Settlement Agents Supervisory Board and Crozet Pty Ltd
[2006] WASAT 65
•20 MARCH 2006
SETTLEMENT AGENTS SUPERVISORY BOARD and CROZET PTY LTD [2006] WASAT 65
| STATE ADMINISTRATIVE TRIBUNAL | Citation No: | [2006] WASAT 65 | |
| SETTLEMENT AGENTS ACT 1981 (WA) | |||
| Case No: | VR:345/2005 | 7 DECEMBER 2005 | |
| Coram: | JUSTICE M L BARKER (PRESIDENT) MS D NEWMAN (SENIOR SESSIONAL MEMBER) MS J TOOMER (SESSIONAL MEMBER) | 20/03/06 | |
| 38 | Judgment Part: | 1 of 1 | |
| Result: | The settlement agent is guilty of the conduct set out in allegations (1) - (3) and (4)(a) and (b). The settlement agent pay a fine of $9 000. The settlement agent pay to the Settlement Agents Supervisory Board the costs of and incidental to the proceedings fixed in the sum of $4 000. | ||
| B | |||
| PDF Version |
| Parties: | SETTLEMENT AGENTS SUPERVISORY BOARD CROZET PTY LTD |
Catchwords: | Settlement agents Discplinary proceedings Whether Settlement Agents Act 1981(WA) and Settlement Agents' Code of Conduct 1982 have been breached Breach of s 46(2)(a) and s 43(1)(a) of the Settlement Agents Act 1981- Breach of Code of Conduct r 15 Conflict of interest or a likelihood of a conflict of interest Fiduciary obligation Meaning of "settlement of a transaction" |
Legislation: | Settlement Agents Act 1981(WA), s 43, s 43(1), s 44, s 46, s 46(2)(a), s 82, s 84, s 84(1), s 84(2)(c)(iii) Town Planning and Development Act 1928 (WA) Settlement Agents' Code of Conduct 1982 |
Case References: | Baker v Palm Bay Island Resort Pty Ltd (No 2) [1970] Qld R 210 Breen v Williams (1996) 186 CLR 71 Chan v Zacharia (1984) 154 CLR 178 Dennis Willcox Pty Ltd v Federal Comissioner of Taxation (1988) 79 ALR 267 Guinness PLC v Saunders [1990] 1 All ER 652 Harris v Digital Pulse Pty Ltd (2003) NSWLR 298 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 Medical Board of Western Australia and Roberman [2005] WASAT 81 (S) Phipps v Boardman (1967) 2 AC 46 Pilmer v Duke Group Limited (in liq) (2001) 207 CLR Re Marseilles Extension Railway Co (1871) LR 7 Ch App 161 Sharkey v Combined Property Settlements Agency Pty Ltd [1999] WADC 41 Walker v Nicolay (1991) 4 ACSR 309 Nil |
Orders | The settlement agent is guilty of the conduct set out in allegations (1) - (3) and (4)(a) and (b).,The settlement agent pay a fine of $9 000.,The settlement agent pay to the Settlement Agents Supervisory Board the costs of and incidental to the proceedings fixed in the sum of $4 000. |
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL STREAM : VOCATIONAL REGULATION ACT : SETTLEMENT AGENTS ACT 1981 (WA) CITATION : SETTLEMENT AGENTS SUPERVISORY BOARD and CROZET PTY LTD [2006] WASAT 65 MEMBER : JUSTICE M L BARKER (PRESIDENT)
- MS D NEWMAN (SENIOR SESSIONAL MEMBER)
MS J TOOMER (SESSIONAL MEMBER)
- Applicant
AND
CROZET PTY LTD
Respondent
Catchwords:
Settlement agents - Discplinary proceedings - Whether Settlement Agents Act 1981(WA) and Settlement Agents' Code of Conduct 1982 have been breached - Breach of s 46(2)(a) and s 43(1)(a) of the Settlement Agents Act 1981- Breach of Code of Conduct r 15 - Conflict of interest or a likelihood of a conflict of interest - Fiduciary obligation - Meaning of "settlement of a transaction"
(Page 2)
Legislation:
Settlement Agents Act 1981(WA), s 43, s 43(1), s 44, s 46, s 46(2)(a), s 82, s 84, s 84(1), s 84(2)(c)(iii)
Town Planning and Development Act 1928 (WA)
Settlement Agents' Code of Conduct 1982
Result:
The settlement agent is guilty of the conduct set out in allegations (1) - (3) and (4)(a) and (b). The settlement agent pay a fine of $9 000. The settlement agent pay to the Settlement Agents Supervisory Board the costs of and incidental to the proceedings fixed in the sum of $4 000.
Category: B
Representation:
Counsel:
Applicant : Ms R Lee
Respondent : Mr S Blyth
Solicitors:
Applicant : Settlement Agents Supervisory Board
Respondent : Lewis Blyth & Hooper
Case(s) referred to in decision(s):
Baker v Palm Bay Island Resort Pty Ltd (No 2) [1970] Qld R 210
Breen v Williams (1996) 186 CLR 71
Chan v Zacharia (1984) 154 CLR 178
Dennis Willcox Pty Ltd v Federal Comissioner of Taxation (1988) 79 ALR 267
Guinness PLC v Saunders [1990] 1 All ER 652
Harris v Digital Pulse Pty Ltd (2003) NSWLR 298
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
Medical Board of Western Australia and Roberman [2005] WASAT 81 (S)
Phipps v Boardman (1967) 2 AC 46
Pilmer v Duke Group Limited (in liq) (2001) 207 CLR
(Page 3)
Re Marseilles Extension Railway Co (1871) LR 7 Ch App 161
Sharkey v Combined Property Settlements Agency Pty Ltd [1999] WADC 41
Walker v Nicolay (1991) 4 ACSR 309
Case(s) also cited:
Nil
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Summary of Tribunal's decision
1 The Settlement Agents Supervisory Board made four allegations against Crozet Pty Ltd trading as Ferguson Settlement Agents (settlement agent) pursuant to s 84(1) of the Settlement Agents Act 1981 (WA).
2 The four allegations were:
· That during the period 26 February 2000 to September 2005 (the relevant period) the settlement agent acted contrary to s 46(2)(a) of the SA Act in that it effected the settlement of a real estate transaction concerning land (being land purchased by Mr A W Smith and Mrs J Smith (the complainants) under a buy-back contract which was not a lot within the meaning of the Town Planning and Development Act 1928. The particulars of that allegation are provided in the application.
· That during the relevant period, contrary to r 15 of the Settlement Agents’ Code of Conduct 1982 (Code of Conduct) the settlement agent failed to carry out all services relating to settlement of the property efficiently in that:
(a) the settlement agent allowed the complainants’ money to be released at settlement without adequately securing the complainants’ position in relation to the property; and/or
(b) a 17 day delay occurred following settlement prior to lodgement of any caveat by the settlement agent.
(c) The particulars of this allegation are provided in the application.
· That during the relevant period contrary to s 43 of the SA Act, alternatively, r 6A(1) of the Code of Conduct, the settlement agent acted for the complainants in relation to the settlement of the property for reward without first obtaining appointment documentation specifically referable to the property purchased by the complaints under the buy-back contract made with All Terrain Aust Pty Ltd. The application provides particulars of this allegation.
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- · That during the relevant period contrary to r 5 of the Code of Conduct, alternatively r 9, the settlement agent acted in such a manner as to put its duty to the complainants in conflict or likelihood of conflict with its own interests and/or those of Ferguson Hartree Fox White Real Estate Agents (FHFW) (which included recovery of a $20 000 commission and settlement agents fees on finalisation of the transaction) by continuing to act and proceeding to settle the transaction in circumstances where the complainants were, by reason of those actions, put at financial risk. The application provides particulars of this allegation.
3 The hearing of the application in the Tribunal, the settlement agents acknowledged the first three allegations involved a breach of the Act or Settlement Agents' Code of Conduct but denied that it was guilty of a conflict of interest or potential conflict of interest as set out in the fourth allegation.
4 The Tribunal was satisfied that the fourth allegation was made out and at all material times, because Mr Ferguson was both a director of, and the person in bona fide control of, the settlement agent, and a director of the real estate agency to which a $20 000 commission was payable following settlement, that the settlement agent had a relevant conflict of interest in relation to both the commission and the settlement fee it was entitled to receive upon completing settlement.
5 In those circumstances, the Tribunal:
1) Found the settlement agent guilty of the conduct in allegations 1-4.
2) Fined the settlement agent $9 000, where a maximum of $10 000 was provided for.
3) Ordered the settlement agent to pay the Board's costs for the proceedings fixed in the sum of $4 000.
Application for disciplinary orders
6 By application to the State Administrative Tribunal lodged 6 September 2005 the Settlement Agents Supervisory Board (the Board) seek disciplinary orders against Crozet Pty Ltd (ACN 123 456 789) trading as Ferguson Settlements (settlement agent), pursuant to s 84(1) of the Settlement Agents Act 1981 (WA)(SA Act).
(Page 6)
7 The Board makes four allegations against the settlement agent:
1) That during the period 26 February 2000 to September 2005 (the relevant period) the settlement agent acted contrary to s 46(2)(a) of the SA Act in that it effected the settlement of a real estate transaction concerning land (being land purchased by Mr A W Smith and Mrs J Smith (the complainants) under a buy-back contract which was not a lot within the meaning of the Town Planning and Development Act 1928. The particulars of that allegation are provided in the application.
2) That during the relevant period, contrary to r 15 of the Settlement Agents’ Code of Conduct 1982 (Code of Conduct) the settlement agent failed to carry out all services relating to settlement of the property efficiently in that:
(a) the settlement agent allowed the complainants' money to be released at settlement without adequately securing the complainants’ position in relation to the property; and/or
(b) a 17 day delay occurred following settlement prior to lodgement of any caveat by the settlement agent.
The particulars of this allegation are provided in the application.
4) That during the relevant period contrary to r 5 of the Code of Conduct, alternatively r 9, the settlement agent acted in such a manner as to put its duty to the complainants in conflict or likelihood of conflict with its own interests and/or those of Ferguson Hartree Fox White Real Estate Agents (FHFW) (which included recovery of a $20 000 commission and settlement agents fees on finalisation of the transaction) by continuing to act and proceeding to settle the transaction in circumstances where the complainants were, by reason of
- those actions, put at financial risk. The application provides particulars of this allegation.
8 Prior to the final hearing of the application, the parties, with the assistance of their respective solicitors and counsel, agreed the material facts relating to the application. As a result, the settlement agent admitted allegations 1, 2 and 3 but denied allegation 4.
Facts
9 At the hearing, the Tribunal received evidence in respect of allegation 4 and submissions in respect of all allegations on the question of penalty (including in respect of allegation 4 should the Tribunal find that the settlement agent had breached either r 5 or r 9 of the Code of Conduct in the manner alleged). The hearing proceeded on the basis of the facts as agreed between the parties, which are now set out.
10 Mr A W Smith was the registered proprietor of lot 22, Amherst Road, Canningvale (lot 22).
11 On 26 February 2000, Mr Smith entered into a selling agency agreement with a firm of real estate agents, FHFW Nominees Pty Ltd (ACN 0091 186 529), which traded as Ferguson Hartree Fox White Real Estate Agents (FHFW or the real estate agency) to sell lot 22. It was a term of the agreement that FHFW would receive a selling fee inclusive of GST of $20 000.
12 On 28 April and 9 June 2000, Mr Smith signed an authority appointing the settlement agent to act as his settlement agent in the sale of lot 22 pursuant to a contract of sale dated 28 February 2000. However, this never proceeded. The proposed sale was to a company with a common representative with All Terrain Aust Pty Ltd, namely Mr Kevin Pollock. All Terrain was the company to which lot 22 was later sold. The authority stated in part that:
(1) Mr Smith agreed to pay settlement fees and disbursements in accordance with s 43 and s 44 of the SA Act 1981;
(2) Mr Smith was aware that there is a relationship between the settlement agent and FHFW that could possibly give rise in the future to some conflict of interest; and
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- (3) Mr Smith organised the settlement agent to receive the sum of $600 000 "less agents (sic) selling fee and disbursements ($20 000)".
13 On 10 August 2000 and contemporaneously:
(1) Mr Smith entered into a contract with All Terrain Aust Pty Ltd for the sale of lot 22 by Mr Smith to All Terrain for the purchase price of $600 000 (the sale contract) prepared by FHFW and in which the settlement agent was nominated as Mr Smith's settlement agent; and
(2) All Terrain Aust Pty Ltd entered into a contract with the complainants for the sale of a portion of lot 22, being the portion with the existing residence, by All Terrain to the complainants for the purchase price of $100 000, which sale was subject to the satisfactory sale and settlement of lot 22 with "both properties to settle concurrently" (the buy-back contract) prepared by FHFW and in which the settlement agent was nominated as the complainants settlement agent (though not All Terrain's settlement agent).
14 As at 14 August 2000:
(1) The certificates of title pertaining to the sub-division of lot 22 and in particular the portion of lot 22 the subject of the buy-back contract had not issued;
(2) The settlement agent did not have a valid appointment to act in relation to settlement of either the sale contract or the buy-back contract;
(3) The settlement agent was the holder of a Settlement Agents Licence Number 241, first granted 1 November 1982;
(4) The settlement agent was the holder of Triennial Certificate Number 241, expiring on 1 November 2003;
(5) Mr Kenneth Leslie Ferguson was a director of
- (a) the licensed settlement agent; and
(Page 9)
- (b) FHFW;
(6) Mr Ferguson was the person listed as the person "in bona fide control" of:
(a) the licensed settlement agent, with the Settlement Agents Supervisory Board; and
(b) FHFW, with the Real Estate and Business Agents Supervisory Board;
(7) The settlement agent is uncertain whether it had disclosed to Mrs Smith that there was a relationship between it and FHFW that could possibly give rise in the future to some conflict of interest or that FHFW would receive $20 000 at settlement. The settlement agent had not done so in writing;
(8) The settlement agent cannot remember disclosing to either Mr Smith or Mrs Smith, and had not done so in writing, that the fee of $671 would be payable at settlement to the licensed settlement agent.
(1) Settlement of the sale contract took place and settlement of the buy-back contract purportedly took place contemporaneously;
(2) The settlement agent, through Mr Ferguson, acted as settlement agent for Mr Smith in relation to the sale contract and for the complainants in relation to the buy-back contract;
(3) The complainants did not receive a Certificate of Title in relation to the portion of lot 22 the subject of the buy-back contract at the settlement;
(4) The settlement agent prepared one final statement in relation to the settlement, which states that the following payments were made or received at settlement:
(a) the "sale price" of $600 000 was received;
(b) the "agent's selling fee" of $20 000 was deducted;
- (c) an amount of $671 for "costs and disbursements" was deducted;
(d) an amount of $100 000 for "purchase of house/lot to be subdivided (lot 22)" was deducted;
(e) an amount of $2130 for "Stamp duty and caveat registration re house lot" was deducted;
- (5) In the process of settlement Mr Smith received the sum of $600 000 from All Terrain pursuant to the sale contract;
(6) In the process of settlement either Mr Smith or the complainants paid:
(a) All Terrain the sum of $100 000 pursuant to the buy-back contract;
(b) FHFW the sum of $20 000 pursuant to the selling agency agreement referred to earlier;
(c) the settlement agent a fee of $671; and
(d) the settlement agent the sum of $2 130 to be held in trust for the purposes of stamp duty and caveat registration regarding the portion of lot 22 the subject of the buy-back contract;
(8) Following settlement on 14 August 2000, All Terrain mortgaged lot 22 in favour of the National Australia Bank Limited, which mortgage was registered on the Certificate of Title of lot 22;
(9) On 1 September 2000 the settlement agent caused a caveat to be lodged on the Certificate of Title for lot 22, which was registered after the mortgage to the National Australia Bank;
(10) On or about 5 October 2000 the settlement agent refunded the sum of $560 to the complainants being the unused portion of the sum of $2 130 which had been held in trust by the settlement agent since settlement.
(Page 11)
- (11) On or about 27 March 2003, Taylor Woodings (the receiver) was appointed as receiver and manager of All Terrain by the National Australia Bank. The receiver then entered into a contract to sell lot 22.
(12) The complainants received $7 500 from the receiver in exchange for the discharge of the caveat.
Issues
16 There are four issues arising from the four allegations made:
(1) Has the settlement agent acted in breach of s 46(2)(a) of the SA Act by arranging or purporting to effect settlement of the buy-back contract, given that as at the date of the purported settlement the portion of lot 22 subject to the buy-back contract was not a lot within the meaning of the Town Planning and Development Act 1928?
(2) Has the settlement agent breached s 43(1) of the SA Act in that the settlement agent received a reward for services as a settlement agent without a valid appointment to act in that capacity?
(3) Has the settlement agent breached r 15 of the Code of Conduct in that it has failed to carry out all services efficiently by reason of either or both of the following:
(a) the settlement agent allowed the complainants' money ($100 000) to be released at settlement without a transfer in the title taking place or the complainants' position being otherwise adequately secured; or
(b) a 17 day delay occurred following the purported settlement prior to lodgement of any caveat by the settlement agent in an endeavour to protect the complainants' interest under the buy-back contract?
(a) the settlement agent proceeding with the concurrent settlement of the sale contract and the buy-back contract (settlement) and a company FHFW receiving the sum of $20 000, where
- Mr Ferguson was a director and in bona fide control of both the settlement agent and FHFW, and the complainants paying out $100 000 and failing to obtain title to the portion of lot 22 as was intended under the buy-back contract, and if so, by acting or continuing to act in the settlement was the respondent in breach of r 5 or r 9 of the Code of Conduct;
- (b) the settlement agent proceeding with the settlement and the settlement agent receiving the sum of $671, and the complainants paying out $100 000 and failing to obtain title to the portion of lot 22 as was intended under the buy-back contract, and if so, by acting or continuing to act in the settlement was the settlement agent in breach of r 5 or r 9 of the Code of Conduct?
17 The settlement agent admits that the answer to each of the first three allegations is "yes". The Board contends that the answer to each of questions 4(a) and (b) is "yes", but the settlement agent contends that the answer in each case is "no".
18 Given the admissions made by the settlement agent in respect of the first three allegations, it remains for the Tribunal to make formal findings against the settlement agent and to impose appropriate penalties in relation to them.
19 However, because the settlement agent does not admit the fourth allegation, the Tribunal needs to deal with the contentions of the parties and to make findings.
Issue 4 - The conflict of interest issue
20 That a settlement agent is a fiduciary and owes fiduciary obligations to the person appointing him or her is not in doubt. The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations, and include such relationships as trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners.
21 In Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at [96] - [97], Mason J noted these fiduciary relationships and went on to explain that:
(Page 13)
- "The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions "for", "on behalf of", and "in the interests of" signify that the fiduciary acts in a "representative" character in the exercise of his responsibility, ..."
22 It is commonly said that a fiduciary owes duties of loyalty to the other person in the relationship, in two particular ways:
(1) the fiduciary must not, except with the informed consent of the person to whom he, she [or it] owes fiduciary duties, place himself, herself [or itself] in a position where there is or may be a conflict between the duty as a fiduciary and his or her own interest, or a duty to a third party (the no-conflict duty); and
(2) the fiduciary must not make a profit out of a fiduciary relationship owed to another person, except with the informed consent of that other person (the no-profit duty)
23 : G E Dal Pont, Law of Agency, Butterworths, 2001, par [10.6], pp 224-227.
24 In the High Court of Australia in Breen v Williams (1996) 186 CLR 71, Judges Gaudron and McHugh explained that these duties of loyalty impose on a fiduciary "proscriptive obligations", not "prescriptive obligations". Their Honours observed at 113, "…the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed".
25 Accordingly, while there may be other legal obligations imposed on a settlement agent effectively to act in the best interests of the client under the law relating to such matters as contract and negligence, such positive legal obligations will not arise as an incident of being a fiduciary. The point of the fiduciary rules is that they are designed to ensure loyalty and to discourage a fiduciary from breaching other, non-fiduciary obligations. As Hayden JA explained in Harris v Digital Pulse Pty Ltd (2003)
(Page 14)
- NSWLR 298 at [414 - 415], the fiduciary rules are quite prophylactic in the sense that they tend to prevent the diseasing of temptation in the fiduciary.
26 It is also appropriate to observe that a conflict only arises if there is a "real or substantial possibility" of conflict between duty and interest: Pilmer v Duke Group Limited (in liq) (2001) 207 CLR at 165.
27 It follows that, if a fiduciary must positively do certain things in relation to another person, those duties will arise independently of the fiduciary duties. For example, in the case of a settlement agent they may arise under contract, the law of negligence, or under the SA Act and the Code of Conduct made under the Act.
28 In relation to the conduct of the licensed settlement agents in Western Australia, the Code of Conduct is made under s 82 of the SA Act and prescribes a code of conduct for settlement agents, the breach of which may be the subject of a proper cause for disciplinary action under s 84 of the Act: see s 84(2)(c)(iii).
29 The Code of Conduct was first gazetted on 15 October 1982. It has since been amended on 10 February 1989, 26 May 2000 and on 31 May 2002, as well as on 4 July 2003.
30 The material events the subject of the agreed facts occurred with the settlement or purported settlement of the sale by Mr Smith of lot 22 and the settlement of the buy-back contract on 14 August 2000, and the lodgement of the caveat by the settlement agent against lot 22 on 1 September 2000. It seems that the payment of the commission of $20 000 to FHFW and the settlement agent's fee were made by Mr Smith as of, or soon after, the settlement date of 14 August 2000.
31 In these circumstances, the Code of Conduct as it applied up to and including these material dates is relevant to the conduct of the settlement agent in question here.
32 The Code of Conduct at material times obliged a licensed settlement agent:
• to have a complete knowledge of the Act, the regulations and the Code of Conduct as amended from time to time and the duties and obligations imposed by the Act, the regulations and the Code of Conduct and to comply with all requirements: r 4;
- • to at all times make a "full and frank disclosure to his client of any interest he may have in any transaction in which he is concerned and if such interest is adverse to that of his client he shall terminate his appointment": r 6;
• under a Rule gazetted on 26 May 2000, to hold an appointment to act as a settlement agent which appointment is in the form of or contains the information set forth in, Form 1 in the Schedule to the Act. If the settlement agent is unable to accept the appointment the settlement agent shall notify the vendor or purchaser, as the case requires, of that inability to act as soon as practicable; or if able to act, sign the appointment and forward a true copy of the appointment document to his or her client: r 6A;
• subject to s 46 of the Act and to r 5, a licensee "may sometimes act for both parties". The test to apply is to consider whether in the interest of one he should withhold some information or advice from the other. If he should, then he should inform both clients that he is embarrassed and, subject to the following, should cease to act for both. He may continue to act for one of them in the same matter, however, unless he has received some confidential information from the other which it would be improper to use against him yet which should be used in the interest of the selected client: r 7;
• to disclose to the person who proposes to appoint the licensee the fact that the licensee has an interest in an agent or developer where the transaction has been negotiated by entities in which the licensee has an interest or negotiated by an entity which has an interest in the licensee: r 8;
• "no licensee may act or continue to act in the settlement of a transaction if any conflict of interest arises or foresee ably could arise between the licensee and his client.": r 9.
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34 In this case, however, the Board refers to rules 5 and 9 and says the settlement agent breached each by acting or continuing to act while having a material conflict of interest.
35 Rule 5 of the Code of Conduct draws the no-conflict rule to the attention of a settlement agent, and emphasises the need to abide by it. It may also be considered to establish a positive conduct role not to act with a conflict of interest.
36 Rule 9 of the Code of Conduct creates the positive obligation that a settlement agent should not act or continue to act in the settlement of a transaction when a conflict of interest arises or foreseeably could arise between the licensee and client.
37 In the context in which it appears in r 9 of the Code, the expression "settlement of a transaction" is not limited to the precise act of "settlement", as that word is defined in the SA Act 1981, but is a reference to the whole process by which a settlement agent is engaged to act in relation to the settlement of a transaction, including all the necessary work to prepare for a "settlement", as defined in the Act, and the steps actually taken to conduct the settlement and to complete all necessary work following a settlement in order to discharge the contractual obligations undertaken by the settlement agent on behalf of the client.
38 Additionally, where r 9 refers to a conflict or foreseeable conflict of interest "between the licensee and his client" it must be understood that such a conflict may exist, or potentially may exist, not only because of a conflict between the licensee's own interest with that of the client, but also because the licensee has an obligation to another person which may cause conflict with the duty of loyalty owed to the client.
39 Under the general law to which r 5 refers and upon which it operates, the no-conflict duty is not unqualified - a settlement agent may act in a conflict situation if the client gives informed consent to the settlement agent continuing to act. In that regard, it is often said that, to avoid liability for conduct that would otherwise be in breach of duty, the fiduciary must fully disclose to the person to whom the duty is owed all relevant facts known to the fiduciary, and the person must consent to the fiduciary's proposal: see generally Meagher R et al, Meagher, Gummow & Lehane's Equity Doctrines and Remedies,4th ed (Sydney : LexisNexis Butterworths, 2002) [5-115]. However, it is also accepted that consent need not be given expressly. Without citing all of the legal authorities going to the proposition, what is required for a fully informed consent is a
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- question of fact in all of the circumstances of each case and there is no precise formula which will determine in every case whether fully informed consent has been given: Meagher, Gummow & Lehane's Equity Doctrines and Remedies at [5-115].
40 However, while informed consent may relieve a fiduciary of the need to comply with the fiduciary duties under the general law referred to in r 5, it may be doubted that the positive requirement of r 6 can be overcome by the giving of consent, intended or otherwise. As noted, r 6 requires a licensee to make a full and frank disclosure to his client of any interest he may have in any transaction in which the settlement agent is concerned and if such interest is adverse to that of his client, to terminate his appointment.
41 However, without having to finally decide that issue in this case it may be thought that r 6 does not apply to every instance of conflict of interest, because, by its terms, it only applies where the settlement agent has an "adverse" interest "in any transaction in which he is concerned". In context, the reference to an "interest in any transaction in which he is concerned" must be taken to be a reference to an interest in the particular transaction the subject of the proposed settlement. Rule 6 seems designed to ensure, among other things, that a settlement agent cannot remain the agent of a client in relation to a settlement in which the settlement agent has a direct or indirect competing interest in the land the subject of the settlement. (The decision in Sharkey v Combined Property Settlements Agency Pty Ltd [1999] WADC 41, referred to further below, provides an example of such a case).
42 In cases to which r 6 does not apply, and where other positive rules are not relevant - which will be the more usual case - the informed consent rule may still apply to alleviate a fiduciary from their onerous fiduciary obligations.
Whether breach of rules – The Board's case
43 In the circumstances of this case, where Mr Ferguson was both a director of the real estate agency, FHFW, which had negotiated the sale of lot 22 and was entitled to a commission on settlement of the transaction, and a director and person in bona fide control of the settlement agent appointed to act on the settlement of the transaction, the Board contends that not only was the settlement agent obliged to give the notice referred to in r 8 of the Code of Conduct that was relevant at the time, but that the settlement agent had a conflict of duty, or foreseeable conflict of duty, in the sense that the settlement agent owed a duty to serve its client's
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- interests but itself had a substantive interest in the transaction by reason of the commission that would flow to FHFW on settlement.
44 The Board also contends that the settlement agent had another conflict of interest in the sense that it owed a duty to serve its client's interest but was itself entitled to receive a fee under its contract with its client upon completing the settlement.
45 The Board says that because the settlement agent acted and continued to act when it had these two conflicts of interest (and indeed effected the "settlement" of the transaction) it breached both r 5 and r 9.
46 Rule 5 is said to have been breached because the settlement agent acted contrary to the duty there expressed, or implied, that the settlement agent should not "put his duty to his client in conflict or in likelihood of conflict with his own interests or that of any other person", and did not have any consent, let alone a fully informed consent from the client, to proceed to settlement notwithstanding the obligation it had or would have upon settlement to pay the real estate agency its commission, and the entitlement it would then have to pay itself the settlement fee.
47 Rule 9 is said to have been breached in that, in these circumstances, the settlement agent acted or continued to act notwithstanding the conflicts of interest that existed or foreseeably could arise.
48 The proper analysis of the duties owed by the settlement agent - and the question of their breach - is complicated by the factual position in this case, in which Mr Smith was the vendor of the property and Mr and Mrs Smith were interested in the portion of the land the subject of the buy-back contract. We will return to those issues.
49 The approach taken by the Board to the alleged conflict issue concerning the commission that would become payable to FHFW, is that, by reason of Mr Ferguson's common directorship of FHFW and the settlement agent, for the purposes of the no-conflict rule the settlement agent had a personal interest in the payment of the commission as much as the real estate agency did.
50 Counsel for the Board contends that the decision of Judge Nisbet in the District Court decision of Sharkey v Combined Property Settlements Agency Pty Ltd is authority to support the view that, at least in a situation like this where the settlement agent and the real estate agency have a common director, who is also the bona fide person in control of the settlement agent under the SA Act, the settlement agent will always have
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- a conflict of interest where it is obliged to acquit commission following settlement to the real estate agency.
51 The Board contend that in respect of the settlement fee payable following settlement, the settlement agent's interest is obvious.
Whether breach of the rules – the settlement agent's case
52 As to the commission issue, counsel for the settlement agent submits that neither the SA Act nor the Code of Conduct makes provision or otherwise expressly or impliedly prohibits or precludes:
(1) A person being a common director of a settlement agency and a real estate agency;
(2) A director of a settlement agency being a director of a real estate agency;
(3) A person in bona fide control of the settlement agency also being in bona fide control of a real estate agency.
53 Counsel further submits that the real estate industry has, for decades, operated lawfully and continues to operate lawfully in circumstances where there is a "connection" between real estate agencies and settlement agencies in that:
(1) there is often common ownership, in whole or in part, of a real estate agency and a settlement agency providing services pursuant to the SA Act in respect of contracts procured or otherwise entered into by the real estate agencies;
(2) there are common directors in respect of real estate agencies and settlement agencies;
(3) there is a common person in bona fide control of each agency.
54 Counsel submits that, notwithstanding the settlement agent here did not have a valid appointment to act in relation to settlement of either the main contract or the buy-back contract on 14 August 2000, due to replacement contracts being entered into by Mr and Mrs Smith with All Terrain Aust Pty Ltd (All Terrain) on 10 August 2000, Mr Smith had signed earlier authorities at which time the settlement agent had disclosed
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- to Mr Smith that there was a relationship between the respondent and FHFW that could possibly give rise in the future to some conflict of interest. That notice was provided in compliance with r 8 of the Code of Conduct as it applied on that earlier occasion. Counsel also draws attention to the fact that the main contract and the buy-back contract indicated that the licensee of the Willetton office of FHFW was Mr Ferguson. Counsel submits the earlier contracts were, to all intents and purposes, the same as the main contract and the buy-back contract, save that All Terrain replaced a company called Hotspell Pty Ltd as the prospective purchaser/vendor, and identified Mr Ferguson as the licensee of the Willetton office of FHFW.
55 Counsel for the settlement agent submits, in the alternative, that the circumstances of the Combined Property Settlements Agency case are distinguishable from those in this case, because:
(1) In that case the vendors of the subject lots had control of the settlement agency, whereas in this case, neither the settlement agent nor FHFW are the vendors of the subject property.
(2) In that case, the respondent was the settlement agent acting on behalf of both the vendors and the purchasers.
(3) In that case, the conflict arose because the settlement agent, the subject of the prosecution was privy to information that he had an obligation to disclose to the purchasers but failed to do so. In that decision at [10] it is noted:
"Mr Wild was told that Mr Wilson on behalf of the vendors was going to terminate the contract because he had just learned that the purchasers had planned to develop a pharmacy as part of their medical centre which would be in competition with a pharmacy that he was developing nearby which was either known as or was part of a development called "The Grange", in which development Mr Wilson apparently had an interest".
(4) When Judge Nisbet commented at [29] that:
- "In my opinion, if ever there was a situation redolent of conflict, this was it" such was a comment on the relationship that existed in par [23] - par [28] of that decision and in particular to the scenario whereby one of the directors of the settlement agent (Mr Wilson) was a director of one of the vendor companies and a director of a company, namely Summit Projects, a builder and the builder nominated by the purchasers on their contracts. The case now before the Tribunal is not analogous to that situation and the facts are not "redolent of conflict".
56 Counsel for the settlement agent also submits that the entitlement of FHFW to a commission payment of $20 000 on settlement of the sale of lot 22 arose because of a contractual relationship between Mr Smith and FHFW. He submits that the settlement agent had a duty to settle the main contract and a duty to Mr Smith to pay the $20 000 commission on settlement to FHFW to discharge Mr Smith's obligation to FHFW.
57 Counsel further submits that the fact that FHFW may have been entitled to the payment of a commission of $20 000 on settlement of the main contract does not constitute an "interest" on the part of FHFW as contemplated by the use of the words "interest or that of any other person" in r 5 of the Code of Conduct.
58 Counsel submits, in the alternative, that if it were to be found that such an entitlement constitutes an "interest" under r 5, then that interest was not in conflict or in likelihood of conflict with the respondent's duties to its client, Mr Smith. This, it is said, is because the obligation to pay the $20 000 commission arose independently of the engagement of the settlement agent.
59 Counsel accepts, however, that, in a general sense, it was not in the "interest" of the complainants for settlement to proceed on 14 August 2005 when a certificate of title was unavailable for the portion of lot 22 they were "buying back", nor to pay over $100 000 in such circumstances. However, counsel submits that the question is not whether something occurred which was not in the "interest" of the client, but whether a conflict or likely conflict existed at such a point in time with the licensee's own interests or that of any other person.
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60 Counsel for the settlement agent submits that the Board has failed to identify what "personal interest" the licensee had in the $20 000 commission. He submits that the entitlement to a commission of $20 000 on the part of FHFW ought not to be seen as a fact, or at law, an "interest" contemplated by r 5 and r 9 of the Code. He submits that the word "interest" should be interpreted in a broad commercial sense. Further, when pursuant to r 8 of the Code of Conduct disclosure is made of a relationship between the settlement agent and the real estate agent, the payment of a commission following such a disclosure ought to be excluded from those conflicts or "interests" covered by r 5 and r 9.
61 Counsel for the settlement agent also points out that, as a matter of law, Mrs Smith had no interest in the main contract nor the proceeds of sale of the main contract as Mr Smith was the sole proprietor of lot 22 at all material times. Only Mr Smith had the obligation to pay the $20 000 commission to FHFW. Accordingly, the settlement agent had no obligation to account to Mrs Smith for Mr Smith's sale price nor his obligation to pay $20 000 to FHFW.
62 Counsel submits there can be no doubt that Mr Smith intended to pay an appropriate fee to the settlement agent on settlement on the sale of lot 22 and in respect of the main contract. Counsel also submits that when the settlement agent's fees were deducted from the proceeds of sale at the settlement or purported settlement, Mr Smith, and Mr Smith alone, paid the amount of $671 concerned. It is said the settlement agent's account was directed to Mr Smith only.
63 Counsel for the settlement agent further submits that the entitlement of the settlement agent to be paid an appropriate fee is not an "interest" for the purposes of or contemplated by r 5 and/or r 9 of the Code of Conduct.
64 In summary, the settlement agent argues, through counsel, that the Board seeks to elevate the settlement agent's failure to comply with s 46(2)(a) of the SA Act - concerning settlement when an appropriate "lot" has not been created - to the creation of a conflict of interest. Counsel submits that that failure and that provision ought to be seen as standing alone and to suggest that such a failure constitutes a breach of r 5 and/or r 9 is duplicitous. Counsel submits that the existence of the "lot" is a pre-requisite to a settlement and is not an "interest" for the purposes of or contemplated by r 5 and r 9 of the Code; nor does the pre-requisite that there be a "lot" create an "interest" in which there may be a conflict between respondent and client. Rather, compliance with s 46(2)(a) is a
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- statutory obligation that does give rise to a conflict of interest that has arisen "between" the settlement agent and its client.
Consideration of the conflict of interest issues
The real estate agency's commission issue
65 To deal with the submissions of the parties, it is appropriate to regard first the separate entity doctrine that counsel for the settlement agent has in large part emphasised. This is the doctrine that a corporate entity has a separate legal personality from its members and directors. Unless some statute provides otherwise, a company cannot be said to have the same rights, interests, duties, obligations, and the like, as another person simply because that person is a member or director of the entity, or vice versa: see Ford, HAJ et al Ford's Principles of Corporations Law 11th ed LexisNexis Butterworths, Sydney 2003 [4.140] and [4.240]. Not even the fact that a company is under the unrestricted control of a person makes the company an agent for that person : Dennis Willcox Pty Ltd v Federal Comissioner of Taxation (1988) 79 ALR 267 at 274.
66 In these circumstances, the starting out position in this case is that the settlement agent and the real estate agency are separate entities, and that whatever the interest of the real estate agency is in a particular transaction, cannot automatically be equated with, or treated the same as, that of the settlement agent who is instructed to carry out the settlement, just because they share a common director. The position might be different if there is some positive law to the contrary. (In this context, r 8 of the Code of Conduct is of some relevance in that it creates special rules of conduct in certain cases requiring notice of interest to be given by a settlement agent who is in prescribed relationships with the real estate agent who effected the sale).
67 It may well be that the settlement agent in this case was, at all material times, contractually bound by its arrangements with the vendor, Mr Smith, to pay the real estate agency its commission upon settlement of the transaction being effected. However, this obligation to pay the commission would ordinarily arise under the arrangement with the vendor, not by reason of an enforceable arrangement or other relationship between the settlement agent and the real estate agency. If the settlement agent, on behalf of its client, failed to pay the real estate agency's commission following settlement, the real estate agency's ordinary course of action would be against the vendor, not the settlement agent.
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68 While a director of a company owes positive duties to act honestly and in good faith for the benefit of the company, of which he or she is a director, as a whole, a director also owes a separate duty of loyalty to avoid conflicts of interest as well. In this context the focus of the law of fiduciaries is on the director, not the company of which it is a director. A director's fiduciary duties are owed to the company, not to parties with whom the company deals, such as creditors and employees : Ford's Principles of Corporation Law, [9.050].
69 A director's fiduciary duty in this context might come into play, for example, if the company was contracting with another company of which the director of the first company is a director, member or creditor : see, for example, Walker v Nicolay (1991) 4 ACSR 309. However, an indirect or ephemeral association between a director and some outside interest is not enough : Baker v Palm Bay Island Resort Pty Ltd (No 2) [1970] Qld R 210 at 221.
70 In the present case, neither the settlement agent, nor its director Mr Ferguson, was at any material time in negotiations with the real estate agency. The real estate agency's commission was the subject of an arrangement made by Mr Smith with the real estate agency before, or at the time, the settlement agent was appointed by Mr Smith to carry out the settlement of the agreed transaction.
71 So, while a question plainly can arise whether a director of one company is in breach of conflict of the duty owed to that company by reason of dealings with another company, that is not the factual circumstance of the case here; and that rule does not help to resolve the issue whether the settlement agent had a relevant interest in the real estate agency's commission in this case.
72 Nor does the rule that provides that one company has the same knowledge as another company where the two companies have a common director who is the directing mind of each company. The fact that Mr Ferguson was at material times a director of the settlement agent and the real estate agency may, depending on the facts of the case, lead to the conclusion that what the real estate agency knew the settlement agent also knew. This will be the case if the facts show that Mr Ferguson was the controlling mind of each. Where a director is not the controlling mind of the two companies, knowledge is not automatically imputed: Re Marseilles Extension Railway Co (1871) LR 7 Ch App 161. Ordinarily, in civil proceedings, for knowledge to be imputed to the other company, the director must be under a duty to communicate the knowledge to that
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- company, and under a duty to that company to receive the knowledge: see generally Ford's Principles of Corporations Law at [16.220].
73 In this case, it is clear Mr Ferguson was the controlling mind of the settlement agent as, on the evidence, he was also the person in bona fide control of it. The evidence before the Tribunal to show that he was also the controlling mind of the real estate agency at material times is not strong but points in that direction. It was Mr Ferguson who set up the settlement agent some 22 years ago when he was then involved in the business of the real estate agency. He has remained involved in the real estate agency's business ever since. It is reasonable to infer from the way the settlement agent conducted its case in the Tribunal that it does not contend otherwise.
74 However, even accepting that Mr Ferguson was the controlling mind of each of the settlement agent and the real estate agency, the application of the knowledge rule simply means that the settlement agent is taken to have known what the real estate agency knew at material times. That would mean that the settlement agent would be taken to have known that the real estate agency was to receive a commission of $20 000 in relation to the Smith transaction. Of course, the settlement agent in fact knew that independently of the application of the knowledge rule, because it was instructed to act for the vendor in the matter and to pay the real estate agency its $20 000 commission after settlement.
75 Again, the application of the knowledge rule – or the fact that the settlement agent had knowledge that the real estate agency was to receive a $20 000 commission at settlement – does not of itself mean that the settlement agent had a relevant interest in the commission. The knowledge rule does not derogate from the separate entity doctrine. Rather, it confirms it. A separate entity is not thereby "merged" with the other, but will be fixed with the knowledge of another entity in appropriate circumstances.
76 However, the separate entity doctrine and the knowledge rule do not necessarily supply the answer to the question whether the settlement agent was in breach of its no-conflict duty to Mr Smith or the complainants, in the circumstances where Mr Ferguson was both a director of the real estate agency entitled to a commission of $20 000 and a director and the person in bona fide control of the settlement agent.
77 The no-conflict duty is, as explained earlier, designed to ensure that a fiduciary – such as the settlement agent here – does not fall into the
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- temptation of preferring its own duty, or that of some other person to that of its client.
78 It has been recognised that, on its strictest formulation, the no-conflict duty could mean that where a fiduciary has a loyalty to some other interest than that of its principal, the fiduciary should not act while that other loyalty persists. That high standard would be based on the view that the principal is entitled to the advice of the fiduciary undiluted by the mere possibility that the advice or decision might have been influenced by the extraneous loyalty, see discussion in Ford at [9.060]. However, as Ford comments at [9.070], the tendency of modern courts is to move from this strict formulation of the duty to a more practical approach, evidenced by the answer to another question: is the fiduciary in breach as soon as an abstract or theoretical conflict between interest and duty arises, or must the possibility of conflict be more real?
79 In Phipps v Boardman (1967) 2 AC 46 at 124, Lord Upjohn, speaking of the phrase "possibly may conflict", said:
"In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events contemplated as real sensible possibilities by any reasonable person, result in a conflict."
80 In another context, Deane J, in the High Court of Australia spoke of the "significant possibility" of conflict: Chan v Zacharia (1984) 154 CLR 178 at 199. In Hospital Products Ltd v United States SurgicalCorp and Ors (1984) 156 CLR 41 at 103, Mason J referred to "a real or substantial possibility of a conflict", which was also adopted, as noted earlier, in Pilmer v Duke Group Limited (in liq).
81 Theoretically, where a company is the fiduciary and owes a duty of loyalty to its clients, and the controlling mind of that company is a director of another company and is involved in the business of that other company - to which other company the first company is due to pay a commission on behalf of its client upon completion by the first company of a contract for the client - there is, in simple commercial terms, a "real sensible possibility of conflict" or a "significant possibility" of conflict, or a "real or substantial possibility" of conflict. This is because there would be a real concern that the director who is the controlling mind of the
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- fiduciary may proceed to act in respect of the contract it is handling for the clients, in a manner designed to advance the interests of the other company in earning its commission upon the completion of that contract. It does not need to be established in such a case that the director was personally bound to enjoy the fruits of the commission. The fact that the other company, to which the director owes a duty of loyalty to act in its best interests, stands to benefit. That is enough to raise the concern of conflict of interest.
82 It is in this context that the decision of Judge Nisbet in Combined Property Settlements Agency, upon which counsel for the Board relies, seems, in part, to have been decided. In Combined Property Settlements Agency, four medical practitioners entered into contracts to purchase land through Summit Realty. They had been approached to establish a medical centre in the Rockingham/Kwinana locality. The initial conditional contract fell over when local government zoning approval did not come through. Subsequently however the doctors were advised by the Council that if they could provide better access to the local hospital from the proposed medical centre, then zoning approval would probably be granted. Upon learning of this the doctors approached Summit Realty in respect of two other properties which were adjacent to the local hospital. Summit Realty advised that the land was for sale at a certain price and the doctors made an offer for each of the two lots, subject to conditions. The offers were subsequently accepted by the vendors. The doctors submitted a rezoning application to the local government and Summit Projects prepared plans for the development of the land into a medical centre which plans included provision for a pharmacy. These plans were likewise submitted by Summit Projects to the local government for building approval. The settlement agent was appointed to act on behalf of both the vendors and the purchasing doctors in respect of the land transaction.
83 A little later the solicitors for the vendors wrote to the purchasing doctors advising that they acted for the Prudential Assurance Co Ltd, Rockingham Park Pty Ltd and Sumreal Nominees Pty Ltd, the registered proprietors of the properties, and advised that each of the contracts had come to an end by virtue of the non-fulfilment of a condition precedent requiring a building contract to be entered into with Summit Projects by no later than 4 June 1995.
84 The settlement agent then wrote to the purchasing doctors in the following terms:
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- "We have received notice from the vendors' solicitors in the above matter advising that these contracts have come to an end, and have also enclosed a copy of the correspondence sent to you.
As a result we are unable to continue to act for you but offer our services should you purchase any other property in the future."
85 In the District Court, Judge Nisbet explained in his reasons, at [9], that while the vendors purported to rely on the purchasers' failure to comply with the condition precedent, their true reason was quite different. Mr Richard John Wild was the holder of the settlement agency licence. He was a director of the settlement agent along with two other persons, John Lesley Wilson and John Lawrence Simpson. Each of Simpson and Wilson were also directors of SUCO Pty Ltd, the company that owned and traded as Summit Projects, builders of the proposed medical centre for the doctors. Additionally, each of these two persons was a director of Sumreal Nominees Pty Ltd, one of the vendors and also of the company which traded as Summit Realty, the real estate agent involved in the transaction. One of the other vendors, Rockingham Park Pty Ltd, was also directed by Mr Simpson (in addition to four other directors).
86 Judge Nisbet found, at [10], that on 3 July 1995 Mr Wild attended a meeting in Mr Wilson's office with Mr Wilson and his solicitor, Mr Mark Balfour, apparently organised by Mr Wilson. Mr Wild was told that Mr Wilson on behalf of the vendors was going to terminate the contract because he had just learned that the purchasers had planned to develop a pharmacy as part of their medical centre which would be in competition with a pharmacy that he was developing nearby, which was either known as or was part of a development called "The Grange" in which development Mr Wilson apparently had an interest.
87 Five allegations were made in disciplinary proceedings before the Settlement Agents Board. The Board found that only allegation 3 had been made out. In the proceedings before Judge Nisbet, Mr Sharkey, an Inspector under the SA Act, appealed in respect of the Board's findings on allegations 1 and 5. Allegations 1 and 5 were as follows:
88 That the settlement agent commenced to act for the medical practitioner purchasers in circumstances where a conflict of interest foreseeably could have arisen between the settlement agent and the purchasers contrary to 9 of the Code of Conduct. (The particulars given concerned the fact that the settlement agent was subject to control by its
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- shareholders, John Lesley Wilson Nominees Pty Ltd and Ginza Pty Ltd; that John Leslesy Wilson Nominees Pty Ltd was a shareholder and one of the vendors of the properties, Sumreal Nominees Pty Ltd; Ginza Pty Ltd was a shareholder in one of the vendors of the properties, Rockingham Park Pty Ltd; in the foreseeable event of a dispute arising between the vendors and the purchasers in relation to the sale of the property the interests of the respondent would conflict with those of the purchasers due to the interest of shareholders in the respondent in two of the vendors of the properties.)
89 That the settlement agent failed to make a full and frank disclosure to the purchasers of an interest it had in the sale of the property contrary to r 6 of the Code of Conduct. (The particulars given included a statement that the interest of the settlement agent was as set out in the particulars to allegation 1 and the respondent failed to disclose that interest to the purchasers.)
90 Judge Nisbet, after considering the terms of rules 5, 6, 7, 8 and 9 of the Code of Conduct (which were either in exactly the same terms as relevant here or materially the same) and the responsibilities of fiduciary at equity, concluded that even though a notice had been given under r 8 and a signed consent in the form and manner contemplated by s 43 of the Act and the Code was obtained, did not excuse the settlement agent from meeting its fiduciary obligation to avoid a conflict of interest. At [44], Judge Nisbet observed that the fiduciary obligation to avoid a conflict of interest was an obligation in equity encompassed by r 5 of the Code. Judge Nisbet also found that the notice and the consent did not alleviate the settlement agent's failure to perform its obligation under r 9 of the Code.
91 His Honour then concluded that:
"In my opinion, the respondent's position was pregnant with conflict of the sort that ultimately arose and was eminently foreseeable. Further, as the events happened, that conflict was not merely theoretical but real. I accordingly find ground 1 of the appeal made out."
92 In other words, Judge Nisbet found that there was a breach of r 9 of the Code of Conduct.
93 Judge Nisbet also found the second ground of appeal was made out in that the settlement agent had failed to make full and frank disclosure as required by r 6 of the Code. At [45], Judge Nisbet observed:
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- "Whoever is the agent is required to make a full and frank disclosure of any interest he may have in the transaction and that duty is not satisfied merely by giving a notice to one of the parties that he is acting for the other party. The issues are quite separate and distinct."
94 At [46] Judge Nisbet added:
"Again it is not to the point, as the respondent argued, that the directors of the respondent were unable to exercise any control over the decisions of the joint venture. That was not an issue, what was an issue is that at least one and probably two of the directors of the respondent had real and not merely theoretical interest in the vendors and they, or at least one of them was developing land in the same manner as that proposed by the purchasers, in a situation which was obvious, had they turned their mind to it at the relevant time (which was at the time of their appointment), was ripe with potential for conflict. And that is precisely what happened. On the evidence available the only inference is that Mr Wilson dishonestly purported to rely on the breach of the development clause in the contracts for sale when his true reason was the protection of other of his commercial interests which in turn were the commercial interests of the vendors. And again, likewise it is not to the point for the respondent to argue as it did that the director Mr Wild was in the day to day control of the business and the other directors, Messrs Wilson and Simpson, were only concerned "with the financial management of the company and did not interfere at all in the day to day running of the business which was under his control."
95 As to the general question of breach of the no conflict duty, at [38], Judge Nisbet noted:
"For my part, I cannot see how the potentialities for conflict here were not recognised by the respondent. It knew through its directors Wilson and Simpson that the purchasers proposed to develop the land in question for a medical centre which would include a pharmacy. It knew through its director Wilson, at least, and probably through its directors Wilson and Simpson, that either its other principals, the vendors or Wilson personally were interested in the development of some other land which proposed development likewise included a pharmacy, and the
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- two pharmacies were going to be in relatively close proximity to one another such that there was at the very least a potential for problems with regard to the viability of two pharmacies operating in close proximity to one another. And I would be very surprised if these directors were not aware of the Commonwealth Government's move to reduce the number of pharmacies throughout Australia such that all licences to dispense now have geographical limitations. These people, are after all, essentially commercial land developers with what commercial analysts may describe as a vertically integrated business. And, for completeness, it does not stretch the meaning of 'personal interest' to find, as I do here, that where two of the three directors of the respondent are directors and shareholders of two of three vendors then it may be truly said that the respondent had a personal interest in the transaction which it failed to disclose to its other principal, the purchasers." (emphasis supplied)
96 The decision made by Judge Nisbet, with respect, is not at all surprising, especially on the evidence before the District Court. When His Honour said he did not consider it to stretch the meaning of "personal interest" to find that the settlement agent had a personal interest in the transaction which it had failed to disclose to the other principal, the purchasers, for the purposes of the no-conflict duty, and the duty to disclose an interest under r 6 of the Code of Conduct, the Tribunal understands Judge Nisbet simply to have found that, in the circumstances the settlement agent had a relevant "interest" for the purposes of the no-conflict duty and for the purposes of r 5 and r 6 of the Code of Conduct.
97 In the circumstances of the present case before this Tribunal, the facts are not materially different from those suggested earlier in the hypothetical case. The settlement agent was controlled by Mr Ferguson. Mr Ferguson was also a director of the real estate agency which had brokered the sale of lot 22 on behalf of Mr Smith. The settlement agent was acting on behalf of Mr Smith in relation to the main transaction, and for the complainants in relation to the buy-back contract. The real estate agency stood to receive a commission of $20 000 on settlement being effected by the settlement agent. In those circumstances, the settlement agent had a real sensible(?) possibility of conflict, or a significant possibility of conflict, or a real or substantial possibility of conflict, of duty because the real estate agency, of which Mr Ferguson was a director, and to which Mr Ferguson as a director owed a duty of loyalty, stood to
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- receive a commission of $20 000 upon the settlement of the main contract simultaneously with the buy-back contract.
98 In such circumstances, it is difficult to see how the settlement agent could feel comfortable in proceeding to settlement, not only without disclosing its interest in the matter, as required by r 8 of the Code of Conduct, but also without obtaining the unambiguous, written, informed consent of its client or clients.
99 At no time did the settlement agent have the fully informed consent of the complainants to act and to proceed to settlement notwithstanding the conflict of interest it had by reason of the commission payable to the real estate agency. In circumstances such as these, fully informed consent requires more than a general awareness that a fee will be charged: see Guinness PLC v Saunders [1990] 1 All ER 652. A consent to the specific conduct that constitutes conflict of interest is required. The consumer interest at risk demands no less.
100 There is no doubt that at material times the settlement agent also owed a no-conflict duty to the complainants in relation to the buy-back contract. At no time did the settlement agent have any dealings with Mrs Smith and there is no basis upon which it can be suggested that she provided any form of consent, fully informed or otherwise, to the settlement agent acting or proceeding to settlement on her behalf in relation to the buy-back transaction. It matters not that Mrs Smith was not responsible for the payment of the commission. The conflict still existed.
101 In these circumstances, the Tribunal is satisfied that the settlement agent breached the no-conflict duty owed to the complainants under r 5 and the positive obligation not to proceed to settlement in such circumstances, set out in r 9, as alleged in allegation 4(a).
The settlement agent's fee issue
102 It is also said by the Board that the settlement agent was in conflict of duty in continuing to act and proceeding to settlement when it was entitled to receive a settlement fee and did not have the informed consent of either of the complainants to do so.
103 At this point, it needs to be remembered that the settlement included the buy-back contract under which the complainants were proposing to buy back a portion of lot 22 immediately following settlement of the sale of the whole of lot 22.
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104 The primary question arising is whether, in the circumstances, the settlement agent had a relevant personal interest in the payment of the settlement fee which caused it to have a conflict of interest while it continued to act for the complainants, or Mr Smith alone, in respect of the settlements of the transactions.
105 It might seem unusual to suggest that a person who has appointed a settlement agent to act for them and has agreed the fee the settlement agent is to receive upon effecting settlement can be considered in breach of the no-conflict fiduciary duty if it proceeds to settle the transaction and pays itself its fee.
106 In ordinary circumstances, the Tribunal considers that the appointment by the client of the settlement agent pursuant to an appointment or contract specifying what fee the settlement agent is entitled to receive following settlement, would constitute a fully informed consent to the settlement agent continuing to act in the transaction and paying itself a fee following settlement.
107 In this case, however, neither of the complainants signed an appointment of the settlement agent to carry out the settlement. While the evidence shows Mr Smith signed papers in respect of an earlier proposed transaction, and also suggests Mr Smith was aware that a settlement fee would be payable it is not possible to conclude, in the absence of a signed appointment and express acknowledgement by him of the fee to be charged, that Mr Smith at any material time gave informed consent to the settlement agent to continue to act notwithstanding this conflict.
108 In truth, what seems to have happened is that the settlement agent acted for the complainants on the instructions of Mr Smith alone and assumed that Mr Smith had authority to give these instructions. Plainly, it owed a no-conflict duty to both the complainants, even though it held no express, written appointment from Mrs Smith – or indeed from Mr Smith in relation to the main transaction or the buy-back transaction.
109 In fact, in this case, the only fee charged for the settlement seems to have been to Mr Smith. The settlement agent's fee was directed to Mr Smith. No account was ever issued to Mrs Smith alone or to the complainants. However, this does not alter the fact that the settlement agent did not have Mr Smith's fully informed consent to proceed with the settlement of the transaction or that of Mrs Smith.
110 In these circumstances, the settlement agent proceeded to settlement and effected settlement in circumstances where it had a personal interest
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- in the transaction by reason of the settlement fee it would receive, and eventually did receive, while at the same time owing a duty of loyalty to Mr Smith in respect of the settlement of the main transaction and to the complainants in respect of the buy-back contract. The settlement agent did not have the fully informed consent of either of the complainants in relation to the payment of the settlement fee. In circumstances such as these, as explained earlier, fully informed consent requires more than a general awareness that a fee will be charged.
111 It follows that the settlement agent was in breach of its no-conflict fiduciary duty and, therefore, in breach of r 5; and also, in breach of r 9 by continuing to act in the settlement of the transaction when it had a conflict of interest.
112 The contention that the "interest" to which r 5 and r 9 refer does not include a settlement fee has no merit. That an "interest" exists is obvious. The way for a settlement agent to avoid the obvious conflict is to obtain a fully informed consent to the payment of the fees. That was lacking in this case.
113 While it may, in one sense, seem technical to find that a conflict of interest and breach of rules 5 and 9 may arise in such circumstances, it is very clear from the substance of the Settlement Agents Code of Conduct that in the interests of consumers, settlement agents should not act on behalf of a client without their express written authority and instructions to do so. If these strict requirements are adhered to, problems of the sort that arose in this case are much less likely to occur.
The question of penalty and costs
114 The Board submits that the three admitted breaches are in themselves serious and require a substantial penalty as they go to the fundamental practice of settlement agent. The Board further submits that in the event the Tribunal finds the settlement agent also acted in breach of r 5 or r 9 of the Code of Conduct, then this increases the seriousness of the matter. In the event, the Tribunal has found rules 5 and 9 were breached, in respect of both the commission payable to the real estate agency and the settlement agent's entitlement to its fee, as set out in allegation 4(a) or (b).
115 The disciplinary powers available to the Tribunal under s 84 of the SA Act are:
(1) to reprimand or caution the settlement agent;
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- (2) impose a fine not exceeding $10 000 on him;
(3) to suspend or cancel his licence and any triennial certificate in respect thereof and, in addition, disqualify him either temporarily or permanently, or until the fulfillment of any condition which may be imposed by the Tribunal or until the further order of the Tribunal, from holding a licence or triennial certificate, or both.
116 The Board submits that it is open to the Tribunal to impose a period of suspension and disqualification and impose a fine. The Board says that if the Tribunal is not inclined to order suspension and disqualification then the fine should be imposed and be at the higher end of the scale. The Board says this is not a case where a mere reprimand or caution is appropriate.
117 The settlement agent by way of mitigation says that it conceded at the earliest opportunity in these proceedings the first three allegations and also agreed material facts in the proceedings.
118 The settlement agent says it is cooperating with the investigation conducted by the Board subject to its obligations to professional indemnity insurers. It says Mr Ferguson participated in an interview with inspectors of the Board in 2005 giving answers to all questions put.
119 On behalf of the settlement agent it is said that Mr Ferguson has at all times been the person in bona fide control of the settlement agency and the creation of the settlement agent approximately 22 years ago. The settlement agent has never been prosecuted for any breach of the Act, Regulations or the Code.
120 As to Mr Ferguson himself, it is said that he became a licensed settlement agent approximately 24 years ago and has an exemplary record for having acted as such and has no convictions in this respect of the SA Act, Regulations or Code or any like legislation.
121 On behalf of the settlement agent it was also said that notwithstanding the events the subject of these proceedings, there have been no complaints made concerning the settlement agent since these events, or before them. Counsel for the settlement agent says that hereto Mr Ferguson had incurred substantial legal fees in relation to the matter already.
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122 On behalf of the settlement agent it is submitted that suspension or cancellation of the settlement agent's licence and any triennial certificate would be inappropriate but that a fine might be considered appropriate; and that Mr Ferguson is truly remorseful for what has happened.
123 In mitigation, counsel for the settlement agent says it did not seek out to be appointed as the settlement agent for the complainants. The engagement arose from Mr Smith approaching Mr Ferguson to act in such a capacity.
124 It is also submitted that historically, the settlement agent and Mr Ferguson were wary of and reluctant to act as settlement agent in respect of the buy back contracts and when approached by Mr Smith to act, Mr Ferguson initially declined. In this regard it should be noted that the other party was not represented by the settlement agent.
125 Prior to the transaction in question being completed, Mr Smith had signed a contract to sell lot 22 to another party, albeit one related to the party that eventually agreed to purchase it. In relation to that earlier contract, Mr Smith had been given by the settlement agent a notice that there was a relationship between the settlement agent and FHFW, that Mr Ferguson was a common director of both, and that the $20 000 commission would be payable to the real estate agent, FHFW.
126 However, no such information was provided in respect of the settlement that actually occurred. At no time were Mr Smith or the complainants invited to provide informed consent in relation to the transaction that proceeded to settlement.
127 The settlement agent also says that in about late May 2000, it "got the inkling" that the contract would not settle on time because the necessary sub-division approval of lot 22 had not been applied for or obtained and that Mr Ferguson contacted Mr Smith and made him aware of the fact that the pre-requisite of sub-division approval was unlikely to be obtained prior to 20 June 2000. On that occasion Mr Ferguson indicated to Mr Smith the necessity of obtaining independent legal advice. On behalf of the settlement agent it is said that Mr Smith "simply fobbed off the recommendation" to get independent legal advice.
128 In general terms the settlement agent submits that Mr Smith acted of his volition in proceeding to instruct the settlement agent to effect settlement in the circumstances. It is submitted that the complainants had their heart set on purchasing another property and wished the settlement to proceed.
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129 In relation to these submissions it may be observed that these facts merely accentuate the obligations of the settlement agent owed to the complainants not to effect settlement in all of the circumstances, particularly in light of the conflict of interest that existed by reason of the likely payment of the commission and the settlement agent's fees on the transaction, without clear authority to do so. That is to say, rather than mitigate the settlement agent's breach of duty, they tend to highlight and exacerbate it. Why the settlement agent should have allowed this matter to proceed to a settlement in all of the circumstances is, to say the least, puzzling.
130 In the event, the Tribunal, while finding that the settlement agent breached r 5 and r 9 of the Code of Conduct in the ways alleged, does not consider that disqualification or suspension are appropriate penalties in this case. The Tribunal has formed this view, having regard to the whole circumstance of the case and the previously unblemished record of the settlement agent, that a fine is the appropriate penalty.
131 A maximum fine of $10 000 can be imposed for such a breach of duty. The Tribunal considers a fine of $9 000 - close to the maximum - is called for. The settlement agent failed to ensure it had clear authority to act as it did on the clients' behalf. Strict adherence to the Code of Conduct is designed to protect the interests of the public in its dealings with settlement agents. A breach of the strict rules will usually attract a commensurate penalty.
132 The settlement agent will also be obliged to meet the costs of the Board in bringing and maintaining these proceedings. As the Tribunal has explained on other occasions, a vocational regulatory body which brings proceedings such as these is usually entitled to an order of costs: see Medical Board of Western Australia and Roberman [2005] WASAT 81 (S) at [31]. However, where a vocational regulatory body does not succeed on all counts in such proceedings, this may be taken into account when costs are fixed.
133 The Board submits that, in the circumstances, a reasonable order for costs is $4 000. Counsel for the settlement agent accepted that the Board's claim to a reasonable order for costs of $4 000 would be appropriate, but only if the allegation of conflict of interest was made out. In the result, both allegations 4(a) and 4(b) have been made out. It follows that costs in the sum of $4 000 is appropriate.
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Conclusion and orders
134 For the reasons given above, the Tribunal finds as follows:
(1) The settlement agent is guilty of the conduct set out in allegations (1) - (3) and (4)(a) and (b).
(2) The settlement agent pay a fine of $9 000.
(3) The settlement agent pay to the Settlement Agents Supervisory Board the costs of and incidental to the proceedings fixed in the sum of $4 000.
- I certify that this and the preceding [134] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
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JUSTICE M L BARKER, PRESIDENT