?

MR MYERS: Yes, it is, your Honour.

McHUGH J: The Full Court seemed to have placed a great deal of emphasis on that, did it not, in terms of breach?

MR MYERS: Yes, they did. At page 286 of the trial judge’s reasons, this is dealt with. It is at about point 7. I do not know whether your Honours want me to read it.

In my view, the April 1987 valuation was of critical importance. If Pilmer and Newman had been aware of it, they would have been obliged to consider

it. The next paragraph:

It is not to the point that Newman (and Pilmer if that was the case) were not actually aware of Crawford’s valuation.

So Newman himself was not aware of it. He was cross-examined and Pilmer did not give evidence, so one cannot be absolutely sure in the end.

McHUGH J: That second paragraph is directed to breach of the duty to take reasonable care, is it not?

MR MYERS: Yes, it is. So the Full Court have used that in a sense that ‑ ‑ ‑

McHUGH J: Yes, they used it as evidence of a breach of fiduciary duty.

MR MYERS: Yes, they did. I do not want to descend into every detail of these sorts of things. There are an enormous number of factual issues that can be addressed and, with respect, your Honours, it would really be better to address them if any of them are relied upon in particular by my learned friends, but that is the answer to that one. It is one we thought may possibly be relied upon and the Full Court has just used it in a different way.

CALLINAN J: Should not the partner who is signing the report or making the valuation talk to the others to ‑ ‑ ‑

MR MYERS: He probably ‑ ‑ ‑

CALLINAN J: Most big solicitors’ firms have a client register and they go to it. Indeed, they understand that there is an obligation to go to it to check to see whether other partners or other people in the firm may have advised.

MR MYERS: He probably should, but the fact of it is the man who wrote the report, Mr Newman – he did write the report. He did all the work and he wrote the report. He did not know about it.

CALLINAN J: The firm got the benefit of the fee, the whole firm.

MR MYERS: Yes, and it might be negligent. In the end, Nelson Wheeler conceded that there was negligence, that the report was incompetent.

CALLINAN J: I am very uncomfortable with the idea of a partner being able to take the benefit of ignorance. Just in the same way as a corporation has to act through its officers, if one officer does not know something, that cannot be an excuse if some other officer knows it.

MR MYERS: That was not this case exactly, your Honour, but we accept that the report was negligent. All I am contending before your Honours today is that this is not an occasion for imposing a fiduciary duty, and the fiduciary duty that the Full Court said was imposed is, with respect, unsustainable because it leads to absurd results and it ignores the substance of the matter, which is that here is a complaint about the competence of a report, or the fairness, accuracy, whatever one likes, of a report. If any loss followed in this case which is attributable to that report, it has to be loss which occurs because the report is wrong – I am using the words very loosely – and someone relied on it. In fact, we say no one relied on it because the directors who made the decision knew all along that the report was no good. It was certainly no good after the stock market crashed.

GUMMOW J: I think one way of looking at this is to say what the Full Court did comes to this, that it was not, as fiduciary duties ordinarily are, proscriptive; it was prescriptive in the sense that Nelson Wheeler had some duty to the company to refuse to take the retainer because, if it did, the company was at risk of not complying with the requirements for an independent report. That would be a step forward, I think. It would be a Canadian type duty, I think.

MR MYERS: It would. Indeed, it would go further than the Canadian‑type duty because, just taking your Honour’s simple hypothesis, what if the company said, “Look, we know about all these” ‑ ‑ ‑

GUMMOW J: Well, the company for this purpose is the directors.

MR MYERS: Yes.

GUMMOW J: So they obviously cannot go to a general meeting to hold it all up.

MR MYERS: No.

GUMMOW J: So the only thing they can do is not act.

MR MYERS: The directors?

GUMMOW J: No, Nelson Wheeler. They cannot be retained by these directors, in other words.

MR MYERS: But if the directors say to Nelson Wheeler, in your Honour’s case, “Look, we know about all those problems” ‑ ‑ ‑

GUMMOW J: Yes, but Nelson Wheeler has got to say, “Okay, you know but the shareholders do not know, so, off. Get out.”

MR MYERS: Nelson Wheeler must say, “Well, we won’t do it. Even though you are begging us to do it and” ‑ ‑ ‑

GUMMOW J: That is right. I think that is what it has to come to.

MR MYERS: Yes, it does, your Honour. “Even though you are begging us to do it and” ‑ ‑ ‑

CALLINAN J: No, they can do it so long as they disclose in the report, as the policy requirement insists, or suggests, what their associations are, any reasons as to why they might not be independent.

MR MYERS: But no loss is caused by the failure to make that disclosure, if it is a good report.

CALLINAN J: No, I am just making a response to what you said to Justice Gummow, that it is not simply a question of not acting. The alternative might be to act but disclose, as the policy requirement contemplates.

MR MYERS: Well, that is not something that the Full Court would allow.

CALLINAN J: No, but it was pleaded.

MR MYERS: Well, what was pleaded was, “And they were thereby in breach of fiduciary duty at the end of” ‑ ‑ ‑

GUMMOW J: But that will be another form of prescriptive fiduciary duty.

MR MYERS: Yes, it would be.

GUMMOW J: Yes.

McHUGH J: Suppose I am contemplating buying a property and I go to a builder and I say, “I want you to inspect this. I am going to reply on your report in determining whether I should buy this property”. Is there a fiduciary duty owed to me by the builder, in those circumstances?

MR MYERS: In that simple case, no, your Honour. No, your Honour. If the builder – perhaps I did not quite – could your Honour, with respect, repeat it? I am sorry, I might not have caught something.

McHUGH J: Yes. Well, I am contemplating buying a property. I go to a builder and I say, “I want you to inspect this for defects and so on. What you say will be determinative of whether or not I buy this particular property”.

MR MYERS: No, no fiduciary duty. I mean, it is a simple case of contract or negligence. Contract, in the case, probably.

McHUGH J: Yes. To a large extent it seems to me not dissimilar from what has occurred here.

MR MYERS: That is so, your Honour. In the end – and that word “act”, which I hope I am not said to be relying too much on, encapsulates the vice, really. These people were not acting on behalf of Kia Ora. They were writing a report. The directors were doing all the acting. They had no management. They had no control. They had no decision‑making power. They were not agents. They had no discretions. They could not do anything which a fiduciary would do. Now, that is really the argument.

Your Honours, the second question which arises, if that first question is answered contrary to the one that I have just addressed, concerns whether the Full Court erred in assessing the amount of compensation. I do not wish to deal with all the matters that have been dealt with in the written submissions repetitiously. There are two ‑ ‑ ‑

McHUGH J: Are you aware of any cases where an independent contractor has ever been held to be a fiduciary?

MR MYERS: Not even in the western provinces of Canada, where I had the honour to teach law about 30 years ago.

HAYNE J: That will provoke a different ‑ ‑ ‑

KIRBY J: Are you being provocative?

MR MYERS: I am not being provocative. I beg your Honours’ pardon. No, is the answer, I am sorry. May I just go, now, to the second question? There are two matters upon which I wanted to say something. One is the question of interest and the other is the question of loss of opportunity. Interest is very simple. The decision on interest was made by the trial judge. It was affirmed by the court, on appeal. So twice we have had the same decision on interest. It involves questions of discretion in truth, or judgment. We have advanced in our written submissions in reply two answers on the question of interest to the submissions that were put as to why Nelson Wheeler should be treated differently from the directors.

The directors were obliged to pay a lot more interest than Nelson Wheeler. First, the directors were found to have acted dishonestly and fraudulently. There was no such finding with Nelson Wheeler. Secondly, the directors were responsible for managing the company and making all relevant decisions relating to the takeover and, indeed, making all relevant decisions in relation to the company after the takeover, when the money that they would have had was lost, and, thirdly – and this is not in here and this what I want to add ‑ the directors who were in default received money in the course of the ‑ ‑ ‑

McHUGH J: Yes.

MR MYERS: So we have missed the best point in the written submissions.

GUMMOW J: Where do we write it in?

MR MYERS: At (c), in paragraph 12.

GUMMOW J: What is the point?

MR MYERS: The faulting directors received cash in the takeover and, so, had the use of it all that time. The other matter on the question of damages, with which I want to deal, is this. There has been raised again some contention about a lost opportunity. Now, when this matter was before your Honours in April this year, the respondent company did not put any submissions about lost opportunity. I have checked their written submissions again - there is not a word about it. However, my clients, in their written submissions, did say something about a lost opportunity and they dealt with the matter at paragraph 69 and following of those written submissions. I respectfully ask your Honours to go back to them because, there, important arguments are dealt with.

The first thing that we say is that a claim based upon a loss of opportunity was not pleaded. It would be unfair to raise it. In the supplementary Court book, at page 232 and following, there is an important passage which arises in relation to the cross-examination and re‑examination of Mr Easton.

McHUGH J: What page is that again?

MR MYERS: Page 232 in the supplementary Court book. I will try and quickly refer to this because it is tedious to refer to all these things. Line 25, Mr Gray is saying:

One thing your Honour can do, if my friend is right that the loss, properly characterised, is a loss of opportunity to issue that capital for worth, then one way that your Honour can get an idea of the measure is to say what would have it cost at the time if permission had been obtained to buy back those shares so the company then had its opportunity available again.

Now, Mr Gray is raising that. Then, on page 234, line 28, we come back to it, his Honour says:

Now, it seems to me that you are entitled to ask, contrary to Mr Mansfield’s submission, if there is any other cost. But I don’t accept, at the moment, anyway, that you can reopen a whole line of possibility for the assessment of damages.

That is a reference to loss of opportunity being cost of buying back. If your Honours would just accept that for the moment, that is what follows from the intervening parts. Then his Honour says, over the page, the second line:

But I don’t think you can, at this stage, put a whole new premise for the assessment of damages on the basis postulated in your question.

Then his Honour goes on – I will not read it all – over to page 236, although it all does repay reading. Line 15, his Honour says:

My ruling is that, unless you can point to something else in the transcript as having arisen in cross-examination, you are not permitted to ask the question that you have asked, but you may take up other losses, apart from money out, based upon the evidence given at –

a certain page. So his Honour has stopped re-examination, on the basis that it is not reasonably open. Now, it was not pleaded, and when it was attempted to be raised, his Honour made that ruling. In fact, there is some evidence, if your Honours go to Court book No 3 at page 538, dealing with this subject. Mr Mansfield is cross-examining Mr Easton and he is testing ‑ ‑ ‑

GUMMOW J: I think we were taken to this before.

McHUGH J: We were taken to this last time.

GUMMOW J: Line 23.

MR MYERS: I did, exactly, but it is really crucial and since the matter has now been raised – it has now been raised. The matter has not been argued. There is nothing further I want to say about that. Your Honours, subject to your Honours’ questions, I do not want to supplement the written submissions on the second question. On the third question I wish only to say this: we respectfully adopt the reasoning of the President of the Court of Appeal in New Zealand in Mead v Day.

GUMMOW J: That is a courageous submission.

HAYNE J: His Honour was admiring your courage, Mr Myers.

GUMMOW J: If you said you adopted Sir Edward Somers’ judgment, I would not be so - - -

MR MYERS: On the point as to whether a court, assessing equitable compensation, can take into account the conduct of the beneficiary so‑called.

GUMMOW J: Yes. It is a sort of contributory negligence argument.

MR MYERS: Yes, it is.

GUMMOW J: Contributory negligence is a bar at common law, anyway, and you have to have a statute and Astley v Austrust says you have to just read the statute and the statute does not talk about this. It does not talk about contract either. It certainly does not talk about this.

MR MYERS: Your Honour, we say, with respect, that one should not be confounded by titles or words in this.

GUMMOW J: It is principles.

MR MYERS: We are not saying that the law of contributory negligence is imported into the law of ‑ ‑ ‑

GUMMOW J: I know. I know that and you say that, but what you are trying to do is then disrupt the whole conceptual underpinning of fiduciary obligations.

MR MYERS: No, with respect, we are not, your Honour. We are trying to bring about a situation where there is a fair result.

GUMMOW J: Quite often it is an unfair result. Regal (Hastings) v Gulliver has been criticised as an unfair result for 60 years.

MR MYERS: Regal (Hastings) v Gulliver, without debating that issue just for the moment, your Honour, is a case dealing with quite different and distinct facts. If one is attempting, by a rule which provides for an award which is greater than the loss that has been suffered, to ‑ ‑ ‑

GUMMOW J: That becomes a causation question and it is all dealt with in Canson v Boughton. Now, why you have to jump on this other bus, I have no idea.

MR MYERS: If your Honour pleases, if it can all be dealt with in causation, then one would be happy. However, that has not been the approach of the courts in many cases and the path of analysis does not ‑ ‑ ‑

GUMMOW J: It is not a path of analysis. It is a path of emotional reaction. That is the problem.

MR MYERS: Your Honour, what I am suggesting is that in this day and age primitive rules of responsibility ‑ ‑ ‑

GUMMOW J: That is more emotion, too.

MR MYERS: ‑ ‑ ‑ by whatever words they are described, would impose upon a wrongdoer a punishment out of – simply have no place in the civil law and that, in the end, is really it.

Sometimes there might need to be presumptions that are necessary to reinforce institutions, such as a trust, and there might be distinctions that need to be made in this area between cases where there is a breach of trust or trust property has been improperly handled and other cases of breach of fiduciary duty, but, with respect, one way or another, we submit that the decision of the Full Court is correct and we respectfully adopt what was said by the learned President in Mead v Day. If your Honours please, they are the supplementary oral submissions I wish to make.

McHUGH J: Yes, thank you Mr Myers. Yes, Mr Whitington.

MR WHITINGTON: If the Court pleases, for the Court to have full appreciation of the facts of the matter, it needs to be said that there was a much wider and deeper array of associations between Nelson Wheeler and the directors of Kia Ora.

Can I just put that in context. The directors, and principally Mr Harold Abbott, but also his co-directors, Mr Lee-Steere and Mr Somes, had proposed a takeover of Western United and each of those three directors had a very substantial interest in Western United and the takeover proposed ultimately was at a grossly inflated price and, as a result, they received an enormous free benefit at the expense of their company, Kia Ora.

3J(3) was designed to act in those very circumstances to provide a kind of gate to such a transaction and the role of the expert was to be the gatekeeper, and if he or she opened the gate, then the directors could proceed to put the proposal before the meeting. The meeting would assess the proposal, based upon the advice in the report. But if there was no such opening of the gate by the gatekeeper, the practical result was the transaction could not proceed.

Now, in this case, Mr Abbott went to Nelson Wheeler, no doubt, because he had a very strong background of associations. Can I just highlight two of the most substantial. Mr Stokes, one of the partners of Nelson Wheeler, was the chairman of directors of a company, Mawson Pacific. Mawson Pacific purchased, in February 1987, the year in question, one half of the Marvel Loch Gold Mine from Kia Ora for $26 million.

Later, at the very time the takeover was under way, a further agreement was entered into with Mr Stokes’ company, Mawson Pacific, that it would buy the other half of the gold mine for $40 million. It was that money, the $40 million, which was to be used to fund the takeover of Western United. So, as things transpired, it was necessary for Mr Stokes’ company to buy the other half of the gold mine and pay $40 million to Kia Ora so Kia Ora could pay $26 million in cash to Western United, ie, to Mr Abbott.

This association went back to February 1987 when Stokes had purchased, or caused Mawson Pacific to purchase, the first half of the gold mine. From that time on Kia Ora, of which Mr Abbott was the most substantial director, the effective controller, Kia Ora and Mawson Pacific conducted a joint venture of the Marvel Loch Gold Mine, until the other half was sold in November 1987. There was another critical antecedent association ‑ ‑ ‑

HAYNE J: Just before you come to that one, that association describes a series of commercial transactions among which there was a period where there was a working together between a director of Duke Group and an accountant in Nelson Wheeler. Is that right?

MR WHITINGTON: Yes, and there was another substantial involvement through a company called Wattle Gully. Mr Stokes and Mr Munachen, partners of Nelson Wheeler, became directors of that company in, I think, late 1986. Mr Abbott had procured that Western United fund their initial shareholding so that they obtained control of the company, and then those directors caused the company to issue shares to Kia Ora so it became the dominant shareholder.

That company then entered into a joint venture with Kia Ora and two other companies to purchase an entity called the Mount Pleasant Gold Trust, and the funds used by that venture to purchase Mount Pleasant Gold Trust, some $22 million, were borrowed from Mr Abbott’s company, Western United, and that $22 million, to a large extent, represented the proceeds of the first purchase of the Marvel Loch interest, the $26 million which Mr Stokes’s company had paid. So Mr Stokes’s company paid $26 million to Kia Ora. Kia Ora deposited the money with Mr Abbott’s company, Western United. That money was then lent back to the joint venturers to undertake another venture. So there was a further association.

McHUGH J: But these matters seem to be directed rather to breach a fiduciary duty rather than whether a fiduciary duty existed. I see it is a quarter to one.

MR WHITINGTON: I see what your Honour says about that, I just ‑ ‑ ‑

McHUGH J: Over lunch, I would like you, if you have not already done so, to have a look at what Sir Anthony Mason said in the Hospital Products Case (1996/1997) 156 CLR, of the critical feature in fiduciary relationships always being, or, I think, almost always being, that the fiduciary acts in a representative capacity and is that not the difficulty that you face in this case in arguing that there was a fiduciary relationship? In no sense, was NWP acting in a representative character – for NWP, was it? It was an independent contractor.

MR WHITINGTON: We accept what your Honour says about what Sir Anthony Mason says and we accept what your Honour says about Nelson Wheeler, but we say there are at two answers. One is, for instance, Chief Justice Brennan’s proposition – I was going to say in Hospital Products but it cannot be that – a proposition that agency or representative capacities are only one of the ways in which a relationship can arise, otherwise it can arise in an array of circumstances. Secondly, we say that the critical feature here is that ‑ ‑ ‑

McHUGH J: But Justice Mason said that that is the critical aspect when one is talking about trust and confidence and that is really what is relied on in this case, is it not, a relationship of trust and confidence. You have got to go beyond trust and confidence. There has got to be a representative character in the person who owes the fiduciary duty. Any way, you might have a think of that.

MR WHITINGTON: Yes.

McHUGH J: Now, how long are your submissions likely to take?

MR WHITINGTON: They may be two hours, if the Court pleases.

McHUGH J: Yes. We will resume at 2 o’clock.

AT 12.46 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.OO PM:

McHUGH J: Yes, Mr Whitington.

MR WHITINGTON: Your Honour, can I take up the matter that your Honour Justice McHugh raised with me before lunch in the Hospital Products Case in the judgment of Justice Mason. We would refer the Court particularly to the passage at the bottom of page 96 on to the top of page 97 and we would respectfully submit that it is significant that his Honour started by talking about “The accepted fiduciary relationships” and then in the sentence on the bottom of the page he said:

The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of –

Can I pause there. We would emphasise the notion of agreeing or undertaking. Then he went on to say:

or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.

We say that is the case we have here. But we also say that need not be ‑ ‑ ‑

GUMMOW J: You have to look at the second paragraph, do you not, on 97, the example of the subcontractor?

MR WHITINGTON: Yes. We accept that he has an example of a subcontractor.

McHUGH J: Take your accountant who prepares your income tax return. He does not owe you a fiduciary duty in the preparation of your income tax, does he?

MR WHITINGTON: Your Honour, there may be an issue here about the stages of the inquiry. Frequently one does not ask the question, “Is there a fiduciary duty?” until a situation of conflict arises. With respect, I think Justice Hayne put his finger on that this morning when he talked about that circumstance throwing light on the relationship. Of course, we do not submit that a situation of conflict is relevant to the finding of a duty, but a situation of conflict does throw light on the relationship. It may be that a relationship is fiduciary but it does not attach to any circumstance – and I have in mind something your Honours Justice McHugh and Justice Gummow said in Breen v Williams – creating a fiduciary obligation at a particular time. One might say the relationship is not fiduciary until it attaches to the circumstance or one might say it is inherently and innately a fiduciary relationship which, if you like, hovers in the background and when a relevant circumstance comes along, it attaches to it and creates a fiduciary obligation.

McHUGH J: But the Full Court, in this case, did not really identify a subject matter over which the fiduciary duty was owed, did it?

MR WHITINGTON: That is the criticism that Mr Myers and the appellant make, but we think he answered that himself this morning when he said unless it be the entire subject matter of the retainer, and we say that is what it was. It was the very report itself, the preparation of the report. Now, there was no need to be explicit about the subject matter in this case because it was evident. It spoke for itself.

In your Honour’s case about the tax accountant, we would say that your Honour’s tax accountant probably is a fiduciary because, as some of the authorities analyse it, it is material that your Honour would have given information of a personal and sensitive nature. Your Honour has invested confidence, if you like, in that person.

McHUGH J: That is the point, is it not? The accountant might be a fiduciary in respect of confidential information I give him, but in terms of the preparation of the report, is the accountant a fiduciary?

MR WHITINGTON: We agree with your Honour. We cannot assert a priori, in this case, that this is a status relationship or per se relationship and that everything done under it involves a fiduciary obligation, and we do not assert that. What we do say is that the relevant inquiry is in the facts of this case, did a fiduciary obligation arise? Now, that involves an investigation of all the facts and the cases say that one must look at all the circumstances and one critical circumstance here is that the ‑ ‑ ‑

HAYNE J: Before you come to the circumstances, obligation to do what, to be what? What is the obligation?

MR WHITINGTON: The obligation, when it arises, your Honour, is the fiduciary obligation and we submit it is ‑ ‑ ‑

HAYNE J: Yes, fiduciary obligation of what content?

GUMMOW J: Is it any greater content that the contractual retainer?

MR WHITINGTON: In a sense it is, your Honour, because it involves a proscription at two levels, but, principally, a proscription on acting at all. You see, here there was a hideous conflict.

GUMMOW J: Well, it is a duty not to contract.

MR WHITINGTON: Yes, it is. Now, that involves a kind of logical dilemma, we accept, because it might be put against us, “But how can there be a fiduciary duty not to contract that precedes the very relationship?”. We say that is almost a semantic problem because looked at another way, once the parties did come into a relevant relationship the duty existed and operated at all times.

GUMMOW J: Well, the breach is the entry into the contract.

MR WHITINGTON: It is, your Honour, but also we say and everything else done purportedly under the contract and the Full Court so found. It is put against us in the appellants’ written submissions that the only breach that the Full Court identified was the accepting of the retainer. The Full Court did not say that. They said that everything up to the provision of the report.

GUMMOW J: Where do they say that?

MR WHITINGTON: I think paragraph [770], going by memory. It is [788], I am sorry.

HAYNE J: So, by providing, Nelson Wheeler was in breach of its fiduciary obligations. You say the relevant fiduciary obligation, singular, was an obligation not to contract, not to accept the retainer.

MR WHITINGTON: Yes and no. Above that there is an obligation to be loyal. That is the overriding obligation.

HAYNE J: Can I just pursue this notion of obligation not to contract, which I understand either to be part of or a complete statement of the fiduciary obligation. Let us not debate, for the moment, which it is. What is it that gives rise to this obligation not to contract?

MR WHITINGTON: Would your Honour let me just read, very briefly, a passage from his Honour Justice Gummow’s reasons in Breen v Williams because I think it comes closest to what I want to say and I cannot, I am afraid, remember it by heart. I think it is page 136 in Breen v Williams – it is 134. At about point 7, your Honour said this:

Advice given by the physician to the patient involves specialised knowledge and matters of skill and judgment, which render the advice difficult, if not impossible, of objective and unassisted assessment by the patient. Hence the particular reliance placed upon the physician.

Now, we do not, of course, say that is a complete statement of the relevant circumstances, but we say, in this case, that is a highly material matter because the very purpose of rule 3J(3) was to permit shareholders to get informed advice, if you like, in lieu of advice from their directors who were conflicted out. So, in a sense, the accountants stepped into the shoes of the directors. There are, I think, 18,000 shareholders here. It is fair to say they were in no position, unassisted, to make any objective assessment of the facts of the matter or of that advice.

They were not privy to the material relating to Western United that Nelson Wheeler had. They, by and large, did not have the expertise to work with that material and reach appropriate conclusions. So when the accountant said, “This company is worth $82 million, but, furthermore, it is fair for Kia Ora to pay a premium for control”, which actually is a nonsense when you are buying 100 per cent of the company, “and, therefore, it is fair for Kia Ora to pay”, I think something like, “$112 million by giving its shares in exchange” and in circumstances where the financial interests of the company was substantially at stake, we say, the accountants came under a fiduciary duty.

McHUGH J: But the difficulty I am having at the moment, Mr Whitington, is this: in the passage at 134 in Breen, to which you referred, there is already the pre-existing relationship of patient and physician in Justice Gummow’s example. So, when it comes to give advice in that relationship, there may be a fiduciary duty, but your argument seems to be that the fiduciary obligation struck before there was any relationship between the parties.

MR WHITINGTON: I accept your Honour’s criticism and there is a kind of logical dilemma for us there. But we say that that would really mean, if people were not ever in a relationship beforehand, one party could go into a relationship with another where they took on the trust and confidence of the other and had a conflict at the outset, and there would be no equitable bar to them acting because they did not have any anterior dealings.

Now, we think that cannot be right and we would test it this way, with respect. What would have happened if a shareholder of Kia Ora had somehow been able to move the company to enjoin Nelson Wheeler from accepting the retainer the very instant before they were about to sign the retainer? We respectfully submit that equity would step in and enjoin against the apprehended risk.

But if we are wrong in that, we say that the duty can spring from the relationship the moment it is instituted. Can I give your Honour an example. We would respectfully submit that Daly is an example. There somebody, as I understand the facts, telephone the sharebroker indicating they were going to seek advice, they spoke to a low level employee. Before they had any further dealings, they said “I want to invest”, and the employee said, “Now is not a good time to invest, put your money on deposit with us.”, and unknown to the employee, the sharebroker was in a bad way and the money was lost. So, there is a case where we would say the fiduciary relationship or obligation sprang up almost at once, without any anterior dealings.

One might ask the question, hypothetically, what would have happened in Breen v Williams, what would the analysis have been of the relationship if the analysis was taken at the very point the patient first came to see that doctor.

MR WHITINGTON: Now, your Honour Justice McHugh also asked me whether I knew of any other cases involving independent contractors. We would submit that Daly may be such a case, but also there is the case of Commonwealth Bank v Smith in the Full Court of the Federal Court. Can I ask the Court to refer there at some convenient time to pages 476 to 477 in the Australian Law Reports and pages 391 to 392 in the Federal Court Reports? Now, there it might be put against me, in support of what your Honour Justice McHugh was saying, that there was an anterior relationship.

GUMMOW J: Quite a long running one, too.

MR WHITINGTON: I am sorry.

GUMMOW J: One of quite an extensive duration.

MR WHITINGTON: Yes, there was, your Honour. I think in the words of the joint judgment of the Full Court, the customer, Mr Smith, was accustomed to seeking advice from the manager.

GUMMOW J: Yes, these are old‑time banks in a country town.

MR WHITINGTON: Yes, but we would say, of course ‑ ‑ ‑

HAYNE J: You could actually go and talk to somebody. Do you remember that, Mr Whitington?

MR WHITINGTON: I am tempted to say I am too young. But the point we would make is that there was no professional relationship there, if you like. The bank was acting gratuitously. So we would see no reason why an independent contractor could not be a fiduciary. It all depends on the circumstances of the case, but some of the Canadian cases I think have indicated that it can depend upon the professional nature of the contractor, that is, if they possess special skill and knowledge which has taken quite some time to acquire and which is difficult to acquire, then it is more likely that the client, or other persons dealing with them, will not be on equal terms and it is more likely they will be vulnerable to them. With respect, we took it that that was one of the points your Honour Justice Gummow was making in Breen v Williams in the passage we have referred to.

Now, those kind of points are taken up in the Canadian case of Hodgkinson v Simms. I hesitate to refer to it for two reasons. One, I do not know whether it is one of those western Canadian cases that Mr Myers referred to, and the other thing is, I am not quite sure how to pronounce the name of the writer of the leading judgment. I think it is Justice La Forest. In the hope it is, could I refer the Court to some pages in his reasons, page 176h, 177a to c, 178b, 181a, 183g, 187a to b, and 187g.

Now, I do not want to take time going to it now, but his Honour stresses the significance of the fact that the adviser is a professional person and has special skill and training. He also stresses the relevance of professional conduct rules because he says that that can create an entitlement in the client, or person dealing with them, to expect that they would prefer the client’s interests over their own. That is exactly what we say Kia Ora was entitled to expect here. It was entitled to go into the relationship with Nelson Wheeler expecting that Nelson Wheeler would prefer the interests of Kia Ora ahead of its own interests.

GUMMOW J: I think the dissenting judgment of Justices Sopinka and McLachlin would probably be more in tune with the decisions of this Court.

MR WHITINGTON: Yes, I accept that there has been some criticism of some of the Canadian cases.

GUMMOW J: Their analysis starts at 214 and reaches its core at 218g.

MR WHITINGTON: Can I say in response to that I was conscious of that judgment and the criticism of Canadian cases when I made the submission I did.

GUMMOW J: Not all of them.

MR WHITINGTON: No. I am coming to Canson and Guerin in due course. I only referred selectively to the judgment of Justice La Forest because I believe that in the passages I have referred to, he picked on factors which are consistent with authority in this Court.

Can I endeavour to put that in the context of listing rule 3J(3) again in the reasons of the Full Court. The Full Court did not say that the fact that the report required professional skill and judgment was a sufficient condition for a fiduciary relationship to apply or arise. It was merely treated as one relevant indicium which was apt to give rise to fiduciary obligations.

The Full Court recognised that a 3J(3) report was more than a mere valuation and that the function of the 3J(3) report was actually to advise the company through its shareholders in general meeting upon a transaction. The very reason for listing rule 3J(3) was that the directors were disabled from acting in the circumstances and the shareholders did not themselves have information or the expertise, one would presume, to take a decision on the takeover by their own light, so to speak. So we say that listing rule 3J(3) explained the occasion for the seeking of the advice and the particular occasion was the vulnerability of the company. The company was vulnerable to the conduct of its conflicted directors.

GUMMOW J: When these directors were sued, what were they sued for? The pleading just says damages.

MR WHITINGTON: Yes. I think Mr Myers did say on the last occasion you can find almost anything in these pleadings. I cannot take your Honour to it now but I believe it was for breach of statutory and fiduciary duty.

GUMMOW J: Fiduciary duty, was it?

MR WHITINGTON: Yes. The Full Court made findings against them in breach of fiduciary duty and awarded damages against them, and particularly damages for loss of use of money in excess of that it awarded against Nelson Wheeler.

GUMMOW J: We are talking about equitable compensation, are we?

MR WHITINGTON: I apologise.

GUMMOW J: Are we, not on account of profits? They derived great profits from this, did they not?

MR WHITINGTON: Yes, your Honour is quite right.

GUMMOW J: They were not sued for recovery of that?

MR WHITINGTON: No, because that was covered in a cloud of mystery really. Some tracing was done in the trial about the interests of the directors but there are overseas and nominee companies involved and I think the trial judge made a finding that Western United was substantially owned and controlled by the directors or their interests, but he also made a finding that it was impossible to be certain about how many of the shares they owned and where the money went.

GUMMOW J: Anyhow, I am taking you of your course.

MR WHITINGTON: The point we want to make about 3J(3) and vulnerability is that it was the very conflict with the directors that created the need for the report and made the company vulnerable, but that, in turn, made the company vulnerable to the accountants if the accountants had an interest aligned with the interest of the directors.

HAYNE J: Now, what was that interest?

MR WHITINGTON: It was a multiplicity of interests, your Honour. It involved mutual business dealings of the kind where such ‑ ‑ ‑

HAYNE J: Continuing or past?

MR WHITINGTON: Past and continuing, your Honour. Can I give your Honour three examples of continuing? Right in the middle of the report writing transaction Mr Abbott through Western United lent Mr Stokes almost $1 million, I think $950,000. Mr Stokes’ company, Mawson Pacific, agreed to buy the second half of Kia Ora’s main asset, Marvel Loch, and it was that money which was going to go to finance the Western United takeover.

So, Mr Stokes was really providing the money to Mr Abbott to put into Western United’s shares and therefore, into Mr Abbott’s own pocket. There was a promise or a proposal that Nelson Wheeler would get the Kia Ora share registry if the takeover went through and there was another critical factor and that is this, that there was a blocking shareholder in Kia Ora, a shareholder of some sophistication, obviously, and they had about a 14 per cent interest, I think. They were based in England. It was a company called Autocure.

When the proposal was announced and the report came out, they concluded that the transaction was improvident and unfair from Kia Ora’s point of view and they told Mr Abbott so and said that they were going to seek an injunction to block the transaction. Mr Abbott then caused that company’s shares in Kia Ora to be bought out at a very generous price and not all of the purchasers could be identified, but one purchaser who was identified was a company related to Kia Ora, Kia Pacific.

Mr Abbott and Mr Lee‑Steere were directors of Kia Pacific. They obviously concluded they could not remain on the company and approve the transaction, so they resigned and Mr Stokes was installed in their stead and it was Mr Stokes who ultimately signed the agreement to accept the purchase of the shares from Autocure for about $1 million. Now, we do not say that that constitutes ‑ ‑ ‑

GUMMOW J: Knowing assistance.

MR WHITINGTON: No, and we do not say that constitutes ‑ ‑ ‑

GUMMOW J: It seems to me that is the sort of allegation you had to make and establish. That is the avenue the law provides you.

MR WHITINGTON: We did make those allegations, but ‑ ‑ ‑

GUMMOW J: What you are seeking to do, really, is, having been afraid to go down that path for fear of not reaching the end of it, to go round it by this other, seems to me, more difficult and less meritorious course.

MR WHITINGTON: I agree with your Honour part of the way. I am not sure I like the adjectival description, “less meritorious” but ‑ ‑ ‑

GUMMOW J: Well, you are trying to find a rule of strict liability, that is what it comes to.

MR WHITINGTON: Yes, that is right, strict liability for acting in breach of fiduciary duty and we are seeking to sheet home to Nelson Wheeler ‑ ‑ ‑

GUMMOW J: Now, fiduciary duty is having strict liabilities and having these drastic consequences in terms of remedies, which Mr Myers was complaining about before he left this morning. The other side of that equation is, one has to be fairly careful in a non-established category case of finding a fiduciary duty, precisely because it is strict liability and drastic consequences.

MR WHITINGTON: Yes, and that is what this Court said ‑ ‑ ‑

GUMMOW J: That is the bedrock of it all.

MR WHITINGTON: Yes, and that is what this Court said in Maguire v Makaronis, in the joint judgment, that one answer ‑ ‑ ‑

McHUGH J: It has enormous consequences, not only between the parties, but very frequently in respect of creditors of the person who is held to be a fiduciary.

MR WHITINGTON: Yes, that, ultimately, can depend on the remedy because many of the remedies will not give proprietary interest. But we accept that and we face up to that. We accept that the Court will be - and the law will be very careful about describing an obligation where a relationship is fiduciary and creating fiduciary obligations, because strict consequences follow, and we seek here some very strict consequences. We do not resile from that. We seek strict consequences when it comes to equitable compensation, and I will come to that in a moment.

But we say this, nonetheless, is a relationship which fits four square within the relevant considerations which have been identified in this Court and, otherwise, in the law. Can I ask the Court, for a moment, to go to paragraph [770] in the judgment, just to highlight the extent of the conflict - at page [770] in the reasons of the Full Court. Some of the things being adverted to there are these. There was a matter your Honour Justice McHugh mentioned earlier this morning. Nelson and Wheeler had valued the stock broker, Ray Porter, back in April, I think it was, at about $4 million, and then when it came to the ultimate valuation for the 3J(3) report, I think that component of Western United was given a value of about $41 million.

There are also back-to-back loans engaged in by Nelson Wheeler partners, where they controlled public companies, they had – lead indirectly to private interests, and they did that through Western United, which had the effect of puffing up Western United’s business so that a loan would be made to Western United, or a deposit. Western United would then make a loan out and its balance sheet would appear more robust, if you like, than it truly was.

HAYNE J: But if you take the introductory clause in [771] about Nelson Wheeler’s:

preference for and loyalty to the directors, rather than to Kia Ora –

does that amount to saying anything more than, they got it wrong and the way they got it wrong was of advantage to the directors? “Preference for and loyalty to, rather than” seems to me to have a deal of baggage with it that needs some unpacking.

MR WHITINGTON: Yes, in a sense, your Honour, that may not be a necessary step in the reasoning because it would be enough that they acted where they had a conflict. It so happens that here, in acting, the finding was that their very conflict affected the way they acted and affected it adversely.

HAYNE J: But it is to understand what you say is the conflict that is my present difficulty.

MR WHITINGTON: Yes.

HAYNE J: I do not understand what is the advantage that was being gained by Nelson Wheeler by pursuing this course.

MR WHITINGTON: There need not have necessarily, in fact, accrued any advantage. The breach came about because they had an alignment of interests with Kia Ora and, particularly, the conflicted directors. In those circumstances, they had an interest in those directors and their interests and they had a duty to Kia Ora which came into conflict. They had an alignment with the directors. The directors had an interest in maximising the value of Western United, so that the maximum amount of consideration came into their pockets. They also had a duty to Kia Ora to write a full, fair and independent report. Those two things came into conflict.

Now, it might have transpired that they came to write a report and it was fair and accurate, but that would not, of course, absolve them of the original conflict and the original breach of accepting the retainer and acting on the retainer in conflict. These matters really give, if you like, a kind of moral dimension to their subsequent conduct, but are not strictly necessary in equity to establish a chain of causation between the breach and the relevant subsequent consequence, which was the takeover transaction.

Put shortly, your Honour – and I think this is answering your Honour Justice Hayne’s question – if somebody is asked to do something to protect the interests of a company against its directors and at the same time they have a very substantial mutual interest with those directors in other areas, they are in conflict. They have an interest with the directors and they have a duty to the company and the directors’ interests is conflicting with the company. Paragraph [761] might go some way to answering your Honour Justice Hayne’s question about the nature and extent of ‑ ‑ ‑

GUMMOW J: It is not just enough to say the word “conflict”. You have to show in relation to this particular complained of dealing what was going to be the conflict; what was going to be the competing claim upon them; what were they going to get out of it if they yielded to their conflicting loyalty. That is never articulated by the Full Court.

MR WHITINGTON: It is not articulated in terms of tangible benefits but ‑ ‑ ‑

GUMMOW J: Their friends would like them more or something or other, or there would be even increased congeniality down there in Adelaide.

MR WHITINGTON: Except in this case the congeniality was financial congeniality. There had been financial benefits bestowed by Harold Abbott in the past. I suppose, to pursue that, there would be an ‑ ‑ ‑

GUMMOW J: I think it would have had to have been pursued in order for you to make out your case, it seems to me.

MR WHITINGTON: Yes.

GUMMOW J: It has to be particularised.

MR WHITINGTON: But, your Honour, we would say that the conflict was the expectation that those benefits would continue in the future if the bidding of the directors was done.

GUMMOW J: And would not continue otherwise.

MR WHITINGTON: Or may not continue.

GUMMOW J: Benefits being what?

MR WHITINGTON: Benefits being business loans, provision of business to the company, loans out of Western United, for instance, to acquire interests in Wattle Gully.

GUMMOW J: This all seems a bit cloudy.

MR WHITINGTON: There was also underwriting of rights issues. There was an occasion, I think, in 1987 when a company in which Mr Martino was involved made a rights issue.

GUMMOW J: But were there particular proposals on the other table? That is what I am trying to get to.

MR WHITINGTON: It is not possible to identify particular proposals of the kind your Honour mentions at the very moment of the acceptance of the retainer. There were mutual dealings at that time. I will have this looked up, but I think there was a finding that when Mr Abbott calls Kia Ora to embark upon the takeover transaction, there was at the very least an expectation that Mr Stokes of Nelson Wheeler would buy the other half of Marvel Loch to enable the money to circulate. That is a pretty substantial connection, we would have thought.

GUMMOW J: It is not a matter of substantial connections, I am afraid.

MR WHITINGTON: That is at [762], the history of that matter.

GUMMOW J: There would be many commercial communities in fairly small States which would involve these sort of connections, I suspect, which falls short of the necessary crystallisation, as it were.

MR WHITINGTON: But the Mawson Pacific matter is particularly critical because, without Mawson Pacific agreeing to buy Marvel Loch, Kia Ora would not have had the money to make the takeover, and therefore to put the money in Mr Abbott’s pocket. So the realisation ‑ ‑ ‑

GUMMOW J: Was that put to witnesses and found, because it is really a knowing assistance case when it gets to that degree of specificity, and that is your problem.

MR WHITINGTON: Mr Stokes gave evidence in-chief but was very ill and he died before he could be cross-examined. Mr Pilmer, who wrote the report, did not give evidence.

HAYNE J: But you go as far at least, do you not, as para [762] against lines 35 and 40 and following, the finding:

that the sale of the second half…..was crucial for the takeover…..His Honour accepted the submission that “there was cooperation between –

various people.

MR WHITINGTON: Yes, and, of course, that must be so. The learned trial judge found, in effect, that the Western United takeover could not proceed without Mawson Pacific agreeing to buy the asset. His Honour also thought it of significance that Mr Abbott caused Kia Ora to have its shareholders’ meeting on 26 October before the directors of Mawson Pacific convened their meeting of shareholders to approve the purchase and the trial judge concluded from that that, in vernacular, Mr Abbott knew “it was in the bag” that he proceeded with his takeover without his money from Mawson Pacific in the knowledge or belief that Mr Stokes would ensure that Mawson Pacific carried the resolution for the purchase so that the money would become available to conclude the takeover.

GUMMOW J: You see, read [765], that is what troubles me, really.

MR WHITINGTON: Yes.

GUMMOW J: It is still left in a very nebulous way, really.

MR WHITINGTON: Well, there was a good deal of evidence about these ‑ ‑ ‑

GUMMOW J: “No impropriety”, however.

MR WHITINGTON: But, your Honour, as I read that, that relates to anterior dealings. In other words, the learned trial judge was not prepared to find that in relation to the anterior dealings between Nelson Wheeler Partners and Mr Abbott or Kia Ora and Western United there was any impropriety, they were commercial dealings, although one might have some question mark over the back-to-back loan through Western United, but it was that state of the relationship which carried into the retainer and while the intimate degree of their dealings may not have involved any prior impropriety it nonetheless coloured the capacity of Nelson Wheeler to be independent.

GUMMOW J: Now, the primary judge dealt with this question of fiduciary duty, did he not, at about page 370, or so?

MR WHITINGTON: Yes, he did. He found there was no fiduciary duty.

GUMMOW J: Yes.

MR WHITINGTON: Essentially, because he thought it was an essential attribute of a fiduciary relationship that the alleged fiduciary act on behalf of the other party and he ‑ ‑ ‑

GUMMOW J: That meant that the Full Court was really making some primary findings of fact or adapting other findings of fact on other issues.

MR WHITINGTON: I think adapting findings of fact on other issues. Yes, I think they drew on his Honour’s primary findings but disagreed with him when he said the linchpin was that Nelson Wheeler had to be acting on behalf of Kia Ora. They said that the circumstances or the relevant indicia were wider than that and so they found a fiduciary relationship by reference to other circumstances which his Honour excluded from his consideration.

GUMMOW J: Did not really need to get to it, I suppose.

MR WHITINGTON: I think that is right, your Honour, yes. He appears to have said there was one all‑embracing requirement that did not exist here. That was the end of the matter. That is as I read his reasons. Now, with respect, we say that cannot be right. This Court might decide he was right in the result but he cannot be right in that process of reasoning, on the authorities, we say.

Now, can I do two things finally? Can I urge upon the Court the last two sentences of paragraph [761] and can I read to the Court a passage from the essay of Professor Finn, as he was, in The Collected Essays of Mr Youdan at page 50. It is on our learned friend’s list of authorities.

KIRBY J: Who is the writer of this piece?

MR WHITINGTON: Professor Finn, your Honour. Your Honour will see that right at the beginning.

GUMMOW J: No, we do not. We start at page 50.

MR WHITINGTON: Just to select a passage. I was looking to go back to page 46. I mean, there is quite a long consideration but it comes to a conclusion at page 50 at about point 7:

The lawyer and the stockbroker illustrate the functionary regarded as clearly fiduciary at least when acting in an advisory, and not merely in a ministerial, capacity. Predictably it is these the courts have in mind when they describe the adviser as a fiduciary. And what these suggest is that fiduciary responsibilities will be exacted where the function the adviser represents himself as performing, and for which he is consulted, is that of counselling an advised party as to how his interests will or might best be served in a matter considered to be of importance to his personal or financial well‑being, and in which the adviser would be expected both to be disinterested, save for his remuneration, and to be free of adverse responsibilities unless the contrary is disclosed at the outset.

GUMMOW J: But there was no advice here, was there?

MR WHITINGTON: Yes, we say there was and the Full Court found that ‑ ‑ ‑

GUMMOW J: They were just preparing a report.

MR WHITINGTON: With great respect, we say no. It went beyond a mere valuation. It contained an assertion that the price to be paid by Kia Ora was fair.

GUMMOW J: Yes.

MR WHITINGTON: And the Full Court deals with that at paragraph [739] and following. It is over to [746]. But that brings in, if the Court pleases, the two matters I mentioned earlier. It was not simply a valuation of Western United, because it also involved a consideration of what Kia Ora should pay by way of issue of its shares and, secondly, the report valued Western United at about $3.22 per share but said it was fair – I think it actually said “fair and reasonable” but the Full Court disregarded the last epithet – to pay in the range $3.99 to $4.40 per share.

That was said to be a premium for control, but, of course, as the Court knows, the premium for control, really, is, if you like, a discount on the full value of a company for a minority parcel which is then added back when you get a controlling parcel but you could never value a company at more than 100 per cent. That is what Nelson Wheeler did here. They valued this company at more than 100 per cent of its value for the purpose of expressing the view that the takeover transaction was fair in the interests of Kia Ora.

So there was an opinion in the nature of advice, we would respectfully submit, and advice on a matter that had a very substantial effect on the financial interests of Kia Ora.

McHUGH J: But what is it that distinguishes one class of advice case from another? I go into a shop and I say to the shop assistants, “I would like your advice on what is a suitable tie to wear with this suit”. Now, is there a fiduciary obligation? Is there a breach if the assistant recommends a tie which is manufactured by some company in which he or she has an interest in?

MR WHITINGTON: I think the answer is no, your Honour ‑ ‑ ‑

McHUGH J: I know, but take another stage. I want to buy a race horse. I say to a trainer, “Give me some advice about buying a yearling and I will give it to you to train”. Is there a fiduciary obligation on the part of the trainer if he has had some connection with the breeding of the horse he recommends to me? Is he in breach of a fiduciary duty?

MR WHITINGTON: I am more confident about ties than I am about race horses, your Honour. I would still say no, although that might be a marginal case.

McHUGH J: Then you get up to the accountant, as in Hodgkinson v Simms – there seems to be a duty. What is it that distinguishes one lot of advice, and trust and confidence, from another?

MR WHITINGTON: Justice La Forest suggested it might be a social utility in keeping certain people up to their mark, but I think there is a more practical reason, and at page 185 in Hodgkinson v Simms, Justice La Forest refers to an article by Professor Frankel, where your Honour’s point is dealt with and ‑ ‑ ‑

McHUGH J: What page is that?

MR WHITINGTON: Page 185, at line d in the quotation:

The second group consists of services requiring skills that are very costly to master; for example, lawyering, and some kinds of investment management.
Because the relationship poses for one party (“the entrustor”) substantial risks of misappropriation and monitoring costs and because public policy strongly supports both groups of services, fiduciary law interferes to reduce these risks and costs.

Now, we would respectfully submit that your Honour Justice Gummow came at it, perhaps, in the opposite direction, but reached, really, the same position, and that is that where you are dealing with somebody who has special knowledge and expertise, who is providing assistance to somebody else, they are not in any position to make their own objective assessment of the advice given. They must trust. They must be guided. They must put their faith and their practical interests in the hands of that adviser. Now, in the case of the tie, there are a number of things you can say. Your Honour is capable of, I expect, making your own assessment of one tie against another.

McHUGH J: Suppose you are going to say, “I have no dress sense at all. I want you to deck me out”.

MR WHITINGTON: Well, with your Honour’s gown, it probably does not matter. We probably should move to gowns rather than ties. In that case, your Honour, even if your Honour were to say that, you still have it within your power to somehow or other make your own assessment. It does not require any special skill or knowledge to make your own assessment. There is no particular mastery involved in assessing ties, so while your Honour might not instantly and on the spot be able to do it, your Honour might be able to do it with very little effort. There is no suggestion of trust or reliance that puts you at a real material disadvantage in that transaction.

McHUGH J: What about the real estate agent?

MR WHITINGTON: That is getting closer. It may depend upon all the circumstances of the case, but a real estate agent probably does have, or may have, a particular knowledge, an expertise in the market that is not easy to acquire or master and, so, it may well be that ‑ ‑ ‑

McHUGH J: I go to a stock and station agent, I say, “I want you to advise me on a property I should buy”, fiduciary obligation?

MR WHITINGTON: That may be a borderline case and really highlights the difficulty that, you know, fiduciary is a bit like a rhinoceros, you may not be able to define it, but you can recognise it when you see it coming at you. And that is why we said earlier that the circumstances of the case and the conflict may help throw light on the relationship. They do not create the fiduciary nature of the relationship, but they can help you answer the question by saying, “In what context is this person doing something for me?”. Now, that does not mean that they move in and out of being a fiduciary. What it means is that their fiduciary obligations may cut in and out, depending on the circumstances.

Now, we would say that there is a policy element here, the law will draw a line somewhere. It is possible to identify identifying factors. It is not possible to have an exhaustive description or statement. But one very material matter is the degree of effort that goes into mastery of the subject matter of the advice, because that tends to create both the reliance, the expectation of entitlement to rely and the trust upon the adviser and the vulnerability. Also, one would expect that most professional relationships involve material matters, material judgments. Buying a tie is not a terribly material matter.

Also, I am reminded, in some of the cases emphasis is given to the fact that the advice is paid for or that the relationship in that sense is a remunerative one. So, when your Honour asks about the tie, it is really gratuitous advice. If, however, your Honour goes to somebody and pays for their services because they have special expertise, that might help in knowing where to draw the line in that case.

KIRBY J: These submissions have some resonances with submissions we heard in your absence earlier in the week in a case involving the limits of the liability in tort for negligent misstatement or advice. One of the principles that Chief Justice Barwick expressed in Evatt’s Case was that the liability would not arise, except in a serious matter. Obviously, a tie is not a serious matter.

MR WHITINGTON: Yes.

KIRBY J: It would not be surprising that the law in its different branches in different courts reached conclusions which had some similarities in respect of liability.

MR WHITINGTON: No.

KIRBY J: But the law is having, I think, as much difficulty drawing the lines in this area as it does in the area of negligence.

MR WHITINGTON: Yes. Certainly I am struggling to draw a line.

KIRBY J: You are not alone.

MR WHITINGTON: It is my submission that that is probably not significant in the end. That is really why the cases repeatedly say that it depends on all the circumstances of the case, because it is not possible a priori to draw a line. It will never be possible. It will only be possible to point to factors which assist with the identification of the relationship and the obligation in a particular case.

GUMMOW J: Assuming you make all this good, do you not then have to show that whatever difficulties and limitations might attend the measure of damages in contract, they do not attend here?

MR WHITINGTON: Yes.

GUMMOW J: In particular, what is said to be the lack of contractual loss suffered to the company.

MR WHITINGTON: Yes, although, if your Honour pleases, there are ‑ ‑ ‑

GUMMOW J: If that reasoning were right – I am not saying it is – why would it be any different here – reasoning bound up with the nature of share issues and so on?

MR WHITINGTON: I cannot give your Honour a short answer to that. It needs a few steps. But also the same line of reasoning applies but at a slightly different level in relation to loss of use of money, because the Court might remember that the Full Court awarded some Hungerfords v Walker damages for loss of use of money, that is, at common law, against the accountants and against the directors.

McHUGH J: That is the 26 million that was paid over?

MR WHITINGTON: Yes. They would not do it in respect of the share issue on a common law basis because they said while a share is an asset that creates value as it goes out and while the money is a valuable consideration as well, there is no antecedent asset in the case of the share. So, in the case of money, if you pay it over where you had it before, you have lost the use of it. In the case of the share, although it is a valuable asset at the moment you pay it out, before it is created you cannot say you had it, and therefore the court would not award Hungerfords v Walker damages or something in the nature of it for loss of use of the shares. The Hungerfords v Walker damages were awarded against the accountants and the directors for six months up to 1 July 1988.

At that point the Full Court said, based on the trial judge’s findings, the damage stops running. They said it stops running – and I will address this shortly – because the directors somehow may have dissipated the funds otherwise. When it came to equitable compensation, the Full Court applied the same reasoning in respect of Nelson Wheeler but said in relation to the directors, it is different. To allow them to rely on that supervening event, if you like, would be to allow them to rely on their own wrong, so equitable compensation in the nature of compounding interest will continue to run as against the directors but not Nelson Wheeler from 1 July 1988. Can I perhaps come to that then and deal with that question of interest?

GUMMOW J: It is not interest so much. There is an anterior question, is there not: measure of damages?

MR WHITINGTON: Yes, your Honour is right.

GUMMOW J: If your opposition is correct on the contractual point, why does not their reasoning carry over to this branch of the case?

MR WHITINGTON: Because they drew a distinction between Nelson Wheeler and the directors, which we say is illegitimate. Can I ask the Court to go – I think it is [815] or [817] – I am sorry, it is [816] and [817].

GUMMOW J: This is all about interest

MR WHITINGTON: Yes.

GUMMOW J: The fact is, the Full Court did not deal with it. It just assumed that the measure of damages is the same, did it not?

MR WHITINGTON: No, they did not ‑ ‑ ‑

GUMMOW J: Putting aside this interest wrinkle, in other respects, they did not draw any distinction, did they?

MR WHITINGTON: That is quite right, yes.

GUMMOW J: Yes.

MR WHITINGTON: This the only area where they drew a distinction.

GUMMOW J: I know, that is why I am asking you to assume the hypothesis that your opposition makes out their case that the Full Court was wrong on the contract branch.

MR WHITINGTON: Yes.

GUMMOW J: If those submissions were accepted, why should they not also carry over, with destructive effect, to the equitable compensation.

MR WHITINGTON: Yes, I understand what your Honour is putting.

GUMMOW J: You have to get to that before you get to any interest because at the moment you might not get any interest on anything.

MR WHITINGTON: I was hoping to deal with it through the so‑called interest or loss of use factor, because in some ways it is an easier analysis, and then translate it to the share issue, but I agree with your Honour entirely. The Full Court simply carried over the common law reasoning. They did not provide any separate reasons in respect of equitable compensation for the share issue. Can I come it this way, to answer your Honour’s question directly, in summary? We say it is different in ‑ ‑ ‑

GUMMOW J: I mean, that is the whole point of relying on the fiduciary duty.

MR WHITINGTON: Exactly. Your Honour is right and we face up to that and we say it is different ‑ ‑ ‑

GUMMOW J: Because it is stricter, or more generous, from your point of view.

MR WHITINGTON: Yes. We say there are two particular factors at work. One is causation. The approach to causation is different, in equity. Secondly, equity adopts certain presumptions in aid of proof for an aggrieved beneficiary. We put that on the basis that it reflects two considerations. The first is that by adopting beneficial presumptions in favour of the beneficiary it helps keeps the fiduciary up to the mark, but the second is a recognition of the fact that the beneficiary in these cases is trying frequently to prove what might have been when it was not because of the conduct of the fiduciary. So the beneficiary is inevitably trying to prove ‑ ‑ ‑

GUMMOW J: I think one can accept all of that, but in the structure of this litigation what is the relevant loss and why is it different?

MR WHITINGTON: Can I put the argument this way? First of all, we do not say that equity will conjure up a loss where none exists but, of course, what is a loss in the law is not a question that can be answered in the abstract. Loss depends upon rules and principles defining what is loss and what is compensable.

We start with the fact that Kia Ora issued the 68 million shares in exchange for shares in Western United. It also paid a consideration of $26 million and, as at 31 December, when the takeover transaction was complete, the Western United shares were worth only about ‑ ‑ ‑

GUMMOW J: Is that the right date? What does “transaction complete” mean?

MR WHITINGTON: The learned trial judge found that by then, I think, all or virtually all of the shares in Western United had been purchased and all the money had been paid.

GUMMOW J: Yes, thank you.

MR WHITINGTON: And Kia Ora was content at trial to rule the line off there.

McHUGH J: The trial judge used Mr Easton’s higher figure, did he not, as at 31 December?

MR WHITINGTON: Yes. There were two arguments about that. One argument that Nelson Wheeler put was that the value of Western United should be taken at the date of the agreement, which was higher.

McHUGH J: Yes, I know, but the trial judge adopted the 68 cent share as at 31 December, did he not?

MR WHITINGTON: Yes, but the trial judge adopted a value of Western United of about $6 million. That was the higher value in a range ‑ ‑ ‑

GUMMOW J: 6.439 roughly.

MR WHITINGTON: Yes. There were two experts, Mr Easton and Mr ‑ ‑ ‑

GUMMOW J: That pans out at 68 cents per share.

McHUGH J: There was Hall and ‑ ‑ ‑

MR WHITINGTON: Hall and Easton. They were both called for the plaintiff. Hall gave a higher range for the value of Western United at 31 December. The trial judge preferred Easton’s approach. He took Easton’s range and then allowed a value at the top end of his range, which is how the figure of about 6.4 million came about.

Now, we submit the starting point is that the issue in equity is what is necessary to restore the plaintiff to the position it would have been in but for the breach. We then say that but for this breach Kia Ora would have been in the position where it could have issued these 67.9 million shares – I will round it out to 68 million shares ‑ ‑ ‑

McHUGH J: The problem I have at this stage of this argument is the identification of this breach. Now, you seem to say that Nelson Wheeler breached the obligation because they preferred the interest of the directors but did that happen in any meaningful sense? I mean, accidentally, the interest of the directors may have preferred, but is it proper in any sense to say they preferred the interest?

MR WHITINGTON: We say they acted in conflict and should not have accepted the retainer and should not have written the report. But for the report, there could have been no takeover, and but for the report, Kia Ora would not have issued these 68 million shares and received virtually nothing in return and, of course, radically ‑ ‑ ‑

GUMMOW J: Are there findings about all of that?

MR WHITINGTON: Sorry?

GUMMOW J: Are there findings that they would not have gone and got another valuation? That is what you would have to have, would you not, to work out this chain?

MR WHITINGTON: There are not findings to that effect. There are findings that, but for this report, the transaction would not have gone ahead, in a practical sense, because there was no suggestion in the evidence that any other expert was looked to, or was available. Only Nelson Wheeler was turned to. Yes, the Full Court deals with that at paragraph [798] ‑ ‑ ‑

GUMMOW J: It just does not seem very credible – [798]?

MR WHITINGTON: Yes.

HAYNE J: Their Honours say it was “idle to speculate” whether they would rented or, rather, found another expert.

GUMMOW J: But why was it idle? It was essential, on this ‑ ‑ ‑

McHUGH J: The reason they seem to say is that “no other competent accountant” could have been found, so, therefore, the report would never have gone ahead.

MR WHITINGTON: That is right, because, you see, Western United shares had been trading at only about $1.30 in about June 1987, or August 1987. In September – and Kia Ora’s shares – Kia Ora had a very substantial asset backing, Kia Ora shares were trading at about $1.10, and that reflected a reasonable fair market value. The valuation that the directors obviously wanted, and that Nelson Wheeler gave, valued the Western United shares not at $1.30, but at $3.22, and said it was fair to pay in the range $3.95 to $4.40.

GUMMOW J: All you are saying is that any other report, if it were not to be negligent, would have had to have produced a figure which would have jammed up the works.

MR WHITINGTON: That is right, yes, and I cannot put it any other way than saying that seems to us, with respect, to be the practical reality of the matter. I have taken the Court before to paragraph [770], but I think that is relevant in this context too.

HAYNE J: The chain of reasoning which you seek to engage is: but for the report, there would have been no transaction; had there been no transaction, they could have issued the shares which were issued at some value or other; therefore, the loss they have suffered is loss of the money that they could have obtained had they been in a position to issue 68 million shares.

MR WHITINGTON: Yes, that is substantially ‑ ‑ ‑

HAYNE J: How does that chain of argument differ in any material respect from the argument that goes in support of the breach of contract or tortious analysis that has already been the subject of debate?

MR WHITINGTON: It differs in this respect, your Honour, that we respectfully submit that in equity certain presumptions would cut in to facilitate proof.

GUMMOW J: What are they?

MR WHITINGTON: First, we say that there is some evidence that there was a market for the issue of at least some of these shares, that is self‑evident. You could have issued some of these shares for 82 cents, and that is at Mr Easton’s valuation. We then submit that equity would permit a presumption to be made in the favour of Kia Ora that there was a market for the issue and allotment of the full quota of the shares and we submit that while that presumption may need some basis in evidence, in equity it would only need a slight basis. Once the presumption operates, of course, it can be rebutted, but, we would submit, only by clear and strong evidence.

HAYNE J: The presumptions, therefore, are evidentiary matters going in proof of the chain of reasoning which we have thus far identified.

MR WHITINGTON: Precisely, your Honour, and we only put them as evidentiary presumptions. In Maguire v Makaronis there was a suggestion that certain presumptions might amount to rules. We do not seek to elevate presumptions here that high. We would say the presumptions could be rebutted, but not by speculation, but only by a clear and strong evidence that there was no market for these shares. Can I elaborate on what your Honour Justice Hayne has said? We say this is really in this aspect a kind of opportunity analysis.

We do not say and we never ran a case that we had a specific alternative opportunity to place the shares. We do not say this is a kind of Adelaide Petroleum case where there is option A and option B, we give up option A to follow option B and we are thwarted and we have thrown away option A. We do say, however, that we are entitled to refer to the market and the opportunities in the market for the more general purpose of assessing equitable compensation.

We say the reasoning would go this way, that Kia Ora must show that there was a market or an opportunity. It must show it could have exercised the opportunity. It must show it would have exercised the opportunity. After that, there may then be considerations of contingencies. Now, in this case, we would submit that equity would engage a presumption at the stage of the opportunity or the market, based upon the evidence, although not a very substantial body of evidence.

Then we come to the question, “Could Kia Ora have issued these shares?” and we say, clearly, it could have. In the appellants’ submissions in reply, they have put against us a passage in the cross‑examination of Mr Easton from appeal book 3, volume ‑ 538 that I think Mr Myers mentioned this morning. But that was simply an answer of Mr Easton to this effect, that based upon the impact of the stock market crash, it was highly unlikely that between October and December 1987 Kia Ora would have been able to issue for cash in the market. It said 57.9 million shares ‑ I think this is apparently a reference to 67.9 million shares.

Now, that is a very limited and narrow proposition and that was as far as the cross‑examiner was prepared to take it. That is not the same thing as saying that there was no capacity to issue the shares, either for a non‑cash consideration, or at some later time, but within a reasonable time of December 1987.

GUMMOW J: Mr Whitington, it seems to me that what all this would come to would be that because the Full Court itself did not apply the reasoning which you say is the correct reasoning on this branch of the case in order to yield a figure, they got a figure but it was not derived by this process of reasoning, that it would have to go back for that to be done.

MR WHITINGTON: I think that may be so, your Honour.

GUMMOW J: But it would not go back unless there was some prospect that it would be a productive exercise, I suppose.

MR WHITINGTON: That is right, and that is what I was going to say to your Honour. If I can perhaps just lay out the final links in the chain of the argument, the Court might see where I am going and see whether there is utility in it. We, of course, say there is, but I think I should press it to the end. The trial judge found that Kia Ora had the capacity to issue new shares after the takeover. That was at page 416 in the Australian Corporations and Securities Report. He at the same place found that:

There is no evidence to suggest that Kia Ora would, or even might, have issued the shares otherwise than for the takeover –

He further said it was unlikely that it would have done so.

GUMMOW J: Whereabouts is this?

MR WHITINGTON: This is still at 416.

GUMMOW J: Which line?

MR WHITINGTON: In the first full paragraph he says this:

There is no evidence to suggest that Kia Ora would, or even might, have issued the shares otherwise than for the takeover of Western United. It is very unlikely that it would have done so. But for the takeover, it would have had substantial cash reserves, in excess of $40m, and it is hardly likely that it would have seen the need for a new share issue to raise capital.

He goes on. He then reasons a little lower:

If Kia Ora was minded to take advantage of these investments, it had some considerable cash but also the capacity to issue new shares even after the takeover. The fact that it did not take advantage of these opportunities strongly suggests that it would not have done so if the takeover did not proceed.

We say that is completely misguided and misconceived because by the time the takeover had been completed, the capital structure of Kia Ora had been entirely changed. What is more, it had, on Mr Easton’s analysis, suffered a massive loss on the transaction, there was a massive goodwill write‑down component, it had wiped out its retained earnings. An investor who came along would be dealing with an entirely different company. He would not be assured of earning any dividend on his shares, so it is not to the point to say that Kia Ora after the takeover did not issue new shares and use that to speculate about its conduct prior to the issue of the shares.

So we say that at the point of what Kia Ora would have done, we are rather in the position of the Indian band, if I can call it that, in Guerin’s Case, where the effect of the court’s reasoning, at least in the judgment that dealt with this point, was that when a party has shown an opportunity, they have shown a capacity to avail themselves of it, it is presumed, if it is an advantageous opportunity, that they would have availed themselves of it, and that presumption can only be rebutted by clear evidence and not speculation.

What the trial judge did here was indulge in speculation and his reasons at page 416 of the report really cannot be characterised in any other way. Now, if we are right about that then we say there was a chain of reasoning and proof open in equity which would have led to the conclusion that there was an opportunity in a general sense to issue these very same shares at 82 cents per share. The company could have, and it should be presumed that it would have, availed itself of it. Nelson Wheeler did not at any point rebut that presumption that it would have and so the company should be put in the position it would have been if it had received real consideration of 82 cents pr share.

Now, it is put against us, as we understand it, that there is an element of expectation loss in all of that. We say that – and we deal with this at paragraph 53 in our written outline – but what we say about expectation is that if that is the criticism then that may be the price that has to be paid by fiduciaries. It may be price the court exacts for keeping fiduciaries up to the mark, and we respectfully cite something that Justice Gummow wrote in the essay in Youdan’s collected essays at page 78 to 79 where your Honour commented upon a passage in the majority judgment in Gates’ Case which in turn referred to some American authorities.

GUMMOW J: Is there a reference to Guerin v The Queen?

McHUGH J: Yes, 55, I think, is it not? Yes, 55.

GUMMOW J: Yes. We make this essential point, I think, in relation to Guerin at page 15, paragraph 57. As we understand what her Honour – her Ladyship, I think, Justice Wilson was saying in that case, it was this: the Indian Band had been deprived of the land by virtue of the unauthorised lease. It had been deprived of it for a very long time. It was as if it had been deprived of it for all time. To restore them you had to ask the question, “What position would they have been in but for the breach”. But for the breach they would have had the land, coupled with an opportunity to make the highest and best use of the land in a development, and Justice Wilson said that they were entitled to damages on that basis.

Now, we regard that, with respect, as really an application of the presumption in trust restoration that the deprived beneficiary is entitled to the highest intermediate value that the asset attains in the intermediate period between breach and trial. We say that process of reasoning would lead us to the point where we are entitled to recover the 82 cents per share and if it is a criticism that involves an element of expectation whilst that may be, as I say, the price that is exacted.

Can I briefly then turn to the question of loss of use of money applying the same reasoning. We say that in the case of, for instance, the $26 million, again the same kind of analysis would apply. A fund has been paid away, Kia Ora has been deprived of the fund. Did it have an opportunity to use that fund otherwise? Yes, clearly it did. That is self‑evident. It could have put the money on deposit at commercial rates and made a return. Could it have availed itself of the opportunity? Yes, it could have. That is self-evident. Would it have availed itself of the opportunity? At that point we say we are entitled to Guerin-style presumption that the aggrieved beneficiary, Kia Ora, would have made the best commercial use of that money. It is at that point that the Full Court comes against us and at paragraph [816] of the reasons - - -

GUMMOW J: Where is that reference in the primary judgment that they are talking about there?

MR WHITINGTON: Would your Honours mind going back to [504] in this judgment first, because I think that is an adequate summary of what is said in the – it is [504] through to [512]. Now, the trial judge’s reasons are at pages 414 to 416 of the report but can I now ask the Court to go back to paragraph [501] because that is critically, really, where the trial judge and the Full Court work it through. At line 15 the Full Court said:

The judge had earlier in his judgment dealt in some detail with those transactions.

Now, that is a transaction involving the Marvel Loch Mine.

In considering those findings it has to be borne in mind that earlier in the judgment the judge had found that the fortunes of Kia Ora improved steadily during the 1985 financial year, and improved substantially in the 1986 financial year. The first half of the Marvel Loch mine was sold early in 1987 for $26m.

That is a transaction I have referred to earlier.

The judge found that the proceeds of the sale of the first half were deposited with Western United, until needed in the operation of the mine, which was being operated by a joint venture. He found that by September 1987 the cash reserves of Kia Ora had reduced to about $8.5m.

I pause there. That does not mean that the difference between $26 million and 8.5 had been dissipated. That money was actually spent on making other investments and that was the evidence before the learned trial judge. He then said:

The cash from the sale of the second half of the mine, $40m, was also placed on deposit with Western United. This was the source of the cash for the payment of approximately $26m used to acquire shares in Western United. His Honour found that by 31 December the amount still on deposit with Western United was bout $13.5m.

We will pause there. That is, effectively, the difference between the 26 million and the 40 million. In other words, the 26 million of the 40 million has gone out on the Western United takeover. Again, that is not any evidence of dissipation. Then the court says, at [502]:

We have earlier referred to the so-called reverse takeover, in which Kia Ora acquired assets of the Duke Group, for cash and for shares in Kia Ora, and in which certain directors and officers of
Kia Ora sold their shares in Kia Ora to the Duke Group. The judge found that the reverse takeover was a “financial disaster” for Kia Ora.

But the important thing to bear in mind is that that was a subsequent transaction and it was only possible because of the Western United takeover. At [503], the court goes on:

The judge made a specific finding about what would have happened if the takeover of Western United had not occurred. He said:
The past history of the two companies suggests that Western United and its subsidiaries would have continued to operate as before but in the difficult climate following the share market crash, and received financial support to a substantial extent from Kia Ora. Kia Ora would not have made wise and successful investment of the proceeds from the sale of the Marvel Loch mine or its other assets. It would have remained as a speculative investor and eventually its cash reserves would have been dissipated.

And he said:

It is reasonable to conclude that the reverse takeover or something like it would have occurred –

And then:

Presumably, his findings mean that even if the takeover of Western United had not taken place, the funds of Kia Ora would have been dissipated by a transaction similar to the reverse takeover or something along those lines.

Now, our complaint with that is that that is all pure and utter speculation and it is also illogical speculation. There is no evidence in the matters recited in paragraph [501] that Kia Ora dissipated money. Rather, it invested money or it spent money on the Western United takeover, the very transaction ordained by the Nelson Wheeler report. As for the reference to the subsequent transaction, the Duke takeover, that was only facilitated, or allowed, by the Western United takeover. Now, their Honours then say, at [511], that there “is some force” in our submission to them that this is speculation.

We say that that is a proper characterisation of this process of reasoning. It is pure speculation, and we say it cannot stand in the face of an equitable presumption of the kind one sees in Guerin, that the beneficiary, who can no longer prove what would have been, because it was not, in a direct sense, we say it is speculation of the kind that cannot stand in the face of a Guerin‑style presumption. If that is right, then Kia Ora was entitled, not just against the directors, but also against Nelson Wheeler in equity, to loss of use of the money, or compensation on account of loss of use of the money, for the entire period from 1 July 1988 to the date of trial.

There is another aspect to the matter that we say was overlooked by the Full Court, and that is this. As the Court well knows, there is a dual element in commercial interest. There is an element of the use value and there is also an element of the nominal value – nominal or inflationary or currency value. So, interest represents a return for not having your money for a period, that is, for giving somebody else the use of it, but it also reflects the changing value of currency. This sort of concept was discussed, for instance, by this Court in Todorovic v Waller, the dual element of commercial interest. Now, on the authority of Re Dawson, the defaulting fiduciary should at least have been obliged to restore the fund in the value of the currency of the day, absent some overriding issue ‑ ‑ ‑

GUMMOW J: We are not talking about statute here, are we?

MR WHITINGTON: No.

GUMMOW J: So forget about Todorovic. That is consumer statute.

MR WHITINGTON: Well, I think, there is actually concern with the discount rate, if I remember correctly, and what discount rate ‑ ‑ ‑

GUMMOW J: It is all in the statutory framework.

MR WHITINGTON: But I was simply making the point ‑ ‑ ‑

GUMMOW J: Common law, no interest.

MR WHITINGTON: No, no, I accept that, but I was making the point, your Honour, that commercial interest has a dual nature. There is a use component and there is a nominal component and that leads me to Re Dawson’s Case because Re Dawson, as we perceive it, stands for the proposition that where a trustee deprives a beneficiary of an asset ‑ ‑ ‑

GUMMOW J: Yes, that is uncontroversial, is it not?

MR WHITINGTON: Yes, but, you see, we say then, in this case, why did we not get back our $26 million in the currency of the day? If interest ‑ ‑ ‑

GUMMOW J: Did you ask for it in the Full Court?

MR WHITINGTON: Yes, we asked for interest on it, both at common law and in equity; and interest, as I say, has a dual component, the real value which in Todorovic v Waller, I think, was assessed at about 3 or 4 per cent and the nominal value. Re Dawson stands for the proposition that where your asset is denominated in money and the value of the currency changes, you are to be restored in the equivalent value at the date of trial.

GUMMOW J: Did the Full Court give reasons why they did not accept what you say is the submission based on Re Dawson?

MR WHITINGTON: I am sorry, I withdraw that, I do not think we put it in these very terms, in Re Dawson terms.

GUMMOW J: I do not think so either.

MR WHITINGTON: No, we simply asked for the interest in equity and under Hungerfords v Walker. In equity, the Full Court - I pause there. We did refer to Wallersteiner v Moir in the judgment of Lord Denning. We also referred to a case of Southern Cross Commodities in the South Australian Full Court. The reason why the Full Court chopped us off, so to speak, in equity was that they said that the directors would have dissipated the money.

GUMMOW J: Yes.

MR WHITINGTON: Now, we say that ‑ ‑ ‑

GUMMOW J: They say there would have been a reverse takeover sooner or later and ‑ ‑ ‑

MR WHITINGTON: Yes, all very airy-fairy stuff about dissipation.

GUMMOW J: But there was a trial judge’s finding to that effect, was there not? They relied on that , did they not?

MR WHITINGTON: Yes, that is in the passage I ‑ ‑ ‑

GUMMOW J: Yes.

MR WHITINGTON: But they accept that that involves a degree of speculation and it necessarily must. But, also, it is flawed, we say, because you could only have a reverse takeover if you had the Western United takeover – I can explain if the Court wants me to – but the Western United takeover permitted the subsequent Duke reverse takeover. It permitted it because by issuing the shares in Kia Ora to Mr Abbott and his confreres in Western United, they got shareholder control of Kia Ora and then in the Duke takeover, Mr Abbott sold out his shares, about 19 per cent of the company, for a special cash consideration. But the short point is there could only have been a Duke takeover after there had been a Western United takeover, that is, after there had been a Nelson Wheeler report.

HAYNE J: Now, the Full Court say that all of these questions of interest should depend, not on assumption, but on findings of fact. The trial judge made findings and they chose not to disturb them.

MR WHITINGTON: Yes.

HAYNE J: Now, what do you say the error in that process is?

MR WHITINGTON: The critical error is this, that while the Full Court may pass the acknowledgment to the domain of equity when it came to equitable compensation, when it stepped from Hungerfords v Walker to equity, when, in its analysis it simply applied the Hungerfords v Walker analysis, it picked up the analysis essentially at paragraph [504] and following and applied that in equity at paragraph [816].

We say that is the essential error because, in equity, Kia Ora had the benefit of certain presumptions and critically, the Guerin style presumption, that it would have made profitable use of the money and that presumption could only be rebutted by clear and strong evidence, not speculation. But the so‑called evidence and findings the Full Court relied on at [504] and following were no more than speculation, as they recognised themselves.

So while it might hold good in common law in respect of a Hungerfords v Walker assessment – I concede that to be so – we say it could never hold good in equity and the court did not appreciate anywhere in the equitable part of its reasoning that the equitable approach to the question, as a matter of proof, was quite different.

Further, there is the Re Dawson point that I have indicated and which your Honour Justice Gummow has noted we did not put in quite these terms below, but there is the Re Dawson point that, in any event, we were entitled to have back our fund of $26 million in the currency value of the day which attracts, at the very least, the nominal component of the interest rate, even if not the real component, and to deny us that would require the Court to find that there was some supervening event that would have chopped off Kia Ora’s fund, would have denied it the fund, in any event.

In other words, but for Nelson Wheeler’s breach, we would have had that fund and we would have been earning on it and we would have been entitled to be given back the fund, we say, in equity in money of the day and unless Nelson Wheeler can point to some overriding factor of the Canson type, a separate cause of the kind recognised in equity, we ought to get back the fund in the money of the day and that would, at least, get us the nominal component out of the interest rate.

Can I briefly turn to two final issues. There is first the issue of contributory negligence. We say the court was quite wrong in its approach to that. The Full Court relied on the approach of Justice McLachlin in Canson to causation in equity when she held that in the context that after due notice to the plaintiff, failure of the plaintiff to take the most obvious steps to alleviate their losses:

The plaintiff’s failure may be so extreme that it is no longer sensible to say that losses were caused by the breach.

You see that in the ‑ ‑ ‑

GUMMOW J: What is wrong with that as a statement of principle? You do not disagree with that, do you?

MR WHITINGTON: No, but, your Honour, that is a principle of causation. It is not a reason to introduce that principle into a concept of contribution. What we say is that her Ladyship’s principle stands on its own and it does not make it any the better by introducing vague notions of contribution by reference to a concept of causation.

GUMMOW J: But on the application of the Canson theory, the whole lot goes.

MR WHITINGTON: Yes, that is right. We accept that. Of course, we have to face up to that and we would say that we are not caught by an application of that principle in this case.

GUMMOW J: Given the nature of the duty and the breach, it does begin to look perhaps like a Canson case, given all these other circumstances.

MR WHITINGTON: We would say this, that ‑ ‑ ‑

GUMMOW J: Pressing on after the October crash and so on and so forth.

MR WHITINGTON: The Full Court addresses that and we say that their approach is right in that. When one appreciates the situation after the crash, in fact the disparity in value between Kia Ora and Western United came down, so in fact in a sense the transaction actually was less improvident from Kia Ora’s point of view than Western United’s point of view. There are a whole host of reasons. The pressing on after the transaction was done by the directors after the meeting of 26 October, which of course was after the crash, but there was no immediately apparent reason from the shareholders’ point of view at that meeting to say that the share market crash had wrought such a change as to transform the report. The court’s reasoning on this point is at paragraphs [393] on, particularly paragraph [403]. I will give the Court another reference to that: the Full Court’s reasons are at paragraphs [362] to [371] and [402] to [412].

It is our submission that the Full Court posed, and correctly posed, a question along these lines: was the subsequent event – that is, the event subsequent to the advice and prior to the transaction – of such a nature as to so materially alter the effect of the advice in relation to the transaction that the operative effect of the report was spent and could not in any way be said to be a nexus to the loss? The Full Court found to the contrary at paragraph [369] and we say they were right in their reasoning as to that. I will not dwell on that, but I made that submission in the course of submissions on contributory negligence.

GUMMOW J: Yes. This contributory negligence idea, another way of looking at it is to say, “There is another set of delinquents here, and there is the directors”.

MR WHITINGTON: Yes.

GUMMOW J: Should not there have been some adjustment as between Nelson Wheeler and the directors? Is there any claim of that sort brought between them?

MR WHITINGTON: Yes, I think that is still live. I think there is a contribution notice ‑ ‑ ‑

GUMMOW J: That is unresolved, is it?

MR WHITINGTON: Yes, I think it is unresolved. We say the fundamental error that the Full Court made in relation to contributory negligence is that it did not compare like with like, or it adopted an approach which did not permit like to be compared with like. In the case of contributory negligence, one is comparing a failure of the defendant to take care for the plaintiff, with a failure of the plaintiff to take sufficient care for his or her own interests. But, in equity, the failure is a failure of loyalty. Now, how does one weigh up, we ask, a failure of the fiduciary loyalty, on the one side, against ‑ ‑ ‑

GUMMOW J: The whole idea is, as Justice McHugh read that passage to you before lunch, you have somebody else to look after you. They are doing something for you on your behalf. It is a different idea.

MR WHITINGTON: Precisely, yes. So we say you just cannot make – you are not in the same domain, not in the same field, you cannot weigh up one against the other and ‑ ‑ ‑

GUMMOW J: It is not your fault if you happen to choose a crook adviser.

MR WHITINGTON: That is right - well, disloyal adviser.

GUMMOW J: Yes.

MR WHITINGTON: Yes. There is no need for us to urge the point any further ‑ ‑ ‑

McHUGH J: Mr Whitington, I would like your opponent to have some time to reply. How much longer do you think you will be?

MR WHITINGTON: I can finish perhaps in five or ten minutes. Is that ‑ ‑ ‑

McHUGH J: Yes.

MR WHITINGTON: That leads me, I think, to the final point that we say if there is to be any answer in equity, it is an answer either of an absence of causation, a break in the chain of causation, or an answer by way of a true and acknowledged equitable defence. The equitable defence pointed to in this case by Nelson Wheeler is informed consent or acquiescence, which we say comes down to the same thing.

Can I briefly put some submissions on that. We respectfully adopt the statement of the defence of acquiescence by Justice Deane in Orr v Ford at page 337.

GUMMOW J: The question, in a way – I will stop interrupting in a minute – is: who is the relevant organ to acquiesce in this corporate structure where the whole complaint is that one organ has been misconducting itself?

MR WHITINGTON: Yes, that is right, and our submission is this, your Honour, that disclosure to Abbott was no disclosure at all. Abbott knew of the associations and conflict of Nelson Wheeler, but that was no disclosure at all. There is no finding that Lee-Steere and Somes knew the full extent and ramifications of the relationship between Abbott and Kia Ora and Western United, on the one hand, and members of Nelson Wheeler on the other. In any event, the interests of those two directors, Lee-Steere and Somes, were aligned with the interests of Abbott in a sale of Western United to Kia Ora, because they held Western United shares and were conflicted.

Further, there is no finding, and, indeed, there was no evidence, of any relevant disclosure or knowledge in the case of the so-called independent directors, Quilty and Singleton, who were appointed for the purpose of the transaction, or of any consent by them following upon disclosure. In the case of the company, adequate disclosure was practically impossible. Consent was also practically impossible but, if it was to be given, presumably it could only be given by the unassociated shareholders. But, in any event, there was no disclosure and there was no consent by that organ of the company.

Can I quickly take the Court to the report itself of Nelson Wheeler, and it is picked up in the Full Court’s judgment at paragraph [48]. The Court will see at line 45 a purported disclosure by Nelson Wheeler which we say was quite wrong and misleading, quite false.

Can I make two final points? The first is that the respondents’ addressed the question of acquiescence in their written submissions at paragraph 40 and following. In paragraphs 40 and 43 they appear to identify two different kinds of acquiescence, but when one analyses what they rely on in those paragraphs essentially it comes down to the same thing, namely, that Kia Ora had knowledge of Nelson Wheeler’s conflicts right at the outset, and we would say, then, that the alleged acquiescence attributed to Kia Ora by paragraphs 40 and 43 of the submissions, that is, knowledge of Nelson Wheeler’s associations and non‑independence, comes to the same thing.

GUMMOW J: Well, look, this brings me back to paragraph [48] and perhaps to the beginning of the case. What do you say should have been said under the heading “Disclosure of Interest”?

MR WHITINGTON: We say, your Honour, that there could not have been any practical disclosure, that the web was so tangled, so extensive, so ‑ ‑ ‑

HAYNE J: Mr Whitington, that is not going to help me. What would help me if you took an example, preferable the best or strongest example, of the sort of thing that should have been disclosed. I understand you say there is lots, but give me your best, as it were.

MR WHITINGTON: Well, your Honour, paragraph [762] is the best. Also paragraph [764], although that is an incomplete statement, you need to go to the trial judge’s findings, and if the Court also would have regard to page 263 to 264 of the trial judge’s reasons where he summarises what he had set out in the previous 70 pages or so on the associations.

HAYNE J: Does it come to more than this, there have been and continue to be commercial dealings between partners in Nelson Wheeler and directors of Kia Ora or companies associated with one or other of those?

MR WHITINGTON: We say it does, your Honour, because, you see, those dealings and associations in that formulation could be arm’s‑length dealings or they could be of such a nature that one is beholden to the other. In this case it was found they were of such a nature that the Nelson Wheeler partners were beholden to Harold Abbott.

Now, it really is impossible to convey that, we would respectfully submit, to the shareholders voting in general meeting. You see, it is one thing for two companies to deal with each other, even on a regular basis and on a normal arm’s‑length commercial basis. It is another for one person repeatedly to do favours for another to the point where the other is beholden, has been beholden in the past, remains beholden at the time in question and, no doubt, expects such treatment in the future. They are, qualitatively, different concepts, we would submit.

HAYNE J: The dealings being such that it is in the interests of Nelson Wheeler that this transaction proceed?

MR WHITINGTON: In the sense that it is in the directors’ interests that the transaction proceed and it is, therefore, in the interests of Nelson Wheeler because they are beholden to the directors and advancement of the directors will, or may, advance them. Now, can I just make one final point in relation to ‑ ‑ ‑

McHUGH J: Well, you try and make it as shortly as you can, because you have had almost two hours. I think your opponent has had just on an hour. I would like him to get the 15 minutes in reply.

MR WHITINGTON: Yes. Well, I was going to refer the Court to the Abbott Tout Case.

GUMMOW J: We know all about that. We can read that.

MR WHITINGTON: Yes. We distinguish it. In that case the solicitors were found not to know of the fraud of the directors when they were said to have a retainer involving divided loyalty. In this case, Nelson Wheeler knew of the conflict of the directors.

GUMMOW J: Is there a particular passage in Abbott Tout? Just read that on the transcript.

MR WHITINGTON: Yes, your Honour. It is right at the end of the case and it would be about page 98. It is pages 96 through to 100 and the critical passage, I think, is ‑ ‑ ‑

GUMMOW J: Report?

MR WHITINGTON: The report in 48 NSWLR 1 and, in particular, within those pages, paragraph 46. A clearly distinguishable case because here Nelson Wheeler knew of the conflict of the directors. Now, finally, I should give the Court a reference to, what I might call, the beholden findings of the trial judge and particularly, since I have taken up with your Honour Justice Hayne, pages 268 to 269 of the trial judge’s – and it is paragraph [761] through to [765] in the Full Court’s reasons. If the Court pleases.

McHUGH J: Thank you, Mr Whitington. Yes, Mr Pagone.

MR PAGONE: If your Honour pleases. I find myself in the same position, I think, as your Honour the presiding Judge, this morning. I have a note I gathered from the Registrar about the absence of my learned leader. I had thought that my learned leader’s absence after lunch was a matter that had been communicated to the Court. I regret that that had not been communicated and apologise for that. If your Honours please.

GUMMOW J: We are perfectly happy with you.

HAYNE J: As you stand up.

MR PAGONE: If your Honour pleases, I am sure, communicate that to my learned leader. Your Honours, we, I think, can be relatively brief in reply. Most of the issues have been either put exhaustively in the submissions or have been dealt with in the exchanges, but if I can just confine myself to one or two relatively small points.

First of all, the question that your Honour Justice Gummow asked about the contribution proceedings. I am instructed that proceedings were commenced by us for contribution from the directors that an award had been made in respect of certain proportions by the primary judge. That was the subject of an appeal. The Full Court, however, has yet to decide on that matter. I understand the matter is reserved, so we are not quite sure what the outcome of that is, but it was certainly argued at the time of the appeal, concurrently, I understand, with the appeal.

Your Honours, at one stage your Honour Justice McHugh, I think, asked some questions about where do you draw the line, the gradations of reliance. That matter, if your Honour pleases, is a matter that had been referred to in the Canadian decision.

McHUGH J: What is this, Hodgkinson?

MR PAGONE: Yes, it is, your Honour. Again, if I can confine myself perhaps with page references. It is considered in the joint judgment of Justices Sopinka and McLachlin at ‑ ‑ ‑

GUMMOW J: It is at about 218, is it, thereabouts?

MR PAGONE: Your Honour, that is the number that rings a bell in my mind.

GUMMOW J: I think the passage starts at 214.

MR PAGONE: Yes, your Honour, I am indebted to your Honour, it does begin precisely there. What one sees there, particularly at 218, is that what their Honours were talking about, effectively, was that cases where there is ceding by one party of effective power over the other, is to be treated somewhat differently from what one might call a more simple case of simply relying upon the advice about the tie or how one should act in a particular way. That, fundamentally, the bedrock, as it were, of these cases and of these principles is that where one puts another in the position of controlling, disposing of, dealing on behalf of, that they are quite distinct and separate matters, carrying with them much more onerous propositions and obligations. The particular finding in this case is quite significant.

If I may take your Honours very briefly to what was said by Justice La Forest, if I a may give it an Anglo-Saxon pronunciation, at page 194. At about letter F, there is a quotation at around about where the letter appears, emphasised by his Honour. It is there said, four lines from the bottom of that paragraph:

“In effect, Mr Simms assumed the responsibility for Mr Hodgkinson’s choice. He analyzed the investments, he recommended the investments, and he effectively chose the investments for Mr Hodgkinson”.

Earlier on on the previous page at 193 the same kind of general approach. At 218, again, the same kind of general approach. That can be contrasted, if your Honours please, rather markedly with the situation here. At paragraph 12.2 of our submissions we set out a passage from the primary judge which appears at, I think, page 377. In any event, the passage that we quote from at 12.2:

“There is no evidence to suggest that the first defendants gave any advice, or made any representation to, Kia Ora about the efficacy or wisdom of the takeover. Indeed, there is no evidence to suggest that the first defendants advised, or even suggested to Kia Ora , that the takeover of Western United be undertaken. In fact the evidence suggests the contrary…
Nelson Wheeler Perth were obliged to value the issued capital of Western United and to express an opinion as to whether the purchase price was a fair price: LR3J(3)(b). That is what they did albeit incompetently and in breach of duty in contract and tort but they did not give advice in the relevant sense.

Then, over the page we also quote from what the Full Court said about this matter at 12.3 and there we quote from the Full Court at paragraph 600 where their Honours say:

“In our opinion the value of Western United and of its shares, was not a matter upon which the directors of Kia Ora were entitled to disregard their own knowledge…or to suspend judgment, as it were,…and act entirely upon the advice of [Nelson Wheeler], without regard to their own commercial judgment…The advice on the fairness of the price was not a matter upon which Kia Ora can claim that it was entitled to rely entirely upon its adviser. Kia Ora, through its directors, had the knowledge and experience to form its own view of the soundness of the advice, and failed to do so.”

HAYNE J: That is, as I understand it, what Mr Whitington described as Nelson Wheeler being beholden to Abbott as the inverse of the kind of relationship which is discussed in the Canadian cases where the client is beholden to the adviser.

MR PAGONE: That is correct, your Honour. Quite so, your Honour. Your Honours, in view of the time I do this with a bit of taking breath, but if I may, nonetheless, just again confine myself to some page references in the transcripts because there is a risk that by referring to some parts of what appears in the judgment one might be led to draw inferences that might be rather more unsafe than they should be. The fact of the matter is, if your Honours please, that the underlying evidence made it quite clear that Nelson Wheeler were not found to be parties to either a fraud or a conspiracy or an arrangement to effect some form of dastardly work upon the unassociated shareholders.

In the Full Court judgment, your Honour will see that, graphically enough, at paragraph [639] and [651]. Specifically in the middle of that paragraph, paragraph [639], their Honours note:

that in the present case there is no finding that NWP acted in fraud of Kia Ora, or that NWP were acting in combination with the directors of Kia Ora who were acting in fraud of Kia Ora.

At [651], a positive conclusion, not a finding, of course, by the Full Court, but a statement about the finding at first instance:

NWP were not acting fraudulently. There is no finding that NWP were in any way a party to the fraud of the directors. NWP is liable for its failure to take proper care. It seems to us both fair and reasonable that Kia Ora should, for the purposes of contributory negligence, be responsible for the faults of its own directors, even though they were acting in fraud of Kia Ora.

The state of mind of Nelson Wheeler, as my learned leader indicated this morning, was relevantly that of Mr Newman, who prepared the report. The evidence about that your Honours will find in the judgment of the primary judge at page 272. Mr Pilmer adopted the report. There was never any case, ever, put that Nelson Wheeler were preferring the directors of the company Kia Ora.

GUMMOW J: Preferring them to, what?

MR PAGONE: To presumably the duty that they might otherwise have had independently. There was no cross-examination to that effect and the case was ‑ ‑ ‑

GUMMOW J: It said that there was a real risk, I think, that it has to be a real risk of conflict-type case. You say, “Where is the reality of the risk?”, I suppose?

MR PAGONE: Exactly, your Honour, but, in any event, I am also saying for present purposes that it was a different case and it was simply not put, and what one has now is facts that, looked at in a particular way, might be thought to look odd, and inferences being drawn from it, without delving into all of the facts and evidence that was before his Honour, that led his Honour to reach a very different conclusion from the one that is being urged upon the courts now.

So far as some of the transactions were concerned, if your Honours please, a good many of them were some time before. We have taken the Court to that. So far as the share registry work is concerned, your Honours, I again confine myself to refer the Court to page 259 of the primary judge’s decision and the Full Court at 774 to indicate only that the evidence does not go as far as our learned friends would perhaps like to imply. The so‑called no-transactions finding that our learned friends were putting this afternoon, I think my learned friend took the Court to paragraph [798] of the Full Court decision where their Honours talked in global terms about:

There can be no doubt in this case that there would have been no loss if the breach of fiduciary duty had not occurred. The takeover simply could not have gone ahead.

That is usefully to be compared, your Honours, with what the primary judge said at page 120, at about lines 20 to 40, where what his Honour found, after what on any view might be regarded as being a lengthy court case, at lines 21, his Honour said ‑ ‑ ‑

McHUGH J: What page is this, Mr Pagone?

MR PAGONE: Page 120, your Honour. This is in relation to the Marvel Loch mine that my learned friend referred to:

Upon the sale of the Marvel Loch mine, in two stages, Kia Ora had substantial cash. The shareholders of Kia Ora were entitled to the benefit of the improved financial position of Kia Ora. However, those controlling Kia Ora decided upon the takeover of Western United at a highly inflated price and to use a good deal of the cash in that way.
The takeover by Kia Ora of Western United was orchestrated by Harold Abbott with the assistance of Gary Abbott and Gardiner.

It had proceeded a significant way before the other directors became aware of what was happening. The various incidents in the process clearly establish that Harold Abbott, Gary Abbott and Schneider‑Paas were determined to proceed with the takeover regardless of any opposition or reliable indication to the contrary. During the trial their determination was described as their being “hell bent” on the success of the takeover and that is an appropriate description. The extent ‑ ‑ ‑

McHUGH J: That hardly answers the reasoning of the Full Court at [798]. What the Full Court is saying is that because this report was so negligently compiled, you could not have got any other competent accountant to give a similar report. As a matter of reality it could not have gone ahead.

MR PAGONE: But that, your Honour, might have been caused by the negligence, not by the breach of duty. The breach of duty is said to have been the acceptance of the retainer and one can readily enough understand that if one is negligent the law will fashion a remedy to deal with that. The problem that we face is that we now face an action based on breach of fiduciary duty and one needs to be quite careful not to be chopping and changing, as it were, as our learned friends, perhaps, urge. Your Honours, there comes a point where one must decide whether to go on for several hours or call it a day.

McHUGH J: Are there any transcript references you want to give us? As long as you put them in within seven days there can be no problem about that.

MR PAGONE: Your Honours, we are indebted for that indication.

McHUGH J: You will give a copy to your opponent.

MR PAGONE: We shall try to exercise restraint, your Honour.

McHUGH J: Yes.

MR PAGONE: If your Honours please.

McHUGH J: Yes. The Court is indebted to counsel for their submissions and will reserve its judgment in this matter.

AT 4.16 PM THE MATTER WAS ADJOURNED

[2000] HCATrans 516

Key Legal Topics

Areas of Law

Commercial Law

Civil Procedure

Equity & Trusts

Legal Concepts

Appeal

Fiduciary Duty

Damages

Remedies

Reliance

Estoppel