Raulfs v Fishy Bite Pty Ltd & Ors

[2012] HCATrans 254

[2012] HCATrans 254

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S153 of 2012

B e t w e e n -

DEBORAH RAULFS

Applicant

and

FISHY BITE PTY LTD

First Respondent

LOUIS MICHAEL AJAKA

Second Respondent

HELEN MARY ABLETT

Third Respondent

Application for special leave to appeal

GUMMOW J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 5 OCTOBER 2012, AT 11.15 AM

Copyright in the High Court of Australia

MR M.L.D. EINFELD, QC:   May it please the Court, I appear with my learned friend, MR M.W. SNEDDON, for the applicant.  (instructed by McLaughlin & Riordan)

MR C.J. BIRCH, SC:   May it please the Court, I appear with my learned friend, MR A.G.A. GEORGE, for the respondents.  (instructed by JSM Lawyers)

GUMMOW J:   Yes, Mr Einfeld.

MR EINFELD:   Your Honours, the Quistclose principle was described by the Acting Chief Justice in the Australasian Conference Case, in terms that were straightforward and the passage normally cited is extracted in the application book at page 86 at the top of the page, to which we would invite the Court’s attention.  In this well‑known passage the indication was given by the Acting Chief Justice that there is a requirement for a mutual intention that the funds provided not become part of the assets of the recipient, but that they be applied to the particular identified purpose and then if that purpose fails, the court will imply the further requirement that the funds be repaid to their provider.

GUMMOW J:   We all know this, but what do you say about Justice Barrett’s succinct reasons at page 116?  He lays it out in (a) to (f) in 114, and then reaches his conclusion in 115.

MR EINFELD:   Your Honours, the reasoning of those pages is erroneous ‑ ‑ ‑

GUMMOW J:   Do you quarrel with any ‑ ‑ ‑

MR EINFELD:   Yes.

GUMMOW J:   What do you quarrel with?

MR EINFELD:   The funds in question never, in fact, became part of the funds of the partnership.  The case, in the way it was conducted at first instance, was on the basis that the funds that were unlawfully removed and improperly removed by Mr Ajaka from the account of his company to which they were paid ‑ ‑ ‑

GUMMOW J:   But 4.4 of the partnership deed was an acknowledgement that there had been a contribution of 400,000, page 73.

MR EINFELD:   Yes, your Honours, the funds were at all times, as his Honour the primary judge found, intended to form working capital of the partnership.  They never did form part of the working capital of the partnership.  The primary judge found, as an undisputed fact, that the $400,000 that was improperly removed was the same $400,000 that had been paid by Mrs Raulfs to the would‑be partner for use as capital in the partnership but it never, in fact, came to be used for that purpose.  So much is apparent from the judgment of the primary judge, and this was not challenged on appeal, commencing in paragraph 7 at page 5 where his Honour said in the last line at page 5:

I shall first set out the factual matters which are not in dispute.

In paragraph 13 on page 7 identified the fact that the applicant:

Mrs Raulfs provided a cheque for $400,000 to Mr Ajaka, made out to Fishy Bite.  Mr Ajaka banked the proceeds –

into an account, which was the company’s own account, where it remained until October, at which time Mr Ajaka arranged for the, that is the same, $400,000 to be transferred to the mortgagee’s account.  Now, that was an undisputed fact.  It was not challenged on appeal, such that the position was that the trial was expressly conducted upon the basis that the funds ‑ ‑ ‑

GUMMOW J:   When you say the trial, the trial was a partnership suit, was it not?

MR EINFELD:   No, it was not, your Honour, it was not constituted as a partnership dispute as such.  It was a claim for return of the moneys from – it was a claim to have imposed upon ‑ ‑ ‑

GUMMOW J:   Your client had obtained the appointment of receiver?

MR EINFELD:   Yes, some years later, but the appointment of a receiver, upon the dissolution of the formal partnership did not, in any way, affect the antecedent question of whether or not, by reason of the failure of the purpose for which the funds were paid in ‑ ‑ ‑

GUMMOW J:   We are looking at this from the point of view of special leave.

MR EINFELD:   Yes, your Honour.

GUMMOW J:   Now, if your clients conducted the litigation in this way, why should you now be able to lower in from the top a Quistclose trust question?

MR EINFELD:   That was the question at trial, your Honour.  The very question at trial was whether or not the provision of $400,000 to be used as working capital in the company which purpose failed gave rise to the implication, or on one view, imposition of an express trust with the implication of a trust of a Quistclose‑type, by which she, upon the failure, was entitled to the return of the funds.

GUMMOW J:   Are you saying that there was an expressed declaration of trust of some sort?

MR EINFELD:   No, no not at all.  We say that on Quistclose principles upon ‑ ‑ ‑

GUMMOW J:   What are the Quistclose principles?

MR EINFELD:   Those stated by Justice ‑ ‑ ‑

GUMMOW J:   Some sort of constructive trust?

MR EINFELD:   A resulting trust or, as it was called in Quistclose itself, the purpose trust, of exactly the type described in paragraph 42 of the judgment of Justice Campbell at 86, namely:

that where money is advanced by A to B –

that is Mrs Raulfs to Mr Ajaka or his company –

with the mutual intention that it should not become part of the assets –

and there is an indisputable finding, a concurrent finding, indeed, that it not form part of the assets of Mr Ajaka or his company and not be at the free disposal of those parties to use as they wish, as in fact occurred, then in those circumstances the exclusive and specific purpose for which they were intended having failed, that there would be implied, said Sir Harry Gibbs –

in the absence of an indication of a contrary intention) a stipulation that . . . the money would be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust. 

Now, in our submission, that proposition was reinforced in the judgment of Lord Millett in the Twinsectra decision of the House of Lords, extracted at the foot of page 88 ‑ ‑ ‑

GUMMOW J:   There are plenty of equitable principles in play here and they come into play through partnership law.

MR EINFELD:   The problem in this case was, as your Honours know, there were again concurrent findings of fact that the partnership relationship collapsed almost before it had begun ‑ ‑ ‑

GUMMOW J:   No doubt.

MR EINFELD:   ‑ ‑ ‑ thus the irrelevance for present purposes of the fact that an order for dissolution was sought and granted some years later.  But if, in fact, the failure of the express purpose, by reason of the removal from not the joint account into which – the joint partnership account into which the funds were by the deed intended to be paid, but rather the separate private account of the recipient, having been received, having been then removed by the respondents and applied to private purposes and not applied for the purpose of the partnership, the purpose failed and it was at that point that the Quistclose trust arose. 

The Quistclose trust, your Honours, as your Honours know, has received acceptance, broad acceptance, both at first instance and appellate level in Australia, yet the Court of Appeal has now called into doubt whether – to use Justice Campbell’s expression below – “there is such a thing as a Quistclose trust.”

GUMMOW J:   I do not think so, Mr Einfeld.  What do you say about paragraph 67 of Justice Campbell’s reasons?

MR EINFELD:   Consistently with what Justice Barrett had said in his judgment that reflects the same error that ‑ ‑ ‑

GUMMOW J:   No, just bear with me, the second sentence before you rush to say it is an error.

MR EINFELD:   There cannot be any doubt that Fishy Bite held the funds upon a fiduciary obligation to apply for the partnership, but as your Honour in the Australian Elizabethan Theatre Case reminded us of what Justice Dixon had previously said, all that Fishy Bite held was a dry legal interest.  When the fiduciary purpose or the fiduciary obligation was never fulfilled, that is the funds were not applied by the partner to the partnership purposes, but rather purloined and used to pay out the private mortgage of the principal, there is no doubt that the legal title, that the bare legal title remained in Fishy Bite.

Once the funds were removed and the fiduciary purpose failed it was almost the classic case in which the Quistclose principle as described by Lord Wilberforce in reliance upon the earlier cases came into play.  The principle embodied in paragraph 67 is that the funds remaining in the hands of one partner ought to have been applied for the partnership purposes, but once they were not and were removed instead and applied for the private purposes, that is the point at which the classic Quistclose trust arose, in our submission. 

There are two principal problems with Justice Campbell’s approach to the issues determined below.  The first is his Honour’s criticism of the passage from the House of Lord’s case because it fails to recognise that it was a direct reflection of what Sir Harry Gibbs had said in the earlier case in 1970, the Australasian Conference Case.  There is no basis, in our respectful submission, upon which the language embodied in the passage from Sir Harry Gibbs’ judgment, reproduced at the top of 86, did not have absolute and direct application to the facts of this case. 

GUMMOW J:   What were the circumstances in that case?

MR EINFELD:   Your Honour, the Australasian Conference Case was one in which the question itself now being considered was not addressed by the other members of the Court.  It was a case in which there was a bank guarantee, the payments pursuant to which were made to a builder for the purpose of – so it was argued – payment to subcontractors and the question arose whether, upon the failure of the builder, the fund was able to revert back to the bank or whether it had to be on the failure of the company to pay for the subcontractors, but the passage from the Acting Chief Justice’s judgment ‑ ‑ ‑

GUMMOW J:   What was the result?

MR EINFELD:   The case was decided not on Quistclose trust principles, but upon the basis that the owner of the property was entitled to use the moneys to satisfy the builder’s obligations and subcontractors, rather than having to pay it back to the bank.  The passage from the Acting Chief Justice’s judgment has been applied, as your Honours know, many times in Australia as standing for the Quistclose proposition and it is difficult to discern any point at which the principles expressed in the passage do not have direct application here. 

If one understands that the $400,000 that was removed from the recipient’s account is the same $400,000 as that which was paid in so that it never reached the partnership joint account, which the deed, the very deed to which, your Honour, the presiding Judge referred us a few moments ago, it just never reached that purpose, it never achieved that purpose because the circumstances, the contractual circumstances in which the moneys were provided allowed for joint decisions as to the use of the funds through the medium of a joint bank account.  There never was a joint bank account.  It was never opened, as the primary judge recorded with the notation of the Court of Appeal in paragraph 10. 

If your Honours would be kind enough just to look at page 76 of the application book your Honours will see the recording of the fact that Ms Raulfs was given no involvement in the proceedings as a partner and the primary judge recorded, and in a manner that was not challenged, that the funds were required to be paid into a joint bank account which, in fact, had never been opened. 

So that part of the contractual context in which the purpose was to be fulfilled was the payment of the funds into a joint partnership account.  It never reached that destination and that is why the observations of Justice Barrett, in which Justice Campbell appears to have joined at the point your Honour the presiding Judge referred me to a moment ago, miscarried because there is a clear, we would submit, unequivocal consequence of the events that occurred and that is that the partner to whom the moneys were paid – Mr Ajaka’s company or Mr Ajaka himself – simply purloined the funds that were intended to be applied to the company’s purposes. 

Now, your Honours, not only was that the primary error of the Court of Appeal, but the second error is to be found at page 89 of the application book where in its focus of the court, upon the absence of anything said by the parties with respect to the circumstances of repayment, if the specified purpose were to fail, at paragraph 52, page 89, Justice Campbell said:

there was no basis for inferring that the parties had an objective intention that the –

money would be paid to the provider of the funds –

Neither of the partners said anything about repayment.

One responds “Naturally”, because if they had specified what was to happen to the funds in the event that the purpose for which the deed provided was never fulfilled there would be no need to call upon the implication by law of the Quistclose trust or any other form of trust if the document had made such provision. 

Your Honours, we submit that the acceptance of the Quistclose trust by Australian courts over four decades now at least has been thrown into doubt by this decision.  His Honour’s suggestion that there might be no such thing as a Quistclose trust is an important question in the law of trust with ‑ ‑ ‑

GUMMOW J:   Where does he say that?

MR EINFELD:   That is at paragraph 51.

GUMMOW J:   What he is meaning is that the Bar latches upon labels and then starts carrying on about labels instead of attaching particular fundamental principles.

MR EINFELD:   At appellate level ‑ ‑ ‑

GUMMOW J:   You have an express trust, an implied or resulting trust and a constructive trust and there are many particular circumstances which fall in one or the other.

MR EINFELD:   Yes, your Honour, but at ‑ ‑ ‑

GUMMOW J:   Just a minute, just listen to me.  It is a good idea.

MR EINFELD:   I am sorry, your Honour.

GUMMOW J:   Therefore, counsel tends to extract from these particular circumstances some new species of the genus.  That is what got Justice Campbell irritated.

MR EINFELD:   This is not a new genus, your Honour, this is ‑ ‑ ‑

GUMMOW J:   He should not be blamed for getting irritated.

MR EINFELD:   Your Honour, courts both at first instance and even at appellate level, have long since in Australia given reference to decisions of the Queensland Court of Appeal and the New South Wales Court of Appeal – and there is a recent one in Victoria – have applied to give, in fact, what is generally described as the “Quistclose trust”.  In paragraph 51 Justice Campbell calls into question the very question as to whether or not there is such a thing as a Quistclose trust. 

In our respectful submission, the fact that courts in this country have for many years applied to a given set of circumstances where a specified purpose has failed what is generally described as the Quistclose trust, the very question as to whether there is such a species of trust which is to be implied in the circumstances where the specified purpose fails is a question deserving of the consideration of this Court. 

Your Honours, the other aspect which we submit warrants this Court’s consideration is the very question considered in the Court of Appeal in this State and adverted to by your Honour Justice Gummow in the

Elizabethan Theatre Case as to whether the nature of the Quistclose trust, if there is such a species of trust, is an express trust or an implied trust with the consequences that that may have as to the desirability of whether or not the funds are kept in specie or something of the kind.  It is also a question deserving of clarity and warranting this Court’s consideration. 

Your Honour, the second aspect of the appeal relates to the Baumgartner v Baumgartner trust.  We appreciate that having the advantage of concurrent findings of fact that there was a very early breakdown of the partnership relationship that the application of the principles, which would suggest that in the circumstance, including a partnership context of the premature breakdown of the relationship gives rise to a constructive trust for the donor of funds which are not used for their required purpose involves an application of established principles of facts of the case. 

If we are correct in our submission that the Quistclose question warrants consideration, in our submission, the addition of reconsideration by this Court of the constructive trust question will be very short and applied on now accepted found facts as to which there is no dispute.  In our respectful submission, the combination of both matters warrants a grant of special leave.  May it please the Court.

GUMMOW J:   We do not need to call on you, Mr Birch.

The conclusion reached by the New South Wales Court of Appeal in this matter was correct.  Accordingly, there is no ground for special leave.  Special leave is refused with costs.

The Court will adjourn to reconstitute.

AT 11.35 AM THE MATTER WAS CONCLUDED