Short v Crawley

[2005] NSWSC 928

CITATION:	Short v Crawley [2005] NSWSC 928 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	15/08/05
JUDGMENT DATE :	15 September 2005
JUDGMENT OF:	White J
DECISION:	See para 55 of judgment.

CATCHWORDS:	PRACTICE AND PROCEDURE - Application to reformulate pleadings and add new respondents - Whether new pleadings are reasonably arguable, inconsistent with previous verified pleadings or cause irremediable prejudice due to the death of the primary respondent - Allegation of unconscionable retention of property arising out of breach of contract - Held that new claims are not manifestly hopeless - Leave to amend granted.
CASES CITED:	Byrne v Australian Airlines Ltd (1995) 185 CLR 410 Commonwealth v Verwayen (1990) 170 CLR 394 News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 Muchinski v Dodds (1985) 160 CLR 583 Baumgartner v Baumgartner (1987) 164 CLR 137 West v Mead [2003] NSWSC 161 Town & Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166 Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874 Hospital Products Ltd v US Surgical Corp (1984) 156 CLR 41 United States Surgical Corp v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 Yeshiva Properties No. 1 Pty Ltd v Marshall [2005] NSWCA 23 Ford Excavations Pty Ltd v Do Carmo [1981] 2 NSWLR 253 Vane v Vane (1873) 8 Ch App 383 In re Montagu's Settlement Trusts [1987] Ch 264 at 283 Agip (Africa) Ltd v Jackson [1990] Ch 265 Attorney-General v Blake [2001] 1 AC 268 Wickstead v Browne (1992) 30 NSWLR 1 Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Gertsch v Atsas (1999) 10 BPR 18,431 New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781 Twinsectra Ltd v Yardley [2002] AC 164 Cadwallader v Bajco Pty Ltd [2002] NSWCA 328
PARTIES:	Roslyn Short as executrix of the estate of the late Warwick Gordon Short & 1 Or v Christopher Crawley & 9 Ors
FILE NUMBER(S):	SC 2824/98
COUNSEL:	Cross-claimants: A J L Bannon SC, D B Studdy Cross-defendants: I M Jackman SC, T M Thawley
SOLICITORS:	Cross-claimants: Blake Dawson Waldron Cross-defendants: Kemp Strang

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WHITE J

Thursday, 15 September 2005

2824/98 Roslyn Short as executrix of the estate of the Late Warwick Gordon Short & 1 Or v Christopher Crawley & 9 Ors – No. 25

JUDGMENT

1 HIS HONOUR: The first to sixth defendants seek leave to file a third further amended cross-claim. The background to the application can be seen from the judgment of Hodgson J of 7 July 2003 and my judgment of 10 March 2005. In the new proposed pleadings, the cross-claimants seek to join Mrs Short as a cross-defendant in her personal capacity and to join Quadrafox Pty Ltd, Fraser Short, Martin Short, and Paris Short as new cross-defendants.

2 I will deal first with the proposed amendments to the cross-claim against the existing cross-defendants: Nabatu Pty Ltd, and Mrs Short in her capacity as executrix of the estate of Mr Short.

Amendments Affecting Existing Cross-Defendants

3 The cross-claimants have reformulated their allegation that Mr Short and Nabatu breached an agreement with Mr Crawley that they would make their properties available as security to support borrowings required to maintain the ownership and operation of the Marlborough Hotel and Jackson’s on George, and to maintain the ownership and development of the Elizabeth Street Centre. Whereas previously, it was alleged that the shareholders would provide security to “support borrowings of the companies to which they agreed”, it is now alleged that it was agreed that they would continue to provide securities for so long as borrowings were required to maintain the ownership and operation of the various establishments, notwithstanding the need to refinance such borrowing with the same or another financier. As reformulated, the pleading does not suffer from the defect which I identified in my judgment of 10 March 2005, namely, that it did not specify what it was that was agreed in 1997 which was said to trigger the term of the agreement which was then alleged, and did not specify what facts constituted the alleged withdrawal and refusal to provide securities as alleged.

4 The attack on the new proposed pleading is that:

(a) it is not reasonably arguable, so it is contended, that the implied term relied upon by the cross-claimants arose;

(b) the way the agreement is now pleaded is inconsistent with the way it had previously been pleaded in a verified cross-claim; and

(c) the delay in formulating the new pleading has caused irremediable prejudice having regard to the death in February 2004 of Mr Short, and the cross-claimants’ earlier disavowal of any intention to cross-claim.

5 The alleged implied term was said by senior counsel for the cross-claimants to arise partly from the express oral term of the agreement and partly from the circumstances in which the agreement was made which, it is said, would make it inequitable for a party not to continue to provide his property as security whilst he continued to have an interest in the companies or partnership that conducted the ventures, thereby freeing himself up to pursue other potentially profitable opportunities, whilst leaving the other party with the burden of providing his property as security for companies in which all parties were shareholders, and less able to pursue other ventures.

6 The alleged agreement is not a formal contract. The question is whether the alleged term can be inferred, perhaps from what the parties have said, or whether it is necessary to imply the term for the reasonable or effective operation of the contract in the circumstances of the case. (Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442). This will involve a consideration of the course of dealings between the parties. It cannot be resolved as a pleading question.

7 The cross-defendants pointed to what they contend are anomalies in the width of the implied term pleaded. As pleaded, Mr Short and Nabatu would be required to continue to offer property as security for the borrowings needed to maintain the ownership and operation of the Marlborough Hotel and Jackson’s on George, and the ownership and development of the Elizabeth Street Centre, irrespective of whether a lender required such security, irrespective of the terms of the loan or the identity of the lender, and irrespective of whether the loan was for the benefit of the borrower. The cross-defendants say that the refinancing by Aldonet Pty Ltd in 1997 was disadvantageous to the borrowers and provided an improper benefit to Mr Crawley. That is not an issue which can be determined on the present application.

8 In Commonwealth v Verwayen (1990) 170 CLR 394, Dawson J said (at 456):

“ Of course, an amendment which is futile because it is obviously bad in law will not be allowed. But it is no ground for refusing an amendment that it raises a claim or defence which ought not to succeed. That will be an issue upon trial. ”

9 I do not conclude from the terms of the pleading that the implied term for which the cross-claimants contend is not reasonably arguable. The cross-defendants may be able to point to matters which show that any agreement in relation to the provision of properties as security for the borrowings for the relevant properties and establishments was narrower than the cross-claimants contend, or that the agreement, if made, did not apply to the terms on which and the circumstances in which finance was offered by Aldonet. In my view, these matters will involve detailed consideration of the evidence and the course of dealings between the parties and they are not matters which can be decided as a pleading question.

10 Nor do I conclude from the changes to the way in which the claim is pleaded, that the claim as now pleaded is not reasonably arguable. It may be that the evidentiary basis for the claim has not changed and that all that has changed is the legal complexion which the cross-claimants’ legal representatives have sought to give it. Whether this is so or not, I do not conclude from the changes to the way the claim has been pleaded that as now pleaded it is futile.

11 Nor do I consider that the lateness of the present formulation of the claim is a sufficient reason to refuse leave. The same matters will be relied upon by the cross-claimants as a defence to the plaintiffs’ claim that the affairs of Marsico and J&J O’Brien have been conducted oppressively and as a defence to the relief sought by the plaintiffs. Although the way in which the claim was put has been recast, it appears to be substantially the same as that pleaded in April 2003. The fact that at a very early directions hearing the defendants said that they did not intend to bring a cross-claim, is not a sufficient reason to refuse leave. A great deal of preparation was done between 1998 and 2003.

12 It was said that Mr Short prepared his final evidence on the basis of the second further amended cross-claim and his cross-examination was conducted on that basis. Accepting that to be so, I doubt that the variances between the way the alleged agreement was pleaded in the second further amended cross-claim and that which is now sought to be pleaded is such that substantial prejudice would be occasioned by the lateness of the amendment. The plaintiffs have been given leave to amend the statement of claim after Mr Short’s death to raise matters about which Mr Short might have given evidence or might have been cross-examined, in a way which could not have been appreciated when his evidence was taken on commission in December 2003. I do not think that it would be fair to the defendants to refuse this amendment because of Mr Short’s death in February 2004.

13 I will therefore allow the reformulation of the claim that Mr Short and Nabatu were in breach of agreements to provide securities.

14 The claim that Mr Short breached his duties as a director has also been reformulated. There was some disagreement between the parties as to whether it was alleged that by putting Quadrafox into a position to acquire the leasehold of the Scubar premises and of the Australian Hotel premises, and to operate the Scubar Downunder business and the Australian Hotel business, he took advantage of the corporate opportunities which properly belonged to the companies of which he was a director. In my view, that allegation is made. In substance, what is alleged against Mr Short, is that in breach of his agreement with the other shareholders, he did not make his properties available as security for the companies’ borrowings. It is said that he used his knowledge of the companies’ financial position and that the companies would have a lesser capacity to pursue business opportunities if he withheld his properties as security, and that he then set about establishing Quadrafox to acquire a business in competition with the business of the companies, without disclosing to the companies his negotiations for the acquisition of those businesses. It is alleged that Mr Short was in a position of conflict between his own interests and his duty to act in the best interests of the company. It is alleged that the business opportunity which Mr Short took up was of a kind in which Marsico, J&J O’Brien and Trudale were likely to have been interested, (para 136), and that his purpose in not offering his assets as security for the companies’ borrowings, was to establish a business in competition with the companies of which he was a director to their detriment. (Para 137). In my view, these allegations raise a triable issue that Mr Short’s conduct in relation to the establishment of Quadrafox to acquire the Scubar business and property and the Australian Hotel business and property, was a breach of his duty as a director.

15 The cross-defendants submitted that a director is under no duty to the company of which he is a director to pledge his personal assets, or to give personal guarantees, in support of the companies’ borrowings. In the abstract, that is so. However, the allegation is intertwined with the alleged breach of the agreement with the shareholders to provide property as security, which might give content to Mr Short’s duties as a director. It is also intertwined with the allegations in relation to the acquisition of the Scubar and Australian Hotel premises and business. I do not think that the alleged breach by Mr Short of his duty as a director is demonstrably futile.

16 The cross-defendants say that by reason of Mr Short’s death and the lateness of the pleading, they are not able to address the allegation in paragraph 137 that in not providing his assets as security, he acted for an improper purpose. I was not taken to any affidavits sworn by Mr Short or to the evidence taken on commission to see to what extent this question was dealt with, if at all. It appears to me, however, that the general allegation that Mr Short acted improperly in not offering his properties as security and in causing Quadrafox to acquire Scubar Downunder and the Australian Hotel was raised in the cross-claim on 16 April 2003, and in particular, in paragraph 10 of that pleading. Although the matters are now pleaded at greater length, the substance of the allegation against Mr Short was known in April 2003. I would not refuse leave to amend to plead the claim for breach of directors’ duty by reason of the delay or of Mr Short’s death in February 2004.

17 No wider factual enquiries are thrown up by allowing the cross-claimants to amend the cross-claim to plead the alleged breach of agreements to provide securities and to plead that Mr Short breached his duty as a director. I will grant leave to the cross-claimants to amend to plead those matters. It was accepted during the hearing of the application that the words “and further or in the alternative 198” where they appear in paragraphs 202 and 205 are to be deleted.

18 The remaining claims against the present cross-defendants are that they hold property allegedly acquired as a result of the breach of the alleged agreement to make properties available as security for the companies’ borrowings, or as a result of the alleged breach of a 1984 agreement between Nabatu, Crawley and Davis to share further opportunities to acquire businesses or commercial properties, or as a result of the alleged breach by Mr Short of his duties as a director, on a constructive trust for the cross-claimants, or they are required to account for profits derived by them as a result of those breaches.

19 Insofar as the claim is based upon the alleged breaches by Mr Short of his director’s duties, the beneficiaries of the constructive trust are the companies. Insofar as the trust is said to arise from the breach of contract, the beneficiary of the constructive trust is the “continuing party” to the agreements, Mr Crawley.

20 In paragraph 199 of the proposed amended cross-claim is alleged that it was unconscionable of Mr Short and Nabatu to provide their properties as securities after June 1997 to enable Quadrafox to pursue its ventures with the Scubar Downunder premises and the Australian Hotel, and to purchase other businesses and properties, to enable Nabatu or Mr Short to acquire half of a share of Ms Cadwallader in the property and business known as the Bridgeview Hotel, to enable Green Slip to acquire the King Street Wharf and the Cargo Bar and Lounge business, and to enable Beverage Boys to acquire leaseholds of premises at King Street Wharf and premises and businesses conducted on those premises. These acquisitions are alleged to have been made from 1997 to 2003. The reason such acquisitions were unconscionable appears to be that the businesses in question were in competition with those conducted by J&J O’Brien, Marsico and Trudale and Mr Crawley, and that those persons had a diminished capacity to pursue their business ventures because of the continuing failure by Mr Short and Nabatu to provide securities pursuant to their agreement to do so.

21 The cross-claimants say that this claim is reasonably arguable. They rely upon the following statement in the judgment of the Full Court of the Federal Court in News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 517:

“ E. Remedies available for breach of contract and procurement of breach

The primary remedy for breach of contract and the tort of inducing breach of contract is damages. However, the court may in its auxiliary jurisdiction in equity make orders by way of mandatory or negative injunction, so that the remedies granted more effectively make good the consequences of the respondents’ wrongdoing. In an exceptional case, the principles stated by Deane J in Muschinski v Dodds (1985) 160 CLR 583 at 619-20; 62 ALR 429 , and by Mason CJ, Wilson and Deane JJ in Baumgartner v Baumgartner (1987) 164 CLR 137 at 148; 76 ALR 75 , could warrant the intervention of equity to impose a constructive trust upon property gained by a party through its breach of contract or tortious conduct. This might be the case if damages were not an adequate remedy and it would be unconscionable to allow the respondent to retain the property: see also Australian and New Zealand Banking Group Ltd v Westpac Banking Corp (1988) 164 CLR 662 at 673. ”

22 The cross-defendants say that this is wrong, and that in any event, the cross-claimants have not pleaded and there is no basis for inferring that damages would not be an adequate remedy for the alleged breaches of contract.

23 The complaint that the proposed cross-claim does not plead that damages would not be an adequate remedy could readily be addressed by further amendment. The question is not whether the Full Court’s statement of the principle is right or wrong, but whether it is reasonably arguable. There are obvious difficulties in the cross-defendants’ submission that it is not reasonably arguable that the Full Court’s statement of the principle is correct. There are serious questions as to whether Muchinski v Dodds and Baumgartner v Baumgartner justify the proposition enunciated by the Full Court. (See the explanation of these cases in West v Mead [2003] NSWSC 161 at [52]-[64] per Campbell J). It is not clear what would make a case exceptional to bring it within the principle enunciated by the Full Court, or, if the principle is correct, why it should apply only in exceptional cases. There is also uncertainty as to what, in the context of a breach of contract, would amount to an unconscionable retention of property acquired through breach of contract. Nor is it clear what causal relationship between the breach of contract and the acquisition of property is required. In my view, the uncertainty attending these questions indicates that there is scope for reasonable argument on them. The contrary arguments were not fully developed.

24 No separate submission were addressed to the claim for an account of profits. There are formidable obstacles to a claim for an account of profits for breach of contract. (See Town & Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166 at [78]-[85] and Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874 at [228]-[237]). However, the observations of Deane J in Hospital Products Ltd v US Surgical Corp (1984) 156 CLR 41 at 124-125, and the decision of the House of Lords in Attorney-General v Blake [2001] 1 AC 268, (which may themselves support the statement of the Full Federal Court quoted in para 21 above), show that at least at an appellate level, the claim is not obviously futile.

25 I will grant leave to the cross-claimants to plead these causes of action. I take into account what Kirby P said in Wickstead v Browne (1992) 30 NSWLR 1 at 5:

“… as the trial must now proceed, there is merit (as it seems to me)
in permitting the appellant to present his case in various ways. The marginal utility to the respondent of preventing the appellant from proceeding upon the alternative cause of action in negligence is minimal. But the marginal cost of doing so would be very great if, subsequently, the trial was concluded, limited by the orders proposed, and it was then held, either by this Court or by the High Court of Australia, that the appellant's cause of action in negligence was viable;
2. Common experience teaches that it is usually more efficient and just to
consider the viability of a cause of action when the facts said to support it are adduced and the suggested action can be judged with a full understanding of all relevant evidence. Testimony gives colour and content to the application and development of legal principle. ”

26 During the hearing I raised the question whether the claims for the alleged breaches of agreements to provide securities, and the alleged breaches by Mr Short of his director’s duties, together with the alleged breach of the agreement to share opportunities and the other claims which have previously been allowed, should be tried separately and in advance of the other issues arising on the cross-claim. I understood the parties to have accepted, or at least not disputed, that claims for relief which arise only if the breaches of contract or duty are established, should be deferred. This would include the deferral until after the determination of the other issues on the cross-claim, of the claims that the executrix of Mr Short’s estate, and Nabatu, hold the property acquired by Mr Short and Nabatu allegedly through their breaches of contract, and Mr Short’s breach of duty as a director, on constructive trust, or are liable to account for profits. I will make orders accordingly, but the parties will have liberty to apply to vary the orders in case it appears that all or some of the new claims for consequential relief against the existing cross-defendants can be dealt with in the hearing fixed for February.

Claim Against the new Cross-Defendants

27 The claims against the proposed new cross-defendants are put in various ways. Paragraph 203 alleges that each of Quadrafox, Mrs Short, Fraser Short, Martin Short and Paris Short were active and knowing participants in Mr Short’s breach of duty as a director of J&J O’Brien, Marsico and Trudale, in connection with the acquisition by Mr Short, Mrs Short, Fraser Short, Martin Short and Paris Short of shares in Quadrafox, and the acquisition by Quadrafox of the leasehold of the Scubar premises, the establishment of the Scubar Downunder business, the acquisition of the leasehold of the Australian Hotel premises, and the acquisition and development of the Australian Hotel business.

28 The cross-claimants claim the personal remedy of equitable compensation. They also claim that the cross-defendants hold assets on constructive trust for them, or are liable to account for the value or profits “attributable” to those assets. It is contended that Quadrafox hold its assets as constructive trustee for J&J O’Brien, Marsico and Trudale and is liable to account for the value and profits attributable to those assets as a consequence of its knowing and active participation by Mr Short in his breach of director’s duties towards those companies, and that Mrs Short, Fraser Short, Martin Short and Paris Short hold their shares in Quadrafox, (and are liable to account for profits “attributable” to those shares), as a constructive trustee for those companies because of their knowing and active participation in Mr Short’s breach of duty.

29 It is said that Mr Short’s knowledge constituted the knowledge of Quadrafox as it acted in accordance with his directions. It is said that Mrs Short had actual knowledge of the matters about which Mr Short knew (paragraph 141) and that she, with Mr Short, directed, procured and funded the incorporation of Quadrafox, the acquisition of shares in Quadrafox, and the acquisition by Quadrafox of the promises and businesses. (para 150).

30 It is alleged that each of Fraser Short, Martin Short and Paris Short permitted Mr Short to act on their behalf in respect of all matters relating to their acquisition of shares in Quadrafox in his discretion, and that by reason thereof his knowledge constituted their knowledge in connection with the acquisition of those shares. In other words, it is alleged that Mr Short acted as their agent in connection with the acquisition of shares in Quadrafox, and that the agent’s knowledge should be imputed to his principals.

31 The same matters are relied on for the contentions in paragraph 200 of the cross-claim that Quadrafox holds its assets on a constructive trust for the “continuing parties” to the Westpac and BAC Securities Agreements and the agreement to share opportunities, and is liable to account to those parties for the value and profits attributable to those assets. The same matters are also relied on against each of Mrs Short and Fraser, Martin and Paris Short for the claim that they hold their shares on a constructive trust for Mr Crawley or are liable to account to him for profits attributable to those shares, because of the alleged breaches by Nabatu and Mr Short of those agreements. It is not alleged that they were active and knowing participants in a breach by Nabatu or Mr Short of duties as constructive trustee. The pleader appears to have assumed that the alleged constructive trust arising from the taking of unconscionable advantage of a breach of contract is a trust which is to be imposed as a remedy by the Court if the claim is established.

Claim Against Quadrafox

32 I do not consider that the allegation that Quadrafox knowingly and actively participated in Mr Short’s alleged breach of director’s duties, because he was the governing mind of Quadrafox, is obviously futile. Nor are the claims that it holds its assets which represent a diverted corporate opportunity on trust for J&J O’Brien, Marsico and Trudale, or is liable to account to them for its profits, obviously futile.

33 The claim that Quadrafox hold its assets on a constructive trust or is liable to account for profits, because its director, Mr Short, took an unconscientious advantage of a breach of contract, is novel. The passage relied on by the cross-claimants from News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 517, does not directly support such a claim. The Full Court only referred to the position of the contract breaker. However, if a constructive trust can arise in respect of property acquired through a breach of contract where it is unconscionable for the contract breaker to retain the property, then it is arguable that a constructive trust may be imposed on assets acquired by a third party through that breach of contract, with knowledge of the breach, where it would be unconscionable to allow the third party to retain the assets. It is reasonably arguable that that is the logical extension to this suggested species of constructive trust for breach of contract, of the principles relating to third parties who acquire assets with knowledge that the property assigned was acquired by the assignor in breach of fiduciary duty. (United States Surgical Corp v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 247, 253-254). The same arguments can be advanced in relation to the claim for an account of profits.

34 Subject to the questions of the effect of delay, I would grant leave to the cross-claimants to bring their claims against Quadrafox.

Claim Against Mrs Short in her Personal Capacity

35 If it is established that Mrs Short directed, procured and funded the incorporation of Quadrafox and the acquisition of shares in it in conjunction with Mr Short and with actual knowledge of his breach of duty, it is reasonably arguable that she has a personal liability for knowingly assisting Mr Short’s breach of fiduciary duty. If she acquired her shares in Quadrafox as a result of Mr Short’s breach of fiduciary duty of which she knew, then it is arguable that she might hold them on trust for J&J O’Brien, Marsico and Trudale, or be liable to account for profits derived from her shareholding. For the same reasons as I have given in respect of Quadrafox, it is arguable that she could also hold those shares on a constructive trust, if she knew that they were acquired through a breach of contract and it is unconscionable for her to retain them. Again, subject to the question of delay, I would grant leave to the cross-claimants to bring their claim against Mrs Short in her personal capacity in respect of her acquisition of shares in Quadrafox.

Claim Against Fraser, Martin and Paris Short in Respect of Their Shares in Quadrafox

36 The claim that Fraser, Martin and Paris Short are personally liable for assisting a breach of fiduciary duty and that they hold their shares in Quadrafox on constructive trust for J&J O’Brien, Marsico and Trudale, or are liable to account for profits derived from their shareholding, raises different questions. The claim against them is that they were active and knowing participants in Mr Short’s breach of duty as a director. However, all that is alleged against them in that respect is that they permitted Mr Short to act on their behalf in respect of all matters relating to their acquisition of shares in Quadrafox in his discretion.

37 It was submitted that this is insufficient to establish a claim for knowing assistance in a breach by Mr Short of his fiduciary duty. It was submitted for the proposed cross-defendants that it was not alleged that they had actual knowledge of the alleged breaches of duty, or knowledge of facts which would communicate to a reasonable person a general understanding that there was a fraud, breach of trust, or breach of fiduciary duty. Nor was it alleged that they did not act as honest persons would act in their position. Therefore, it was submitted, it was not reasonably arguable that they could be liable as constructive trustees for knowingly assisting a breach of fiduciary duty. (See Yeshiva Properties No. 1 Pty Ltd v Marshall [2005] NSWCA 23 at [18]-[22]).

38 In response, the cross-claimants submitted that they allege that Mr Short acted as agent for Fraser, Martin and Paris Short in relation to their acquisition of shares in Quadrafox and that it is reasonably arguable that his knowledge of his own breach of duty should be attributed to them, on the grounds that it was knowledge of matters of a kind that it was his duty to communicate to his principals. It was submitted that the knowledge of an agent which is so attributed to a principal is actual knowledge, not constructive knowledge, and they are fixed with Mr Short’s knowledge. (Ford Excavations Pty Ltd v Do Carmo [1981] 2 NSWLR 253 at 266-267). (See also Vane v Vane (1873) 8 Ch App 383 at 399-400; but compare In re Montagu’s Settlement Trusts [1987] Ch 264 at 283).

39 I was not referred to any case where this precise issue was determined in the context of a claim against a third party for knowing assistance of a breach of trust or fiduciary duty, although there are useful observations on the subject by Sir Robert Megarry VC in In re Montagu’s Settlement Trusts [1987] Ch 264.

40 It is not alleged that Fraser, Martin and Paris Short are vicariously liable for the conduct of their agent. (Compare Agip (Africa) Ltd v Jackson [1990] Ch 265 at 296; [1991] Ch 547 at 570 where the defendant was vicariously liable for the acts of his employee and partner.)

41 In Yeshiva Properties (No. 1) Pty Ltd v Marshall [2005] NSWCA 23, Bryson JA, who gave the leading judgment, said (at [21]) that he found it difficult to distinguish the exposition of the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378, from that of Stephen J in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 408-412. The Privy Council emphasised that a third party may be liable as a constructive trustee for assisting a breach of trust or fiduciary duty, where the third party’s actions which assist the breach are actions which an honest person in his or her position would not take. According to their Lordships, dishonesty is a necessary and sufficient ingredient for accessorial liability.

42 If this is the correct test, then I think it plain that the imputation of the actual knowledge of Mr Short as the actual knowledge of his children could not be sufficient to render them liable as constructive trustees. They could not be charged with acting otherwise than as honest persons in their position would act. It is also clear that neither Stephen J in Consul Developments, nor Bryson JA in Yeshiva Properties was concerned with the attribution of knowledge of an agent to his principal.

43 It seems to me that this area of the law is too unsettled to decide the sufficiency of the allegation as a pleading point. It has been suggested that the formulation of accessorial liability in Royal Brunei Airlines v Tan may not represent the law in Australia, (Gertsch v Atsas (1999) 10 BPR 18,431 at 18,440; New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781 at [17]). In any event, its status has to be considered in the light of the House of Lords’ retreat in Twinsectra Ltd v Yardley [2002] AC 164, (see Cadwallader v Bajco Pty Ltd [2002] NSWCA 328 at 198-199).

44 For the reasons given in para 33 in relation to the “constructive trust” claim against Quadrafox in relation to its acquisition of property through Mr Short’s and Nabatu’s alleged breaches of contract, and in paras 38-43 in relation to imputation of Mr Short’s knowledge to his children, I do not consider that I should refuse leave to the cross-claimants to plead against Fraser, Martin and Paris Short that they hold their shares in Quadrafox on a constructive trust for the “continuing parties” to the alleged agreements to provide securities and to share opportunities. It is preferable to establish the facts. (Wickstead v Browne at 5).

Claim Against Fraser Short in Respect of Shares in Green Slip and Beverage Boys

45 The last claim relates to shares held by Fraser Short in Green Slip and Beverage Boys. It is alleged that Green Slip was incorporated in 1999 and acquired the sub-leasehold of the Cargo Bar and Lounge premises at King Street Wharf and conducted the Cargo Bar and Lounge business.

46 It is alleged that Beverage Boys was incorporated in 2003 and in and from 15 July, 2003 acquired the sub-leasehold of the Bungalow 8 premises and the Loft premises at King Street Wharf and conducted the Bungalow 8 and Loft businesses from those premises.

47 It is alleged that Fraser Short holds his shares in Beverage Boys on an express or resulting trust for the estate of Mr Short, and that Mr Short held the shares on a constructive trust for Mr Crawley by reason of Mr Short’s alleged breaches of contract.

48 It is also alleged that Fraser Short permitted Mr Short to act on his behalf in respect to all matters in connection with the acquisition of shares in Green Slip and Beverage Boys and the taking of any step or decision as a shareholder in Green Slip and Beverage Boys. It is alleged that Mr Short provided the funds for the acquisition of the shares, and directed that they be put in the name of Fraser Short. It is alleged that by reason of these matters, Mr Short’s knowledge constituted the knowledge of Fraser Short, and that even if there is no express or resulting trust, Fraser Short holds the shares on a constructive trust for Mr Crawley.

49 It was submitted that Mr Crawley has no interest in these proceedings in contending that Fraser Short held shares on trust for Mr Short. It the cross-claimants are entitled to judgment against Mr Short, they can recover against his estate, of whatever it consists. However, the cross-claimants say that Mr Short held his alleged beneficial interest in the shares held by Fraser Short on a constructive trust for them, and they seek declarations that Fraser Short, as the legal holder of the shares, holds the property on trust for them, so that Mr Short’s interest as a sub-trustee disappears. That claim is not manifestly groundless if it is reasonably arguable that:

(a) Fraser Short held the shares in Green Slip and Beverage Boys on trust for Mr Short;

(b) the alleged agreements to share opportunities and make properties available as securities operated indefinitely, or for so long as Nabatu held shares in J&J O’Brien, Marsico and Trudale, notwithstanding the acquisition by Mr Crawley, or companies he controlled, of Mr Davis’s or Athann’s shares, and the falling out of the parties in 1997;

(c) Mr Short’s acquisition of a beneficial interest in the shares in Green Slip and Beverage Boys was in breach of those agreements or either of them;

(d) it is unconscionable for him or his executrix to retain the beneficial interest in the shares;

(e) damages are not an adequate remedy; and

(f) the principle stated by the Federal Court in News Ltd v Australian Rugby Football League Ltd at 217 is correct;

or alternatively, (b) is reasonably arguable and it is reasonably arguable that:

(g) Mr Short’s allowing the shares to be acquired by Fraser Short was a breach by him of the contracts;

(h) Mr Short’s knowledge can be imputed to Fraser Short; and/or

(i) Fraser Short is a volunteer;

(j) it is unconscionable for Fraser Short to retain the shares beneficially by reason of (g) – (i); and

(k) (e) and (f) are satisfied.

50 The arguments are complicated, and might be thought to stretch the boundaries of the law of constructive trusts. But I do not consider that it can be said as a matter of pleading that the claims cannot possibly succeed. Again, it is preferable to establish the facts, rather than decide such issues as a matter of pleading.

51 It was submitted for the proposed new cross-defendants that leave should not be given for the cross-claim to be filed because of the following factors, which are to be considered in combination:

(a) delay and the lack of explanation for the delay, notwithstanding the earlier disavowal of any intention to cross-claim;

(b) that the amendments would affect the interests of third parties who had acquired interests in the businesses when no allegations had been made that their business partner held his interest on trust for a competitor;

(c) the weakness of the claims;

(d) prejudice to the cross-defendants owing to the death of Mr Short;

(e) the prejudice to the cross-defendants in having to meet the claims; and

(f) that the cross-claim is brought merely for the purpose of obtaining discovery of the financial records of the competitive businesses.

52 The difficulty with these arguments is that refusal of leave to file a cross-claim would not prevent the cross-claimants from instituting separate proceedings claiming the same relief. The cross-defendants can raise the same defences based on the analogical application of the Limitation Act or laches in these proceedings, as they could raise in separate proceedings. They would face the same difficulties by reason of Mr Short’s death as they do in these proceedings. Third parties’ interests would be affected in the same way if separate proceedings were brought as they may be affected by the filing of a cross-claim. The disadvantage of separate proceedings is that the new cross-defendants, as defendants to separate proceedings, would not be bound by the findings in these proceedings in relation to the liability of Mr Short and Nabatu to the cross-claimants. It is clearly desirable that the proposed cross-defendants have the opportunity, if they wish to take it, to defend the claims made by the cross-claimants against Mr Short, and it is clearly desirable that they be bound by the findings as to whether Mr Short breached his duty as a director as the cross-claimants contend, or whether he or Nabatu breached the alleged contracts. Those issues should not be ventilated in separate proceedings, which they would be if leave were refused on discretionary grounds.

53 I do not conclude that the application is brought merely to obtain discovery of the financial records of the competing businesses. In any event, I propose to order that the cross-claims against the proposed new cross-defendants be tried separately from and after the trial of the issues on the statement of claim and defences, and after those parts of the cross-claim against the existing cross-defendants to be heard during the hearing to commence next February. The new cross-defendants will have leave to defend the cross-claim against Nabatu and Mrs Short in her capacity as executrix of the estate of Mr Short and will be bound as between themselves and the cross-claimants on those issues. However, as the claims against them will not be tried until after the trial of the other issues, and will not be tried at all if the cross-claimants fail in their claims against Nabatu and Mrs Short in her capacity as executrix, I will not be making any orders for discovery by the cross-defendants at this stage.

54 It may be that there are some discrete issues which may arise on the new cross-claims which could conveniently be heard during the hearing to commence next February. To ascertain whether that is so, the cross-defendants should file defences to the new cross-claim.

55 For these reasons, I make the following orders:

1. Grant leave to the cross-claimants to file and serve a third further amended cross-claim in the form of annexure ‘A’ to the notice of motion filed on 14 April, 2005 but deleting the words “and further or in the alternative 198” in paragraphs 202 and 205;

2. Order that paragraphs 141, 142, 150 in so far as it contains allegations against Mrs Short, 151, 152, 156 in so far as it contains allegations against Mrs Short, 159, 160, 172, 173, 174, 175, 178, 181, 184, 185, 186, 187, 190, 193, 198 in so far as it alleges that Mr Crawley has suffered loss and damage, 199, 200, 203, 204, 213 after the words “143 to 193 above”, 214 and 215 of the third further amended cross-claim be heard separately and after the remaining issues in the proceedings;

3. Grant leave to the third to eighth cross-defendants to defend the claim on the originating process, and to the third to ninth cross-defendants to defend the cross-claim against the first and second cross-defendants.

4. Order that the cross-defendants file and serve their defences to the third further amended cross-claim on or before 21 October, 2005.

5. Grant liberty to the parties to apply to vary the terms of order 2.

6. Costs of the notice of motion of 14 April, 2005 to be costs in the proceedings.

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15/09/2005 - Incorrect solicitor for cross-claimants - corrected - Paragraph(s) 0