Rahnam Investments Pty Ltd v Esplin

[2004] NSWSC 529

CITATION:	Rahnam Investments Pty Ltd v Esplin & Anor [2004] NSWSC 529
HEARING DATE(S):	25/05/04, 26/05/04
JUDGMENT DATE:	22 June 2004
JURISDICTION:	Equity Division
JUDGMENT OF:	Barrett J
DECISION:	Claims based on resulting and constructive trusts dismissed
CATCHWORDS:	TRUSTS AND TRUSTEES - implied trusts - whether vendor's solicitors holding deposits under contracts for sale of lots in subdivision became trustee of such moneys for second mortgagee - whether Quistclose trust or other resulting trust arose - whether constructive trust arose because of unconscionability
LEGISLATION CITED:	Evidence Act 1995, s.79
CASES CITED:	Australian Broadcasting Commission v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 77 ALJR 926 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Guimelli v Guimelli (1998) 196 CLR 101 Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd's Rep 142 In re Spectrum Plus Ltd [2004] EWCA Civ 670 Twinsectra Ltd v Yardley [2002] 2 AC 164
PARTIES :	Rahnam Investments Pty Limited - Plaintiff Donald Phillip Reid Esplin - First Defendant Stephen John Rush - Second Defendant
FILE NUMBER(S):	SC 1744/04
COUNSEL:	Mr J L Trew QC - Plaintiff Mr P M Biscoe QC/Mr C Mantziaris - Defendants
SOLICITORS:	Abadee, Dresdner & Freeman - Plaintiff Esplins - Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

TUESDAY, 22 JUNE 2004

1744/04 – RAHNAM INVESTMENTS PTY LIMITED v DONALD PHILLIP REID ESPLIN & ANOR

JUDGMENT

1 Zolstat Pty Limited (“Zolstat”), a company controlled by Mr Robert Oayda, developed a residential flat building at 280-282 Bronte Road Waverley which became the subject of a strata subdivision. The defendants are solicitors practising under the name “Esplins”. They were retained by Zolstat to act for it upon sales of the units and associated garages as and when buyers were found.

2 There were, at the times relevant to these proceedings, two mortgages affecting all the lots in the strata subdivision owned by Zolstat. The first of these mortgages to be created was a mortgage to the plaintiff, Rahnam Investments Pty Limited (“Rahnam”). The other mortgage, subsequently created, was a mortgage to Perpetual Trustee Company Limited (“Perpetual”) – sometimes referred to in the parties’ correspondence as “Perpetual Nominees”. Both mortgages were registered. Zolstat, Rahnam and Perpetual subsequently became parties to a deed entitled “deed of postponement” in accordance with which a postponement of mortgage was executed and registered so that Perpetual’s mortgage came to enjoy priority, in point of security, over Rahnam’s mortgage as to the whole of the moneys secured by it. That security position prevailed at the time of the events the subject of the proceedings.

3 Rahnam (the second mortgagee), as plaintiff, contends that it is entitled to certain moneys that Esplins received out of the proceeds of the sale of certain of the lots in the strata subdivision. The moneys in question were appropriated by Esplins out of balances standing to the credit of their trust account or a controlled moneys account. The appropriation was to meet unpaid fees payable to Esplins. There is, for present purposes, no relevant distinction between the two types of account and I shall use the expression “trust account” to refer to accounts of both kinds.

4 Esplins, as solicitors for Zolstat as vendor under contracts for the sale of strata lots, received and held as stakeholder the deposits provided for in several of the contracts which did not involve a deposit bond as distinct from a cash deposit. Each such contract contained a provision envisaging release of the deposit by the stakeholder to the vendor (Zolstat) in accordance with an order or direction given by the purchaser.

5 Ten sale contracts are relevant for present purposes. In referring to particular sales, I shall refer to the sales of apartments by number without mentioning that each numbered apartment represents a residential lot in the strata plan having a number corresponding with that of the apartment, together with a garage lot having a different number.

6 The ten sale contracts fall, for the purposes of this case, into three groups. The first group consists of three contracts, being the contracts for the sale of apartments 17, 11 and 7. The second group consists of four contracts, being the contracts for the sale of apartments 6, 16, 4 and 1. (Apartments 2 and 10 are notionally included in this group but as they involved deposit bonds rather than cash deposits, they need not be considered.) The third group consists of three contracts, being the contracts for the sale of apartments 3, 15 and 9. For reasons that will emerge, it is unnecessary to say very much about the contracts in the third group.

7 Completion under the contracts for the sale of the apartments in the first group, being apartments 17, 11 and 7, occurred on 17 October 2003, 18 November 2003 and 20 November 2003 respectively. Completion in relation to the apartments in the second group occurred in the period 21 to 27 November 2003. Completion under the contracts in the third group occurred after 27 November 2003.

8 The contention of Rahnam is, in effect, that Esplins, without any sufficient warrant to do so, appropriated all but $3,819.34 out of a total of $146,652.21 held in its trust account as deposits (and interest on invested deposits) relating to the contracts in the second group, that is, the contracts relating to the sales of apartments 6, 16, 4 and 1, in circumstances where Rahnam had some form of interest in or entitlement to the full $146,652.21. The proceedings were commenced by summons. There are no pleadings elucidating the basis for the claims in the summons which are claims for:

(a) a declaration that Esplins are “liable to account to” Rahnam “as mortgagee under” the second mortgage “for the whole of the deposits held by them in trust in relation to the sales of” apartments 6, 16, 4 and 1 without reduction by way of reimbursement of their costs and disbursements referable to certain identified files;
(b) a declaration that Esplins hold the sum of $146,652.21 transferred from their trust account for those costs and disbursements (and any property into which any of the money may be traced) upon trust for Rahnam without deduction except for two identified items, one of $15,000 and the other of $3,819.34; and
(c) consequential relief.

9 Mr Trew QC, who appeared for Rahnam, expressly disavowed any intention of Rahnam to assert a right to the funds in question as mortgagee or chargee. He made it clear that Rahnam regarded itself as mortgagee of the real property only. Rahnam’s claims do not involve the proposition that moneys accruing due to Zolstat became subject to a charge in favour of Rahnam at a particular point when in the hands of a third party: cf Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142, In re Spectrum Plus Ltd [2004] EWCA Civ 670. Rahnam’s claims appear to proceed on a different basis, namely, that Esplins, from the point at which they ceased to be a stakeholder in relation to the deposit moneys in their trust account in respect of apartments 6, 16, 4 and 1, held those moneys, in the words used in the written outline of submissions filed in advance of the hearing, “upon a constructive trust for the mortgagees in the order of their priority”. The constructive trust is said to have arisen – or, perhaps, to be in need of imposition by the court – because of unconscionability. I quote again from the written outline:

“It is unconscionable for solicitors who have been entrusted by all parties to a conveyancing settlement to deal with deposit moneys for the purpose of completing a settlement, to capture and apply those funds to the payment of their own costs at a point after partial discharges of mortgages have been given and the outgoing mortgagees are vulnerable to an abuse of that trust.”

10 There was, at all material times, a relationship of debtor and creditor between Zolstat and Rahnam. It appears from the mortgage between them to which I have referred that a deed of loan (called, in the mortgage, “Loan Agreement”) was made between those parties on the date the mortgage itself bears, 4 June 1997. The mortgage contains a covenant by Zolstat to pay principal and interest in accordance with the loan agreement. But as the loan agreement itself is not in evidence, it is not possible to identify the arrangements between Zolstat and Rahnam for repayment of the loan made by Rahnam. In particular, there is no evidence that Rahnam was, as a matter of contract, entitled to receive moneys from Zolstat as and when units in the development were sold, settlements took place or deposits were released to Zolstat as vendor. From a contractual perspective, Rahnam does not appear to assert anything more than a general right to have its debt paid.

11 So far as the terms of Perpetual’s debt is concerned, there is in evidence no more than the mortgage itself. According to the mortgage, the secured moneys are payable on demand, subject to any other agreement between the parties as to the payment of any part of the secured moneys. There is no evidence of any such other agreement.

12 The facts are largely uncontroversial and emerge principally from contemporary documents. It is convenient to begin with the documentary evidence.

13 The first settlement in relation to an apartment in the development was the settlement of the sale of apartment 17. On 13 October 2003, Esplins, acting for Zolstat, wrote to Heidtman & Co (“Heidtman”), solicitors for Perpetual, enclosing a settlement sheet for settlement scheduled for the following day, 14 October 2003. On 10 October 2003, Heidtman had written to Esplins saying that “the payout figure is $3,8884,835.23 with daily interest of $927.47”, that Perpetual required “$220.00 as a discharge fee per discharge” and giving details of Heidtman’s charge “for each discharge”. This letter clearly contemplated several discharges of mortgage being given by Perpetual and the clear inference is that partial discharges of the mortgage affecting all apartments were to be made available progressively as sales of individual apartments were completed. The letter of 10 October 2003 from Heidtman said nothing about the amount on account of the Perpetual debt that Perpetual was to receive in return for each such discharge.

14 On 13 October 2003, Abadee Dresdner & Freeman (“ADF”), solicitors for Rahnam, wrote to Perpetual asking for particulars of its debt and saying, with respect to the impending settlement of apartment 17, that they were aware that Esplins intended “to take their costs and disbursements of some $80,000 out of the settlement proceeds”. ADF asked Heidtman for confirmation that Perpetual had “consented to that deduction”. This was a reference to an aspect of the settlement sheet for apartment 17 prepared by Esplins. There were two relevant items of deduction from the purchase moneys to be received by Esplins for Zolstat as vendor. One was of about $3,500 for costs and disbursements of acting on the particular sale. The other was of something more than $75,000 for acting in relation to “the overall development of the project”, including registration of the strata plan. The settlement sheet made it clear that the purchase moneys would be paid by the purchaser in such a way as to cause Esplins to receive these two sums in satisfaction of Zolstat’s liability to Esplins for the relevant costs and disbursements. That deduction would be made at the behest of Zolstat.

15 By letter dated 14 October 2003, Heidtman, acting for Perpetual, specified the cheques required by them on settlement of the sale of apartment 17. The cheques coincided in amount with those proposed in Esplins’ settlement sheet, from which it must be inferred that Heidtman raised no issue about the deflection of the two sums totalling almost $79,000 to cover Esplins’ costs as described. By letter of the same date, ADF conveyed its client’s approval of the settlement sheet. The Heidtman letter concluded:

“Please note that in addition to the above cheques we will require an undertaking from your firm that you will deliver a further bank cheque for the deposit monies in favour of Perpetual Nominees Limited for $53,000 within 48 hours of settlement.”

16 The procedure adopted on this first settlement was thus that Esplins with the knowledge and consent of not only their client Zolstat but also the two mortgagees (through their respective solicitors) retained out of the moneys receivable on settlement both their costs of acting on the particular sale and their costs in relation to the development and the strata plan; and that Esplins were also required by Heidtman on behalf of Perpetual to give (no doubt on behalf of Zolstat) an undertaking to forward the deposit to Perpetual immediately after settlement. I say that the undertaking with respect to the deposit was effectively an undertaking on behalf of Zolstat because Esplins, after ceasing to be stakeholder, would hold the deposit for Zolstat as vendor. Esplins do not say that they ever had any entitlement to deposit moneys in their trust account except such as was given to them by their client by way of authority or direction to apply such moneys.

17 Following settlement of the sale of apartment 17, Esplins sent to Heidtman a cheque in favour of Perpetual for the deposit, receipt of which was duly acknowledged.

18 I turn next to the settlement of the sale of apartment 11. On 6 November 2003, Esplins sent separately to Heidtman and to ADF “for your review” the settlement sheet for the settlement of the sale of apartment 11 expected to occur on 10 November. The covering letter sought “your approval” in each case. In the settlement sheet, a sum of almost $4,000 was shown as coming out of the settlement moneys for Esplins’ costs and disbursements of acting for the vendor in the particular sale transaction, as was a sum of almost $3,500 for costs and disbursements of an earlier “non-proceeding” sale of both the same apartment and apartment 17 in respect of which settlement had already occurred. This aggregate of about $7,500 was to be retained by Esplins out of the settlement moneys. Also to be deducted were sums for outstanding rates, body corporate levies, strata insurance premiums and the fees of a quantity surveyor. These lastmentioned items were clearly referable to the development as a whole, not just apartment 11. The balance to go to Perpetual was shown as $474,736, the total settlement moneys being $514,271.

19 Upon receipt from Esplins of the proposed settlement sheet for apartment 11, Heidtman sent a copy to their client and sought instructions. Heidtman’s letter also said:

“Please also advise whether you require an undertaking from the borrower’s solicitor to account to the mortgagee for the deposit moneys.”

20 On 10 November 2003, Heidtman wrote to Esplins conveying Perpetual’s instructions that it was “not prepared to allow the proposed adjustments” for legal expenses of the “non-proceeding” sale or the quantity surveyor’s fee. Heidtman also said:

“Our client requires their debt to be fully extinguished from the progressive sales following which your firm can deal directly with your client as to any outstanding costs relating to the development.”

And later:

“Our client also requires you to provide an undertaking at settlement that you will account to it for the deposit monies of $57,000.00 within 4 business days.”

21 On the same day, 10 November 2004, Esplins received a letter from ADF on behalf of Rahnam in reply to Esplins’ letter of 6 November 2004. ADF said that their client did not approve the deduction of the quantity surveyor’s fee “as this creditor has no right to be paid prior to the secured creditors”.

22 Following receipt of the letter of 10 November 2003 from Heidtman, Esplins engaged in correspondence with that firm in which they asserted a lien over documents held for Zolstat that, if enforced, would prevent settlement unless their fees were paid. Heidtman contacted the Law Society. There was a dispute between the two firms as to whether what Heidtman reported as having been said by the Law Society was right or wrong. Halsbury’s Laws of England (fourth edition) were quoted. Heidtman’s client spoke of appointing a receiver. Esplins said that Zolstat would seek to restrain any such appointment.

23 There was a resolution as between Esplins and Heidtman on the basis that there would be no deduction from the sale proceeds for the aborted sale of apartment 17 and a much reduced deduction for the quantity surveyor. In a letter of 13 November 2003 to Heidtman, Esplins said:

“We advise that our firm’s agreement to proceed on this basis does not in any way limit or prejudice our firm’s lien in respect of unpaid costs and disbursements. We propose to enforce our lien in respect of the unpaid costs and disbursements in respect of the aborted sale of Apartment 17 at the time when your client’s first Mortgage over the properties is fully discharged.”

24 Esplins wrote to ADF on the same day:

“As a compromise and on a without prejudice basis we have agreed with the first mortgagee not to enforce our lien at present in respect of the costs for the aborted sale of Apartment 17 so that the sale of Apartment 11 can proceed to settlement.
We confirm our advice that we propose to insist on payment of our costs and disbursements from the sale proceeds in respect of the aborted sale of Apartment 17 immediately following discharge of the first mortgage and, at that time we will enforce our lien to ensure that these outstanding costs are paid. We note that this has no real impact on your client as we are entitled to insist on payment of our costs now rather than at a later time.
We confirm that you have no objection to our firm proceeding in the manner set out above.”

25 ADF replied to Esplins on the same day conveying Rahnam’s instructions that “the contents of your fax are acceptable to our client and that our client has no objection to your firm proceeding in the manner set out in your fax”.

26 Settlement of the sale of apartment 11 took place on 18 November 2003. On settlement, Esplins gave to Heidtman a signed receipt for the certificate of title and the discharge of mortgage. On this and signed “Esplins Solicitors” was a handwritten endorsement as follows:

“Re: Sale of Unit 11
We are instructed by Mr Oayda to withdraw deposit money held on investment at Commonwealth Bank and pay to your client together with one half interest earned thereon less any fees and charges.”

27 A cheque for the deposit moneys held by Esplins in respect of apartment 11 was drawn in favour of Perpetual and sent by them to Heidtman on 20 November 2003. The covering letter said that the cheque was sent “[i]n accordance with our client’s instructions”.

28 The next sale to be considered is the sale of apartment 7. A draft settlement sheet in relation to this was sent by Esplins to Heidtman under cover of a letter dated 19 November 2003. There was a deduction for Esplins’ costs and disbursements of acting on the sale itself, as well as costs and disbursements of an earlier aborted sale of the same unit.

29 The same settlement sheet was sent by Esplins to ADF, also on 19 November 2003.

30 There is no other documentary evidence about the sale of apartment 7 save for a letter from Esplins to Heidtman dated 21 November 2003 enclosing a cheque for “the deposit moneys held by our firm” which was sent “[i]n accordance with our client’s instructions”.

31 It is not necessary to recount the details of the settlement for apartments 6, 16, 4 and 1 beyond saying that, in each case, Esplins’ costs and disbursements of the particular sale (and, in one case, of an earlier aborted sale) were deducted and retained out of the moneys received on settlement. In each case (and also in the case of apartments 2 and 10 which were settled at about the same time but involved deposit bonds rather than cash deposits held in Esplins’ account), the settlement sheet was submitted by Esplins to both Heidtman and ADF in advance, together with a covering letter seeking “approval” of it.

32 It should also be recorded that there was an expectation, on the part of Heidtman, that the deposit moneys for apartments 2, 4 and 16 at least would be received by them from Esplins. Heidtman sent emails to their client, Perpetual, in relation to those three apartments reporting settlement and banking of the cheque in favour of Perpetual received on settlement and adding:

“Deposit moneys [or proceeds] will be banked on receipt from the borrower’s solicitor.”

33 It should also be recorded that alleged defects affecting apartment 1 brought about a last minute arrangement between Zolstat and the purchaser for the quarantining of $15,000 (originally $12,500) of the purchase moneys for the purpose of rectification. Esplins reported this to Heidtman by letter dated 26 November 2003. The letter concluded:

“The Purchaser has already drawn the settlement cheques. Accordingly we will retain $12,500 out of the deposit moneys on trust for the above purposes.”

34 By an email of 27 November 2003, Heidtman asked to see Esplins’ controlled moneys statement relating to investment of the retained funds. Esplins’ reply of the same date was:

“The deposit monies are in our trust account – the Contract did not provide for investment of deposit. We will retain the sum of $15,000 in our trust account on the basis previously advised and we will notify you before this amount is applied in payment of the costs of the rectification works and invoices set out in our earlier correspondence.”

35 After the sales of apartments 1, 4, 6 and 16 had been completed, deposit moneys, together with interest, to the extent of $146,652.21 remained in Esplins’ trust account freed from the constrains arising from Esplins’ stakeholder role under the contracts. Esplins proceeded to apply that sum as follows:

1. Agreed retention in relation to apartment 1 $ 15,000 . 00
2. Payment of Esplins’ costs and disbursements
described as “Zolstat v Waverley Council
(File No 970 395)” $ 17,816 . 25

3. Payment of Esplins’ costs and disbursements
described as “Zolstat v Sy Pty Limited
(File No 990611)” $ 16,078 . 55

4. Payment of Esplins’ costs and disbursements
described as “Zolstat re Dispute with
Parkview Constructions (File No 000212)” $ 5,970 . 50

5. Payment of Esplins’ costs and disbursements
described as “Zolstar re Proposed sale of
284 Bronte Road Waverley (File No 000204)” $ 5,748.48

6. Payment of Esplins’ costs and disbursements
described as “Zolstat re Purchase of Boundary
Hotel (File No 980493)” $ 19,273 . 00

7. Payment of Esplins’ costs and disbursements
described as “Zolstat re Movies You Ride Pty
Limited (File No 000335)” $ 15,876 . 39
8. Payment of Esplins’ costs and disbursements

described as “Zolstat re Continental Company
reconstruction (File No 000148)” $ 34,159 . 60

9. Payment of Esplins’ costs and disbursements
in relation to seven rescinded contracts for
the sale of apartments in the Bronte Road
development (with a separate figure ascribed
to each) $ 12,910 . 10

36 A cheque was drawn by Esplins in favour of Perpetual for the balance of $3,819.34 and sent to Heidtman with a covering letter dated 2 December 2003 referring to the settlements of the sales of apartments 1, 4, 6 and 16 and to the enclosed cheque and continuing:

“This represents the balance of the deposits (and interest earned thereon) held in connection with the above sales after payment of our firm’s costs and disbursements owed by Zolstat Pty Limited. Payment has been made in accordance with our client’s instructions and as detailed in the attached Trust Statement.”

The attached trust statement detailed the nine applications of funds I have described. Attached to it were documents giving further particulars of the costs and disbursements in respect of which trust moneys had been applied by Esplins.

37 On 4 December 2003, Heidtman wrote to Esplins in reply to the letter of 2 December 2003. Heidtman returned Esplins’ cheque for $3,819.34 and demanded payment of $146,642.21. Heidtman also referred to (indeed, enclosed a copy of) what they described as a “direction” given by Zolstat to Esplins on 20 November 2003. Heidtman expressed opinions about the proper construction of the direction. Heidtman also said:

“A general retaining lien only allows a solicitor to hold money and such money can only be released with the appropriate authority. A solicitor cannot assert his or her lien against moneys that belong to somebody else. In this case those moneys belong to Perpetual Nominees Limited and following which they belong to Rahnam Investments Pty Limited, not Esplins.”

Heidtman said that it had instructions “not to settle any further lots without full deposit moneys being available”. There was also reference to the possibility of appointment of a receiver and to instructions “to report this most serious matter to the Professional Conduct Committee of the Law Society, who we feel confident will be very interested”.

38 The “direction” dated 20 November 2003 given by Zolstat to Esplins and referred to in the exchange of correspondence just mentioned was as follows:

“ Re: 280-282 Bronte Road, Waverley
We instruct you to account for the sale proceeds (including deposit monies) to the first mortgagee, Perpetual Nominees Limited, and once its mortgage is discharged to the second mortgagee, Rahnam Investments Pty Limited after payment of your firm’s costs and expenses and also agents’ commissions, and other amounts necessary to effect the settlements.”

39 Mr Esplin gave evidence of a wider authority previously given by Mr Oayda on behalf of Zolstat. That authority was oral and was to the effect that Esplins could progressively recoup from moneys held in their trust account for Zolstat all outstanding costs and disbursements owing by all Mr Oayda’s companies.

40 The letter of 4 December 2003 from Heidtman to Esplins was copied by Heidtman to ADF who in turn wrote to Esplins (on 4 December 2003) as follows:

“We refer to the letter of today’s date to yourselves from Heidtman & Co and are instructed to place the following on record:
1. Our client associates itself with the contentions advanced on behalf of the First Mortgagee in that letter and calls upon you to pay forthwith to Perpetual Nominees Limited the amount demanded (save that, on our understanding of the agreement in that regard, it seems to us that you should be retaining the sum of $15,000.00 in trust for the rectification works).
2. According to our records the deposits paid on Apartment 16 and Apartment 4 were $53,000.00 and $38,500.00 respectively. Please clarify why the amounts referred to in your Trust account are less than that.”

41 Esplins wrote to Heidtman on 10 December 2003 acknowledging Heidtman’s letter of 4 December 2003 and continuing:

“In paragraph 4 of your letter you state ‘a general retaining lien only allows a solicitor to hold money and such money can only be released with the appropriate authority’. The appropriate authority is our client.
Perpetual Nominees Limited had discharged its Mortgage when the monies came into our client’s control. No undertaking had been given by our firm to hand the monies to Perpetual Nominees Limited, indeed we had specifically refused to give an undertaking.
With its mortgage discharged we cannot see that the direction from our client to our firm dated 20 November 2003 in anyway gives Perpetual Nominees Limited a legal claim over the monies, irrespective of how you like to argue the interpretation of that direction.
We believe we have acted appropriately and in accordance with the law.
We are instructed to fully cooperate with your current demand that ‘the full proceeds of sale including the deposit’ be paid to your client in respect of future sales and this will be the arrangement for future settlements (subject to payment of our costs and disbursements in respect of that sale and any prior rescinded sale).
We will advise you as and when appointments are made for settlements.”

42 ADF wrote to Esplins on 11 December 2003 as follows:

“We refer to our most recent fax regarding the deposits which you currently hold in your trust account and would appreciate a response as a matter of urgency. Please also furnish us with a copy of your response to the fax from Heidtman & Co in that regard; when we last spoke to them they had not yet received any such response but we assume that you would have responded by now.”

43 Esplins replied to ADF on 15 December 2003 as follows:

“We refer to your letters of 4 December 2003 and 11 December 2003.
Enclosed herewith is a copy of our letter dated 10 December 2003 to Messrs Heidtman & Co responding to their letter of 4 December 2003.
We advise that the deposits are no longer held in our trust account and the deposits have been applied in payment of our costs and disbursements in accordance with the Trust Account Statement, a copy of which was forwarded to Messrs Heidtman & Co with our letter of 2 December 2003. For your information we enclose a copy of our letter dated 2 December 2003 together with the Trust Account Statement.”

44 The next relevant link in the chain of correspondence is a letter from ADF to Heidtman dated 12 December 2003 referring to a settlement scheduled for that day (apparently the settlement of the sale of apartment 15):

“Two things. First, have you had a reply from Esplins to your fax regarding their retention of the four deposits in their Trust Account? If so, could you let me have a copy. Secondly according to my calculations after the settlement today your payout figure (excluding interest which has been accruing on a reducing balance since the settlements commenced and also excluding any additional legal costs which you have incurred) should be under $100,000 so that your client should be paid out in full with part of the proceeds of the next settlement which appears to be that of Lots 9 and 27 on 19th December, 2003.
It would be appreciated if you would let me have details of your client’s payout figure as at close of business today as soon as possible next week. Your assistance will be greatly appreciated.”

45 Correspondence in the normal course about subsequent settlements may be passed over until the settlement for apartment 9. The settlement sheet for that settlement showed the balance, after ordinary adjustments and deduction of Esplins costs and disbursements for the particular transaction as payable in part to Perpetual and as to the remainder to Rahnam. The amount payable to Perpetual was the residue of indebtedness secured by the first mortgage. It amounted to $97,648.43. The payment provided for in favour of Rahnam was $283,175. An adjusted settlement sheet incorporation these features was sent by Esplins to ADF on 16 December 2003. ADF conveyed their client’s approval of it on the same day. Settlement took place and Esplins instructed the agent to account for the deposit to the purchaser (as to a small amount of accrued interest) and Rahnam (as to the balance).

46 It is clear from the evidence about the course of dealing that Esplins, on behalf of Zolstat, considered it necessary to obtain approval from both Heidtman, on behalf of Perpetual, and ADF, on behalf of Rahnam, to the manner of disposition of the balance of purchase moneys on completion. In every instance, Esplins informed the other two firms of the proposed method of application and sought their approval. In some instances, the approval was withheld until there had been changes to ensure that funds going otherwise than to Perpetual were reduced.

47 The course of conduct does not show any such consistent pattern with respect to deposits held in Esplins’ trust account. In the case of the first sale (apartment 17), Heidtman expressly stated when conveying approval of the settlement sheet that they would require upon settlement, in addition to the cheque for the part of the balance of purchase moneys passing to Perpetual, an undertaking from Esplins to pay the deposit to Perpetual within 48 hours after settlement. In relation to the second settlement (apartment 11), Heidtman asked their client, Perpetual, whether it required an undertaking by Esplins to account to Perpetual for the deposit moneys. Presumably after receiving a positive response from Perpetual, Heidtman told Esplins that such an undertaking would be required. The undertaking was given by Esplins by way of the handwritten endorsement on the receipt they gave to Heidtman for the certificate of title and discharge of mortgage relating to apartment 11. In the case of apartment 7, the documentary evidence shows no more than that, after settlement, Esplins sent to Heidtman a cheque for the deposit “[i]n accordance with our client’s instructions”.

48 Thus, in the first case, the question of disposition of the deposit after settlement was raised by Heidtman who told Esplins that an undertaking to pay it to Perpetual would be required on settlement. In the second case, Heidtman asked their client whether a corresponding undertaking by Esplins would be required on settlement and, presumably after receiving an affirmative response, conveyed that requirement to Esplins who then complied. In the third case, there is merely an indication that Esplins paid the deposit to Perpetual, through Heidtman, on Zolstat’s instructions.

49 The events in relation to the second case show that, at least as far as Heidtman were aware, there was no standing and continuing arrangement under which Zolstat was to pay to Perpetual (by means of appropriate instructions to Esplins) the deposit moneys held in Esplins’ trust account immediately those moneys ceased to be held by Esplins as stakeholder and, as between vendor and purchaser, belonged to Zolstat. On the evidence, Heidtman, on behalf of Perpetual, acted before settlement in the first two cases to inform Esplins that the deposit moneys were to be paid to Perpetual after settlement. It is likely that the same thing happened in the third case, although I can make no finding that it did. Such conduct is consistent with Perpetual’s having included the requirement for payment of deposit moneys in the package of stipulations which it insisted be met before it would release the particular apartment from its mortgage.

50 This last point is, I think, important. Perpetual’s loan was, on the evidence, an on-demand loan. Perpetual could, at any time, have called up the whole of the outstanding moneys. That, it appears, was Perpetual’s only clearcut contractual right. But, as a practical matter, it was in a position to dictate the terms upon which it would release each apartment from its mortgage as and when Zolstat required release in order to complete the sale of that apartment. Receipt by Perpetual of the agreed amount on each settlement and the giving of undertakings on settlement as to payment of the deposit moneys to Perpetual were attributable to the de facto ability of Perpetual to dictate the terms for release of apartments from its security.

51 Rahnam was in the same position. For Zolstat to complete the sale of a particular apartment, it required release of that apartment not only from Perpetual’s mortgage but also from Rahnam’s mortgage. The evidence shows that Esplins, on behalf of Zolstat, submitted the settlement sheets for the first three settlements to ADF, on behalf of Rahnam, for “your approval”. There was thus an assumption by Esplins that settlement – and, more particularly, release of each apartment from Rahnam’s mortgage – would be dependent upon Rahnam’s approving the application of funds as proposed in the settlement sheets. Rahnam was not, however, consulted in any way in relation to the deposit moneys held in Esplins’ trust account. None of the correspondence in evidence involving Rahnam’s solicitors, ADF, refers at all to the disposition of such deposit moneys until after 2 December 2003 when Esplins took action to appropriate deposits to satisfy its costs and disbursements after those deposits had ceased to be subject to the stakeholder arrangements.

52 The documentary evidence shows that ADF questioned certain deductions proposed in settlement sheets submitted by Esplins and were concerned to know whether Heidtman had approved certain matters in such settlement sheets on behalf of Perpetual. ADF were also furnished by Esplins with a copy of Esplins’ letter of 12 November 2003 to Heidtman in which Esplins asserted a lien in respect of documents of Zolstat. Esplins wrote to ADF direct on 13 November 2003 to explain the agreement reached with Heidtman on behalf of Perpetual to the effect that the costs and disbursements referable to the aborted sale of apartment 17 would be recouped after Perpetual’s mortgage had been discharged (obviously a reference to the point at which Perpetual had been paid out in full). By letter of the same date, ADF conveyed agreement on that to Esplins.

53 So far as Esplins’ actions in resorting to the deposits are concerned, the reaction of ADF, on behalf of Rahnam, was to say in the letter of 4 December 2003 to Esplins that their client associated itself with the contentions advanced on behalf of Perpetual – essentially, that what Esplins had done was not in accord with the “direction” given to Esplins by Zolstat and that the moneys in the trust account “belong to someone else”, being “Perpetual Nominees Limited and following which they belong to Rahnam Investments Pty Limited, not Esplins”. ADF also said to Esplins that Rahnam “calls upon you to pay forthwith to Perpetual Nominees Limited the amount demanded”. Rahnam thus appears quite clearly to have endorsed a claim by Perpetual to ownership of the relevant moneys, as distinct from asserting any entitlement of its own.

54 Having contended in early December 2003 that the moneys taken by Esplins from its trust account were moneys belonging to Perpetual, Rahnam now seeks to say that they are moneys belonging to Rahnam.

55 Rahnam’s argument, as I understand it, is that all moneys in Esplins’ trust account representing deposits for the sale of apartments in the development the subject of the two mortgages were the subject of a species of specific purpose trust (of the kind most often associated with Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567). This is based upon the 20 November 2003 direction given by Zolstat to Esplins that those monies were to be accounted to the first and second mortgagees in turn, after payment of Esplin’s costs and expenses and other amounts necessary to affect the settlements (see paragraph [38]). Rahnam says that where a party is given money with specific directions as to its application, such as was the case here, that party has a fiduciary duty to apply those funds as directed. Reliance was placed on the opinion of Lord Millett in Twinsectra Ltd v Yardley [2002] 2 AC 164. At 186 he said:

“It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. As North J explained in Gibert v Gonard (1884) 54 LJ Ch 439, 440:
‘It is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.’
The duty is not contractual but fiduciary.”

56 Rahnam contends that Eslpins was in breach of this fiduciary duty by deducting from the deposit monies amounts above and beyond those permitted by the direction before passing the monies to Perpetual. Rahnam argues that this action was unconscionable, and gives rise to a constructive trust of the kind generally discussed in Guimelli v Guimelli (1998) 196 CLR 101.

57 It uncontroversial that a fiduciary duty arises in the circumstances described by Rahnam. As noted by Lord Millett at 192:

“I do not think that subtle distinctions should be made between ‘true’ Quistclose trusts and trusts which are merely analogous to them. It depends on how widely or narrowly you choose to define the Quistclose trust. There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other's money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. The arrangement between the purchaser's solicitor and the purchaser's mortgagee is an example of just such an arrangement. All such arrangements should if possible be susceptible to the same analysis.”

58 But such duty is owed only to the person who paid the money with directions as to its application. Rahnam was not a party to the 20 November 2003 direction. Nor did Rahnam pay money to Esplins on terms as to its disposition. Rahnam cannot be the beneficiary of any fiduciary duty of Esplins arising from the receipt of the deposit moneys into their trust account.

59 Furthermore Rahnam cannot assert a beneficial interest under any trust. The question of the identity of the beneficiary under a Quistclose trust while the specific purpose for which it was formed is still capable of being fulfilled was discussed by Lord Millett at length in Twinsectra at pages 186 and following. In the final analysis, he saw that kind of trust as a resulting trust:

“As Sherlock Holmes reminded Dr Watson, when you have eliminated the impossible, whatever remains, however improbable, must be the truth. I would reject all the alternative analyses, which I find unconvincing for the reasons I have endeavoured to explain, and hold the Quistclose trust to be an entirely orthodox example of the kind of default trust known as a resulting trust. The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and insofar as he does not it is held on a resulting trust for the lender from the outset. Contrary to the opinion of the Court of Appeal, it is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower's power or duty to apply the money in accordance with the lender's instructions. When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower's mandate while it is still capable of being carried out, must depend on the circumstances of the particular case.”

60 Rahnam has no beneficial interest that can be asserted against Esplins. There being no duty owed to or beneficial interest enforceable by Rahnam, it is unnecessary to consider whether Esplins was in fact in breach of the 20 November 2003 direction.

61 Similarly the assertions made by Rahnam that a constructive trust arises fails for lack of ‘proximity’, for want of a better term, between the parties. Rahnam seeks to bring its claim under the general rubric of “unconscionability”. But to say, in isolation, that particular conduct is “unconscionable” leads nowhere. As the High Court has emphasised most recently in Australian Broadcasting Commission v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 and Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 77 ALJR 926, “unconscionability” is a characteristic of action or inaction which may preclude assertion of or reliance on legal rights in circumstances where equity has the capacity, in any event, to intervene. It is not itself a cause of action or an independent basis for intervention. In the present case, the capacity of equity upon which Rahnam seeks to rely is the capacity to find or impose a constructive trust under Guimelli v Guimelli principles as an instrument for redressing unconscionability. For reasons I have given, Rahnam’s attempt in that direction fails.

62 Unless it had paid off both Perpetual and Rahnam in full, Zolstat could not have sold even one apartment without appropriate concurrence of both those companies. It obtained concurrence in relation to each sale. Rahnam did not see fit to impose any condition as to the application of the deposit moneys. After the stakeholder obligations had ended, those moneys belonged to Zolstat, so that Esplins were obliged to deal with them as Zolstat required. Where Perpetual, as a condition of releasing the particular apartment from its mortgage, required that the deposit, when free, be paid to it, Zolstat came under a liability to pay to Perpetual accordingly. But where no such requirement was imposed in relation to a particular deposit, Zolstat could deal with it as it wished, including by paying its own or others’ fees due to Esplins. As far as the particular deposits are concerned (those in respect of apartments 6, 16, 4 and 1), Rahnam made no attempt to ensure that Zolstat applied them in any way. It asserted no ability to control the application of the moneys. The series of dealings did not establish a discernable pattern that could found Rahnam’s reliance on how subsequent deposits would be dealt with and thus no right of Rahnam has been shown that Esplins invaded by applying the deposits as they did.

63 Rahnam’s claims must be dismissed.

64 Having dealt with the parties’ controversy, I should refer to some rulings I made on evidence and mention my reasons for them. Rahnam sought to read an affidavit of Mr Neville Moses on the basis that Mr Moses is, in terms of s.79 of the Evidence Act 1995, qualified by specialised knowledge based on training, study or experience to express opinions on matters of conveyancing practice. I accepted that Mr Moses is so qualified. I nevertheless ruled most of Mr Moses’ affidavit inadmissible and, in the end, Rahnam did not seek to rely on any part of it. My main reason for rejecting the material in Mr Moses’ affidavit was that it did not go to the expertise Mr Moses professes and which I am satisfied he possesses, namely, expertise in the practice of conveyancers.

65 Mr Moses purported to express opinions about what he understood to be “the standard practice of competent and prudent conveyancers in transactions such as this”. He then referred to the need for a vendor to give a clear title to the purchaser on settlement and said:

“Obviously in order to do this it is necessary to pay out from the proceeds of the sale the amount required by the mortgagees or other persons holding charges over the property, to pay them out.”

66 From there, Mr Moses proceeded to describe what is “usually the case” between property developer borrowers and financiers so far as progressive release of lots in a subdivision is concerned. He discussed the kinds of agreements that may be made between such parties. He referred to things “mortgagees are often happy with” and what they “might decide”, as well as what they are “entitled to” on sales of lots.

67 There were three problems with Mr Moses’ affidavit. First, Mr Moses said, in relation to the relevant issues between property developers and lenders, that they are for agreement between mortgagor and mortgagee. That is obviously so and immediately takes matters outside the province of conveyancing practice. Some assistance might possibly have been derived from evidence about the practices of lenders and borrowers (assuming there to be such a thing) but evidence of that kind could not be given by a person whose field of expertise is the practice of conveyancers.

68 Second, Mr Moses said that he had acted on many occasions where mortgages were being progressively discharged out of the proceeds of the sale of a number of related properties but that he could not recall having acted in a situation such as the present where the debts of registered mortgages left no surplus for the vendor/developer. He thus expressed, in effect, an inability to comment on the practice of conveyancers in the kind of situation before the court in this case.

69 Third, Mr Moses’ affidavit expressed opinions on matters of law relevant to the resolution of the issues in the case. Evidence is not required and will not be received on such matters.

70 The claims in the summons are dismissed with costs.

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Last Modified: 06/25/2004