Sunsie Pty Ltd as trustee for the Sunsie Trust v KDD Conveyancing Services Pty Ltd
[2023] WASC 18
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: SUNSIE PTY LTD AS TRUSTEE FOR THE SUNSIE TRUST -v- KDD CONVEYANCING SERVICES PTY LTD [2023] WASC 18
CORAM: ARCHER J
HEARD: 9-11 MARCH 2022 & 7 & 10 JUNE 2022 & 29 NOVEMBER 2022
DELIVERED : 14 FEBRUARY 2023
FILE NO/S: CIV 2805 of 2019
BETWEEN: SUNSIE PTY LTD AS TRUSTEE FOR THE SUNSIE TRUST
Plaintiff
AND
KDD CONVEYANCING SERVICES PTY LTD
First Defendant
KYLIE DIANNE DILLON
Second Defendant
Catchwords:
Statutory interpretation - Section 70 and 70A of the Strata Titles Act - Proposed strata lot - 'contract of sale' - 'moneys payable' - Legislative purpose - Contracting out prohibition
Contract construction - Entire agreement
Trust - Nature of trust - Terms of trust - Assenting to being a trustee - What knowledge is required
Statutory interpretation - Section 49 of the Settlement Agents Act - Private cause of action - Section 97 of the Settlement Agents Act - Subrogation by State - Section 117 of the Settlement Agents Act - Liability of director - 'Defalcation by a licensee'
Legislation:
Settlement Agents Act 1981 (WA), s 49, s 117
Strata Titles Act 1985 (WA), s 70, s 70A, s 70B
Result:
Judgment for the plaintiff
Category: A
Representation:
Counsel:
| Plaintiff | : | J Garas SC & S Cobbett |
| First Defendant | : | M D Cuerden SC & L D Coci |
| Second Defendant | : | MD Cuerden SC & L D Coci |
Solicitors:
| Plaintiff | : | State Solicitor's Office |
| First Defendant | : | Barry Nilsson Lawyers (WA) |
| Second Defendant | : | Barry Nilsson Lawyers (WA) |
Case(s) referred to in decision(s):
Alcoa of Australia Ltd v Apache Energy Ltd [2012] WASC 209; (2012) 6 ARLR 120
Anderson v Mackellar County Council [1968] 2 NSWR 217; (1968) 69 SR (NSW) 444
Armstrong v Commissioner for Consumer Protection [2014] WASCA 71
Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25; (2000) 202 CLR 588
Australian Leisure and Hospitality Group Pty Ltd v Commissioner of Police [2020] WASCA 157; (2020) 56 WAR 102
Australian Tea Tree Oil Research Institute v Industry Research and Development Board [2002] FCA 1127
Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219, 17
Bontempo v Mirvac (WA) Pty Ltd [2012] WASC 104
Braham Investments Pty Ltd v Sovereign MF Ltd (in liq) [2017] VSC 801
Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410
Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253
Caltex Oil (Australia) Pty Ltd v Best [1990] HCA 53; (1990) 170 CLR 516
Cameron v Wendy Le Noble t/as Wendy Le Noble & Co [2010] ACTSC 131
Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; 96 ALJR 89
Container Terminals Australia Ltd v Xeras (1991) 23 NSWLR 214
Council of the New South Wales Bar Association v EFA (a pseudonym) [2021] NSWCA 339
CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 224 CLR 98
Crimmins v Stevedoring Industry Finance Committee [1999] HCA 59; (1999) 200 CLR 1
Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371
Delahunty v Victorian Legal Services Board [2017] VSCA 327
EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23
Electricity Generation and Retail Corporation trading as Synergy v EIT Kwinana Partner Pty Ltd [2022] WASCA 3
Epic Energy (Pilbara Pipeline) Pty Ltd v Commissioner of State Revenue [2011] WASCA 228; (2011) 43 WAR 186
Esso Australia Pty Ltd v Australian Workers' Union [2017] HCA 54; (2017) 263 CLR 551
Gardiner v State of Victoria [1999] VSCA 100; (1999) 2 VR 461
Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) [2018] WASCA 163; (2018) 53 WAR 325
Harman Nominees Pty Ltd v Leighton Shores Pty Ltd [2012] WASCA 189
Hook v Rolfe (1986) 7 NSWLR 40
Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA 82
IW v City of Perth [1997] HCA 30; (1997) 191 CLR 1
Kauter v Hilton [1953] HCA 95; (1953) 90 CLR 86
Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216
Khoury v Government Insurance Office of New South Wales [1984] HCA 55; (1984) 165 CLR 622
Legal Services Board v Gillespie-Jones (2013) 249 CLR 492; [2013] HCA 35
Legal Services Board v Werden [2011] VSC 74
Lewis v Condon [2013] NSWCA 204; (2013) 85 NSWLR 99
Mantova Holdings Pty Ltd and Commissioner for Consumer Protection [2013] WASAT 47; 83 SR (WA) 238
Marriner v Australia Super Developments [2012] VSCA 171; (2016) 46 VR 213
McDonald v Girkaid Pty Ltd [2004] NSWCA
Minogue v Victoria [2018] HCA 27; (2018) 264 CLR 252
Mirvac (WA) Pty Ltd v Yeo [2011] WASC 162
O'Connor v SP Bray Ltd [1937] HCA 18; (1937) 56 CLR 464
Ong v Ping [2015] EWHC (Ch) 1742
Pickett v State of Western Australia [2020] HCA 20; (2020) 270 CLR 323
Prisoners Review Board v Freeman [2010] WASCA 166
Public Transport Commission of New South Wales v J Murray-More (NSW) Pty Ltd [1975] HCA 28; (1975) 132 CLR 336
R v Kearney; Ex parte Jurlama [1984] HCA 14
Re Real Estate and Business Agents Supervisory Board; Ex Parte Cohen [1999] WASCA 47; (1999) 21 WAR 158
Saunders v Vautier (1841) 4 Beav 115; 49 ER 282
Sino Iron Pty Ltd v Mineralogy Pty Ltd [2019] WASCA 80, 18
SST Consulting Services Pty Ltd v Rieson [2006] HCA 31; (2006) 225 CLR 516
Taylor v Owners – Strata Plan No 11564 [2014] HCA 9; (2014) 253 CLR 531
Utah Construction & Engineering Pty Ltd v Pataky [1966] AC 629
Walker v Clough Property Claremont Pty Ltd [2009] WASC 367
Wilderness Society of WA (Inc) v Minister for Environment [2013] WASC 307; (2013) 45 WAR 471
Wilson and Commissioner for Consumer Protection [2012] WASAT 200
ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2; 96 ALJR 144
Table of Contents
Introduction
Legislation
The Strata Titles Act 1985 (WA)
The Settlement Agents Act 1981 (WA)
Approach to statutory construction
Contract construction
General principles
Multiple transaction documents
The facts
The purchase of the property
The Strata Contract
The Loan Agreement
The payment obligations
The payments
The deal falls through
Other documents
The issues
Did the protective provisions of the STA render clauses of the Loan Agreement ineffective? (Issue 1)
Were the Strata Contract and Loan Agreement together a contract of sale? (Issue 1(a))
Sunsie's submissions
KDD's submissions
Discussion
As the answer is 'yes', the clauses were of no effect
If the answer is 'no', do the protective provisions of the STA nevertheless extend to the money paid by Sunsie? (Issue 1(b))
Do the protective provisions of the STA extend to money purportedly paid other than under a 'contract of sale'? (Issue 1(b)(i))
What are the terms on which money paid to an agent is required to be held? (Issue 1(b)(ii))
Is knowledge required? (Issue 1(b)(iii))
Revisiting the construction question in Issue 1(b)(i)
Were the payments under the Loan Agreement part of the purchase price? (Issue 1(b)(iv))
Summary of conclusions on Issue 1
If clauses were of no effect, North West was not entitled to the money
Were the payments made by KDD a breach of trust (Issue 2)
The $5,000
The $360,000
Is KDD liable for breaching s 49 of the SAA? (Issue 3)
Does section 49 confer a private civil cause of action? (Issue 3(a))
The relevant factors
The SAA
Analysis of factors
Conclusion on whether section 49 confers a private right of action
Was s 49 of the SAA breached? (Issue 3(b))
Conclusion on Issue 3
An apparent submission about loss
Is the State entitled to be subrogated to Sunsie's claim? (Issue 4)
The liability of Ms Dillon (Issues 5 and 6)
The meaning of 'defalcation by a licensee' (Issue 5)
The cases
Construction of a definition
Statutory context and purpose
Section 117
Conclusion on meaning of 'defalcation by a licensee'
Was any of KDD's conduct a defalcation? (Issue 6)
Conclusion on Ms Dillon's liability
Summary of conclusions
ARCHER J:
Introduction
This case has its origins in a failed proposed development of a property in South Hedland. It is one of seven actions brought against the defendants by different purchasers of proposed strata lots. The plaintiff in this case (Sunsie) alleges that it lost $380,000 due to the conduct of the first defendant (KDD), a settlement agent acting for the developer, North West Property Investments Pty Ltd (North West). The second defendant (Ms Dillon) is the sole director and shareholder of KDD. As part of this allegation, Sunsie alleges that several clauses of a loan agreement it entered into with North West were of no effect, due to certain provisions of the Strata Titles Act 1985 (WA) (STA) which gave[1] statutory protection to purchasers of proposed strata lots. In particular, where a proposed strata lot was to be sold prior to the registration of the proposed strata plan, the STA sought to protect money paid by a purchaser under a contract of sale prior to the registration of the plan.
[1] The STA has since been amended since the date of these events. However, similar protections are provided in the current STA (see s 163 and s 165).
Sunsie made a claim against the Settlement Agents Fidelity Guarantee Account (Fidelity Guarantee Account) to be reimbursed for its claimed loss of $380,000. The Fidelity Guarantee Account is an account established by the Settlement Agents Act 1981 (WA) (SAA), which can be used to compensate those who suffer a loss due to the conduct of an agent. In its claim, Sunsie sought to be reimbursed for its claimed loss of $380,000. Sunsie was paid $365,000 out of the account in partial settlement of its claim. The State of Western Australia brought these proceedings in Sunsie's name, relying on s 97 of the SAA. That section deems the State to be subrogated, to the extent of the payment, to all rights and remedies of Sunsie against KDD and 'in respect of the defalcation to which the claim relates'.
Sunsie's primary claim is that KDD paid the $380,000 to North West in breach of trust. It claims that the money was, in fact, part of the purchase price for the proposed lot and was therefore required to be held on trust by KDD until the strata plan was registered. In the alternative, it submits that the payments contravened s 49 of the SAA, which regulates the circumstances in which money may be paid out of a settlement agent's trust account.
KDD denies it is liable, apart from a $5,000 payment. First, it submits that, apart from that $5,000, the money it received was not paid under a 'contract of sale', but under the loan agreement. KDD submits that the money was therefore not covered by the protective provisions of the STA. Second, it submits that the way it dealt with the money it received was authorised by Sunsie and was not a breach of trust. Third, it submits that the SAA does not confer upon Sunsie a private cause of action against KDD for a breach of s 49 of the SAA.
The defendants also challenge the State's right of subrogation and deny Ms Dillon's liability for the conduct of KDD. Both of these issues involve consideration of the meaning of 'defalcation' under the SAA.
Later, I will set out the specific issues that arise. For the moment, it is enough to note that the central questions to be determined are:
1.Did the protective provisions of the STA apply to the money Sunsie paid to KDD? This question will turn upon the proper construction of the STA and the contracts entered into by Sunsie and North West.
2.Did KDD hold the money on trust until the strata plan was registered (or the sale lawfully avoided[2]), or could it pay out the money earlier at Sunsie's direction? This question will turn on whether KDD assented to be the trustee (and what, if anything, it needed to know, actually or constructively, in order to be found to have assented) and on the terms of the trust under which the money was held.
3.Does s 49 of the SAA confer a private cause of action? This question will turn upon the proper construction of the SAA.
[2] If the strata plan is not registered within a specified period, s 70(4) gave the purchaser the right to avoid the sale and have the money returned at any time up to the registration of the strata plan.
Legislation
The Strata Titles Act 1985 (WA)
Since the events in this case, the STA has been amended. The provisions that protected purchasers of proposed strata lots have been repealed (and replaced by similar provisions with different numbering[3]). However, for ease of reference, I will refer to these provisions in the present tense, as if they were still operative.
[3] See s 163 and s 165 of the STA in its current form.
The provisions in the STA that protect purchasers of proposed strata lots are contained in Part V. Part V is titled 'Protection of purchasers'. Sections 70 and 70A are contained in Part V.
Section 70 relevantly provides:
70.Holding of deposit and other contract moneys when a lot is pre-sold
(1)No person shall sell a lot in a proposed scheme before the strata/survey-strata plan is registered under Part II unless the contract of sale provides that any deposit and all other moneys payable by the purchaser prior to the registration of the strata/survey-strata plan are to be paid to a solicitor, real estate agent or settlement agent, who shall be named or specified in the contract, to be held by that solicitor, real estate agent or settlement agent on trust for the purchaser until the strata/survey-strata plan is registered.
(2)Any deposit and other money payable and paid by the purchaser prior to the registration of the strata/survey-strata plan under any such contract as is referred to in subsection (1) shall be paid by the purchaser to the solicitor, real estate agent or settlement agent named or specified in the contract of sale.
(3)In the event of a contravention of subsection (1) or subsection (2), the purchaser may at any time before the strata/survey-strata plan is registered avoid the sale.
(4)If the strata/survey-strata plan is not registered -
(a)within such period after the date of the contract as is agreed in writing by the purchaser and the vendor; or
(b)in the absence of any such agreement, within 6 months after that date,
the purchaser may avoid the sale at any time before the plan is registered.
(5)Where a purchaser avoids a sale under this section, all money, including the deposit, shall be recoverable by him from the solicitor, real estate agent or settlement agent or other person to whom they were paid, but the purchaser shall be liable to pay an occupation rent for any period during which he was in occupation of the lot or entitled to receive the rents and profits of the lot.
[(6), (7) deleted]
(8)In this section -
date of the contract means the day on which the contract of sale referred to in subsection (1) was signed or, if the parties signed it on different days, the last of those days;
real estate agent means a person licensed as a real estate agent under the Real Estate and Business Agents Act 1978;
settlement agent means a person licensed as a settlement agent under the Settlement Agents Act 1981.
Section 68 of the STA defines 'contract' for the purposes of Part V to mean 'a contract, agreement or document that legally binds the purchaser whether conditionally or unconditionally'.[4] It defines 'purchaser' as including an intending purchaser.
[4] Section 3 of the current STA defines 'contract' in identical terms, although uses 'person' instead of 'purchaser'.
The central elements of s 70 can be summarised as follows:
(a)subsection 70(1) creates a prohibition with an exception. It relevantly prohibits the sale of lots in proposed strata schemes before the strata plan is registered, unless the sale contract provides that all money payable by the purchaser prior to the registration of the strata plan is to be paid to the settlement agent, to be held on trust for the purchaser until the strata plan is registered;[5]
(b)subsection 70(2) relevantly requires, regardless of the terms of the sale contract, that all money payable and paid by the purchaser prior to the registration of the strata plan be paid to the settlement agent;[6]
(c)subsections 70(3) to (5) confer rights on the purchaser to avoid the sale before the strata plan is registered and recover its money, including where s 70(1) or s 70(2) are breached.
[5] See Harman Nominees Pty Ltd v Leighton Shores Pty Ltd [2012] WASCA 189 [16] (Buss JA, as his Honour then was, with whom Newnes JA agreed).
[6] See Harman Nominees [17].
In these reasons, I will refer to a trust under which money must be held for the benefit of the purchaser until the strata plan is registered (or until the sale is lawfully avoided) as a 'Strata Lot Trust'.
Section 70A provides:
70A.Contracting out prohibited
(1)A contract or arrangement is of no effect to the extent that it purports to exclude or restrict the operation of this Part or the rights and remedies conferred on a purchaser by this Part.
(2)A purported waiver of a right, remedy or benefit conferred on a purchaser by this Part is of no effect.
Section 70B provides:
70B.Saving
Except as provided by sections 69D, 70(3) and (4) and 70A, this Part does not apply so as to render any contract illegal or void or to empower any party to avoid the contract.
It can be seen from s 70A and s 70B that a contract which includes a term that purports to exclude or restrict the operation of Part V, or the rights and remedies conferred on a purchaser by that Part, is not rendered illegal and unenforceable. The limit of the severance required by s 70A(1) is only 'to the extent that it purports to exclude or restrict the operation of this Part'.[7]
The Settlement Agents Act 1981 (WA)
[7] Harman Nominees [102] - [103] and [119]. And see SST Consulting Services Pty Ltd v Rieson [2006] HCA 31; (2006) 225 CLR 516 [40] and [52] (Gleeson CJ, Gummow, Hayne, Heydon & Crennan JJ).
The SAA provides for the licensing of settlement agents and sets out various requirements as to trust accounts. It regulates the manner in which settlement money received by agents is to be treated. It establishes a framework within which agents can be disciplined or prosecuted for breaching provisions of the SAA. It establishes the Fidelity Guarantee Account.
A detailed overview of the SAA is set out in the discussion of Sunsie's claim under s 49 of the SAA. For present purposes, the following is sufficient.
Part IV of the SAA is titled 'Controls'. Division 2 of Part IV, titled 'Trust Accounts', contains s 49. Section 49 relevantly provides:
49. Trust accounts etc. of licensees
…
(3)A settlement agent may pay out of a trust account such of the proper charges relating to settlements as are payable by the persons on whose behalf the moneys are received but may do so only when those charges lawfully fall due.
(4)Settlement moneys[8] received by a settlement agent in the course of arranging or effecting a settlement shall not be withdrawn from a trust account except for the purpose of completing the settlement, or in accordance with the contract entered into between the parties to the transaction, or as otherwise authorised by this Act, or by the prior written consent of all parties to the transaction involved.
(5)A settlement agent shall pay moneys withdrawn from a trust account to the person or persons lawfully entitled or authorised to receive them.
[8] The SAA does not define 'settlement moneys'.
Section 65 of the SAA provides that a person who contravenes or does not observe any of the provisions of Division 2 of Part IV (in which s 49 appears) commits an offence.[9] A person accused of an offence under s 65 would be entitled to rely on any available defence, including the defences of honest claim of right[10] or mistake of fact[11] that, if raised, would have to be negated by the prosecution beyond reasonable doubt. Therefore, a person whose conduct breached s 49 may ultimately be found not to be criminally responsible for that conduct and therefore not guilty of the offence created by s 65.[12]
[9] And see, in relation to relevantly identical legislation, Re Real Estate and Business Agents Supervisory Board; Ex Parte Cohen [1999] WASCA 47; (1999) 21 WAR 158 [69] - [70] (Malcolm CJ, with whom Pidgeon & Wallwork JJ agreed).
[10] Section 22 of the Criminal Code (WA) provides that a person is not criminally responsible, as for an offence relating to property, for an act done or omitted to be done by him with respect to any property in the exercise of an honest claim of right and without intention to defraud.
[11] Section 24 of the Criminal Code (WA) provides that a person who does or omits to do an act under an honest and reasonable, but mistaken, belief in the existence of any state of things is not criminally responsible for the act or omission to any greater extent than if the real state of things had been such as he believed to exist.
[12] And see Pickett v State of Western Australia [2020] HCA 20; (2020) 270 CLR 323 in relation to criminal responsibility and the meaning of 'offence' in different contexts in the Criminal Code (WA). See in particular [37], [42], [44], [53] - [58] (Kiefel CJ, Bell, Keane & Gordon JJ).
Part V of the SAA establishes the Fidelity Guarantee Account and regulates the manner with which claims are to be dealt. It relevantly contains s 93, s 95, and s 97.
At the time of these events,[13] s 93 relevantly provided:
[13] Section 93 has been amended since the time of these events, but not materially.
93. Purpose of Account; making claims against Account
(1)Subject to this Act, the Account shall be held and applied for the purpose of reimbursing persons who may suffer pecuniary loss or loss of property by reason of any defalcation by a licensee during any period when he was the holder of a current triennial certificate, but reimbursing only to the extent of the defalcation of the licensee.
(2)The chief executive officer is to disallow a claim against the Account unless -
(a)notice of the claim is given in writing to the chief executive officer within 3 years after the day on which the claimant became aware of the defalcation; or
(b)the chief executive officer -
(i)has been given notice in writing of the claim within 6 years after the day on which the claimant became aware of the defalcation; and
(ii)considers that it is just and reasonable in the circumstances to deal with the claim even though notice was not given within the time referred to in paragraph (a).
Sections 95 and s 97 relevantly provide:
95. Claims against Account; recovery from Account
(1)The chief executive officer may receive and, subject to section 93(2), settle any claim against the Account at any time after the defalcation in respect of which the claim arose has occurred, but no person is entitled, without the leave of the chief executive officer, to commence any action in relation to the Account, unless the chief executive officer has disallowed his claim and unless and until the claimant has exhausted all relevant rights of action and other legal remedies available against the defaulting licensee or any other person in respect of the loss suffered by the claimant.
(2)A person is not entitled to recover from the Account an amount greater than the balance of the actual loss suffered by him after deducting from the total amount of his loss, the amount or value of all money or other benefits received or receivable by him from any source other than the Account in reduction of his loss, including any benefits received by reason of services rendered or payments made by the defaulting licensee.
…
(5)No right of action lies in relation to the Account in respect of any loss suffered by the spouse or de facto partner of a licensee by reason of any defalcation by that licensee, or in respect of any loss suffered by any licensee by reason or any defalcation in the course of the licensee's business by any one or more of the persons in the class of persons specified in the definition of defalcation by a licensee in section 3.
97. Subrogation of rights of claimant against Account
On payment out of moneys standing to credit of the Account of any money in settlement in whole or in part of any claims under this Act, the State shall be deemed to be subrogated, to the extent of that payment, to all rights and remedies of the claimant against the licensee in relation to whom the claim arose or in the event of the death or insolvency or other disability of the licensee, against his personal representatives or other persons having authority to administer his estate, and to all other rights and remedies of the claimant in respect of the defalcation to which the claim relates.
Section 3 of the SAA sets out the meaning of terms used in the Act. Section 3(1) relevantly provides that, unless the context otherwise requires:
defalcation by a licensee includes criminal or fraudulent conduct —
(a)of a licensee; or
(b)of any one or more of the servants or agents of the licensee; or
(c)of a person who is a partner in the business of the licensee; or
(d)where the licensee is a firm and a body corporate is a partner in the firm or where the licensee is a body corporate, of any one or more of the directors, officers, servants, or agents of the body corporate,
in the course of the business of the licensee and from which arises pecuniary loss or loss of property to any other person;
Part VIII of the SAA sets out various miscellaneous provisions. Section 117 provides:
117. Liability of directors of body corporate for defalcations
Where a licensee is a firm and a body corporate is a partner in the firm or where the licensee is a body corporate, all persons who are directors of the body corporate at the time of any defalcation by the licensee are jointly and severally liable in respect of that defalcation.
Approach to statutory construction
The general principles to be applied in statutory construction were recently summarised by Buss P in Australian Leisure and Hospitality Group Pty Ltd v Commissioner of Police (citations omitted):[14]
The focus of statutory construction is upon the text of the provisions having regard to their context and purpose.
The statutory text is the surest guide to Parliament's intention. A decision as to the meaning of the text requires consideration of the context, in its widest sense, including the general purpose and policy of the provision.
The context includes the existing state of the law, the history of the legislative scheme and the mischief to which the statute is directed.
However, legislative history and extrinsic materials cannot displace the meaning of statutory text. Further, the examination of legislative history and extrinsic materials is not an end in itself.
The purpose of legislation must be derived from the statutory text and not from any assumption about the desired or desirable reach or operation of the relevant provisions. The intended reach of a legislative provision is to be discerned from the words of the provision and not by making an a priori assumption about its purpose.
[14] Australian Leisure and Hospitality Group Pty Ltd v Commissioner of Police [2020] WASCA 157; (2020) 56 WAR 102 [151] - [155] (Buss P). Quinlan CJ and Vaughan JA agreed with the recitation of principles in these paragraphs - see [3].
Buss P went on to discuss s 18 of the Interpretation Act 1984 (WA), noting it applied where there is a constructional choice. His Honour said:[15]
Section 18 of the Interpretation Act provides that, in the interpretation of a provision of a written law (including all Acts for the time being in force), a construction that would promote the purpose or object underlying the written law (whether that purpose or object is expressly stated in the written law or not) shall be preferred to a construction that would not promote that purpose or object. The requirement in s 18 that one construction be preferred to another can apply only where two constructions are otherwise open. If the ordinary meaning conveyed by the text of a provision is to be modified by reference to the purposes or objects underlying the written law, the modification must be able to be identified precisely as that which is necessary to give effect to those purposes or objects and it must be consistent with the text otherwise adopted by the draftsperson. Section 18 requires a court to construe a written law, and not rewrite it by reference to its purposes or objects.
[15] Australian Leisure and Hospitality Group Pty Ltd [159] (Buss P). Quinlan CJ and Vaughan JA agreed with the recitation of principles in this paragraph - see [3].
Further, where there is a constructional choice, a construction that avoids an irrational or unjust outcome should be preferred.[16] However, as observed by Martin CJ in Wilderness Society of WA (Inc) v Minister for Environment:[17]
There are limits upon the impact which an assessment of the hypothetical consequences of a particular construction will have upon the proper construction of a statute. Where the language of the statute is clear, the fact that negative consequences may flow from the application of a particular provision will not operate to change the proper construction applied to the section: …
[16] Legal Services Board v Gillespie-Jones (2013) 249 CLR 492; [2013] HCA 35 [48], citing Public Transport Commission of New South Wales v J Murray-More (NSW) Pty Ltd [1975] HCA 28; (1975) 132 CLR 336, 350.
[17] Wilderness Society of WA (Inc) v Minister for Environment [2013] WASC 307; (2013) 45 WAR 471 [213].
A remedial or beneficial provision is 'to be given a liberal interpretation so as to give the fullest relief which the fair meaning of its language will allow'.[18]
[18] Prisoners Review Board v Freeman [2010] WASCA 166 [150] (Murphy JA, with whom Pullin & Newnes JJA agreed). See also IW v City of Perth [1997] HCA 30; (1997) 191 CLR 1, 12 (Brennan CJ and McHugh J), cited in Esso Australia Pty Ltd v Australian Workers' Union [2017] HCA 54; (2017) 263 CLR 551 in footnote 83.
One of the constructional questions that arises in this case is the meaning of the defined term 'defalcation by a licensee' in s 3(1) of the SAA. I will set out the relevant principles to be applied when construing a definition when I deal with the liability of Ms Dillon.
The 'constructional task remains throughout to expound the meaning of the statutory text, not to divine unexpressed legislative intention or to remedy perceived legislative inattention. Construction is not speculation, and it is not repair'.[19] Further, '[i]t is no function of the courts to fill in gaps in legislation'.[20]
[19] Taylor v Owners – Strata Plan No 11564 [2014] HCA 9; (2014) 253 CLR 531 [65].
[20] Minogue v Victoria [2018] HCA 27; (2018) 264 CLR 252 [43].
Contract construction
General principles
In Black Box Control Pty Ltd v Terravision Pty Ltd, the Court of Appeal summarised the relevant principles to be applied to contract construction as follows (citations omitted):[21]
[21] Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219 [42]. See also Electricity Generation and Retail Corporation trading as Synergy v EIT Kwinana Partner Pty Ltd [2022] WASCA 3 [230].
(1)The process of construction is objective. The meaning of the terms of an instrument is to be determined by what a reasonable person would have understood the terms to mean.
(2)The construction of a contract involves determination of the meaning of the words of the contract by reference to its text, context and purpose.
(3)The commercial purpose or objects sought to be secured by the contract will often be apparent from a consideration of the provisions of the contract read as a whole. Extrinsic evidence may nevertheless assist in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding of the genesis of the transaction, its background, the context and the market in which the parties are operating.
(4)Extrinsic evidence may also assist in determining the proper construction where there is a constructional choice, although it is not necessary in this case to determine the question of whether matters external to a contract can be resorted to in order to identify the existence of the constructional choice.
(5)If an expression in a contract is unambiguous and susceptible of only one meaning, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning.
(6)To the extent that a contract, document or statutory provision is referred to, expressly or impliedly, in an instrument, that contract, document or statutory provision can be considered in construing the instrument, without any need for ambiguity or uncertainty of meaning.
(7)There are important limits on the extent to which evidence of surrounding circumstances (when admissible) can influence the proper construction of an instrument. Reliance on surrounding circumstances must be tempered by loyalty to the text of the instrument. Reference to background facts is not a licence to ignore or rewrite the text. The search is for the meaning of what the parties said in the instrument, not what the parties meant to say.
(8)There are also limits on the kind of evidence which is admissible as background to the construction of a contract, and the purposes for which it is admissible. Insofar as such evidence establishes objective background facts known to the parties or the genesis, purpose or objective of the relevant transaction, it is admissible. Insofar as it consists of statements and actions of the parties reflecting their actual intentions and expectations it is inadmissible. Such statements reveal the terms of the contract which the parties intended or hoped to make, and which are superseded by, or merged into, the contract.
(9)An instrument should be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience. However, it must be borne in mind that business common sense may be a topic on which minds may differ.
(10)An instrument should be construed as a whole. A construction that makes the various parts of an instrument harmonious is preferable. If possible, each part of an instrument should be construed so as to have some operation.
(11)Definitions do not have substantive effect. A definition is not to be construed in isolation from the operative provision(s) in which the defined term is used. Rather, the operative provision is ordinarily to be read by inserting the definition into it.
The starting point for the proper construction of a contractual clause is the language used in the clause.[22]
Multiple transaction documents
[22] Sino Iron Pty Ltd v Mineralogy Pty Ltd [2019] WASCA 80; (2019) 55 WAR 89 [296].
In EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd, Buss JA,[23] with whom Owen and Newnes JJA agreed, said:[24]
Where a commercial transaction is implemented by several contracts or documents, all of the contracts or documents may be read together for the purpose of ascertaining their proper construction and legal effect, at least where the contracts or documents are executed contemporaneously or within a short period.
[23] As his Honour then was.
[24] EDWF Holdings 1 Pty Ltd v EDWF Holdings 2 Pty Ltd [2010] WASCA 78; (2010) 41 WAR 23 [104] (Buss JA, as his Honour then was, Owen & Newnes JJA agreeing).
The facts
Most of the facts were not in issue. The parties helpfully provided a statement of agreed facts.[25]
[25] Statement of Agreed Facts filed 4 February 2022 (Agreed Facts).
Sunsie also tendered a witness statement of its director Sandra Micallef. KDD did not seek to cross-examine Ms Micallef, but objected to the relevance of parts of her statement. Ultimately, only parts of the statement were admitted into evidence.[26] I will refer to those parts of the statement as the 'Micallef Statement'.
[26] The paragraphs admitted into evidence were paragraphs 1, 2, 5 - 8, 11 - 24, 26 and 27 of the Micallef Statement, and those paragraphs became exhibit 29.
In addition, Sunsie tendered two written contracts entered into by Sunsie and North West.
What follows is drawn from the facts admitted on the pleading, the agreed facts, the contracts, and the Micallef Statement.
The purchase of the property
In April 2013, North West entered into an agreement to purchase the property at 15 Somerset Crescent, South Hedland, Western Australia (Somerset Property).
The Strata Contract
On or about 6 September 2013, Sunsie entered into a written agreement (Strata Contract)[27] with North West to purchase a proposed strata lot (Proposed Lot 7) in a proposed strata scheme in relation to the Somerset Property. In the Strata Contract, North West named KDD as its settlement agent. The Strata Contract incorporated the REIWA General Conditions (General Conditions) and 'Special Conditions'.[28]
[27] Exhibit 1.
[28] Strata Contract page 3 (in relation to the Special Conditions) and page 4 condition 3 (in relation to the General Conditions).
The purchase price under the Strata Contract was $495,000. The Strata Contract required Sunsie to pay a deposit of $20,000, of which $10,000 was required to be paid 'now' and $10,000 within 21 days of the application for development approval.[29] At the time the Strata Contract was executed, Sunsie had already paid the first $10,000 to North West.[30]
[29] Strata Contract page 3.
[30] It was paid around 2 September 2014 - see the Micallef Statement [5].
The balance of the purchase price was required to be paid on settlement by bank cheque.[31] The settlement date was fixed by reference to the last of three events, including the issue of a separate certificate of title for the property.[32] Accordingly, the settlement date was to be a date after the strata plan had been registered (which, as will be seen, never occurred).
[31] General Condition 3.7 (page 15 of the Strata Contract).
[32] Special Condition 10 (page 36 of the Strata Contract).
General Condition 1.3(a) required the deposit to be paid and held in accordance with s 70 of the STA until registration of the strata plan. In the circumstances of this case, it required the deposit to be paid to KDD and held by KDD until registration of the strata plan.
In contrast to s 70(1), General Condition 1.3(a) referred only to the 'deposit', as opposed to 'any deposit and all other moneys payable by the purchaser prior to the registration of the [strata plan]'. However, Sunsie submits that Special Condition 19.1 would have deemed General Condition 1.3(a) to be amended so that it would apply to 'any deposit and all other moneys payable by the purchaser prior to the registration' in accordance with s 70(1).[33]
[33] The Plaintiff's Outline of Opening Submissions filed 14 February 2022 (Sunsie's Submissions) [44].
Special Condition 19.1 of the Strata Contract provided:
If at any time and for so long as:
(a)the Strata Titles act applies to this Contract;
(b)a provision of the Strata Titles Act conflicts with a provision of this Contract; and
(c)under the Strata Titles Act, that provision of the Strata Titles Act prevails, each conflicting provision of this Contract is deemed to be amended or deleted, as applicable, to the extent necessary to enable this Contract to comply with the Strata Titles Act.
In Harman Nominees Pty Ltd v Leighton Shores Pty Ltd,[34] Buss JA,[35] with whom Newnes JA agreed, said that a clause similar to Special Condition 19.1 was incorrectly formulated. His Honour said that the clause should have referred to 'a provision of this Contract' conflicting with 'a provision of the Act', and not the other way around. His Honour said, however, that despite this inversion, the meaning was clear enough.
[34] Harman Nominees [106].
[35] As his Honour then was.
I accept Sunsie's submission that Special Condition 19.1 would have deemed General Condition 1.3(a) to be amended so that it would apply to 'any deposit and all other moneys payable by the purchaser prior to the registration' in accordance with s 70(1). KDD did not contend otherwise.[36]
[36] See the Defendants’ Outline of Opening Submissions filed 28 February 2022 (KDD's Submissions) [29] and ts 190.
The Strata Contract gave Sunsie the right, in certain circumstances, to terminate the Strata Contract and recover its deposit.[37]
[37] See Special Conditions 3 and 4 on page 31 of the Strata Contract. North West also had the right to terminate under the latter condition.
In September 2013, KDD received an executed copy of the Strata Contract. KDD created, within the KDD Trust Account ledger, a file reference number 130483 relating to the sale of the Proposed Lot, noting the seller as North West and the buyer as Sunsie.
In early October 2013, Sunsie paid the second of the $10,000 payments required as the deposit. Sunsie did this by paying $5,000 to North West and, via Sunsie's settlement agent, $5,000 into KDD's trust account (the KDD Trust Account).[38] This meant that, of the $20,000 deposit paid by Sunsie, only $5,000 was paid into the KDD Trust Account.
[38] Micallef Statement [7] and [8] and exhibit 4.
On or about 16 October 2013, KDD paid $5,000 from the KDD Trust Account to North West.
The Loan Agreement
On or about 29 October 2013, Sunsie entered into a written loan agreement with North West in connection with the purchase of Proposed Lot 7 (Loan Agreement).[39] Sunsie was defined to be the 'Lender' and North West the 'Company'.[40]
[39] The Loan Agreement became exhibit 6.
[40] Loan Agreement, in the recitation of the parties.
Clause 4.1(a) of the Loan Agreement provided that on the 'Execution Date', each party was to deliver to the other party a signed counterpart of the Loan Agreement and the 'Strata Contract'.
The Loan Agreement defined the 'Execution Date' as 'the date that each of the parties has each respectively executed this and the Strata Contract'.[41]
[41] Loan Agreement cl 1.1.
'Strata Contract' was defined to mean 'a strata contract in respect of [Proposed Lot 7] in substantially the form of the Annexure between the Company and the Lender'.[42] Annexed to the Loan Agreement was a copy of the Strata Contract.[43]
[42] Loan Agreement cl 1.1.
[43] ts 130.
Clause 16.7 of the Loan Agreement provided that, in the event of inconsistency between the terms of the Loan Agreement and the Strata Contract, the terms of the Loan Agreement were to prevail to the extent of the inconsistency.
Clause 16.11 of the Loan Agreement was headed 'Entire agreement'. It provided:
The Transaction Documents represent the sole understanding of the parties in relation to the subject matter of this agreement and no alteration or requirement of this agreement will be binding on a party unless it is in writing dated after the date of this agreement and executed by all parties. The Transaction Documents supersede all prior discussions, negotiations, understandings and agreements in respect of its subject matter.
'Transaction Documents' was defined to mean the Loan Agreement and the Strata Contract.[44]
The payment obligations
[44] Loan Agreement cl 1.1.
Under cl 4 of the Loan Agreement, Sunsie agreed to pay to North West:
(a)$10,000 on execution, called the 'First Participation Fee';[45]
(b)$10,000 within 21 days of the application for development approval, called the 'Second Participation Fee'.[46]
[45] Loan Agreement cl 4.1(b).
[46] Loan Agreement cl 4.2.
The Loan Agreement expressly stated that these payments were not refundable and did not form part of the advances to be repaid to Sunsie under the Loan Agreement.[47]
[47] Loan Agreement cl 4.3.
These fees were, self-evidently, in the same amounts as the deposits required by the Strata Contract. In addition, the first fee was payable on execution, similarly to the first component of the deposit having been payable 'now'. The second fee was due at the same time as the second component of the deposit.
Further, under cl 5 of the Loan Agreement, Sunsie agreed to pay two 'Advances' to North West.
The first, called the 'First Tranche', was $360,000.[48] This was payable, relevantly, five business days after Sunsie received a copy of the grant of development approval.[49] It was not disputed that, in the development of strata lots, development approval is a much earlier step than the registration of the strata plan. Under the Loan Agreement, the First Tranche was to be used firstly for the purpose of completion of the purchase of the Somerset Property. Any remainder was permitted to be used by North West for development of the apartments on the Somerset Property.[50]
[48] Loan Agreement cl 5.1.
[49] Loan Agreement cl 5.2.
[50] Loan Agreement cl 5.1.
The second, called the 'Second Tranche', was $115,000.[51] This was payable, relevantly, after the registration of the proposed strata plan.[52]
[51] Loan Agreement cl 6.1.
[52] Loan Agreement cl 6.2.
The sum of the two 'tranches' equalled the balance owing under the Strata Contract (as the $20,000 deposit had been paid).
By cl 3 of the Loan Agreement, the parties agreed that the Participation Fees and Advances were to be applied by North West for the purchase and development of the Somerset Property.
Under cl 7.3 of the Loan Agreement, the parties had to 'complete' the Strata Contract within five business days of Sunsie providing the 'Second Tranche'. At completion, North West had to 'pay [Sunsie] the Purchase Price by offsetting that amount against the purchase price payable to [North West] by [Sunsie] under the Strata Contract'.[53]
[53] Loan Agreement cl 7.3(a).
'Purchase Price' was defined in the Loan Agreement to mean '$495,000, being the total purchase price to be paid by the Lender to the Company under the Strata Contract for [Proposed Lot 7]'.
Upon the transfer of Proposed Lot 7 to Sunsie at completion, all of North West's repayment obligations in respect of the Loan Facility would be discharged.[54]
[54] Loan Agreement cl 7.3(b).
KDD appeared to accept that, under the terms of the Loan Agreement, if the purchase and development of the Somerset Property proceeded as planned, Sunsie would not receive any interest or other financial benefit in exchange for the money it provided to North West.[55] If it did not proceed as planned, the Loan Agreement provided for repayment of the Advances and 'interest holding costs', subject to a limited recourse provision.[56] The Loan Agreement also provided that North West charged its interest in the Somerset Property in favour of Sunsie to secure its payment obligations to Sunsie, and that North West consented to Sunsie to registering a caveat once the Somerset Property had been purchased.[57]
The payments
[55] See ts 200, 261. Under the Loan Agreement, the earliest time at which interest could become payable was 12 months after the 'First Tranche Date', and only in certain circumstances (see cl 8).
[56] Loan Agreement cl 7, cl 8, cl 10 and cl 11.
[57] Loan Agreement cl 9.
As noted earlier, Sunsie paid $20,000 to North West ($5,000 of which went to KDD) prior to the execution of the Loan Agreement. Therefore, at the time these payments were made, they could only have been the deposit under the Strata Contract. After the execution of the Loan Agreement, Sunsie did not pay an additional $20,000 for the Participation Fees. In practical terms, it appears that the parties treated the obligation under the Loan Agreement to pay the Participation Fees as having been discharged by the payment of the deposit under the Strata Contract.
On 7 November 2013, Sunsie paid $360,000 into the KDD Trust Account.[58]
[58] Micallef Statement [11].
On or about 19 November 2013, KDD credited in favour of North West in the KDD Trust Account three amounts of $360,000, which KDD described in the KDD Trust Account ledger entries as 'Purchase Monies'. KDD recorded North West as having a credit balance of $1,080,000 in the KDD Trust Account under reference 131060 (which related to the sale of the Somerset Property).
One of the $360,000 amounts was debited as against Sunsie.
The same day, the sale of the Somerset Property settled and, in connection with completing that sale, KDD paid out $1,080,000 of the KDD Trust Account as follows:
(a)various amounts, totalling $978,822.48 in the aggregate, to the vendor of the Somerset Property and other third parties; and
(b)the amount of $101,177.52 to North West.
KDD debited those amounts as against the $1,080,000 credit balance recorded in favour of North West under reference 131030 (relating to the sale of the Somerset Property).
On 20 November 2013, North West became the registered proprietor of the Somerset Property.
The deal falls through
The proposed strata plan was never registered, no land was transferred to Sunsie, and the money Sunsie paid to North West and KDD was never repaid.[59] North West was deregistered in 2018.
[59] In addition to the Statement of Agreed Facts, see Micallef Statement [26].
On 16 April 2019, Sunsie made a claim against the Fidelity Guarantee Account for the $380,000 it had paid in connection with these events.
Ms Micallef's unchallenged evidence is that, if KDD had retained and held the money paid by Sunsie in the KDD Trust Account for Sunsie's benefit, she would have asked KDD to pay that money to Sunsie.[60]
[60] Micallef Statement [27].
On around 10 September 2019, Sunsie's claim was partially allowed in the amount of $365,000.
The State of Western Australia has brought this proceeding in Sunsie's name relying on s 97 of the SAA. KDD challenges, among other things, the right of the State to bring this action.
Other documents
In addition to the two written contracts, Sunsie tendered a number of documents during the course of the hearing. KDD objected to most of them, primarily on the basis of relevance.
A number of the documents were said to establish that KDD knew the funds it held were on trust and were for the purchase of Proposed Lot 7. I will say more about the issue of knowledge later. For present purposes, it is sufficient to note that I provisionally rejected[61] the documents said to establish knowledge on the basis that KDD's knowledge did not arise on the pleading (as it then stood).
[61] And, in relation to tab 7, I reserved my decision. Tab 7 went no further than establishing that KDD also acted for North West in the purchase of the parent lot (see ts 83 - 85). This was not relevant and I would not admit it into evidence.
Other documents were said to establish that the chief executive officer (CEO) had acted properly in settling Sunsie's claim. KDD did not say otherwise, so these documents were not relevant. I rejected those documents.
Other documents became exhibits by consent.[62]
[62] Exhibits 1, 4, 6, 8 - 10, 12 - 16 and 18.
The issues
The parties helpfully provided an agreed list of issues, numbering 16. However, several issues on the list were not in dispute. In addition, a number of other issues were only issues because a previous issue on which that issue was premised was in dispute. Further, some issues were modified during the hearing. Accordingly, I have recast the issues to be determined as follows:
1.Did the protective provisions of the STA apply to the money Sunsie paid to KDD? This question will turn upon the proper construction of the STA and the contracts entered into by Sunsie and North West. Two sub-issues arise:
(a)Were the Strata Contract and Loan Agreement together (being the 'Transaction Documents') a 'contract of sale' within the meaning of s 70 of the STA?
(b)If not, do the protective provisions of the STA nevertheless extend to the money paid by Sunsie? This raises the following questions:
i.Do the protective provisions of the STA extend to money purportedly paid other than under a 'contract of sale'? Specifically, in relation to this case, do they extend to where the purchaser of a proposed lot purports to pay to the vendor under a loan agreement money that would otherwise have been payable under a contract for the purchase of the proposed lot?
ii.What are the terms on which such money is held by an agent?
iii.What, if anything, must an agent know (actually or constructively) in order to be found to be holding the money under a Strata Lot Trust?[63]
[63] It will be recalled that I use 'Strata Lot Trust' to refer to a trust under which money must be held for the benefit of the purchaser until the strata plan is registered or the sale avoided.
iv.If the protective provisions of the STA do extend to such a situation, is the money paid by Sunsie properly characterised as being part of the purchase price that would otherwise have been payable under the Strata Contract?
2.Were the payments made by KDD a breach of trust, or was it entitled to make the payments because Sunsie had, in effect, directed the payments to be made? Although I have expressed this question as an issue, it will be answered by the answers to Issue 1.
3.Is KDD liable for breaching s 49 of the SAA? This issue gives rise to the following sub-issues:
(a)Does s 49 confer a private civil cause of action?
(b)If so, did KDD breach s 49?
4.Is the State's right of subrogation dependent on it proving a defalcation? This question will turn upon the proper construction of the SAA.
5.What does 'defalcation by a licensee' mean under the SAA? This question will also turn upon the proper construction of the SAA.
6.Was any of KDD's conduct a defalcation?
Did the protective provisions of the STA render clauses of the Loan Agreement ineffective? (Issue 1)
Sunsie submits that the protective provisions of the STA rendered ineffective those clauses in the Loan Agreement that required payments to be made before the strata plan was registered (cl 4 and cl 5) and those clauses, or parts of clauses, which flowed from those clauses (such as cl 7.3). In these reasons, I will refer to those clauses as the 'Pre-Registration Payment Clauses'.
The parties identified three main issues in relation to this.[64]
[64] The parties numbered these as Issues 5, 6 and 7, but I have renumbered them.
The parties expressed the first of these issues in terms of whether the Loan Agreement was 'a "contract" for the sale of a proposed lot in a proposed strata scheme within the meaning of the STA' (my emphasis). This was intended to address whether s 70(1) of the STA applied to the Loan Agreement. However, that section refers to a 'contract of sale' (my emphasis). During the hearing, the parties agreed that this was what they intended the issue to address.[65] While there is no reason to suppose the difference is material, I prefer to use the actual words of the provision.
[65] See ts 138, with which KDD did not disagree.
Further, during the hearing, Sunsie clarified its case in relation to this issue. Sunsie said that it contended that the Loan Agreement and the Strata Contract together (being the 'Transaction Documents') were a 'contract of sale'.[66]
[66] See, for example, ts 134 - 135. KDD did not suggest it was unable to deal with the case on this basis - see ts 215.
Accordingly, the first issue (as modified) is whether the Transaction Documents were a contract of sale of a proposed lot in a proposed strata scheme within the meaning of s 70 of the STA. Sunsie submits that they were. KDD submits they were not. This is Issue 1(a) in my list of issues.
If the answer to Issue 1(a) is 'yes', the next issue identified by the parties[67] was whether the Pre-Registration Payment Clauses were therefore of no effect by s 70A of the STA. KDD disputes only the premise. It was therefore not a real issue.
[67] The parties numbered this (modified similarly to Issue 1) as 'Issue 6'.
If the answer to Issue 1(a) is 'no', the next issue (Issue 1(b)) is whether the protective provisions of the STA nevertheless extend to the money paid by Sunsie. This will depend on whether the protective provisions extend to where the purchaser pays part of the purchase price to the vendor by way of a loan (Issue 1(b)(i)[68]) and, if they do, whether the money paid by Sunsie is properly characterised as being such a payment (Issue 1(b)(iv)[69]). If so, the Pre-Registration Payment Clauses would be of no effect, by the operation of s 70A.
[68] The parties numbered this as 'Issue 7'.
[69] This issue was included in the parties' 'Issue 7'.
In dealing with Issue 1(b), I will also discuss the terms on which such money is held by an agent (Issue 1(b)(ii)) and what, if anything, an agent must know (actually or constructively) in order to be found to be holding the money under a Strata Lot Trust (Issue 1(b)(iii)).
Were the Strata Contract and Loan Agreement together a contract of sale? (Issue 1(a))
Sunsie's submissions
Sunsie places particular emphasis on cl 16.11 of the Loan Agreement. It will be recalled that that clause, headed 'Entire agreement', provided that '[t]he Transaction Documents represent the sole understanding of the parties in relation to the subject matter of this agreement and no alteration or requirement of this agreement will be binding on a party unless it is in writing dated after the date of this agreement and executed by all parties. The Transaction Documents supersede all prior discussions, negotiations, understandings and agreements in respect of its subject matter'.
Sunsie submits that this clause makes it plain that it is both the Strata Contract and Loan Agreement that represent the entirety of the subject matter of its agreements with North West.[70] Sunsie submits that the agreement reflected in these two documents is a contract of sale.
[70] ts 131.
Sunsie accepts that, factually, the Strata Contract had already been executed and the deposit paid before the Loan Agreement was executed. Sunsie notes, however, that the Loan Agreement must be construed on its face, in its terms. When that is done, Sunsie says, it is plain that the Loan Agreement and the Strata Contract are conditional on each other and work together. That is, the 'Entire agreement' described in the Loan Agreement would only come into operation if there was also a Strata Contract delivered with it.[71] Sunsie submits that, by virtue of cl 16.11 of the Loan Agreement, there was in effect a 'reset' of the position between the parties when the Loan Agreement was executed.[72]
[71] ts 133.
[72] ts 237.
In addition, Sunsie refers to cl 16.7 of the Loan Agreement which provided that the terms of the Loan Agreement were to prevail to the extent of any inconsistency with the terms of the Strata Contract.[73]
[73] Sunsie's Submissions [50] - [51].
Sunsie also refers to the references in the Loan Agreement to Sunsie as 'the Lender', even in relation to Sunsie's obligations under the Strata Contract.[74]
[74] ts 47 - 51. And see the Loan Agreement Background C, the definition of 'Purchase Price' in cl 1.1, and cl 7.3(a).
Further, Sunsie refers to those provisions of the Loan Agreement by which Sunsie was required to provide sums equivalent to the sums required by the Strata Contract.
Sunsie also refers to cl 7.3 of the Loan Agreement, which dealt with the completion of the sale and transfer of the Proposed Lot 7, along with the discharge of the purchase price. It will be recalled that, under cl 7.3, the parties had to 'complete' the Strata Contract within five business days of Sunsie providing the 'Second Tranche'. At completion, North West had to 'pay [Sunsie] the Purchase Price by offsetting that amount against the purchase price payable to [North West] by [Sunsie] under the Strata Contract'.
Sunsie notes that 'there is a complete correspondence and equation between the repayment of the loan and the purchase price'. Sunsie submits that the loan 'is the purchase price. It is the consideration'.[75]
[75] ts 55 - 57.
Sunsie submits that the obligation under the Strata Contract to pay the balance of the purchase price on the settlement date by a bank cheque 'was, in effect, released and substituted with the offset right created in the clause 7.3 of the Loan Agreement'. Sunsie submits that the payment of the purchase price under the Strata Contract was converted to the offset. Sunsie submits, therefore, that the Loan Agreement purported to require Sunsie to pay money in discharge of the purchase price prior to the registration of the strata plan.[76]
[76] ts 105. See also ts 140.
Sunsie submits that, if North West was to try to specifically enforce the Strata Contract, and the Participation Fees and Advances had already been paid, an order for specific performance would not require Sunsie to pay a further $475,000[77] in order to complete the contract.[78]
[77] Being the purchase price less the deposits of $20,000 it had already paid.
[78] ts 105 and 132.
Sunsie submits, therefore, that the effect of this 'Entire agreement' was to substitute the payment obligations under the Strata Contract with the obligations to pay the Participation Fees and Advances.[79]
KDD's submissions
[79] ts 132.
KDD acknowledges that the Loan Agreement was a 'contract' within the meaning of the STA. However, it submits that it was not a 'contract of sale'. It submits it was, in its terms, a loan agreement.
KDD notes that s 68 of the STA defines 'contract' for the purposes of Part V to mean 'a contract, agreement or document that legally binds the purchaser whether conditionally or unconditionally'. Part V refers to contracts in a number of contexts, and is clearly not intended to be limited only to contracts of sale.[80] Plainly, a contract that is not a contract of sale could legally bind a purchaser.
[80] See, for example, s 70A and s 70B.
KDD further notes that Sunsie pleaded that the Loan Agreement was a loan agreement[81] and that this was also an agreed fact.[82] In its written submissions, KDD pointed out that there was no plea that the Loan Agreement was a sham and that it did not reflect the true nature of the legal relationship between the parties. It submitted that, therefore, the legal relationship between the parties was governed by the terms of the Loan Agreement[83] and not by some notion of 'reality' outside of it. It submitted that the legal rights and obligations established by the written Loan Agreement were decisive of the character of the relationship.[84]
[81] Further Amended Statement of Claim filed 16 February 2022 (Statement of Claim) [12].
[82] Agreed Facts [13].
[83] Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; 96 ALJR 89 [43] (Kiefel CJ, Keane & Edelman JJ). See also ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2; 96 ALJR 144 [8] and [62] (Kiefel CJ, Keane & Edelman JJ).
[84] KDD's Submissions [41], [48] and [50].
The sham doctrine is a doctrine under which legal meaning is given to a document by reference to a subjective intention. Where it applies, it displaces the orthodox objective approach of contractual construction.[85] Allegations of shams are distinct from allegations that a contract is invalid due to the operation of a statutory provision, such as contracts entered into for an improper purpose.[86]
[85] Lewis v Condon [2013] NSWCA 204; (2013) 85 NSWLR 99 [62] (Leeming JA, with whom McColl JA & Sackville AJA agreed).
[86] See Lewis [64] and ZG Operations Australia [62].
Sunsie does not contend that, contrary to the terms of the Loan Agreement, the parties intended the Loan Agreement to actually be a contract for the sale of the proposed lot. Rather, Sunsie contends that, objectively assessed, the Loan Agreement purported, relevantly, to permit the payment to the vendor of deposits and part of the balance of the purchase money, prior to the registration of the strata plan. It contends that this was achieved by way of loans in which the repayment obligations would be discharged upon the transfer of Proposed Lot 7 to Sunsie at completion, in circumstances where the purchase price to be paid by Sunsie would have been offset by the money it had paid under the Loan Agreement. Sunsie contends that, therefore, by operation of the STA, the Pre-Registration Payment Clauses were of no effect.
Understood in this way, the contention does not raise an allegation of a sham.
In oral submissions, KDD said that it raised the issue of a sham solely to demonstrate that the reasons why the parties entered into the Loan Agreement were not relevant.[87] I entirely accept this was irrelevant (as did Sunsie).
[87] ts 201. See also ts 212.
KDD also submits that the Loan Agreement did not contain any of the essential elements of a contract of sale. It did not impose an obligation on the owner to sell or impose an obligation on the other party to purchase.[88]
[88] ts 216.
I accept this submission. However, this does not mean that the Loan Agreement and the Strata Contract together were not a contract of sale.
KDD further submits that the $360,000 required to be paid under the Loan Agreement could not be said to have been part of the balance of the purchase price because Sunsie had no obligation under the Strata Contract to pay the balance until settlement, and the settlement never came.[89]
[89] ts 199 - 200.
I do not accept this. Under the Strata Contract, Sunsie was obliged to pay the balance of the purchase price when certain conditions were met. Sunsie had, therefore, a conditional obligation under the Strata Contract to pay the balance of the purchase price from the moment the Strata Contract was executed. Further, as I will explain later, I consider that the Transaction Documents reflect an agreement by the parties to change the time at which the purchase price was required to be paid.
KDD further submits that, at the time the Loan Agreement was executed, the Strata Contract had already been executed. KDD points out that, when the Loan Agreement was executed, there were already existing binding obligations on the parties to the Strata Contract to sell and buy respectively.[90] Further, Sunsie had already paid everything it was required to pay before settlement under the Strata Contract. KDD submits that the hypothetical reasonable businessperson, in those circumstances, would not have thought that the parties were entering into another contract of sale.[91]
[90] ts 216.
[91] ts 217, 220.
I do not accept this. I am required to construe the Loan Agreement and the Strata Contract (together being 'the Transaction Documents'). It is true that, at the time the Loan Agreement was executed, the Strata Contract had already been executed and the deposits under the Strata Contract had been paid. However, the Loan Agreement in its terms provided that the Loan Agreement and the Strata Contract represented the sole understanding of the parties in relation to the subject matter of 'this agreement'. The Strata Contract was annexed to the Loan Agreement. The Loan Agreement further provided that its terms were to prevail to the extent of any inconsistency between the terms of the Loan Agreement and the Strata Contract.
In those circumstances, the facts relied upon by KDD (that, at the time the Loan Agreement was executed, the Strata Contract had already been executed and the deposits under the Strata Contract had been paid) would not have affected what the reasonable businessperson would have understood the terms of the Loan Agreement to mean.
KDD also submits that the correlations between the amounts payable under the Strata Contract and the amounts payable under the Loan Agreement does not mean that the money payable under the Loan Agreement was the purchase money payable under the Strata Contract.[92] I accept that the correlations are not determinative.
[92] KDD's Submissions [49] and ts 263.
KDD submits that Sunsie's submissions are demonstrated to be wrong by the questions that would arise had there been a difference in the amounts payable under the Loan Agreement and the Strata Contract.[93]
[93] KDD's Submissions [50].
I do not accept this. If there had been a difference, this would have been one less factor supporting Sunsie's contention that the money payable under the Loan Agreement was the purchase money payable under the Strata Contract. Whether this would mean that the money was not payable under the Strata Contract would depend on the proper construction of the contractual documentation. If the answer was 'no', this would not mean that the answer must be 'no' in this case. In any scenario, the answer would turn upon the proper construction of the contractual documentation in that scenario. Each case would require an assessment of whether the money payable under that contractual documentation was in fact part of the purchase price.
KDD acknowledges that the $20,000 required by the Loan Agreement to be paid as 'Participation Fees' was never paid. KDD says that the effect of the Loan Agreement was to 're-characterise' the $20,000 deposit that had been paid under the Strata Contract as the Participation Fees required by the Loan Agreement.[94]
[94] ts 220 - 221.
KDD submits that the Loan Agreement did not have the same effect in relation to the balance of the purchase price required to be paid under the Strata Contract because Sunsie's obligation under the Strata Contract to pay the balance had not arisen and would not arise until settlement.[95]
[95] ts 244 - 245.
I asked KDD what it would say about the deposits if, hypothetically, the Strata Contract and the Loan Agreement had been executed at the same time and the deposits under the Strata Contract had not been paid prior to that date. KDD said that the deposits, when paid, would have had a dual character and would have been payable under both contracts. KDD said that the deposits would probably not have been refundable 'because in their character as payments under the loan agreement, they were non-refundable'.[96]
[96] ts 286 - 288.
KDD accepted that, if I were to find that the $360,000 was part of the purchase price, it too would have a dual character.[97]
Discussion
[97] ts 288 - 289.
In my view, the money required to be paid under the Loan Agreement was the deposits and the balance of the purchase price. The fact that it could also be characterised as fees and advances does not alter that conclusion.
First, there was a striking correlation between the payments to be made under the Strata Contract and the payments to be made under the Loan Agreement.
1.Under the Strata Contract, the first part of the deposit, $10,000, was required to be paid 'now'. Under the Loan Agreement, the First Participation Fee of $10,000 was required to be paid on execution.
2.Under the Strata Contract, the second part of the deposit, another $10,000, was required to be paid within 21 days of the application for development approval. Under the Loan Agreement, the Second Participation Fee of $10,000 was required to be paid at the same time.
3.Under the Strata Contract, after the deposits were paid, the balance to be paid was $475,000. Under the Loan Agreement, after the Participation Fees were paid, the amounts still to be paid (the two Advances) totalled the same amount.
Second, the deposits under the Strata Contract were paid prior to the execution of the Loan Agreement. After the execution of the Loan Agreement, Sunsie did not pay an additional $20,000 for the Participation Fees. KDD said that the effect of the Loan Agreement was to 're-characterise' the $20,000 deposit that had been paid under the Strata Contract as the Participation Fees required by the Loan Agreement.[98] That is, KDD appeared to accept that the Loan Agreement would be objectively understood as meaning that the deposits already paid under the Strata Contract would satisfy the obligation to pay the Participation Fees and would be paid to North West.
[98] ts 220 - 221.
Third, by cl 7.3(a) of the Loan Agreement, upon completion of the Strata Contract, North West had to 'pay [Sunsie] the Purchase Price by offsetting that amount against the purchase price payable to [North West] by [Sunsie] under the Strata Contract'.[99] That is, if Sunsie paid the money required to be paid under the Loan Agreement, Sunsie's conditional obligation to pay the balance of the purchase price under the Strata Contract on settlement would be discharged.
[99] Loan Agreement cl 7.3(a).
Fourth, by cl 7.3(b) of the Loan Agreement, upon the transfer of Proposed Lot 7 to Sunsie at completion of the Strata Contract, all of North West's repayment obligations in respect of the Loan Facility were discharged.[100]
[100] Loan Agreement cl 7.3(b).
Construing the Loan Agreement on its face, it was part of an entire agreement made up of the Loan Agreement and the Strata Contract. In my view, that entire agreement was, among other things, a contract of sale.
Under that entire agreement, the refundable deposits that were to be paid under the Strata Contract for the purchase of the Lot and held on trust until the strata plan was registered were instead to be paid to the vendor for the purchase and development of the Somerset Property, and were not refundable. Under that entire agreement, the balance of the purchase price for the Lot that was to be paid under the Strata Contract on settlement was instead to be paid to the vendor before settlement, in two tranches. The first tranche was the $360,000 payment under cl 5 of the Loan Agreement.
Adding the surrounding facts to the analysis does not change the result. It is true that, before the Loan Agreement was executed, the Strata Contract had already been executed and the deposits had been paid. However, at the time of executing the Loan Agreement, the parties agreed that it and the Strata Contract would represent their entire agreement. They agreed that the Loan Agreement would prevail to the extent of any inconsistency between the terms of the Loan Agreement and the Strata Contract. The deposits that had been paid under the Strata Contract were, to use KDD's word, re-characterised as the Participation Fees required to be paid under the Loan Agreement. In my view, the balance of the purchase price was similarly re-characterised as the Advances required to be made under the Loan Agreement. The Advances were, under the Loan Agreement, properly to be seen to be loans. However, they were also the balance of the purchase price that was required to be paid under the Strata Contract.
In my view, this conclusion is unaffected by the fact that the time at which Sunsie was required to pay the balance of the purchase price under the Strata Contract had not yet been reached. Under the Strata Contract, Sunsie was obliged to pay the balance of the purchase price on settlement. Under the entire agreement, Sunsie was obliged, in my view, to pay the balance at an earlier time. By cl 16.7 of the Loan Agreement, the provisions in the Loan Agreement that achieved this prevailed over the provision in the Strata Contract that regulated when (and how) the balance was to be paid. If settlement had occurred, Sunsie would not have been obliged under the Strata Contract to pay the balance of the purchase price at settlement. That obligation had been replaced by the obligation under the Loan Agreement to pay the Advances. Consistently with this, upon the transfer of Proposed Lot 7 to Sunsie at completion of the Strata Contract, all of North West's repayment obligations in respect of the Loan Facility would be discharged.
For these reasons, I consider that the Transaction Documents were a contract of sale of a proposed lot in a proposed strata scheme within the meaning of s 70 of the STA.
As the answer is 'yes', the clauses were of no effect
KDD did not dispute that, if the Transaction Documents together were a contract of sale, the Pre-Registration Payment Clauses were of no effect by s 70A of the STA.[101] It was the premise that KDD disputed.[102]
[101] The parties numbered this as 'Issue 6'. However, as KDD disputed only the premise, it was not a real issue.
[102] KDD's Submissions [42].
Therefore, as I have concluded that the Transaction Documents were a contract of sale of a proposed lot in a proposed strata scheme within the meaning of the STA, the Pre-Registration Payment Clauses were of no effect.
If the answer is 'no', do the protective provisions of the STA nevertheless extend to the money paid by Sunsie? (Issue 1(b))
It will be recalled that Issue 1(b) is whether, if the Transaction Documents together were not a contract of sale, the protective provisions of the STA nevertheless extended to the money paid by Sunsie.
As I have found that the entire agreement comprised of the Transaction Documents was a contract of sale, Issue 1(b) does not arise. However, in case I am wrong about that, I will consider it. Further, some of the issues discussed in this section are also relevant to determining whether, if the Pre-Registration Payment Clauses were of no effect (as I have found), KDD was required to hold the $360,000 under a Strata Lot Trust (and therefore breached its duties under that trust by paying the $360,000 out of the KDD Trust account before the strata plan was registered).
Do the protective provisions of the STA extend to money purportedly paid other than under a 'contract of sale'? (Issue 1(b)(i))
Section 70 of the STA - its operation and the rights it conferred
In Harman Nominees, Murphy JA observed (citations omitted):[103]
As s 70 is a remedial or beneficial provision, it is to be read in a way so as to effectuate the beneficial purpose which it is intended to serve … The construction to be assigned to the provision must nevertheless be 'fairly open' on the actual words used …
[103] Harman Nominees [135].
Section 70(1) relevantly operates to prohibit the sale of lots in proposed strata schemes before the strata plan is registered, unless the contract of sale (Proposed Lot Sale Contract) makes specific provision for money payable by the purchaser. Proposed Lot Sale Contracts are required to provide that such money is to be paid to a solicitor, real estate agent, or settlement agent (Agent), to be held on trust for the purchaser until the strata plan is registered.
This much was common ground. It was also common ground that the operation of s 70(1) is limited to money payable by a purchaser for the purchase of a proposed strata lot.[104] However, as reflected in Issue 1(b), the parties disagreed as to whether the protective provisions of the STA could extend to money paid for the purchase of a proposed strata lot under a contract that was not a Proposed Lot Sale Contract.
[104] ts 188 (KDD) and ts 321, 323 - 325 (Sunsie).
Section 70(2) relevantly operates to require, regardless of the terms of the Proposed Lot Sale Contract, all money payable and paid by the purchaser prior to the registration of the strata plan under such a contract to be paid to the Agent. Although on its face s 70(2) appears to impose an obligation on the purchaser, KDD did not contend that this was the effect of s 70(2). The parties appeared to accept that s 70(2) obliged the vendor to ensure that this occurred.[105]
[105] ts 194 - 195.
Section 70(3) to s 70(5) confer rights on a purchaser to avoid the sale before the strata plan is registered and recover its money, including where there is a contravention of s 70(1) or s 70(2). The application of these provisions is not entirely straightforward.[106] However, it is unnecessary to resolve their application in determining this case.
[106] See KDD's submissions at ts 202 - 204.
Section 70 does not expressly require the money paid to an Agent to be held. Section 70(1) deals with what must be included in a Proposed Lot Sale Contract. Section 70(2) requires only that money paid under such a contract be paid to the Agent named in the contract. However, given s 70(3) to s 70(5), which contemplates the purchaser avoiding the sale and recovering the money, s 70 should be construed so as to require the money to be held. This was common ground. However, the parties did not agree as to whether s 70 requires the money to be held under a trust of equity or some other type of trust or some other creature. They also did not agree as to whether the money was required to be held until the strata plan was registered. I will discuss these issues later.[107]
Section 70A - prohibition on contracting out
[107] See under the heading 'What are the terms on which money paid to an agent is required to be held?'
It will be recalled that s 70A prohibits 'contracting out'. It provides:
70A.Contracting out prohibited
(1)A contract or arrangement is of no effect to the extent that it purports to exclude or restrict the operation of this Part or the rights and remedies conferred on a purchaser by this Part.
(2)A purported waiver of a right, remedy or benefit conferred on a purchaser by this Part is of no effect.
Section 70A(1) would relevantly render the Pre-Registration Payment Clauses of no effect if they purported to exclude or restrict the operation of s 70 or the rights and remedies conferred on a purchaser by that section. In these reasons, I will use the shorthand expression 'restrict s 70' to mean 'exclude or restrict the operation of s 70 or the rights and remedies conferred on a purchaser by that section'.
Construction of a definition
Both parties noted that the definition in s 3 of the SAA is not a definition of 'defalcation'. Rather, it is a definition of 'defalcation by a licensee'.
In defining 'defalcation by a licensee', s 3 of the SAA uses the word 'includes'. In other definitions, s 3 uses the word 'means'.
This raises the question of whether the definition should be construed as an exhaustive explanation of the meaning of 'defalcation by a licensee', so as to exclude from its scope conduct that is not criminal or fraudulent.
Generally, a definition that is framed inclusively expands the meaning beyond its ordinary meaning, so as to add the specified meanings to the ordinary meaning. However, if it appears from the context that Parliament intended to confine the ordinary meaning of the word to the meaning conveyed in the definition, it will be taken to be exhaustive.[309]
[309] See Epic Energy (Pilbara Pipeline) Pty Ltd v Commissioner of State Revenue [2011] WASCA 228; (2011) 43 WAR 186 [139] - [141] and Council of the New South Wales Bar Association v EFA (a pseudonym) [2021] NSWCA 339; (2021) 106 NSWLR 383 [115].
KDD notes that an example of when it might be taken to be exhaustive is when the items contained in the definition are already within the ordinary meaning of the word.[310] While this is correct, the definition may simply be putting beyond doubt that a particular concept is within the meaning, without intending it to be exhaustive.[311]
[310] Hook v Rolfe (1986) 7 NSWLR 40, 49 - 50, cited in Epic Energy [141].
[311] Epic Energy [142].
In any event, KDD does not submit that the definition in s 3 of the SAA is exhaustive, and accepts it is expansive. However, it submits that the way in which it is expansive is the extension of the meaning of 'defalcation by a licensee' to include criminal or fraudulent conduct of not only the licensee itself, but of the licensee's servants and agents.[312] KDD submits that[313]
the use of the word 'includes' is readily explicable on the basis that it effectively deems criminal or fraudulent conduct of a person other than the licensee to be the conduct of the licensee itself, and therefore enlarges the ordinary meaning of the language. However, the use of the word 'includes', of itself, says nothing about what constitutes a 'defalcation'.
[312] KDD's Submissions [99].
[313] KDD's Submissions [100].
I accept that this is a possible construction.
KDD goes on to submit:[314]
If 'defalcation' is not limited to criminal or fraudulent conduct and includes conduct which was honest but negligent, it would not have been necessary to specifically provide, in sub-par (a) of the definition, that 'defalcation by a licensee' includes criminal or fraudulent conduct of a licensee. Both those concepts (criminal and fraudulent conduct) are within the ordinary meaning of the term 'defalcation' in any event. That is, if the definition was not intended to be exhaustive as to what constituted a 'defalcation' (ie including a requirement for criminal or fraudulent conduct), sub-par (a) would be entirely redundant.
[314] KDD's Submissions [101].
There is merit in this submission.
Sunsie submits that KDD's construction suffers from a difficulty of its own. Sunsie submits that, on KDD's construction, the phrase would not be limited to misapplication of funds and would extend to any form of criminal conduct. Such a construction would be plainly wrong.[315] KDD accepts that the phrase should not be construed as extending to any form of criminal conduct, but says that its construction does not do this. It says, in effect, that on its construction, the word 'defalcation' bears its ordinary meaning of misapplication of funds, while the phrase 'defalcation by a licensee' is limited to the criminal or fraudulent misapplication of funds by the licensee and its servants.
[315] Mantova Holdings [25] - [26].
I accept that this is a possible construction of the words in the definition. I do not consider, however, that it is the most natural way to construe the definition.
In Kelly v The Queen,[316] McHugh J said:
Nothing is more likely to defeat the intention of the legislature than to give a definition a narrow, literal meaning and then use that meaning to negate the evident policy or purpose of a substantive enactment…the better - I think the only proper - course is to read the words of the definition into the substantive enactment and then construe the substantive enactment - in its extended or confined sense - in its context and bearing in mind its purpose and the mischief that it was designed to overcome. To construe the definition before its text has been inserted into the fabric of the substantive enactment invites error as to the meaning of the substantive enactment.
[316] Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216 [103].
The definition of 'defalcation by a licensee' is therefore to be read into the provisions in which it appears (or in which the phrase 'defalcation by the licensee' appears). The parties did not suggest that the phrase had different meanings in different sections.
Statutory context and purpose
As noted earlier, the focus of statutory construction is upon the text of the provisions having regard to their context and purpose.
KDD submits that the relevant statutory context in respect of the SAA is not the same as that in Daly. It submits that the Tribunal in Wilson did not consider the relevant statutory context, because the issue was agreed.
I accept that the statutory context is not the same as that in Daly. I do not accept that the Tribunal in Wilson did not consider the statutory context. The passages extracted included the Tribunal's view that 'it is consistent with the object of the provisions of the [SAA] dealing with the [Fidelity Guarantee Account], and consistent with a liberal construction of those provisions, to conclude that the payments from trust by Shoalwater was defalcation'.
In addition, I have considered the relevant statutory context in the SAA and compared it to the statutory context in Daly. As will be seen, the object of the fidelity fund provisions in the Act under consideration in Daly appears to be the same as the object of the Fidelity Guarantee Account. In addition, I consider that the use of the phrase 'defalcation by a licensee' in s 113 of the SAA provides further support for Sunsie's construction. My reasons are as follows.
Long title
The long title of the SAA is 'An Act to make provision with respect to the licensing, regulation, and supervision of settlement agents, and for related purposes'. Looking at the SAA as a whole, it provides for the licensing of settlement agents (Part III), controls over their conduct (Part IV), and three accounts (Parts V, VI and VII), one of which is the Fidelity Guarantee Account (Part V).
Other provisions in which the phrase appears
The phrase 'defalcation by a licensee' (or 'defalcation by the licensee') appears in s 85, s 93, s 95, s 113 and s 117. Of these, I will first discuss s 93 and s 95, as they relate to the Fidelity Guarantee Account.
Sections 93 and 95 - the Fidelity Guarantee Account
Sections 93 and 95 are contained in Part V. Part V deals with the Fidelity Guarantee Account. The relevant parts of s 93 and s 95 were set out earlier.[317] Of particular significance in this context is s 93(1). It will be recalled that it provides:
Subject to this Act, the Account shall be held and applied for the purpose of reimbursing persons who may suffer pecuniary loss or loss of property by reason of any defalcation by a licensee during any period when he was the holder of a current triennial certificate, but reimbursing only to the extent of the defalcation of the licensee.
[317] See under the heading 'Legislation'.
Sunsie notes that the express purpose of the Fidelity Guarantee Account is to reimburse persons who suffered pecuniary loss or property loss because of any defalcation by a licensee. Sunsie submits that the Fidelity Guarantee Account is 'meant to be a fund to provide assistance to persons who have suffered a loss as a result of, in effect, a failure by a licensee as part of the regulated scheme composed in this State, and it effectively shifts the burden from those purchasers to the State'.[318] Having regard to the SAA as a whole, I accept this submission.
[318] ts 159.
In Daly, Gibbs CJ noted:[319]
The provisions of the Securities Industry Acts which deal with fidelity funds appear to have been intended to afford a relief which the law did not provide and should be given a liberal construction. It would seem consonant with the object of those provisions that a person who had suffered loss as a result of a failure to account for funds entrusted to a firm as trustee should be able to recover from the fund even if the failure was due, e.g., to negligence rather than dishonesty.
[319] Daly, 380 - 381.
The same reasoning applies to the provisions of the SAA that deal with the Fidelity Guarantee Account. In my view, this supports Sunsie's construction.
Section 85
Two other provisions, apart from s 117 itself, use the phrase 'defalcation by a licensee' (or 'defalcation by the licensee'): s 85 and s 113. Neither party addressed these sections in their original submissions or in their oral submissions during the original hearing dates. When advising the parties of the need to list the matter for a further hearing in relation to the knowledge issue, the court advised that, if any party wished to make submissions about s 85 or s 113 of the SAA, they could do so at that further hearing. The parties took up that opportunity in relation to s 85.[320]
[320] See ts 381 - 382, 418 - 421, 445 - 558 and 456.
Section 85 is contained in Part IV. Part IV deals with controls over the conduct of agents. Section 85 provides:
85. Offences that cause licence and triennial certificate to be cancelled
If a licensee is convicted of an offence involving -
(a)defalcation by the licensee; or
(b)the fraudulent rendering of an account, knowing it to be false in any material particular, in respect of money or other property entrusted to him by or on behalf of another person in the course of the licensee's business; or
(c)a breach of any one or more of the provisions of Division 2 of Part IV relating to the proper payment in and out of the trust account of the licensee of money entrusted to him by or on behalf of another person in the course of the licensee's business,
his licence and any triennial certificate in respect thereof is thereby cancelled, and the registrar of the court convicting him shall forthwith notify the Commissioner accordingly.
Section 85 distinguishes between offences involving defalcation by the licensee (referred to in subparagraph (a)) and a breach of any one or more of the provisions of Division 2 of Part IV relating to the proper payment in and out of the trust account of the licensee of money entrusted to him by or on behalf of another person in the course of the licensee's business (referred to in subparagraph (c)). I will refer to the provisions captured by subparagraph (c) as 'Trust Payment Provisions'.
KDD contends that s 85(a) would have no work to do on Sunsie's construction. All other things being equal, a construction that gives each clause work to do is to be preferred to one that does not.
Sunsie does not accept that its construction would give s 85(a) no work to do.
Sunsie says that s 85(a) would capture two things. First, it would capture any misapplication of funds by the licensee firm (regardless of whether it was criminal or fraudulent). Second, it would capture the criminal or fraudulent misapplication of funds by any of the persons named in the definition of the phrase 'defalcation by a licensee', without the need to resort to the common law to ascertain whether the licensee was responsible for the actions of particular persons within the firm. So, for example, where, by criminal conduct, a servant misapplied trust funds contrary to s 49(5), and any defence was negated, the firm would be guilty of the offence. The firm would then have been convicted of an offence involving defalcation by the licensee and would fall under s 85(a). By the operation of s 85, the licence would then be cancelled. Sunsie submits that, where a misapplication of funds occurred due to the criminal conduct of a servant, it is entirely understandable that the legislation would intend that the licence be cancelled without more having to be proved.
Sunsie submits that, by contrast, s 85(c) would capture breaches of any Trust Payment Provision. It submits that not all such provisions involve the misapplication of funds, giving s 49A and s 50 as examples. Sunsie submits that it would therefore extend beyond the misapplication of funds captured by s 85(a).
It is debatable whether s 50 should be characterised as a Trust Payment Provision (a provision 'relating to the proper payment in and out of the trust account of the licensee of money entrusted to him by or on behalf of another person in the course of the licensee's business'). It deals with receipts and accounts. Whether s 50 should be so characterised would depend on the meaning of 'relating to'.
Section 49A is plainly a Trust Payment Provision. It requires an agent to comply with any request by a person to deposit money paid by that person into an interest bearing trust account and to pay the interest to that person. However, it is arguable that a breach of s 49A could be characterised as a misapplication of funds.
That said, even if I was to conclude that there would be a redundancy on Sunsie's construction, it would not be relevant to the construction task. That is because, as I will explain, there would also be a redundancy on KDD's construction.
There would be a redundancy on KDD's construction unless there could be a criminal misapplication of trust money that would not also be a breach of a Trust Payment Provision. As I will explain, unless this was possible, s 85(a) would be redundant.
If a misapplication of trust money breached a Trust Payment Provision, and if the licensee was convicted of an offence involving such a breach, the licensee would fall under s 85(c).
Further, by the conviction, the misapplication would have been criminal. The licensee would have been convicted of an offence involving criminal misapplication of trust money. On KDD's construction of a 'defalcation by a licensee', the licensee would fall within s 85(a). KDD appeared to accept this.[321] KDD did not suggest that there could be a misapplication of trust money that would not be a breach of a Trust Payment Provision.
Section 113
[321] See ts 445 - 448.
Section 113 is contained in Part VII, the part containing miscellaneous provisions. Section 113 provides:
113. Reports by Commissioner to Minister
The Commissioner shall, from time to time, submit a report to the Minister as to the opinion of the Commissioner on -
(a)the effectiveness or otherwise of current provisions for the purpose of providing protection to the public against any defalcations by a licensee; and
(b)the desirability or otherwise of having further or alternative measures for that purpose,
and where, in the opinion of the Commissioner it is desirable to have such further or alternative measures, the Commissioner shall include in the report details of a scheme to implement those measures.
In my view, it is unlikely that Parliament intended to limit the reports to those breaches of the SAA that involved criminal or fraudulent conduct. The SAA seeks to regulate agents for the benefit of those involved in transactions. It seeks to protect those people from loss. Section 113 directs the Commissioner to advise on the effectiveness of the current measures and the desirability of any new measures for the purpose of providing protection to the public against any defalcations by a licensee. It is highly unlikely Parliament would want to be informed of the effectiveness of current measures and the desirability of any new measures only in relation to protecting the public from loss caused by criminal or fraudulent conduct.
Section 117
Section 117 was set out earlier. Like s 113, it is contained in Part VII, the part containing miscellaneous provisions. It provides:
117. Liability of directors of body corporate for defalcations
Where a licensee is a firm and a body corporate is a partner in the firm or where the licensee is a body corporate, all persons who are directors of the body corporate at the time of any defalcation by the licensee are jointly and severally liable in respect of that defalcation.
Sunsie submits that, if KDD's construction is accepted, it would limit the liability of directors in a manner unlikely to have been intended. Sunsie submits:[322]
Assume that a client of a settlement agent (company) brings a claim against the settlement agent for breach of trust, including breach of s 49 of the SAA. That is, there is no claim on the Fidelity Guarantee Account and the claim that is brought is not a subrogated claim. Assume also that there was in fact a breach of trust, but not one that involved criminal or fraudulent conduct.
The phrase "defalcation by the licensee" is irrelevant to that claim, as it is no part of any element to the cause of action.
Then assume that the client joins the director of the settlement agent (company) relying on s 117 of the SAA, on the basis that that person was a director at the time of the breach of trust.
On the defendants' construction, the licensee would be liable for the breach of trust, but the director would not be liable under s 117 of the SAA – because, on the defendants' construction, defalcation by the licensee is confined to criminal or fraudulent conduct.
It is highly unlikely that Parliament intended to confine the liability of such directors to instances where the licensee's breaches involve criminal or fraudulent conduct. The evident purpose of s 117 is to impose joint and several liability on directors for breaches by the licensee to promote (through the directors' stewardship and conduct) compliance by the licensee of its duties as trustee.
[322] Sunsie's Reply [31] - [35].
KDD contends that there is nothing surprising in Parliament limiting the extent to which the corporate veil is pierced.[323]
[323] ts 337.
There is merit in KDD's submission. In many cases, there will be good reason to limit the extent to which the corporate veil is pierced. However, in the context of the SAA as a whole, I consider that it is unlikely that Parliament intended to limit the liability of directors to breaches of trust that involved criminal or fraudulent conduct. Extending liability beyond criminal or fraudulent conduct would encourage directors to seek to ensure compliance by the licensee of its duties as trustee, which would promote the purpose of the SAA.
Conclusion on meaning of 'defalcation by a licensee'
Having regard to the words of the definition, the sections in which the defined phrase appears, and the context and purpose of the SAA, I consider that 'defalcation by a licensee' in the SAA is not limited to criminal or fraudulent conduct.
I note that this construction is consistent with the decision of the Tribunal in Wilson. It is also supported by Daly.
Was any of KDD's conduct a defalcation? (Issue 6)
Even if the meaning of defalcation by a licensee extends to honest but negligent conduct, KDD submits that none of its conduct was a defalcation. KDD submits that the essence of a 'defalcation' is the misappropriation or misuse of money held by a person as trustee or in some other fiduciary capacity, citing Daly in support. KDD goes on to submit '[t]hat is, central to the concept of a 'defalcation' is that a trustee or other fiduciary has dealt with money held on trust (or in some other fiduciary capacity) contrary to the wishes of the beneficiary'.[324]
[324] KDD's Submissions [4].
KDD asserts that it dealt with the money in accordance with Sunsie's directions, as contained in the Loan Agreement.
I do not accept that dealing with money in accordance with a beneficiary's direction cannot be a defalcation. A simple illustration would be when the beneficiary is a child.
The purpose of the legislation is to ensure, among other things, that purchasers of Proposed Lots cannot waive their rights. KDD held the money on trust for Sunsie on terms that meant it could not be paid to North West prior to the registration of the strata plan, regardless of any direction Sunsie gave KDD to the contrary. The payment of the $360,000 in breach of that trust was a misapplication of trust money.
Further, I have found that the Pre-Registration Payment Clauses were of no effect. There was no effective direction given by Sunsie.
Conclusion on Ms Dillon's liability
KDD's conduct in paying the $5,000 and $360,000 out of the KDD Trust Account prior to the registration of the strata plan involved the misapplication of trust money, in breach of trust and in breach of s 49 of the SAA. Each act of payment was a defalcation by KDD within the meaning of the SAA. Accordingly, Ms Dillon is liable for that conduct.
Summary of conclusions
My conclusions may be summarised as follows.
I consider that the entire agreement comprised of the Transaction Documents was a Proposed Lot Sale Contract.[325] It was common ground that, if this was right, the Pre-Registration Payment Clauses[326] were of no effect.
[325] A 'Proposed Lot Sale Contract' means a contract of sale of a proposed lot in a proposed strata scheme within the meaning of s 70 of the STA.
[326] 'Pre-Registration Payment Clauses' means those clauses in the Loan Agreement that required payments to be made before the strata plan was registered (cl 4 and cl 5) and those clauses, or parts of clauses, which flowed from those clauses (such as cl 7.2, 7.2 and 7.3).
If I am wrong about the entire agreement being a Proposed Lot Sale Contract, I would nevertheless conclude that the protective provisions of the STA extended to the money Sunsie paid. This is because I consider that the protective provisions of the STA will render ineffective a clause in any contract that purports to require the purchaser of a proposed lot to pay the vendor, prior to the registration of the plan, money for the purchase of the proposed lot that would otherwise have been payable under the Proposed Lot Sale Contract. I consider that the Loan Agreement required Sunsie to do this. I consider that the $360,000 was part of the purchase price that would otherwise have been payable under the Strata Contract. If this is right, again, the Pre-Registration Payment Clauses would be of no effect.
I further consider that the money paid by Sunsie was held by KDD under a Strata Lot Trust.[327]
[327] Under such a trust, the money must be held for the benefit of the purchaser until the strata plan is registered or the sale avoided.
As the Pre-Registration Payment Clauses were of no effect, Sunsie had no obligation to pay the $360,000 to North West before the registration of the proposed strata plan. Further, North West had no lawful entitlement or right to receive and use the $360,000 or any part of the deposit, before the registration of the proposed strata plan.
Accordingly, when KDD paid the $5,000 and the $360,000 out of the KDD Trust Account to North West, it did so in breach of trust.
I also consider that, when KDD made those payments, it did so in breach of s 49 of the SAA. However, I consider that the SAA does not confer a private cause of action in relation to s 49.
Further, I consider that the State's right of subrogation was not conditioned on there having been a defalcation.
Finally, I consider that both the payment of the $5,000 and the payment of the $360,000 were defalcations by a licensee within the meaning of the SAA. Accordingly, Ms Dillon is liable for that conduct.
I would give judgment for the plaintiff. I will hear from the parties as to the appropriate orders to reflect these reasons and as to costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
KH
Associate to the Honourable Justice Archer
10 FEBRUARY 2023
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