Sell Your Gold Pty Ltd(ACN 150 167 990) v Australian Diamond Trading Corporation Pty Ltd(ACN 157 686 578)

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2018 0017

SELL YOUR GOLD PTY LTD (ACN 150 167 990)	Applicant
v
AUSTRALIAN DIAMOND TRADING CORPORATION PTY LTD (ACN 157 686 578)	Respondent

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JUDGES:	MAXWELL P, HARGRAVE and ASHLEY JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	23 October 2018
DATE OF JUDGMENT:	20 December 2018
MEDIUM NEUTRAL CITATION:	[2018] VSCA 355
JUDGMENT APPEALED FROM:	Australian Diamond Trading Corporation Pty Ltd v Ronnie Ben-Simon & Ors (Unreported, Supreme Court of Victoria, Efthim AsJ, 15 December 2017)

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TORT – Conversion – Pledge – Owner of diamonds gave possession to bailee – Bailee pledged diamonds to lender as security for loan – Lender unaware of true owner – Lender returned diamonds to borrower after loan repayment – Whether lender liable in conversion – Whether possession and control sufficient – Spackman v Foster (1883) 11 QBD 99; Bunnings Group Limited v CHEP Australia Limited (2011) 82 NSWLR 420 applied – M’Combie v Davies (1805) 6 East 538 explained – Lender not liable in conversion – Appeal allowed – Discussion of possible need for legislative reform.

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APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr D J Williams QC with Mr D Bongiorno	Madgwicks Lawyers
For the Respondent	Mr I G Waller QC with Mr B Ihle	Lewis Allen Janover

MAXWELL P

HARGRAVE JA
ASHLEY JA:

Where a bailee of goods wrongfully pledges them, by giving the goods to a lender as security for a loan, is the lender liable to the true owner for conversion of the goods?

The respondent, Australian Diamond Corporation Pty Ltd, is a diamond wholesaler. It gave a diamond dealer, Ronnie Ben-Simon, possession of five diamonds as a bailee. In breach of the bailment agreement, Ben-Simon pledged the diamonds to the applicant, Sell Your Gold Pty Ltd, as security for loans made by the applicant to him — and gave possession of the diamonds to the applicant for that purpose. At all relevant times, Ben-Simon held himself out to the applicant as the owner of the diamonds.

Later, believing the loans to be sufficiently discharged, the applicant returned the diamonds to Ben-Simon. The respondent was unsuccessful in its attempts to get Ben-Simon to return the diamonds, and upon finding out that the applicant had previously dealt with the diamonds, sued the applicant for conversion. The trial judge held that the applicant had converted the diamonds and awarded damages in a sum representing the full value of the diamonds. The applicant now seeks leave to appeal.

There were no pleadings in the proceeding below. Instead, the parties set out their respective cases in written submissions filed before commencement of the trial, and in written submissions at the end of the trial. Importantly, the respondent based its case on the allegation that the applicant committed the tort of conversion by taking possession of the diamonds as security for the loans to Ben-Simon, and retaining the diamonds subject to a right to sell them if Ben-Simon did not repay the loans. Specifically, the applicant stated that it ‘relies on the following propositions to establish its claim’:

1.At all material times the Plaintiff was the lawful owner of the subject Diamonds.
2.The Plaintiff gave possession of the Diamonds to Ben-Simon subject to the terms of a bailment agreement.
3.The bailment agreement did not give Ben-Simon any authority to pledge the Diamonds as security for loans.
4.[The applicant] took possession of the Diamonds as collateral for loans it advanced Ben-Simon.
5.At the time of [the applicant’s] receipt of the Diamonds:
(a)Ben-Simon was not [the respondent’s] ‘mercantile’ or other agent; and/or
(b)the providing of the diamonds as security for loans [was] not ‘in the ordinary course of business of a mercantile agent’ pursuant to the terms of [section 67 of] the Goods Act 1958 (Vic).

6. [The applicant] converted the diamonds in that it:
(a)took possession of them as security for loans advanced to Ben-Simon;
(b)retained them subject to a purported right of sale upon the default of repayment of the loans made to Ben-Simon; and/or
(c)offered them for sale to its customers.

By these particulars of its claim, the respondent alleged a strict, or perhaps more accurately described as absolute, liability for conversion. It was no part of its case that the applicant took possession of the diamonds, and retained them, with notice of the fact that Ben-Simon was not the true owner of the diamonds or otherwise had no authority to pledge them. This strict liability case was maintained in final submissions at trial. The allegation that the respondent converted the diamonds by offering them for sale is no longer pursued.

The trial judge accepted that strict liability case. He found that the applicant’s conduct constituted the tort of conversion of the five diamonds, and rejected various statutory and equitable defences argued. The applicant was ordered to pay USD$145,658 plus interest and costs. The applicant now seeks leave to appeal the decision.

The sole proposed ground of appeal is that ‘[t]he Court erred in holding that the applicant … converted the respondent’s property’. The applicant does not seek leave to appeal the rejection of its other defences, and there is no notice of contention from the respondent relating to any findings made.

For reasons which follow, we would grant leave to appeal, allow the appeal and order that the respondent’s claim in conversion be dismissed. It is first necessary to set out the key facts, including the relevant findings of the trial judge.

Relevant facts

Between 12 October 2015 and 20 November 2015, the respondent released the five diamonds to Ben-Simon on consignment for sale. Somewhat inconsistently with a consignment arrangement, each diamond was provided subject to the terms of a bailment agreement, constituted by an ‘Approval Note’ in the following terms:

In consideration of [the respondent] permitting me to remove from its premises for the sole purpose of inspection by me the goods which I agree are respectively described and possess the value and each of the other characteristics referred to in the Schedule hereto (hereafter called ‘the goods’) and the receipt of which I hereby in all respects acknowledge, I HEREBY AGREE as follows:
1.to keep the goods at all times in safe care and custody and solely in my own possession as Bailee thereof; and
2.regardless of the results of my inspection, to return the goods to [the respondent] by no later than the earlier of the dates of either SEVEN (7) days from the date hereof or on the day of request by [the respondent]; and
3.I shall be responsible for any loss or damage suffered by the goods whilst they are in my care and custody; and
4.the Bailment hereby created shall continue and shall not be determined until either I return the goods to [the respondent] or both a sale thereof shall be made to me and [the respondent] shall have received and cleared payment in respect thereof; and
5.if the goods are despatched by me by post, I shall first insure the goods to no less than their value as referred to in Schedule 1 hereto and my responsibility and liability for or in respect of such goods shall not cease until the date that [the respondent] forwards to me an acknowledgement of receipt.[1]

[1]Australian Diamond Trading Corporation Pty Ltd v Ben-Simon (Unreported, Supreme Court of Victoria, Efthim AsJ, 15 December 2017) [8], [10] (‘Reasons’).

The total value of the five diamonds, as specified by the Approval Notes, was USD$145,658.

Contrary to the terms of the Approval Notes, Ben-Simon used the diamonds as collateral for a series of loans from the applicant. Ben-Simon would attend the offices of the applicant with the diamonds and meet with its sole director and shareholder, Alejandro Mendieta Blanco (‘Mendieta’). Mendieta would test the diamonds for authenticity, and determine their value through the online Rappaport Wholesale List. While a matter of dispute below, the trial judge accepted Mendieta’s evidence that Ben-Simon provided him with an original certificate for each diamond, issued by the Gemological Institute of America.[2] Mendieta would then lend an amount that ranged between 60 to 95 per cent of each diamond’s value, and this would be done either via electronic transfer, cash, or an exchange of the diamond for ones that had previously been pledged.[3]
[2]Ibid [17]–[22].
[3]Ibid [15], [26].

In January 2016, the respondent requested that Ben-Simon (and the companies controlled by him) advise of any of its diamonds that had been sold, so that the respondent could invoice Ben-Simon for them, and have the unsold diamonds returned to it. Ben-Simon did not return the diamonds despite numerous requests over several months, and instead asked the respondent to invoice him for the diamonds. Ben-Simon did not pay the amounts owing despite repeated assurances, and provided the respondent a cheque in April 2016 that was dishonoured.[4]
[4]Ibid [12]–[13].

While the diamonds were in the applicant’s possession, its principal Mendieta controlled how the diamonds were kept and where the diamonds were kept — including transferring them to a bank safety deposit facility.

On 5 May 2016, Ben-Simon requested that Mendieta return the five diamonds to him. Around 9 or 10 May 2016, Mendieta gave evidence that the applicant returned the diamonds to Ben-Simon, after assessing — incorrectly — that Ben-Simon had paid the principal amount owing under the loans.[5] The trial judge accepted that evidence.[6]
[5]Ibid [33].
[6]Ibid [33], [34], [51]–[55].

Trial judge’s reasons

The trial judge described the competing arguments in the following terms:

The [respondent] submits that the [applicant] converted [its] diamonds, as the [applicant] possessed them contrary to the limitations on the terms of the bailment as provided for by the Approval Notes, and in a way that deprived the [respondent], as true owner of the diamonds, to its rights in respect of them. It says that the [applicant] as the pledgee exercised its purported right of possession over the diamonds, inconsistently with and repugnant to, [its] right to possession.
On the other hand, the [applicant] submits that there is no conversion because [its] brief possession of the diamonds was a mere unauthorised possession. It says that it took possession of the diamonds under a bailment and passively retained the diamonds for a time before releasing them. It says there was no demand, no denial of the [applicant’s] rights and no assertion of inconsistent rights.[7]

[7]Ibid [37]–[38].

The trial judge then quoted from some leading cases concerning the tort of conversion, which, among others, advanced the following propositions:

(1) ‘The essence of conversion is a dealing with a chattel in a manner repugnant to the immediate right of possession of the person who has the property or special property in the chattel’.[8]
[8]Penfolds Wines Pty Ltd v Elliott (1946) 74 CLR 204, 229 (Dixon J) (‘Penfolds Wines’); see Reasons [39].

(2) ‘The tort [of conversion] is one of strict liability and thus a mental element in knowing that a wrong is being committed is not required. Nevertheless, intention is not irrelevant. The act or dealing in question must be intentional …’[9]
[9]Reasons [40], quoting Bunnings Group Limited v CHEP Australia Limited (2011) 82 NSWLR 420, 456 [125] (Allsop P) (‘Bunnings’).

(3) ‘Mere unauthorised possession of another’s chattel is not a conversion of it … For possession or keeping to be a conversion a demand is required …’[10]

(4) ‘If one finds a party in possession after an apparently lawful transfer of possession, not involving the purported transfer of title or proprietary interest, some care must be taken before a conclusion of conversion can be drawn from a subsequent use by that party’.[11]

(5) A wrongful pledge of goods is a conversion of them.[12]

[10]Reasons [43], quoting Bunnings (2011) 82 NSWLR 420, 455 [117] (citations omitted).

[11]Reasons [44], quoting Bunnings (2011) 82 NSWLR 420, 458 [130].

[12]Reasons [41], citing Singer Manufacturing Co v Clark (1879) 5 Ex D 37. In that case, the pledgee was also held liable for conversion because, ‘after notice of the plaintiff’s title and demand [for possession], the pledgee returned the goods to the pledger’: at 42.

The trial judge rejected the applicant’s contention that it was merely an unauthorised possessor of the diamonds, and could not be liable in conversion unless and until the respondent demanded delivery-up of the diamonds and it refused that demand; holding that the lack of a demand and refusal was irrelevant.[13]
[13]Reasons [45]–[46].

The trial judge then noted the respondent’s contention that there was more than mere possession in this case because the applicant:

did not acquire possession of the diamonds in any lawful way. Rather than merely possessing the diamonds, it transferred them to a secure bank vault safe, retained them as security for loans advanced by it, [and] purported to exercise a potential future right of sale upon default of the loans by Mr Ben-Simon …[14]

[14]Ibid [47]. The reference to the applicant purporting to exercise a ‘potential future right of sale upon default’ is an error. The evidence was that the applicant offered the diamonds for sale on Ben-Simon’s behalf; and that offer was made after Ben-Simon had repaid the loans and re-taken possession of the diamonds.

The trial judge also noted that the fact the applicant returned the diamonds to Ben-Simon when the loans were repaid was contended by the respondent to be a demonstration of ‘the extent of the control exercised by [the applicant] over the diamonds’.[15]
[15]Ibid [51].

The trial judge’s conclusion involved acceptance of these contentions on the part of the respondent, as follows:

I accept on the evidence that it was Mr Mendieta who had control over where the diamonds went when he was in possession of them. He determined where they were to be kept, to whom they would be given and when they would be returned to Mr Ben-Simon. He clearly had control and possession over the diamonds which was repugnant to the interests of the plaintiff. Here there was conversion.[16]

This was the trial judge’s elaboration of the proposition noted at para 16(5) above.

[16]Ibid [55].

We turn to consider the competing submissions of the parties.

Applicant’s submissions

In summary, the applicant contends that the trial judge erred by not applying a decision of the Court of Appeal in England,[17] referred to with approval by the Court of Appeal in New South Wales,[18] which held that a pledgee in circumstances such as the present does not commit the tort of conversion. It contends that those cases hold that, for a pledgee to be liable for conversion, it must do something more than merely take possession of the relevant goods on the security of the pledge — for example, on default by the pledgor in paying the secured debt, exercising the pledgee’s security by selling and delivering the goods to the purchaser;[19] or, while the goods are in the pledgee’s possession, refusing a demand by the owner for delivery-up of the goods.[20] In such cases, the conduct of the pledgee after taking possession of the goods will constitute an intentional act which is repugnant to the owner’s right to immediate possession.
[17]Spackman v Foster (1883) 11 QBD 99 (‘Spackman’).
[18]Bunnings (2011) 82 NSWLR 420.
[19]Consolidated Co v Curtis & Son [1892] 1 QB 495, 498 (‘Consolidated Co’).
[20]Bunnings (2011) 82 NSWLR 420, 454–5 [117].

But the same cannot be said of a pledgee’s conduct in returning the goods to the pledgor on payment of the secured debt, as here. As to that situation, the applicant contends that the respondent did not allege that the return of the diamonds to Ben-Simon was an act of conversion, and the trial judge did not hold that it was; accepting the respondent’s submissions only that returning the diamonds to Ben-Simon on repayment of the loans ‘demonstrate[d] the extent of the control exercised by [the applicant] over the diamonds’.[21] Thus, the respondent’s case is that the applicant should be liable in conversion for the ‘window of time’ it was in possession of the diamonds.
[21]Reasons [51], see also [52]–[55].

As the applicant correctly points out, the critical finding by the judge was that its ‘control and possession’ of the diamonds was ‘repugnant to the interests of the plaintiff’.[22] That control was illustrated, his Honour found, by Mr Mendieta’s ability to determine where the diamonds ‘were to be kept, to whom they would be given and when they would be returned to Mr Ben-Simon’;[23] ‘the diamonds be transferred to a safety deposit facility.[24] Specifically, the judge found that the applicant refused to release the diamonds to Ben-Simon until it completed an accounting, confirming that the secured loans had been repaid;[25] and only gave the diamonds back to Ben-Simon when so satisfied.[26]
[22]Ibid.
[23]Ibid.
[24]Ibid [47]; where the trial judge referred to the respondent’s submissions to this effect. This fact is agreed between the parties.
[25]Ibid [52].
[26]Ibid [53]–[54].

The applicant’s contention, however, is that the factors evidencing its control of the diamonds were all incidental to its ‘mere possession’ of them. In support of its contention, the applicant placed principal reliance on the decision of the English Court of Appeal in Spackman,[27] and its approval by Allsop P in the New South Wales Court of Appeal in Bunnings.
[27]Spackman (1883) 11 QBD 99.

In Spackman, the plaintiffs were the owners of title deeds. A third person fraudulently took possession of the title deeds and deposited them with the defendant to secure repayment of a loan. That arrangement was similar to the pledge of the diamonds in this case.[28] The defendant had possession of the title deeds for 23 years. When the plaintiffs discovered this, they demanded possession of the title deeds. The defendant refused and, in defence to the plaintiffs’ claim in conversion, pleaded the statute of limitations. The Court of Appeal held that the statute could not be relied upon because, until demand and refusal, the plaintiffs had no cause of action for conversion.
[28]Except that the pledgor originally took possession of the title deeds fraudulently, a matter of no present moment.

Grove J (Stephen and Day JJ concurring) held that, because the defendant did not know that the pledgor did not own the title deeds when they were deposited as security for the loan, he held them against the pledgor, but not against the plaintiffs as owners. Thus, until demand and refusal, there was no conversion, because:

[t]here was no injury to the property which would render it impossible to return it, nor claim of title to it, nor claim to hold it against the owner. The defendant was somewhat in the position of a finder of lost property, and the trover or finding is innocent unless it is followed by conversion … On the whole, I think there was no conversion, and consequently no right of action against which the statute would run till the demand and refusal to give up the deeds.[29]

[29]Spackman (1883) 11 QBD 99, 101.

The principal case relied upon by the defendant in Spackman was M’Combie v Davies,[30] which it contended had the effect that the defendant converted the title deeds upon taking possession of them, as that conduct was ‘hostile to the plaintiffs’.[31] In rejecting this contention, Grove J described the judgment of Lord Ellenborough CJ in M’Combie in the following terms:

Lord Ellenborough says that assuming to oneself the property and right of disposing of another man’s goods is a conversion, but that was not the case here, for all the defendant assumed was the right of safe keeping against the person depositing till the amount advanced should be repaid, but he did not in any other respect assume to himself the right of disposing of another man’s goods which Lord Ellenborough said would amount to conversion.[32]

[30](1805) 6 East 538 (‘M’Combie’).

[31]Spackman (1883) 11 QBD 99, 100 (in argument).

[32]Ibid 101 (emphasis added).

In Bunnings, Allsop P (Giles and Macfarlan JJA agreeing) cited Spackman as authority for the proposition that: ‘Mere unauthorised possession of another’s chattel is not a conversion of it … For possession or keeping to be a conversion a demand is required …’[33] More will be said of this case later in our analysis of the rival contentions.
[33]Bunnings (2011) 82 NSWLR 420, 455 [117] (citations omitted).

The applicant also relies on the decision of Bigham J in The Union Credit Bank Ltd v The Mersey Docks and Harbour Board.[34] Three cases were heard and determined together. For present purposes, only the third proceedings is relevant, although some mention must be made of the second proceeding also.
[34][1899] 2 QB 205 (‘Union Credit Bank’).

In the second case, the owner of 18 hogsheads of tobacco lawfully pledged them to the plaintiff bank (‘Union Credit’) as security for advances. The hogsheads were warehoused by the defendant Dock Board in the name of the owner, but he transferred them into the name of Union Credit in the Dock Board’s records. From that time, until the advances were repaid, Union Credit was entitled to possession of the hogsheads against the owner. When the owner repaid part of the advances, Union Credit signed a ‘delivery-order form’ issued by the Dock Board. The order was complete on its face. It authorised the Dock Board to release four out of the
[35]Ibid 212–13.
18 hogsheads to the owner. After signature by Union Credit, the owner fraudulently altered the form so as to authorise transfer of all 18 hogsheads into his name in the Dock Board’s records. He then obtained all 18 hogsheads and disappeared. Union Credit sued the Dock Board. There having been no carelessness by Union Credit in signing the form, Bigham J held that the Dock Board was liable in trover to Union Credit by reason of the transfer of the 14 hogsheads which the fraudulent owner had not been entitled to redeem by his part payment.[35]

We come to the third proceeding. Nine of the 14 hogsheads were then unlawfully pledged by the fraudulent owner (‘N’) to the North and South Wales Bank Ltd (‘the defendant bank’) as security for a loan. Following the giving of the pledge, N signed a delivery-order form transferring the nine hogsheads into the name of the defendant bank in the Dock Board’s records. Before the fraud was discovered, N repaid the loan and the defendant bank signed a delivery-order form to the Dock Board, authorising N to take possession of the nine hogsheads, which he did. He then made away with the goods. Union Credit sued the defendant bank in conversion.

Because he had already decided that the Dock Board was liable to Union Credit for the value of the 14 hogsheads, Bigham J considered it unnecessary to decide the claim against the defendant bank, except as to costs. In that context, he considered whether the defendant bank was also liable in conversion for the nine hogsheads. Without reference to authority, Bigham J held that the defendant bank was not guilty of conversion, stating:

The defendant bank never interfered physically with the goods at all. They made an advance to [N] on what they erroneously supposed to be a pledge in their favour of the nine hogsheads. I say erroneously, because in point of law they got no pledge at all, [N] not being legally in a position to give a pledge. The only right [N] had in the goods was the right to redeem them from the plaintiffs — an equity. [N] procured a transfer of the nine hogsheads in the Dock Board books in favour of the defendant bank and I presume handed to the defendant bank the Dock Board’s warrant for the goods. This warrant the defendant bank held as their security until such time as [N] came to redeem it. Then they did the only act which can in any way be described as a conversion: they signed a delivery order addressed to the Dock Board authorising the delivery of goods to [N] and [N] by means of the order got possession. But all this took place before the defendant bank heard or knew anything of the plaintiffs’ title. It was not until some time after the whole transaction between themselves and [N] was at an end that any demand was made upon the defendant bank by the plaintiffs, and when that demand was made they were of course unable to comply with it, because they had already [returned the hogsheads to [N]]. … Of course it would be different if, before [a person in N’s position] repossessed himself of the goods the true owner were to demand possession. If he did so and possession were refused, [a party in the position of the defendant bank] would be guilty of conversion.[36]

[36]Ibid 215–16.

Before setting out the respondent’s contentions, we note that Spackman was approved in Miller v Dell,[37] another case involving a statute of limitations defence. The case involved an initial conversion by the plaintiff’s son of a deed of lease, which the son deposited as security for a loan from a lender who took without knowledge that the plaintiff was the owner of the lease. When the lender became bankrupt, his trustee assigned the debt to the defendant and handed the lease over to him. Subsequently, the plaintiff demanded the lease from the defendant, and upon his refusal to return it, brought an action for detinue and conversion. If the lender’s initial receipt of the lease was a conversion by the lender — the defendant submitted that it was, relying upon M’Combie — it occurred outside the limitation period. The later alleged conversion by the trustee of the lender’s estate in assigning the debt and delivering the lease to the defendant and the defendant’s refusal to return the lease on demand from the plaintiff, each occurred within the limitation period. For that reason, the limitation defence failed. The question whether the lender had earlier converted the title deeds by receiving them was beside the point.
[37][1891] 1 QB 468.

Esher MR made the point that the Statute of Limitations was only relevant to the proceeding as between the plaintiff and the defendant. It was in that context, not with reference to the earlier transaction, that his Lordship said this:

The other case which was cited to us, that of Spackman v Foster, seems to be applicable to the present, especially upon the lease, being a document of title, is not a mere chattel, and that therefore where title deeds are fraudulently taken from the rightful owners and deposited with a third person, until demand and refusal to give up the deeds to the real owners they have no right of action against the third persons against which the statute would run.[38]

[38]Miller v Dell [1891] 1 QB 468, 471–2 (‘Miller’).

Kay LJ said this:

[The lender] became bankrupt, and within six years of the commencement of this action the trustee of his estate sold the debt to the defendant and handed over the lease to him. Subsequently the plaintiff, who was the real owner of the leasehold interest, and therefore of the lease, demanded it from the defendant, who refused to give it up. These facts seem to be almost identical with those in Spackman v Foster.[39]

[39]Ibid 473.

His Lordship then referred to the passage in the judgment in Spackman in which Grove J said:

The defendant was somewhat in the position of a finder of lost property, and the trover or finding is innocent unless it is followed by conversion … On the whole, I think that there was no conversion, and consequently no right of action against which the statute would run till the demand and refusal to give up the deeds.[40]

[40]Ibid.

It was with these remarks that Kay LJ stated that he entirely concurred, and that in the case before him, ‘there was no cause of action against the defendant upon which the statute could operate until the demand of the lease and refusal by him to give it up’. In the event, Esher MR and Kay LJ held that Spackman was relevant and applicable in the transaction as between the defendant, to whom the lease was assigned, and the plaintiff.

Respondent’s submissions

Before recording the respondent’s contentions, we note that the respondent contended in its written case that the trial judge’s decision could be supported on the basis of his factual findings that Mendieta did not act in good faith when he received the diamonds, and it could not therefore be said that he took possession of them lawfully. We do not accept those contentions, which were effectively abandoned in oral submissions and were not supported by a notice of contention.

We note in any event that the trial judge made positive findings that:

(1) Mendieta did not know that the diamonds belonged to the respondent;[41]

(2) Ben-Simon told Mendieta that he owned the diamonds;[42] and

(3) the respondent and Mendieta had never been in contact prior to the proceedings below.[43]

[41]Reasons [16].

[42]Ibid.

[43]Ibid [16], [36].

On the other hand, perhaps inconsistently, the trial judge found that:

(1) Mendieta’s oral evidence below was ‘not convincing to demonstrate that [he] was of the opinion that … Ben-Simon was the owner of the diamonds’;[44]
[44]Ibid [25].

(2) Mendieta ‘did not care whether … Ben-Simon was the owner’;[45] and

(3) Mendieta’s:

lack of enquiry, lack of documentation, poor tracking of the diamonds pledged for loans and the haphazard way that he went about his business raises serious questions about his bona fides as to the ownership and of … Ben-Simon’s authority to deal with the diamonds.[46]

[45]Ibid [74].

[46]Ibid [118] (emphasis added).

The latter two findings were made in the context of considering various defences raised by the applicant in the event that it was liable in conversion. Read in context, these findings do not undermine the trial judge’s positive finding that Mendieta did not know that the respondent owned the diamonds. As the respondent’s counsel acknowledged in oral argument, liability for the tort of conversion does not depend on concepts of negligence, suspicion or constructive knowledge or notice. As appears below, even where a person comes into possession of goods knowing they belong to another, provided that the coming into possession was not unlawful, there is no liability in conversion unless and until the recipient does something repugnant to the owner’s title — mere possession is not enough.[47]
[47]Bunnings (2011) 82 NSWLR 420; discussed in detail below.

The respondent contends that the trial judge correctly held the applicant liable for its possession and control as pledgee. It places particular reliance on the fact that, as pledgee, the applicant had a right to sell the diamonds if Ben-Simon did not repay the loans. In support of its contentions, the respondent contends that Spackman was wrongly decided, as it misunderstood the ratio of M’Combie; and the result was influenced by its limitation of actions context.

We do not accept that contextual criticism. A limitation of actions context raises important questions of substantive legal principle concerning the tort of conversion. For example, in Clayton v Le Roy,[48] Fletcher Moulton LJ said, concerning a detinue claim, but in words also applicable to a conversion claim, that:

If there is a demand by the owner from the person in possession of the chattel and a refusal on the part of the latter to give it up, then in six years the remedy of the owner is barred; it is therefore very important for the owner that the law should lay down the principle that some clear act of that kind is required to constitute a cause of action in detinue. It would be [depriving] the real owner of his rights, if the law did not thus insist upon some definite act or deliberate withholding as being necessary preliminaries to the arising of this cause of action. If something less were sufficient, the Statute of Limitations might commence to run against the true owner without his knowledge.[49]

[48][1911] 2 KB 1031.

[49]Ibid 1048 (emphasis added).

In M’Combie, the plaintiff employed a broker to purchase tobacco for him. The broker purchased the tobacco in his own name and placed it in the King’s warehouse, where it was held in the broker’s name pending payment of the applicable duties. While the tobacco was in the warehouse, the broker pledged it with the defendant as security for a loan and transferred the tobacco into the defendant’s name in the records of the King’s warehouse. Later, the plaintiff demanded delivery of the tobacco by the defendant, who refused to deliver the tobacco to the plaintiff until repayment of the loan to the broker. The duties due on the tobacco remained unpaid. The plaintiff sued the defendant in conversion, contending that its refusal to deliver up the tobacco on demand was a conversion, or alternatively on the basis that, by taking constructive possession of the tobacco from the broker, the defendant assumed dominion over it and thus converted the tobacco to its own use.[50]
[50]M’Combie (1805) 6 East 538, 538–40.

Lord Ellenborough CJ (Lawrence and Le Blanc JJ agreeing) is recorded as having said that the alternative case ‘was the true ground to put the plaintiff’s case upon’.[51] As to the alternative case which Lord Ellenborough CJ accepted, he said:

But taking the case higher up on principle, I think that the defendant’s acts amount to a conversion … the very assuming to oneself the property and right of disposing of another man’s goods is a conversion: and certainly a man is guilty of conversion who takes my property by assignment from another who has no authority to dispose of it; for what is that but assisting the other in carrying his wrongful act into effect.[52]

[51]Ibid 540.

[52]Ibid (emphasis added, citations omitted).

The respondent relies on the fact that M’Combie is cited as stating the correct legal position, in preference to Spackman, in the most recent edition of Fleming’s The Law of Torts, in the following terms:

Anyone who, without lawful justification, takes a chattel out of another’s possession without consent and with the intent to exercise dominion over it, commits conversion …. The same also goes for anyone receiving possession of the goods from someone not entitled to give it. Thus where goods are sold or given away by someone not entitled to do so, then (unless the transaction is sufficient to pass good title to the recipient despite the transferor’s lack of it) the recipient is as liable as the transferor. The tort is complete on taking or receipt: hence there is no need for any prior demand for the return of the goods. Nor is it necessary that the defendant should have intended to acquire full ownership: taking a thing … as a pledgee[53] … is sufficient.[54]

[53]The footnote in the text is as follows: ‘M’Combie v Davies (1805) 6 East 538 (cf Spackman v Foster (1883) 11 QBD 99). By statute in England: Torts (Interference with Goods) Act 1997 (UK) s 11(2)’.

[54]Carolyn Sappideen and Prue Vines (eds), Fleming’s The Law of Torts (LawBook, 10^th ed, 2011) 70 [4.100] (emphasis added; some citations omitted) (‘Fleming’). Cf the position stated in the 9^th edition of this text where Spackman, without any reference to M’Combie, was cited in support of the propositions that: (1) ‘If lawfully acquired, detention alone does not become a wrong in the absence of some manifestation of intent to keep them adversely or in defiance of rights’; and (2) an innocent pledgee’s ‘mere acceptance of goods by way of security is not deemed sufficiently unequivocal to constitute conversion’: John G Fleming, The Law of Torts (LBC, 9^th ed, 1998) 64.

On this basis, the respondent contends that Union Credit Bank[55] was also wrongly decided. Given that in the third proceeding the nine hogsheads received under the pledge had also been transferred into the defendant bank’s name in the Dock Board’s records upon the pledge being given, the decision in Union Credit Bank appears to be inconsistent with the decision in M’Combie, which is in this respect indistinguishable on its facts. In both cases, the fraudulent pledgor transferred the registration of the goods in his name at the relevant warehouse into the name of the pledgee. This gave the pledgee the right to demand the goods from the warehouse. Thus, as between the pledgee and the warehouse, the pledgee was entitled to immediate possession of the goods.
[55][1899] 2 QB 205, 215–16.

Finally, in support of its contention that M’Combie should be preferred to Spackman as the governing authority in pledge cases like the present, the respondent relies also on the fact that M’Combie was cited with approval by Redlich J in Johnson Matthey (Aust) v Dascorp Pty Ltd.[56]
[56](2003) 9 VR 171, 230 [211] (‘Johnson Matthey’).

Did the applicant convert the respondent’s diamonds?

Any conflict in the English authorities was resolved by the UK Parliament. Following a Law Reform Committee report (‘1971 Law Reform Report’),[57] the Torts (Interference with Goods) Act 1977 (UK) was enacted. Section 11(2) of that Act provides:

Receipt of goods by way of pledge is conversion if the delivery of the goods is conversion.

In the present case, Ben-Simon converted the diamonds by delivering them to Sell Your Gold. If s 11(2) were applicable, it would render Sell Your Gold liable in conversion by virtue of its receipt of the diamonds.

[57]United Kingdom Law Reform Committee, Eighteenth Report (Conversion and Detinue), Cmnd 4774 (1971).

In the 1971 Law Reform Report, no mention was made of the conflict on the authorities. Rather, it was accepted that the law was that stated in Spackman and approved in Miller; but it was said that this law was difficult to justify in light of the accepted principle that ‘it is a conversion to receive a chattel by way of a purported sale under which the title does not pass, even if the purchaser acted in good faith and without knowledge of any adverse claim’.[58] Although a law reform report is not an authority, it can provide authoritative evidence as to the state of the law at the time of its publication.[59] Relevantly, the Report in question was prepared by a most distinguished committee, including Lord Pearson as chairman, Lord Diplock, Buckley and Orr LJJ and Megarry J.
[58]Ibid 15 [42].
[59]See, eg, PGA v The Queen (2012) 245 CLR 355, 394 [106].

In England, however, receipt of goods under transactions which are similar to, but do not constitute, a pledge does not necessarily establish a conversion. In Marcq v Christie Manson & Woods Ltd (trading as Christie’s),[60] a painting was stolen in 1979 and registered as stolen on the Art Loss Register. In 1997, Christie’s took possession of the painting from a prospective seller, who instructed them to sell it at auction on the terms of their conditions of business. Christie’s accepted those instructions and catalogued and advertised the painting, offering it for public auction. The painting was not sold at auction and Christie’s returned it to the prospective seller. There was no allegation that Christie’s lacked good faith or had notice of the fact that the painting was stolen. The owner sued Christie’s, claiming that it was liable for the tort of conversion of the painting. In the absence of any claim that Christie’s lacked good faith or had notice of the owner’s title, the claim was struck out as disclosing no reasonable cause of action. An appeal to the Court of Appeal was dismissed. The judgment of the Court of Appeal was delivered by Tuckey LJ (Keene and Peter Gibson LJJ agreeing).
[60][2004] QB 286 (‘Christie’s’).

Tuckey LJ defined the question for determination by the Court of Appeal in the following terms:

If a painting is unsold at auction and returned to the prospective seller, who is not in fact its true owner, is the auctioneer, who has acted in good faith and without notice, liable in conversion or bailment to its owner?[61]

[61]Ibid 294 [1].

The answer to this question was: no. In order to understand the significance of this case for the present, it is necessary to set out more of the facts and to set out the relevant contentions which were rejected by the Court of Appeal.

It is first necessary to set out the contractual terms on which Christie’s accepted the stolen painting for auction:

(1) The prospective seller agreed to pay Christie’s its packing, shipping, insurance and ‘catalogue illustration’ costs, together with five percent of the painting’s insured value as a contribution to its general expenses if the painting was not sold.[62]
[62]Ibid 295–6 [5].

(2) The prospective seller undertook to Christie’s that he was the sole owner of the painting, with an unrestricted right to transfer title to a buyer free from all third party rights or claims.[63]

(3) If the painting was withdrawn from the auction, the prospective seller agreed to pay Christie’s a liquidated sum of 10 per cent of the insured value, plus Christie’s agreed commission if the lot had been sold at the insured value, together with tax and other expenses.[64]

(4) If the painting was unsold at auction, the prospective seller could not collect the painting until it paid the above amounts due to Christie’s and, if not paid within 90 days and the painting collected, Christie’s had the right to dispose of the painting as it saw fit and then to account to the prospective seller for the proceeds of sale, having deducted all amounts due.[65]

[63]Ibid.

[64]Ibid.

[65]Ibid.

In summary, Christie’s had the contractual right to sell the painting to satisfy its auctioneer’s lien for unpaid charges and agreed liquidated damages.

The owner contended that Christie’s were strictly liable in conversion in these circumstances.[66] Tuckey LJ rejected that contention, for the following reasons. First,[67] he accepted the statement by Lord Nicholls of Birkenhead in Kuwait Airways Corporation v Iraqi Airways Co [Nos 4 and 5],[68] that:
[66]Ibid 297 [7].
[67]Ibid [13].
[68][2002] 2 AC 883 (‘Kuwait Airways’).

Conversion of goods can occur in so many different circumstances that framing a precise definition of universal application is well nigh impossible,[69]

but noted that Lord Nicholls nevertheless went on to state the basic features of the tort of conversion in the following terms:

In general, the basis features of the tort are threefold. First, the defendant’s conduct was inconsistent with the rights of the owner (or other person entitled to possession). Second, the conduct was deliberate, not accidental. Third, the conduct was so extensive an encroachment on the rights of the owner as to exclude him from use and possession of the goods. The contrast is with lesser acts of interference.[70]

[69]Ibid 1084 [39].

[70]Ibid.

Tuckey LJ accepted that the first two features were present, but decided that the third was not present in the circumstances of the case. In reaching that conclusion, Tuckey LJ reviewed a number of cases concerning the alleged liability of auctioneers for conversion[71] and concluded that:

it is interference with the title or ownership of the chattel which counts for conversion. Thus it is the act of delivery following sale which makes the auctioneer liable in conversion since that is what interferes with the title or ownership of the goods.[72]

[71]Christie’s [2004] QB 286, 299–301 [15]–[20].

[72]Ibid 300 [19], citing Consolidated Co [1892] 1 QB 495, 497–8 (emphasis added).

Second, while recognising that an auctioneer’s intention is to sell goods entrusted for sale, that intention does not constitute a conversion. For the auctioneer to be liable for conversion there must be a sale and delivery of the goods to the buyer. Thus, it is not the auctioneer’s intention which attracts liability for conversion but ‘what he does in relation to the goods which determines liability’.[73] Thus, mere receipt of goods by an auctioneer for the purposes of sale by auction does not amount to conversion.[74]
[73]Ibid 302 [24] (emphasis in original).
[74]Ibid.

Third, Tuckey LJ held that the contractual terms on which Christie’s received the painting did not change this position. The mere existence of those contractual rights governed the relationship between Christie’s and the thief, but had no effect upon the plaintiff’s legal ownership of the goods.[75] It was only if Christie’s exercised their contractual rights against the plaintiff’s interests that they may have been liable in conversion: ‘What Christie’s may do in exercising their contractual rights may impact upon the [plaintiff’s] title but the mere existence of those rights will not’.[76]
[75]Ibid 302 [25].
[76]Ibid (emphasis added).

Fourth,[77] Tuckey LJ considered that this position was consistent with the decision of Millett J in Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd[78] that:

Demand is not an essential pre-condition of the tort: what is required is an overt act of withholding possession of the chattel from the true owner. Such an act may consist of a refusal to deliver up the chattel on demand, but it may be demonstrated by other conduct, for example by asserting a lien. Some positive act of withholding, however, is required; so that, absent any positive conduct on the part of the defendant, the plaintiff can establish a cause of action in conversion only by making a demand.[79]

[77]Ibid 305 [35].

[78][1992] 1 WLR 1253.

[79]Ibid 1257–8. This statement by Millett J followed his acceptance of the general proposition that ‘mere unpermitted keeping of another’s chattel is not conversion of it’.

Fifth, as Christie’s had not exercised its rights under the contractual terms ‘to the detriment of the [plaintiff’s] title’,[80] it was not liable in conversion.
[80]Christie’s [2004] QB 286, 303 [27].

The reasoning in Christie’s is consistent with the applicant’s principal contentions that:

(1) a mere pledgee of goods is not immediately liable in conversion upon receipt of those goods, or by returning the goods to the wrongful pledgor upon payment of the debt secured by the pledge; but

(2) if a pledgee does something with the goods which is inconsistent with the rights of the owner then there will be conversion.

So in a case such as the present, the applicant contends that for it to be liable in conversion it needed to do something to enforce its rights as pledgee. For example, the applicant would have been liable for conversion if:

(1) the respondent had discovered it had possession of the diamonds, demanded the applicant deliver them up, and the applicant refused that demand;

(2) on default in payment of the secured loan, it sold the diamonds to a third person and completed that sale by delivery; or

(3) it took steps to register itself — or took a transfer of registration — as the owner or person entitled to possession of the diamonds, such as the conduct of the pledgee in M’Combie in becoming registered in the records of the King’s warehouse as the person entitled to deal with the tobacco.

We agree with the applicant’s contentions. They are supported by the reasoning in Christie’s. More importantly, they are consistent with the reasons of Allsop P in Bunnings when speaking for the New South Wales Court of Appeal.

In that case, Bunnings received deliveries of goods on pallets owned by Chep. Chep hired its pallets to suppliers of goods. The suppliers used the pallets to deliver goods in bulk form to purchasers. A hirer was contractually liable to Chep to return any pallet which it hired, not necessarily the actual pallet, after use. All the hirings constituted bailments at will. As it turned out, according to Chep, many pallets found their way into the distribution system, but hiring fees ceased to be paid on them. Such pallets were described by Chep as ‘non-commercial pallets’, or ‘NCPs’. A purchaser of goods such as Bunnings would not know, at the time of accepting delivery of a pallet of goods, whether that pallet was subject to a subsisting hire, or was an NCP.

Over a period of time, Chep became very concerned at the number of NCPs which were in circulation. It came to believe that a very large number of such pallets were in the hands of Bunnings. It sought to negotiate with Bunnings either an arrangement by which there was an audit of pallets in the possession of Bunnings, so as to determine which of them were NCPs, and that Bunnings establish its own account with Chep so as to ensure that all pallets in its possession were subject to a subsisting hiring agreement; or else that Bunnings return the pallets in its possession to Chep. Negotiations between the parties continued for years, but without avail. In August 2006, Chep made an unequivocal demand on Bunnings for the return of all its pallets. Bunnings did not comply. Chep sued Bunnings in conversion.

There were two different periods involved in the litigation. The first was the period after demand had been made. The second was the period before demand.

The position with respect to the period after demand was made was clear-cut. The claim for conversion being made out, Chep was entitled to relief by way of damages. Allsop P said this:

the consequence of my analysis of the events and communications of 2006 are that Bunnings failed to deliver up or make available Chep’s pallets after
8 August 2006 and, as a consequence, its possession and use of them were acts of dominion contrary to Chep’s asserted (and actual) immediate right to possession.
Conversion can, of course, occur by retaining goods after a demand. The act of retention is one that is repugnant to the owner’s right to possession expressed by the call for making available or return of the goods. Mere unauthorised possession of another’s chattel is not a conversion of it.[81]

[81]Bunnings (2011) 82 NSWLR 420, 454–5 [116]–[117] (citations omitted).

It will be noted that his Honour cited a number of cases, including Spackman, in this connection.

As to the period of time before demand was made, a number of different factual circumstances fell for consideration. The trial judge, in a passage cited by Allsop P, had identified the position as follows:

In short, as Chep submitted, Bunnings’ use of Chep pallets over the Relevant Period included the following:
(1)The display of goods for sale in promotional displays and displays at aisle-ends registers etc. As Chep submitted, the display of goods on pallets was an integral part of the warehouse retail concept.
(2)For storing in high rise stock not immediately needed.
(3)For storing heavy goods until needed, so as to avoid the safety and cost issues associated with unloading, handling and restacking those goods.
(4)For swapping with suppliers who delivered goods on Chep pallets, so as to avoid the time, cost and other problems of unloading goods delivered on pallets from those pallets forthwith upon delivery.
(5)For transporting surplus stock (on the pallets on which it was delivered) between stores or between stores and delivery centres.
(6)From time to time, for palletising and delivering to stores imported goods received at distribution centres.[82]

[82]Ibid 434 [31].

Allsop P highlighted the critical reasoning of the trial judge:

At [trial reasons] [195] Chep was found to have made out its case in conversion in relation to any NCPs as were from time to time in its possession. His Honour said at [195]–[196]:
[195]In my view, Chep has made out its case in conversion, in relation to such Non-Commercial Chep Pallets (ie, Chep pallets not at any time on hire to a Chep customer) as were in Bunnings’ possession from time to time over the Relevant Period. That is because, as Mr Davis conceded, Bunnings understood at all material times over the Relevant Period that Chep did not consent to Bunnings’ using those pallets for the purposes of its business, unless of course Bunnings entered into a hire agreement: something that Bunnings was not prepared to do.
[196]It follows, in my view, that for Bunnings to continue to use the pallets, for the various purposes described above, was a conversion because it was inconsistent with Chep’s immediate right to possession of those pallets. Of course, not all the pallets used in that way were Non-Commercial Chep Pallets and not all of that use amounts to conversion. But if, as I have concluded, there were at all material times in Bunnings’ possession substantial quantities of Non-Commercial Chep Pallets, the various uses that Bunnings made of those pallets amounted to conversion: particularly in the face of Chep’s clear and repeated statements of its position.

The uses to which the trial judge had referred at both [195] and [196] were all the uses described in [114] of his reasons set out at [31] above.[83]

[83]Ibid 454 [40]–[41].

Contrary to the conclusion of the trial judge, Allsop P concluded that only one of the six uses by Bunnings of the Chep pallets in its possession before the demand for return was made constituted a conversion. His Honour’s conclusions can be summarised as follows:

(1) The display of the goods delivered on the pallets for sale in promotional displays and displays at aisle-ends, registers etc. As Chep submitted, the display of goods on pallets was an integral part of the warehouse retail concept. It was ‘no more than possessory’. It was not an act of dominion repugnant to Chep’s right of possession. This use was not a conversion.[84]
[84]Ibid 463 [157].

(2) For storing stock on the pallets that was not immediately needed ‘in high rise’. It was a holding of the pallets, and no more. This use was not a conversion.[85]
[85]Ibid 462 [151].

(3) For storing heavy goods until needed, so as to avoid the safety and cost issues associated with unloading, handling and restacking those goods. Again, it was a holding of the pallets as delivered with goods on them. This use was not a conversion.[86]
[86]Ibid 462 [155].

(4) For swapping with suppliers who delivered goods on Chep pallets, so as to avoid the time, costs and other problems of unloading goods delivered on pallets from those pallets forthwith upon delivery. Absent the refusal of a demand for return, this use was not a conversion.[87]

(5) For transporting surplus stock (on the pallets on which it was delivered) between stores or between stores and delivery centres. This was no more than possession, not an act repugnant to Chep’s rights of ownership or possession. This use was not a conversion.[88]

(6) From time to time the palletising and delivering to stores imported goods received at distribution centres. The pallets were thus being used as if they did not belong to anyone other than Bunnings. This use was a conversion.[89]

[87]Ibid 462 [151].

[88]Ibid 463 [156].

[89]Ibid 463 [161].

In summary, while the goods which were delivered on pallets remained on those pallets, Bunnings’ use of the pallets did not amount to a conversion. On the other hand, category (6) of the uses involved Bunnings using pallets for its own purposes, after the goods delivered on those pallets had been unloaded by Bunnings. From that time, Bunnings ceased to be in mere possession of the pallets for the purpose authorised by their circulation under the Chep ‘pooling system’, and used the pallets for its own private purposes to move other goods. Allsop P summarised the distinction of category (6) from the other categories of uses in the following terms:

The above distinction draws force from the character of the acts done. On the one hand the pallets are held and placed with goods as delivered in the ordinary course of business, or exchanged promptly or held available for exchange. These acts, in the commercial context of the operation of a pallet pool by Chep, releasing into commerce fungible goods to facilitate transport and handling of goods, do not bespeak an act of dominion contrary to the true owner’s immediate right of possession. On the other hand, once a pallet is unloaded, belonging as it does to Chep, then to use it for one’s own purposes, unconnected with the circumstances in which its possession was (not unlawfully) transferred, is to exercise dominion over it as one’s own.[90]

[90]Ibid 464 [162] (emphasis added).

Allsop P reached his conclusions on the basis of a careful review of the relevant authorities.[91] He summarised his conclusions as follows:[92]

Conversion can, of course, occur by retaining goods after a demand. The act of retention is one that is repugnant to the owner's right to possession expressed by the call for making available or return of the goods. Mere unauthorised possession of another's chattel is not a conversion of it.[93] For possession or keeping to be a conversion a demand is required.[94]

[91]Ibid 454–61 [117]–[147].

[92]Ibid 454-5 [117] (citations in original).

[93]Clayton v Le Roy [1911] 2 KB 1031, 1048–50; Barclay's Mercantile Business Finance Ltd v Sibec Developments Ltd [1992] 1 WLR 1253, 1257; Spackman (1882) 11 QBD 99, 100-1.

[94]Clayton v Le Roy [1911] 2 KB 1031, 1052; General and Finance Facilities Ltd v Cooks Cars (Romford) Ltd [1963] 1 WLR 644, 649.

On ordinary principles of comity, we would apply his Honour’s analysis of the common law position unless persuaded that it was clearly wrong.[95] Not only was no such submission advanced, but we respectfully agree with the analysis. In particular, we agree with Allsop P’s view that Spackman — which is indistinguishable from the facts of this case — should be characterised as one of ‘mere unauthorised possession of another’s chattel’ which does not amount to a conversion.[96]
[95]R v Falzon (2018) 357 ALR 394, 406-7 [49].
[96]Bunnings (2011) 82 NSWLR 420, 455 [117].

We reject the respondent’s contention that Spackman should not be followed because it is inconsistent with M’Combie, and that M’Combie should be preferred as the governing authority in a pledge case such as the present. First, we do not accept that M’Combie is inconsistent with Spackman. In M’Combie, the goods were registered in the pledgee’s name in the King’s warehouse, thus giving the pledgee a form of informal title to (or property in) the goods which was repugnant to the owner’s title. In that context, Lord Ellenborough CJ categorised the pledgee’s actions as ‘assuming to oneself the property’ and taking the owner’s ‘property by assignment’ from the pledgor.[97] That situation more closely resembles an unauthorised sale and delivery of the goods by the pledgor to the pledgee, which would be a conversion by both. But that is not what happened in this case, where there was mere possession as pledgee on the usual terms of a pledge securing repayment of a loan.
[97]M’Combie (1805) 6 East 538, 540.

Second, this was the sense in which Redlich J cited M’Combie in Johnson Matthey: ‘An assignee who receives property from another who has no authority to assign the same will in general be guilty of conversion upon taking possession’.[98]
[98]Johnson Matthey (2003) 9 VR 171, 230 [211] (emphasis added).

Third, whether or not our analysis of M’Combie is correct, the reasoning of Allsop P in Bunnings accords with that of Tuckey LJ in Christie’s. That reasoning can be applied by analogy to cases of mere possession by a pledgee — such as in Spackman and here. Spackman is consistent with the requirement in both Christie’s and Bunnings that something more than mere possession needs to be proved for liability in conversion. As the cases demonstrate, liability will attach where the innocent possessor either:

(1) deals with the property in the goods — such as by sale and delivery; or

(2) exercises acts of ownership over the goods — such as refusing a demand by the true owner for delivery-up; or using the goods as if they were his own, such as in Bunnings.

Fourth, we adopt Allsop P’s analysis of the often-quoted statement by Cleasby B in Fowler v Hollins,[99] that it is a principle of English law ‘that persons deal with the property in chattels or exercise acts of ownership over them at their peril’.[100] Of that statement, relied upon by the respondents in this case, Allsop P stated:

Two things are to be noted about this passage. First, … his Lordship did not say ‘use chattels’ at their peril but ‘deal with the property in or exercise acts of ownership over [chattels] ... at their peril.’ The reference was dealing with property or exercising ownership. So much can be accepted. The principle of nemo dat quod non habet is a related concept. Secondly, it was not an expression of principle, but a salutary warning of the effect of English Law.[101]

[99](1872) LR 7 QB 616.

[100]Ibid 639.

[101]Bunnings (2011) 82 NSWLR 420, 458 [132] (emphasis in original).

That analysis is consistent with our analysis above, in distinguishing M’Combie from the facts of this case and those in Spackman.

Conclusion

For the above reasons, the applicant is not liable for conversion of the diamonds. That is because:

(1) contrary to the respondent’s submissions, mere receipt of the pledged diamonds by Sell Your Gold did not constitute a conversion; and

(2) on the authorities, the circumstances upon which the judge relied in his reasons,[102] were not such as to constitute conversion of the diamonds by the applicant. That position is not altered by the respondent’s conduct in returning the diamonds to Ben-Simon when the loan was repaid.[103]

[102]See [20] above.

[103]See, eg, Christie’s [2004] QB 286.

Leave to appeal should be granted and the appeal allowed.

Postscript: a need for legislative reform?

That this appeal was necessary, and that its disposition has required detailed analysis of case law extending back to the beginning of the 19^th century, suggest that the time may now have come for a ‘radical reappraisal of the tort of conversion’.[104] This appeal has exposed two striking features of the tort, both of which point to the need for such a reappraisal. The first is the considerable degree of uncertainty — and hence unpredictability — in the application of the current law; the second is the potential for this strict liability tort to work real injustice against innocent parties.
[104]Kuwait Airways [2002] 2 AC 883, 1093 [79].

We deal first with uncertainty. As appears from our reasons, successive
19^th century decisions of the English Court of Appeal came to apparently different conclusions on the point at issue here, namely, whether the mere taking of possession of goods by a pledgee constitutes conversion. Conflicting views on that question were likewise expressed in the successive editions of Professor Fleming’s The Law of Torts to which we have referred.[105] While the ninth edition stated that mere acceptance by an innocent pledgee was ‘not deemed sufficiently unequivocal to constitute conversion’,[106] the current edition (the tenth) states that

taking a thing for the purpose of acquiring a lien in it, or as a pledgee, … is sufficient.[107]

[105]See [47] above and fn 56.

[106]John G Fleming, The Law of Torts (LBC, 9^th ed, 1998) 66, citing Spackman v Foster (1883) 11 QBD 99.

[107]Carolyn Sappideen and Prue Vines (eds), Fleming’s the Law of Torts (LawBook, 10^th ed, 2011) 70 [4.100], citing M’Combie (1805) 6 East 858.

That reasonable views may differ in this way is a reflection of the — necessary — imprecision with which the tort is defined. In Fleming, conversion is defined as

an intentional exercise of control over a chattel which so seriously interferes with the right of another to control it that the intermeddler may justly be required to pay its full value.[108]

In Kuwait Airways, Lord Nicholls said that in order for the defendant’s conduct to be tortious, it must be
so extensive an encroachment on the rights of the owner as to exclude him from use and possession of the goods. The contrast is with lesser acts of interference.[109]

[108]Ibid 66 [4.60] (citations omitted, emphasis added).

[109][2002] 2 AC 883, 1084 [39] (emphasis added).

The most recent appellate exposition in Australia is that given by the New South Wales Court of Appeal in Bunnings. Allsop P said that the ‘essential elements, or basic features’ of the tort involved

an intentional act or dealing with goods inconsistent with or repugnant to the rights of the owner, including possession and any right to possession. Such act or dealing will amount to such an infringement of the possessory or proprietary rights of the owner if it is an intended act of dominion or assertion of rights over the goods.[110]

[110](2011) 82 NSWLR 420, 456 [124] (citations omitted).

Because questions of degree are involved, and because abstract concepts like ‘repugnancy’ and ‘dominion’ can be elusive, there is often real difficulty in determining whether a particular dealing with goods constitutes a sufficiently serious interference with the rights of the owner to give rise to tortious liability. As Allsop P said in Bunnings:

The character of the use involving the intention to exercise dominion can be a fine one to evaluate. There is no requirement for permanent deprivation or an intended act of permanent deprivation … The question of the sufficiency of the act or dealing is the qualitative act of interference — the extent in terms of right, not time.[111]

[111]Ibid 460 [140]–[141] (citations omitted).

The scope for divergent views is nowhere better illustrated than in Penfolds Wines.[112] There the High Court divided on the question whether the defendant’s use of bottles owned by the plaintiff amounted to dealing with them ‘in a manner repugnant to the [plaintiff’s] immediate right of possession’.[113] Latham CJ concluded that it did, holding that the defendant’s filling of the bottles with wine for the purposes of his trade was ‘inconsistent with the dominion’ of the plaintiff as owner of the bottles.[114] Dixon J came to the opposite conclusion, holding that this ‘was not a use of the bottles involving any exercise of dominion over them, however transitory’.[115] And, for Williams J, what was critical to a finding of conversion was that the defendant was on notice of the plaintiff’s ownership of the bottles.[116]
[112](1946) 74 CLR 204.
[113]Ibid 229.
[114]Ibid 219.
[115]Ibid 229.
[116]Ibid 243-4.

That evaluating the character of a particular use can be a matter of fine judgment is further illustrated by the different conclusions which Allsop P reached with respect to the various uses made by Bunnings of the pallets which had come into its possession. For so long as the pallets were used to store goods which had been on the pallets when they arrived, there was no conversion. This was ‘not an act repugnant to Chep’s rights of ownership or possession’.[117] When, however, the pallets were used to carry Bunnings’ own goods, or to store imported goods, these were ‘acts of appropriating the pallets’ and amounted to conversion, albeit temporary.[118]
[117]Bunnings (2011) 82 NSWLR 420, 462 [155].
[118]Ibid 463-4 [161]–[162].

In the absence of real clarity being introduced by legislation, courts and tribunals — especially busy trial courts and tribunals with heavy caseloads and time constraints — will continue to be placed in the difficult position of undertaking such fine evaluations. There is a significant likelihood of error, idiosyncratic results and consequent injustice.

The second reason for thinking that the law of conversion should be reviewed is that the imposition of strict liability can work injustice against innocent parties. The principle of strict liability is, of course, ‘deeply ingrained in the common law’,[119] reflecting the policy of the common law

to afford strong protection from external interference to basic personal and proprietary interests.[120]

As Professor Varuhas has explained:
That the underlying interests are afforded such strong protection attests to and reinforces their fundamental importance: the law signals that these interests are of such importance that it is inexcusable to trespass upon them regardless of whether one does so innocently, benevolently or reasonably, and perhaps whether one knows one is trespassing upon them or not.[121]

[119]Kuwait Airways [2002] 2 AC 883, 1093 [80].

[120]Jason Varuhas, Damages and Human Rights (Hart Publishing, 2016) 18.

[121]Ibid 28.

The stringency of the common law was emphasised by Lord Diplock in Marfani & Co Ltd v Midland Bank Ltd:[122]

At common law, one’s duty to one’s neighbour who is the owner, or entitled to possession, of any goods is to refrain from doing any voluntary act in relation to his goods which is a usurpation of his property or possessory rights in them … [I]t matters not that the doer of the act of usurpation did not know, and could not by the exercise of any reasonable care have known, of his neighbour’s interest in the goods. The duty is absolute; he acts at his peril.[123]

[122][1968] 1 WLR 956.

[123]Ibid 970–1.

The strictness of the law of conversion has long been criticised for its harsh operation against innocent defendants. As long ago as 1875, Blackburn J, sitting in the House of Lords in Hollins v Fowler,[124] drew attention to the hardship inflicted ‘on those who deal innocently and in the ordinary course of business with a person in possession of goods’.
[124](1875) LR 7 HL 757, 764.

A century later, in RH Willis and Son v British Car Auctions Ltd,[125] Lord Denning MR repeated the criticism. The common law, his Lordship said, had always

protected the property rights of the true owner. It has enforced them strictly as against anyone who deals with the goods inconsistently with the dominion of the true owner. Even though the true owner may have been very negligent and the defendant may have acted in complete innocence, nevertheless the common law held him liable in conversion. Both the ‘innocent acquirer’ and the ‘innocent handler’ have been hit hard. That state of the law has often been criticised.[126]

In that case, the English Court of Appeal confirmed the liability in conversion of an auctioneer who had innocently resold a car purchased in good faith from a person who was not in fact the true owner.

[125][1978] 1 WLR 438.

[126]Ibid 441–2.

The corollary of strict liability is the tort’s ‘apparent indifference to causation’.[127] As Dr Simon Douglas has pointed out:

The most likely explanation for conversion’s indifference to the requirement of causation is that it is a rule based on policy. The only party who would be liable for the claimant’s loss if the ‘but for’ test was applied in conversion would be the first converter. Because the first converter is often a thief, conversion would in practice, if not in theory, start to resemble the tort of negligence as only blameworthy parties would usually be sued. In short, if the courts did not allow a claimant to recover the full amount of his loss against a subsequent converter of his goods then the strict liability of the tort would be essentially redundant.[128]

[127]Simon Douglas, ‘The Nature of Conversion’ (2009) 68(1) Cambridge Law Journal 198, 220–3.

[128]Ibid 222. See also Kuwait Airways [2002] 2 AC 883, 912-15 [63]–[74].

In its 1971 Report, referred to above, the UK Law Reform Committee rejected a proposal that conversion be abolished as a tort of strict liability ‘leaving only a liability to pay damages based on proof of fault, which could be absorbed into the law of negligence’.[129] In recommending the creation of a new tort of unlawful interference with chattels, the Committee proposed that the existing rules of conversion should continue. In particular, it was said, the legislation should

preserve the existing rule of conversion that, if an act of interference is proved, the existence of an honest but mistaken belief on the part of the defendant that he had a right to interfere is no defence.[130]

[129]1971 Law Reform Report 6 [12].

[130]Ibid 8 [19].

The Committee said:

[Conversion] is and always has been primarily an action for the protection of ownership and it is because of this that questions as to the fault of the defendant are irrelevant, the principle adopted being that ‘persons deal with the property in chattels or exercise acts of ownership over them at their peril’. It seems to us that there are sound practical reasons for retaining this principle and that to depart from it would be inconsistent with the view taken by this committee in its 12^th Report as to the balance to be struck between sanctity of property on the one hand and, on the other, the commercial advantages to be derived from facilitating transfer of title.
…
It seems to us that, since the burden of proving bad faith or want of due care on the part of an intermediate vendor or handler is likely to be a difficult one, liability based on fault might well prove an encouragement to dishonesty.[131]

[131]Ibid 6 [12]–[14].

Consistently with its position on strict liability, the Committee recommended that the decision in Spackman v Foster be reversed by legislation. In the Committee’s view, receipt by an innocent pledgee should be regarded as ‘a sufficient denial of the plaintiff’s title’, comparable to receipt of a chattel by way of a purported sale under which the title does not pass, which is a conversion at common law.[132] The Committee’s recommendations were given effect to in the Torts (Interference with Goods) Act 1977 — which is not to say that this should necessarily be regarded as the desirable legislative solution.
[132]Ibid 15-16 [42]–[43].

It is almost 50 years since the Law Reform Committee’s review of the law. For the reasons we have given, it seems appropriate that these important questions of legal policy be examined by an equivalent Australian body.

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Citations

Sell Your Gold Pty Ltd(ACN 150 167 990) v Australian Diamond Trading Corporation Pty Ltd(ACN 157 686 578) [2018] VSCA 355

Cases Citing This Decision

0

Cases Cited

5

Statutory Material Cited

0

Bunnings Group Ltd v CHEP Australia Ltd [2011] NSWCA 342

Johnson Matthey (Aust) Ltd v Dascorp Pty Ltd [2003] VSC 291

PGA v The Queen [2012] HCA 21

[2018] VSCA 355

20 December 2018