Tasmanian Seafoods Pty Ltd v Kossman
[2005] TASSC 5
•25 February 2005
[2005] TASSC 5
CITATION: Tasmanian Seafoods Pty Ltd v Kossman [2005] TASSC 5
PARTIES: TASMANIAN SEAFOODS PTY LTD
v
KOSSMAN, Peter Joachim
ADELAIDE BAY SEAFOODS PTY LTD
(ACN 009 531 588)
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: 185/1998
DELIVERED ON: 25 February 2005
DELIVERED AT: Launceston
HEARING DATE/S: 20 – 24 September 2004
JUDGMENT OF: Crawford J
CATCHWORDS:
Equity – General principles – Fiduciary obligations – General principles – Conflict of interest and duty – Test of fiduciary relationship – Commercial contract – Agreement between fish processor and abalone diver – Each paid 50 per cent of price of acquisition of diver's licence – Diver to pay processor 25 per cent of beach price of abalone and sell all of catch to processor – Agreement frustrated by statutory and regulatory changes to licensing regime – Diver refused to comply with spirit of agreement – Liability to account for profit or gain received in breach of fiduciary duty – Principles applicable – Basis for account of profits – Stripping of profits wrongly gained – Interest to be paid on amounts found due.
Warman International Ltd v Dwyer (1995) 182 CLR 544; Orr v Ford (1989) 167 CLR 316; Wallersteiner v Moir (No 2) [1975] 1 All ER 849, applied.
Aust Dig Equity [34]
Equity – Trusts and trustees – Constitution and classification of trusts generally – Classification of trusts in general – Constructive trusts – General principles – Common intention – Express trust becoming impossible of performance – Frustrated by statutory and regulatory changes – Breach of fiduciary duty – Remedy of constructive trust on terms moulded according to the nature of the relationship and the facts of the case.
Chan v Zacharia (1984) 154 CLR 178; De Tozser v Tasmanian Seafoods Pty Ltd A86/1992; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, applied.
Pennington v McGovern (1987) 45 SASR 27, distinguished.
Aust Dig Equity [102]
REPRESENTATION:
Counsel:
Plaintiff: S B McElwaine
Defendants: P R Garling SC and W A Ayliffe
Solicitors:
Plaintiff: S B McElwaine
Defendants: Ayliffe & Ayliffe
Judgment ID Number: [2005] TASSC 5
Number of paragraphs: 72
Serial No 5/2005
File No 185/1998
TASMANIAN SEAFOODS PTY LTD v PETER JOACHIM KOSSMAN
and ADELAIDE BAY SEAFOODS PTY LTD (ACN 009 531 588)
REASONS FOR JUDGMENT CRAWFORD J
25 February 2004
The 1985 deeds
At all material times the plaintiff was a substantial processor of abalone and a substantial investor in the industry. The first defendant, Mr Kossman, was an abalone diver. In 1985, commercial abalone fishing licences, which could not be held by a company, were expensive to acquire and frequently divers who were interested in purchasing one had insufficient capital to do so. The plaintiff frequently provided finance to the purchasers of licences. It did so for Mr Kossman and as a consequence on 16 December 1985, they entered into deeds described as a trust deed and a deed of agreement.
The trust deed recited that in consideration of a payment of $375,000, David Wells had agreed to transfer to Mr Kossman Commercial Abalone Fishing Licence number 121 that had been issued by the Tasmanian Fisheries Development Authority (but which at the time of the trust deed had been replaced by the Department of Sea Fisheries); that half of the purchase price had been provided by the plaintiff; and that the licence was transferred to Mr Kossman as trustee for the plaintiff of an equal undivided half share of the licence. Mr Kossman formally declared that he so held that half share of the licence upon trust for the plaintiff and that he would deal with the licence in accordance with the terms of the deed of agreement.
Those terms included the following. By cl 1, the plaintiff granted to Mr Kossman the right to use and enjoy the plaintiff's undivided half share of the licence as a commercial abalone diver. By subcl 2(a)(i), Mr Kossman agreed to make payments to the plaintiff of a sum equivalent to 25 per cent of the average Tasmanian market price payable to him for the sale of any abalone caught by him pursuant to the licence. (For the purposes of this action, the parties agreed that the relevant market price at any material time is the amount published each quarter by the Department of Sea Fisheries for the purpose of determining royalties on abalone entitlements.) By subcl 2(c), Mr Kossman agreed to sell and deliver his total catch of abalone to the plaintiff and to no other person or company. Subclauses 2(a)(i) and 2(c) are the main bases of the plaintiff's claim against him.
By subcl 2(d), the plaintiff agreed to pay Mr Kossman the average Tasmanian market price for abalone delivered by him to the plaintiff, "less any costs of freight incurred by the company in having such Abalone freighted to Launceston or St Helens or such other destination in Tasmania as agreed by the Company and the diver [Mr Kossman] from time to time". (It was the evidence of the plaintiff's managing director, Allen George Hansen, that notwithstanding the agreed deduction for freight costs, the plaintiff did not deduct its costs of transporting abalone by its own truck, once the fish had been picked up by the truck.) By subcl 2(f), Mr Kossman agreed not to sell any part of the quota of abalone permitted to be taken under the licence without the plaintiff's consent. By subcl 4(a), he agreed that unless he had the prior written consent of the plaintiff, he would at all times carry on business as a commercial abalone diver to the best of his ability and take all reasonable steps to ensure that he fulfilled the quota of abalone allowed to be caught by him under the licence. By cl 7, he agreed that unless he had the plaintiff's written consent, he would not offer for sale, grant an option, sell, hire, lease, assign, mortgage, charge or otherwise encumber the licence or any rights attaching to it.
By cl 13, the deed of agreement could be terminated by mutual consent or by either party giving to the other three months' notice in writing of intention to do so. In the event of such a notice being given, cl 14 provided a formula for calculating the value of the interest of the party giving notice and for payment out of that party by the other party. At no time did the parties mutually consent to the agreement being terminated and no party gave to the other party a notice of intention to terminate the agreement.
In 1972, five special abalone licences were made available to residents of Flinders Island, the largest of the Furneaux group of islands. Commercial Abalone Fishing Licence number 121 was such a licence. As a result, Mr Kossman became known as a "Furneaux diver". Originally the holders of such licences were restricted to taking abalone only from the waters around the Furneaux Islands. There were also 120 "mainland Tasmanian" licensed divers and originally they were not excluded from fishing those waters. However, from 1985 the 120 "mainland Tasmanian" divers were so excluded. That protected the five Furneaux divers who had access only to the Furneaux waters. Also in 1985, quotas were introduced. A quota was expressed as a number of units. A unit was a weight of abalone that varied from time to time, depending on the availability of resource and other considerations. The special status of the five Furneaux licences was retained and each of them was allocated 20 quota units. The "mainland Tasmanian" diver's licences were allocated 28 quota units. Although Furneaux licences could effectively be transferred to another diver, no transfer, exchange or trade of quota units was permitted between Furneaux licensees and mainland Tasmanian licensees.
At all relevant times until 31 December 1990, the right to take abalone in State fishing waters was regulated by the Sea Fisheries Regulations 1962. In effect, they provided (inter alia) that no person could take abalone in commercial quantities in State fishing waters unless the holder of a subsisting commercial abalone licence used and sold for that purpose (subreg17A(1)(a)), that a licence continued in force from the date of issue until 31 December in each year (subreg17A(3)) and that the Minister might issue exploratory licences to persons to take abalone in State fishing waters (subreg17C(1)).
The 1991 regulatory changes
With effect from 1 January 1991, the Sea Fisheries Regulations were significantly amended by the Sea Fisheries Amendment (Abalone Licences and Fees) Regulations 1990. The licence system was restructured. The diving entitlement was uncoupled from the entitlement to hold quota units. There were created abalone quota licences. Commercial abalone licences became known as commercial abalone diver's licences and the provisions relating to them were substantially amended. The holder of a commercial abalone diver's licence was entitled to take abalone for commercial purposes under the authorisation of the holder of an abalone quota licence. (Regulation 17A.) At first, the holder of an abalone quota licence was required to be an individual, but from a later date corporations were permitted to hold such a licence. The holder could not personally take abalone unless also the holder of a commercial abalone diver's licence. In that way, investment in licences to take abalone in commercial quantities, and the opportunity to hold such licences, was extended. Each abalone quota licence was expressed to authorise the taking of a specified number of quota units. There was no longer a limit, upper or lower, on the number of quota units that might be owned by an individual. As with the previous quotas, a quota unit was expressed as a weight, the amount of which has varied from time to time. An abalone quota licence authorised the holder of the licence and any person authorised by the holder under the licence and whose authorisation had been approved under reg17(1), to take, in total, not more than the number of abalone quota units specified in that licence. (Regulation 16H.) The holder of the abalone quota licence had to apply to the Minister for approval of each licensed commercial abalone diver authorised by the holder to take abalone under the licence and the number of abalone quota units the holder had authorised the diver to take. (Regulation 16I.) The holder of the abalone quota licence was entitled to apply to have that licence transferred to another person. (Regulation 16K.) Prior to that regulation, transfers were not legally possible but in effect, they were officially endorsed by the issue of a new licence to a proposed "transferee" in place of the "transferor's" licence, which was surrendered.
As a consequence of the regulatory changes, on or about 1 January 1991 Mr Kossman applied for and was issued in his own name with an abalone quota licence for 20 quota units and 20 abalone quota certificates for each unit and a commercial abalone diver's licence. For the State a total of 3,500 units were authorised to be taken each year under all of the abalone quota licences that were issued. In effect, the licences he obtained replaced the commercial abalone licence he held previously. He obtained them as a consequence of the fact that at the material time, he had been the holder of a commercial abalone licence.
The 1994 statutory changes
By the Fisheries Amendment (Contracts) Act 1994 amendments were made to the Fisheries Act 1959 to provide in the alternative that the Minister or the Director of Sea Fisheries might enter into a deed of agreement by which there was conferred upon a person a licence to take and acquire in State fishing waters a specified number of abalone quota units for commercial purposes for an initial period of 9½ years from 1 July 1994 to 31 December 2003, with an option in the licensee to renew the term, and each renewed term thereafter, for a further period of 10 years. Wishing to take advantage of the new scheme, in or about July 1994 Mr Kossman surrendered his abalone quota licence and in its place entered into four such deeds of agreement ("the contract deeds") with the Director of Sea Fisheries. Pursuant to the contract deeds, Mr Kossman acquired four licences and authorities to enter State fishing waters and take and acquire a total of 20 abalone quota units each year for commercial purposes; acquired in respect of each abalone quota unit the right to one three thousand five hundredth of the total allowable catch of abalone for the State in any year; and acquired the licences and other authorities and rights for a period of 9½ years from 1 July 1994 to 31 December 2003, with an option to renew the term, and each renewed term thereafter, for a further period of 10 years. On 17 September 2003 he exercised the option to renew the term of each deed.
The 1996 statutory and regulatory changes
The Fisheries Act 1959 and the Sea Fisheries Regulations 1962 were repealed upon the commencement of the Living Marine Resources Management Act 1995, but pursuant to the Marine Resources (Savings and Transitional) Act 1995, the contract deeds continued in force. Pursuant to the Living Marine Resources Management Act and the Fisheries Rules 1996, commercial abalone divers' licences ceased to exist. They were effectively replaced by fishing licences (abalone dive). As a consequence, Mr Kossman ceased to hold the former licence and became the holder of the latter licence. Those who were entitled to take fish under an abalone quota licence, rather than contract deeds, were issued instead with a fishing licence (abalone quota). The holder of an abalone quota licence could be a partnership, corporation or trustee. Licences continued to be transferable. Quota licences could also be amalgamated and divided.
The Furneaux entitlements
In 1989 it was decided by the Government that the geographical restrictions on fishing around the Furneaux Islands would be removed as from 1 January 1990. Thereafter all 125 licensed abalone divers were allowed to take abalone in all Tasmanian waters. The five Furneaux divers were not happy with the prospect of 120 extra divers having access to their formerly restricted fishing grounds. To address an accepted imbalance, the five Furneaux divers, who included Mr Kossman, were each granted eight additional quota units, effective from 1 January 1990, bringing their total allocation to 28 quota units, in line with the 28 quota units enjoyed by the 120 licensed divers. The five Furneaux divers were not required to make a capital payment for the additional quota units but they held them on a limited basis. The eight units were attached to a licence that is generally known as a Furneaux Group licence. It has been subject to conditions that it is personal to the holder (in this case, Mr Kossman) and cannot be transferred by the holder; the holder is entitled, in each calendar year, to take eight quota units of abalone from State fishing waters; the quota allocated to the licence must be caught personally by the holder; and the licence must be surrendered when the holder ceases to be a licensed abalone diver. The licence has since been issued each year to Mr Kossman.
When the split licensing system was introduced on 1 January 1991, the original 20 quota units held by each Furneaux diver became eligible for quota re-distribution to interested third parties, pursuant to the regulations. Accordingly, some investors, but not the plaintiff insofar as concerned its interest in abalone quota licence 121 which was in Mr Kossman's name, had their financial interests recognised, and the 20 quota units were divided among the divers and their financiers in a manner that reflected their investment. However, despite lobbying from the plaintiff, the Minister determined that the eight additional Furneaux quota units would not be eligible for re-distribution because they were granted for the personal use of the diver. They were required to remain in the diver's name. Further, a Furneaux diver could permanently transfer his original 20 quota units but not the eight special units nor annually assign the eight units to another diver to harvest. In a departmental briefing note at about that time, the point was made that the Furneaux divers were given the asset of eight units free of any capital charge and to add to that gift the right to sell the asset on the open market was considered not to be equitable or necessary when regard was had to the fact that other abalone divers and fishermen wishing to acquire such assets were required to pay the full market price. It was considered that to allow Furneaux divers to sell off their Furneaux units would unjustifiably give them a windfall capital gain from an asset specifically granted for their personal use.
In July 1992 the Minister relented to some extent by making an offer to the Furneaux divers to convert the eight Furneaux units they each owned into permanent quota units capable of transfer, provided that they paid a sum of money representing the "market value" of the new form of units. Mr Kossman and the other Furneaux divers did not take up the offer.
The extent to which there was compliance with the 1985 deeds or their spirit
It was common ground at the trial that although in recent years Mr Kossman has arranged for other licensed divers to take 20 of the quota units under his deeds of agreement with the Director of Fisheries, he has personally dived for and taken the eight quota units authorised to be taken each year by him by his Furneaux Group licence.
It is accepted by the parties that the 1985 deeds directly governed the relationship between the plaintiff and Mr Kossman until the 1991 regulatory changes took effect on 1 January 1991, insofar as they governed their mutual entitlements with respect to 20 quota units. It is common ground that the deeds did not thereafter directly govern their relationship, because the deeds dealt with their interests in Commercial Abalone Fishing Licence number 121 and did not deal with the entitlement to take abalone that arose under the abalone quota licence that was first issued to Mr Kossman on or about 1 January 1991. The deeds did not deal with the additional eight Furneaux units either, for their creation also occurred after the 1985 deeds were entered into.
In 1990, Mr Kossman sold and delivered to the plaintiff, as he had done since 1985, that part of his total catch of abalone that was represented by the original 20 quota units. However, he did not supply the eight Furneaux quota units taken by him. He maintained that the 1985 deeds did not apply to those units and that he was under no obligation to the plaintiff with regard to them. For the 1990 calendar year the eight units amounted to 4800 kilograms of additional abalone and he supplied it to another processor. On or about 10 April 1990, the plaintiff asserted that his actions amounted to a breach of contract. It demanded (inter alia) payment of $20,400, being 25 per cent of the average Tasmanian market price, as laid down in the 1985 deed of agreement, together with interest at the plaintiff's then current bank overdraft rates, and threatened court proceedings if payment was not made. Following an exchange of correspondence, Mr Kossman relented and on 6 November 1990 he paid the amount demanded, including interest at bank overdraft rates, less an amount claimed by him by way of set off. It was conceded by his counsel that in each year thereafter until 1994, he supplied 28 quotas units of abalone to the plaintiff on the terms contained in the 1985 deed of agreement. No argument has been raised by the plaintiff that as a consequence of doing so, Mr Kossman is prevented from denying that the 1985 deeds continued to apply.
Subject to what is related in the preceding paragraph, it is agreed that initially the 20 quota units, and after the creation of the Furneaux Group licence, the 28 quota units of abalone to which Mr Kossman was legally entitled, were fully taken each year until the trial and that until and including 1993, the plaintiff and Mr Kossman continued to deal with each other in accordance with the spirit of the 1985 deeds, by Mr Kossman taking the 28 quota units of abalone each year and in the main selling and delivering them to the plaintiff as before upon the terms of the deed of agreement as to payment and price. However, their relationship broke down in 1994. Mr Kossman's commercial dive dockets reveal that abalone landed by him on 18 March 1994 were supplied to a processor other than the plaintiff. Between then and 29 August 1994, some of what he took was supplied to the plaintiff and some was supplied to other processors. The last supply to the plaintiff was of abalone landed by him on 29 August 1994. Thereafter, all of the abalone taken by him was supplied to processors other than the plaintiff. Apart from $25,000 paid by him to the plaintiff in 1995, no payment has since been made by Mr Kossman to the plaintiff in respect of abalone taken under the 28 quota units.
Mr Kossman's commercial abalone dive dockets reveal that although he continued to dive for the abalone he was entitled to take pursuant to the Furneaux entitlements, his diving for abalone in the other 20 quota units lessened, to the extent that by 1998, until 2004, he was diving for abalone pursuant to the Furneaux entitlements but not for abalone in the other 20 quota units. It appears that in 2004, he did dive for part of the 20 quota units. It also appears from the evidence, in particular abalone quota certificates, that instead of diving himself for abalone in the 20 quota units he assigned his right to dive for them to other divers.
On 11 August 1994 Mr Kossman's solicitors wrote to the plaintiff, asserting that their agreement had been frustrated and suggesting "that each party go his own way on the basis sthat [sic] our client will take his ten units (together with the Furneau [sic] units) and you will transfer the registered proprietorship of your company's ten units to your name or nominee. With respect to the diving entitlement, we suggest that they remain equally shared and registered in our client's name pending negotiations by our client to but out your intersdt [sic] in that entitlement." The plaintiff did not agree. There is no evidence that it responded directly.
The plaintiff's response to Mr Kossman's failure to comply with the spirit of the 1985 deeds
Mr Kossman did not give evidence and there was no evidence from the defendants of his reason for ending his supply of abalone to the plaintiff. However, Mr Hansen's evidence was that Mr Kossman told him that he wanted to dive in southern Tasmania; that the plaintiff did not then have a processing factory in that area; that it was uneconomical for the plaintiff, at its own cost, to pick up abalone from southern Tasmania and transport it to its factory at Smithton in northwest Tasmania; that the requirement of the 1985 deed of agreement was that Mr Kossman should deliver the abalone to the plaintiff; and that Mr Kossman said that it was too difficult for him to deliver on that basis. Mr Hansen explained that all of the divers who had supply arrangements with the plaintiff were diving in the northern part of the State. The plaintiff had no objection to Mr Kossman moving south and diving down there. It offered to have its truck pick up his abalone at Conara, in the midlands, on its way from St Helens on the east coast, and transport the fish to Smithton at its own cost, if he would deliver the abalone to a meeting point at Conara. Mr Kossman delivered to there a couple of times, but that was all.
The evidence of the plaintiff's response to Mr Kossman's cessation of supply came largely from Mr Hansen also. Asked whether he contacted Mr Kossman after the last supply of abalone on 29 August 1994 and asked what was going on, Mr Hansen replied that he contacted him a number of times. He told Mr Kossman that by selling abalone to other people he was breaking their agreement and that the plaintiff required him to deliver the abalone to it. Mr Kossman did not do so. He stated that it was his intention not to abide by the 1985 deeds.
On 25 May 1995 the plaintiff sent a letter to Mr Kossman stating that in 1994 he had only supplied 6892 kilograms. I infer that it was not then in a position to know whether he had taken any abalone in 1995 which he had failed to supply. It demanded that he pay $56,971 "as required by our contract", calculated as 25 per cent of the market price for 9908 kilograms that had not, but which, on the plaintiff's case, should have been supplied in 1994. The calculation was based on 28 quota units. No response was received and on 3 July 1995 a further letter was sent in which the plaintiff threatened to "commence legal proceedings to collect the money owed" if payment of $56,971 was not made within seven days. On 19 July 1995 the plaintiff received from Mr Kossman a cheque for $25,000. Its receipt noted the payment as being for "TSF Share FISH CATCH". Asked whether he had a discussion with Mr Kossman about the basis upon which that amount was paid, Mr Hansen's answer was that "it came out of the blue as far as I recall, I can't remember specifically". No other explanation for it was provided by the evidence.
The writ was filed on 22 July 1998. It was submitted by the defendants' counsel that there were no relevant communications between the plaintiff and Mr Kossman until then, but the evidence does not permit me to make such a finding, having regard to Mr Hansen's evidence that after the cessation of supply on 29 August 1994 he contacted Mr Kossman a number of times. However, it was conceded by the plaintiff that between 1994 and 2004 no letter was sent by it to Mr Kossman calling for the supply of abalone to be resumed. (A demand in those terms was not in fact made in the letter of 25 May 1995.)
Exploratory entitlement claims
In 1989, 1993 and 1995, Mr Kossman acquired from the Minister of Primary Industry or the Director of Sea Fisheries the right to take further quantities of abalone in State fishing waters pursuant to exploratory licences issued under the Sea Fisheries Regulations 1962 or in the exercise of a ministerial discretion. I understand the purpose of the issue of such exploratory entitlements was to enable a limited taking of undersize abalone from specified waters within a specified period of time, usually about a month, for research. The exploratory licences were only issued to those existing licensed commercial abalone divers who applied.
No issue between the parties falls to be determined with respect to the 1989 and 1993 exploratory entitlements. However, with respect to the 1995 exploratory entitlement, pursuant to which he landed 1,015 kilograms of abalone, an issue arose, because he supplied all of them to a business called St Helens Aquaculture in November 1995 and none of them to the plaintiff.
The plaintiff's claim for a constructive trust and for breach by Mr Kossman of a fiduciary duty
The plaintiff's case is that with the regulatory changes that took place on 1 January 1991, the essential agreement contained in the 1985 deeds was frustrated, for the licence in which the plaintiff had invested, Commercial Abalone Fishing Licence number 121, as to which Mr Kossman held one undivided share on trust for the plaintiff, was replaced by the abalone quota licence and the commercial abalone diver's licence that were issued to Mr Kossman. The abalone quota licence was in turn replaced in 1994 by the contract deeds into which Mr Kossman entered with the Director of Sea Fisheries. The plaintiff claims that Mr Kossman continues to hold an undivided half share of his interest in the contract deeds and each of the quota units conferred by them, and the fishing licence (abalone dive), upon trust for the plaintiff. Alternatively, it claims that Mr Kossman is a constructive trustee for it, because of the events that occurred, and that a denial of its claimed beneficial interest would be unconscionable. The plaintiff also claims that in the circumstances, Mr Kossman has owed it fiduciary duties, and in particular a duty to avoid conflicts or possible conflicts of interest, a duty not to make a profit without the informed consent of the plaintiff, and a duty to hold any property acquired by him in his capacity as a fiduciary upon trust for the plaintiff.
Subject to what is said hereafter it is the plaintiff's case that Mr Kossman's duties to it, consistent with the 1985 deed of agreement continued, including his duties to pay the plaintiff a sum equivalent to 25 per cent of the average Tasmanian market price payable to him for the sale of any abalone caught by him and to sell and deliver his total catch of abalone to the plaintiff and to no other person or company.
The case against the second defendant
The second defendant was incorporated in 1981. It has been the trustee of the Peter Kossman Family Trust at all material times. Mr Kossman was a director of it from its inception but ceased to hold that office in about April 2004. There is evidence that he was its chairman and manager. Since 1997 Lorraine Alyson Kossman has been a director and since 2002 she has been the company secretary. She has the same address as Mr Kossman and since 28 August 2003, she has been the holder of the three issued shares in the company. The evidence does not disclose share information prior to that date. At all material times, the second defendant has carried on business in Tasmania as a processor of seafood and abalone in particular. Since 29 March 1995 most of the abalone taken pursuant to Mr Kossman's quota entitlements, including the Furneaux entitlements, has been supplied and delivered by him to the second defendant for processing.
The plaintiff pleaded that since 29 March 1995 the second defendant received and processed abalone taken from all of the relevant entitlements, including the Furneaux entitlements, and that the second defendant knew that Mr Kossman was acting in breach of his trusts; that the second defendant was not a bona fide purchaser for value without notice and knew that the abalone had been delivered to it in breach of the trusts; and that the second defendant knowingly assisted Mr Kossman in breach of the trusts, by receiving and processing the abalone taken and used by him in breach of them. It was further pleaded by the plaintiff that the second defendant is bound by a constructive trust which applies to the proceeds of the abalone and must account to the plaintiff for such proceeds or pay equitable compensation together with interest.
Counsel for the plaintiff said that its case against the second defendant is based on the principle that a stranger who knowingly participates in a breach of fiduciary duty should account for its profits from doing so. See Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 395 – 398. I note that in Equity Doctrines and Remedies (4th ed) by Meagher, Heydon and Leeming at par 5-245, there is a discussion concerning whether the principle extends to account against an accessory for profits made by a fiduciary in breach. The question does not require resolution at this time because the parties have agreed, and I have ordered accordingly, that the only matters requiring determination now are a number of issues. A consideration of the orders that might appropriately be made against either defendant does not yet arise.
The relief sought by the plaintiff in the amended statement of claim
In the amended statement of claim the plaintiff sought (inter alia):
1A declaration that Mr Kossman held and continues to hold his interest in the 1994 contract deeds, the quota units conferred by them, the commercial abalone diver's licence until 31 May 1996 and the fishing licence (abalone dive) in trust for the plaintiff to the extent of one half of such entitlements.
2Orders pursuant to the Partition Act 1869 for the partition of the contract deeds, the quota units conferred by the contract deeds and the fishing licence (abalone dive) as to one half for the plaintiff and one half for Mr Kossman, or alternatively, a court directed sale of those items and an equal division between the plaintiff and Mr Kossman of the proceeds of such sale. (The plaintiff abandoned the claim for those orders near the end of the trial.)
3Orders that Mr Kossman account for and pay to the plaintiff its share of income derived by Mr Kossman from the commercial abalone diver's licence, his interest in the contract deeds, the 20 quota units conferred by them and the fishing licence (abalone dive). (An additional claim for an order that Mr Kossman pay to the plaintiff a reasonable fee for the use of the two licences since 1994 was abandoned by the plaintiff at the commencement of the trial.)
4An order for the payment by Mr Kossman of interest on whatever is found due upon the taking of such account, at such rate and for such period as the Court shall think fit.
5In addition or alternatively, orders restoring to the plaintiff it's interest in the trust property including the income which the plaintiff ought to have derived from the use of it, together with interest.
6A declaration that Mr Kossman holds his Furneaux Group licence on trust for the plaintiff as to one half.
7Orders that Mr Kossman account for and pay to the plaintiff its interest in all income derived from or advantage obtained by him pursuant to the Furneaux Group licences.
8An order for the payment by Mr Kossman of interest on whatever is found due upon the taking of such account, at such rate and for such period as the Court shall determine.
9[In addition or alternatively,] orders restoring to the plaintiff its interest in the income derived from or advantage obtained by Mr Kossman from the Furneaux Group licences from 1994.
10Orders that Mr Kossman account for and pay to the plaintiff its interest in all income derived by him pursuant to the exploratory entitlements.
11An order for the payment by Mr Kossman of interest on whatever is found due upon the taking of such account, at such rate and for such period as the Court shall determine.
12In addition or alternatively, orders restoring to the plaintiff its interest in the income derived or the advantage obtained from the use of the exploratory entitlements from 1994 and requiring Mr Kossman to make good the loss suffered by it.
13An injunction restraining Mr Kossman consequential upon the Court's determinations.
14A declaration that the second defendant is liable as a constructive trustee to the plaintiff in respect of abalone received or processed by it in breach of the trusts pleaded against Mr Kossman.
15Orders that the second defendant account to the plaintiff.
16Orders against the second defendant restoring the plaintiff to its interest in the income derived or the advantage obtained by use of each of the licences, including the Furneaux Group licences, from 29 March 1995.
17Orders that the second defendant pay to the plaintiff equitable compensation together with interest.
Issues for determination
At the outset of the trial, an order was made by consent that five questions be tried before any other issue in the case. The claim encompassed by the fifth issue, concerning whether the plaintiff is entitled to a transfer of 10 permanent quota units into its own name, was abandoned by the plaintiff towards the end of the trial. The remaining four issues requiring determination are:
1Is the amount outstanding to the plaintiff from the 20 permanent quota units and from the exploratory entitlement in 1995, to be determined on a division of:
(a)50 per cent of the beach price after expenses in each year;
(b)25 per cent of the gross beach price in each year; or
(c)some other basis and if so what?
2What is the rate of interest to be paid by the defendants on the amount outstanding and how is it to be calculated.
3Is the income derived from the eight Furneaux units to be included in the amount due to the plaintiff? That is, are the eight Furneaux units subject to a trust in favour of the plaintiff or not and if so, what are the terms of the trust?
4What are the obligations of the plaintiff and the first defendant in the future with respect to:
(a)the 20 permanent quota units;
(b)the eight Furneaux units?
The defendants' case in brief
The defendants admit that the fishing licences (abalone dive) that have been held by Mr Kossman since about 1996 have been so held by him upon trust for the plaintiff and himself equally. I infer that they make the same concession with regard to the commercial abalone diver's licences held by him between about January 1991 and 1996. Nor do they dispute that the 20 abalone quota units that Mr Kossman has held since about January 2001, and the exploratory entitlements, have at all times been the subject of a constructive trust in favour of the plaintiff. Counsel for the defendants conceded that they became the subject of a fiduciary obligation on the part of Mr Kossman because his opportunity to own those 20 units and the exploratory entitlements arose by reason of the previous trust relationship or joint venture agreement between the plaintiff and Mr Kossman. The dispute between the plaintiff and the defendants in regard to the 20 quota units and the exploratory entitlements concerns the terms of the constructive trust that equity should impose and the rate of interest that the defendants should pay on monies due from them to the plaintiff.
However, the case for the defendants concerning the eight Furneaux units is different. They maintain that no constructive trust should arise and that they owe nothing to the plaintiff in respect of them.
In their defence, the defendants raised restraint of trade defences under the Trade Practices Act 1974 (Commonwealth) and a limitation defence under the Limitation Act 1974 (Tas), s4. However, by the time the evidence concluded they were no longer maintained.
Issue 1
That equity should find that there was a constructive trust with respect to the 20 permanent quota units and the exploratory entitlements, as conceded by the defendants, is consistent with Chan v Zacharia (1984) 154 CLR 178, particularly at 199, and De Tozser v Tasmanian Seafoods Pty Ltd A86/1992, particularly at pages 6 – 8. However, the parties are not in agreement concerning the terms of the trust.
The case for the defendants is that the amount outstanding to the plaintiff from the 20 permanent quota units and the exploratory entitlement in 1995 should be determined on a division of 25 per cent of the gross beach price in each year particularly because, having regard to subcl 2(a)(i) of the 1985 deed of agreement, what the plaintiff missed out on was the payment by Mr Kossman of a sum equivalent to 25 per cent of the average market price payable to him for the sale of any abalone caught by him. (For this purpose, I do not understand there to be any difference between the deed's reference to market price and the reference to beach price.) Counsel for the defendants relied on dicta in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, particularly at 97, where Mason J pointed out that the existence of a basic contractual relationship had in many situations provided a foundation for the erection of a fiduciary relationship. His Honour continued: "In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction." At 102, his Honour noted that "the categories of fiduciary relationships are infinitely varied and the duties of the fiduciary vary with the circumstances which generate the relationship" and that "it is now acknowledged generally that the scope of a fiduciary duty must be moulded according to the nature of the relationship and the facts of the case". See also Duke Group Ltd v Pilmer (1999) 73 SASR 64 at 218.
Counsel for the defendants also submitted that the Court should find 25 per cent and not 50 per cent of the gross beach price is appropriate because Mr Kossman essentially complied with the deed from 1985 until 1994; ever since 1985 the plaintiff has been an investor and Mr Kossman has by personal exertion, undertaken the diving and borne the cost of it; and by his personal exertion he has participated in a hazardous and perilous occupation. Counsel for the defendants also pointed to the evidence of Mr Hansen that by 1994, having taken legal advice, he decided that the plaintiff should not seek to terminate the agreement under its notice provisions and that one of his reasons (he was not asked what the others were) was that the future cashflow, if the agreement was kept alive, would be more advantageous to the plaintiff than would be the case if the agreement was terminated. That future cashflow was, so it was submitted, 25 per cent of the beach price and not 50 per cent, and the decision tended to support a finding that 25 per cent was fair and reasonable because the plaintiff regarded it as such in 1994.
The defendants therefore accept that there should be held to be a constructive trust in favour of the plaintiff on terms that include a result that Mr Kossman must pay to the plaintiff 25 per cent of the average Tasmanian market price (as that term was used in the deed of agreement) with respect to abalone authorised for taking under the 20 permanent quota units and the 1995 exploratory entitlement, insofar as such payment has not been made by him. However, the defendants oppose a term that would impose on Mr Kossman an obligation since 1994, consistent with the obligations imposed by the 1985 deed of agreement, to sell and deliver to the plaintiff all of the abalone so authorised for taking. Their counsel submitted that it is fair and reasonable not to include the obligation of exclusive supply of fish. He argued that the law would not permit, and equity would not do so either, a contractual term that obliged Mr Kossman to sell all of the abalone taken by him to one processor, in circumstances where, at all material times, there was, and still is, a market in which the owners of quota units and divers may negotiate with processors over the terms of supply, dealing with matters such as price and delivery. It was submitted that a requirement of exclusivity of supply would amount to an unreasonable restraint upon Mr Kossman's ability to trade. It was argued that the plaintiff could easily have acquired the abalone from other sources.
On the other hand, it was submitted for the plaintiff that instead of 25 per cent of the price for the abalone, as originally agreed, Mr Kossman should be required to pay 50 per cent of the price for all of the abalone taken since 1994. Counsel for the plaintiff submitted that upon the basis that I should recognise the underlying ownership as equal; that the plaintiff lost the economic advantage of processing the abalone from 1994 and Mr Kossman kept all of the fish for disposal to others in contravention of what the parties had agreed; that the defendants conceded that his company, the second defendant, processed the fish and thereby gained an economic advantage; that with regard to most of the fish since 1994, Mr Kossman did not personally take them by diving as originally contemplated by the parties; and that because of a change in the regulations on 1 January 1991, he was no longer obliged to do so to the extent that any licensed diver could be employed for that purpose. Counsel for the plaintiff accepted that Mr Kossman was entitled to credit for the reasonable expenses incurred in acquiring the abalone, such as reasonable fees for diving, including a fee for himself if he personally did the diving, and royalties that had to be paid, before each party's half share of the price for the abalone is calculated. The plaintiff accepts that if I accede to its counsel's submissions, it should not be entitled to anything else, other than interest. In other words, it accepts that if the obligation of Mr Kossman is determined to be to pay the plaintiff 50 per cent of the net price for the abalone, the plaintiff will not be entitled to an account of profits, such as the profits made by the second defendant out of processing the abalone. However, if it is determined that Mr Kossman need only account for 25 per cent of the price, the plaintiff maintains that claim for an account of profits.
In my view the answer to the issue is clear. This is an appropriate case for the application of the principles stated by Mason J in the Hospital Products case to which I referred earlier. The 1985 contractual arrangements laid the foundation for the basic rights and liabilities of the parties. Until 1994, and notwithstanding the frustration of the arrangements on 1 January 1991 by the regulatory changes, the parties essentially continued to deal with each other as if those arrangements still applied, with Mr Kossman paying the plaintiff 25 per cent of the price for the abalone and selling and delivering all of the fish to the plaintiff. What then happened in 1994 and thereafter was that Mr Kossman, contrary to the protests of the plaintiff, breached his plain fiduciary duties by withholding supply and ceasing payment. In the words of Mason J, "the fiduciary relationship ... must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them", to the extent reasonably possible.
I do not accept that the agreement of the parties concerning exclusivity of supply should be struck down as an unreasonable restraint of trade. That arrangement reflected the fact that a licensed diver was required to hold the commercial abalone fishing licence necessary for what the parties planned, and Mr Kossman was the holder of such a licence. To balance to some extent his preferential entitlement to retain 75 per cent of the price, the parties agreed that he would supply all of the abalone to the plaintiff so that it could process the fish and make a profit from doing so. On its face, a reasonable commercial arrangement was made. The price at which Mr Kossman was effectively to be paid for the fish appears to have been a reasonable one having regard to all of the terms of their arrangement. On its face, that arrangement contained no unreasonable restraint of trade. On the contrary, Mr Kossman's insistence that he or his company should now be entitled to the profit from processing all of the fish and also receive 75 per cent of the price, in circumstances where he provided only 50 per cent of the capital to acquire the right to obtain the fish, seems an unreasonable one. The plaintiff should continue to be entitled to the benefit of exclusive supply.
I find no relevant significance in the fact that Mr Kossman has not dived for most of the fish taken pursuant to the entitlements since 1994. There is no reason to think that he arranged for a person or persons who were unlicensed to do the diving or that he did anything else to jeopardise the plaintiff's interests in a licence or in the entitlements. The deed of agreement basically imposed on him the responsibility for ensuring that all of each year's entitlement would be taken and supplied to the plaintiff. At the time of the deed of agreement, the law required him to personally do the diving. From 1991, the law did not so provide. Equity should hold him to the obligations of ensuring that the whole of the entitlement was taken and supplied to the plaintiff. Equity should not punish him by ordering him to pay to the plaintiff 50 per cent of the price of the abalone because he did not personally dive for it. The purpose of equity's relief is to do what is practically just and prevent unjust enrichment, but not to punish. Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557; Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 69 ALJR 678 at 684; Maguire v Makaronis (1997) 188 CLR 449 at 496; Hospital Products Ltd v United States Surgical Corporation (supra) at 109.
The defendants pleaded that the plaintiff abandoned the trust deed and the deed of agreement by making no demands for any monies or income revenue or any of the entitlements between 1994 and the issue of the writ on 22 July 1998 and that "by reason of the delay and laches (so) pleaded ... it would be unfair to grant the Plaintiff any of the remedies that he [sic] seeks". Reliance was placed by the defendants on statements by Deane J in Orr v Ford (1989) 167 CLR 316 at 337 – 342, particularly at page 341 where his Honour said:
"The ultimate test effectively remains that enunciated by Lord Selborne LC ... speaking for the Privy Council, in Lindsay Petroleum Co v Hurd (1874) 5 PC 221 at 239 – 240, namely, whether the plaintiff has, by his inaction and standing by, placed the defendant or a third party in a situation in which it would be inequitable and unreasonable 'to place him if the remedy were afterwards to be asserted': see Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1279, and also, per Rich J, Hourigan v Trustees Executors and Agency Co Ltd (1934) 51 CLR 619 at 629 – 630."
That passage requires that for a defence of delay or laches to succeed the plaintiff's delay must have placed the defendant in such a situation that it would be inequitable and unreasonable to allow the remedy sought by the plaintiff to be enforced. That reflects what is generally the case, that delay alone will not usually amount to a defence. Jones v Stones [1999] 1 WLR 1739. There is some disagreement about that to be found in authorities. Compare for example, Dixon CJ and Fullagar J in Fitzgerald v Masters (1956) 95 CLR 420 at 433 with McTiernan, Webb and Taylor JJ at 440 – 441. The matter is discussed in Equity Doctrines and Remedies (supra) at par36-070, where the authors express the view that the correct position is that mere delay cannot constitute laches.
Upon the basis of evidence to which I referred earlier, I find that following the final supply to the plaintiff of abalone on 29 August 2004, Mr Hansen contacted Mr Kossman a number of times and asserted that Mr Kossman was breaking their agreement by selling the abalone to others and demanded that he deliver it to the plaintiff. The evidence does not confine those demands to 1994 or any other time remote from the issue of the writ. The response of Mr Kossman was to state that he intended not to comply with the 1985 deeds. By a letter sent on 25 May 1995, the plaintiff demanded that he pay to it, in accordance with subcl 2(a)(i) of the deed of agreement and his practice up until 1994, $56,971 being 25 per cent of the average Tasmanian market price for the abalone he should have supplied, but failed to supply, in 1994. He partly responded on 19 July 1995 by paying $25,000.
There is no evidence to suggest that the defendants believed that because of the plaintiff's delay in asserting its rights they concluded that it had abandoned its claims. There is no basis upon which it can be found that they would be prejudiced by the delay or that for some other reason it would be unfair, unreasonable or inequitable to allow the plaintiff's action to succeed. The silence of the defendants about the matter at the trial must cause their defence of abandonment and laches to fail.
I therefore hold that the amount outstanding to the plaintiff from the 20 permanent quota units and the 1995 exploratory entitlement, includes 25 per cent of the average Tasmanian market price payable to Mr Kossman for the sale of any abalone taken within the authority of the 20 permanent quota units and the exploratory entitlement, the expression "average Tasmanian market price" having the meaning accorded to it in the 1985 deed of agreement. If that is not clear to the parties, I will hear submissions and make a further determination as to the meaning. Because Mr Kossman breached his fiduciary duty by failing to supply the abalone to the plaintiff, it would in normal circumstances be entitled either to equitable compensation representing its losses suffered as a consequence, or, alternatively, to an account of profits. However, the parties have agreed that if I make the finding that I have, that is to say that Mr Kossman is liable to pay 25 per cent of the price to the plaintiff and that he should have continued to supply the abalone to the plaintiff, then an account should be taken including an inquiry into the profit made by the second defendant out of processing those abalone.
Issue 3
It is convenient to deal with this issue now. It concerns whether the eight Furneaux quota units should also be the subject of a constructive trust in favour of the plaintiff.
The case for the defendants is that the Furneaux units should not be so subject because the capital that was originally provided by the plaintiff and Mr Kossman in 1985 was for the purchase of an entitlement to take the 20 permanent quota units; the eight Furneaux units were not allocated to Mr Kossman until 1 January 1990 and the 1985 deeds did not apply to them; the eight Furneaux units were made available to Mr Kossman by the Government without a contribution of capital because he was a licensed Furneaux diver; and the Furneaux Group licence was issued to him strictly upon conditions that the licence was personal to him, he could not transfer the licence to another, the eight quota units had to be caught personally by him and the licence had to be surrendered by him when he ceased to be a licensed abalone diver. Counsel for the defendants submitted that equity should not uphold a claim the effect of which would give to the plaintiff an interest in something with respect to which the Government would not allow a transfer. He also submitted that before there could be a constructive trust, the diving entitlement had to be property of a kind that equity recognises as property that can be made the subject of a trust.
Reliance was placed by the defendants on dicta in Pennington v McGovern (1987) 45 SASR 27. At 31, King CJ approved of the statement in Jacobs Law of Trusts in Australia (5th ed) at 657 (and in the 6th ed at 707) that all forms of property may be the subject of a trust unless the policy of the law or any statutory enactment has made particular property inalienable. At 44 Legoe J said: "There are some forms of property the transfer of which is wholly, or partly prohibited and the restriction may prevent a trust being created in relation to them."
There is little to distinguish the 20 permanent quota units from the eight Furneaux quota units. When the 1985 deeds were entered into and Mr Kossman became the holder of Commercial Abalone Fishing Licence number 121 and a "Furneaux diver", there was no provision in the law for the licence to be transferred just as there has been no provision in the law for the transfer of a Furneaux Group licence. The practice had developed that if the holder of a commercial abalone fishing licence wanted to transfer whatever rights he had by virtue of holding such a licence, he could agree to sell them for a consideration and surrender the licence, and at the same time request that a new licence be issued to the purchaser. The request would be acceded to by the relevant authority if it approved of the new licensee. The only real difference concerning a Furneaux Group licence was that the Minister determined that he would not permit a new licensee to replace an existing one in that way.
The plaintiff's claim to a constructive trust arising out of the eight Furneaux units is supported by equitable principles to which reference was made by Deane J in Chan v Zacharia (supra) at 199:
"Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee: see Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 at 350. That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed. In some, perhaps most, cases, the constructive trust will be consequent upon an actual breach of fiduciary duty: eg, an active pursuit of personal interest in disregard of fiduciary duty or a misuse of fiduciary power for personal gain. In other cases, however, there may be no breach of fiduciary duty unless and until there is an actual failure by the fiduciary to account for the relevant benefit or gain: eg, the receipt of an unsolicited personal payment from a third party as a consequence of what was an honest and conscientious performance of a fiduciary duty. The principle governing the liability to account for a benefit or gain as a constructive trustee is applicable to fiduciaries generally including partners and former partners in relation to their dealings with partnership property and the benefits and opportunities associated therewith or arising therefrom: see Birtchnell v Equity Trustees (1929) 42 CLR at 395 – 397, 408 – 409; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 394."
Mr Kossman was undoubtedly under a fiduciary obligation to the plaintiff with respect to Commercial Abalone Fishing Licence number 121 and the benefits it provided him. The defendants do not challenge that. The taking by him of abalone pursuant to the Furneaux Group licence was a profit or benefit obtained by reason of him taking advantage of an opportunity which he obtained in consequence of his occupation of the fiduciary position. There is little to distinguish the situation from his entitlements to abalone pursuant to the exploratory licences issued to him (as to which he did not seek to argue that a constructive trust did not arise) and the situation of the plaintiff in De Tozser v Tasmanian Seafoods Pty Ltd (supra). In that case at 8, Zeeman J concluded with remarks that equally apply to the benefits from the Furneaux Group licence that was issued to Mr Kossman:
"The exploratory licence in itself had value in that it enabled the taking of abalone in addition to those authorised to be taken under the commercial abalone licence. The benefit of the further licence was that it enabled the holder thereof to derive additional financial benefits from abalone fishing. That opportunity clearly derived from the fiduciary relationship. It was only because the plaintiff was the fiduciary in relation to the commercial abalone licence that he was afforded the opportunity of obtaining the exploratory licence. The plaintiff ought to be required to account for an equitable portion of the benefits derived from the exploratory licence."
Although the Furneaux Group licences themselves were inalienable, the abalone obtained by their holders were not inalienable. No principle of equity prevents the creation of a constructive trust in favour of the plaintiff with respect to the abalone obtained by Mr Kossman pursuant to the eight Furneaux units. I hold that those abalone were subject to the same constructive trust as the abalone obtained pursuant to the 20 permanent quota units. As in that case, I hold that the amount outstanding to the plaintiff with respect to the abalone includes 25 per cent of the average market price payable to him for the sale of any abalone taken under the authority of the eight Furneaux quota units. I also hold that the constructive trust included a term that required Mr Kossman to sell and deliver all of those abalone to the plaintiff and to no other person or company, as was the case with the abalone taken under the authority of the 20 permanent quota units and the 1995 exploratory licence. I am not aware of any other terms of the constructive trust that need to be determined, but I will hear further submissions about the matter, if necessary.
Issue 4
With regard to abalone taken under the 20 permanent quota units and the eight Furneaux quota units, the obligations of the plaintiff and Mr Kossman in future will be in accordance with my determinations of Issues 1 and 3. They will include that abalone acquired by him under all 28 quota units must be sold and delivered by him to the plaintiff, he must pay the plaintiff a sum equivalent to 25 per cent of the average Tasmanian market price for them, as that expression is used in the 1985 deed of agreement, and the plaintiff must pay him for those abalone that average Tasmanian market price "less any costs of freight incurred by" the plaintiff "in having such abalone freighted to Launceston or St Helens or such other destination in Tasmania as agreed by the" plaintiff and Mr Kossman "from time to time". See the 1995 deed of agreement, subcl 2(d).
Issue 2
Upon the basis that Mr Kossman should have paid the plaintiff 25 per cent of the average Tasmanian market price payable to him with respect to abalone taken under all 28 quota units, the evidence before the Court establishes that he should have paid, but did not pay, the following amounts for the years shown. The amount that should have been paid for abalone caught pursuant to the 1995 exploratory licence is not included.
1994
$77,258
1995
70,340
1996
108,612
1997
169,193
1998
140,465
1999
163,800
2000
253,399
2001
232,288
2002
231,077
2003
175,380
2004 (to 20 September)
126,926
$1,748,738
What profits were made by Mr Kossman and the second defendant from processing the abalone have not yet been established.
Upon the basis of my conclusion that Mr Kossman should pay 25 per cent, and not 50 per cent, of the average Tasmanian market price, it is the plaintiff's case that both defendants should also be required to account by paying interest on whatever is found to be outstanding from them. The case is based on the object of stripping the defendants of the profits or benefits they gained from Mr Kossman's breaches of the fiduciary duties he owed the plaintiff.
I note that the parties agreed that for the purpose of these reasons for judgment and the determination of the issues that were defined for my consideration, no distinction is to be drawn between the two defendants. I assume that means that I should treat Mr Kossman and the second defendant as if they were one and the same person.
Financial records of the second defendant reveal a number of matters. In the financial years ending in the years stated below, the second defendant paid overdraft interest to its bank and interest on Commonwealth Development Bank loans in the stated amounts.
1996
$37,367
1997
28,079
1998
26,802
1999
46,253
2000
66,713
2001
126,024
2002
181,127
2003
182,908
Additional amounts were paid for hire and hire purchase.
The company had the following liabilities as at 30 June in each of the following years:
1997
$2,200,616
1998
2,356,510
1999
2,412,649
2000
2,687,904
2001
3,768,303
2002
3,758,718
2003
3,715,652
Included in those amounts are the following bank overdraft liabilities and non-current liabilities to financial institutions (not including amounts owing on loans from L Kossman and shareholders).
Bank overdraft
Non-current liabilities
Total
1997
$95,332
$296,069
$391,401
1998
59,345
437,491
496,836
1999
338,290
350,679
688,969
2000
439,948
635,874
1,075,822
2001
952,263
1,119,099
2,071,362
2002
1,366,164
1,030,436
2,396,600
2003
919,052
1,376,930
2,295,982
In evidence are some of the cheque account statements for the second defendant between 1 July 1998 and 1 July 2002 and 1 July 2003 to 1 July 2004. Analysis of them must by necessity be confined to those periods and even within them some of the statements were not tendered. From 1 July 1998 until February 2004 the cheque account had an overdraft arrangement and was consistently overdrawn. A change in the account set-up then took place and from March until 1 July 2004, it appears that the bank required the second defendant to use a cheque account that was generally in credit. What was previously an overdraft cheque account became known as a Better Business Loan Account and it continued with substantial debits in the same way as it had previously been substantially in debit when known as an Overdraft Cheque Account.
From 1 July 1998 until about 1 March 2004, when the changes in the accounts took place, the bank charged the second defendant a lower rate of interest on sums overdrawn below a prescribed amount, which varied from time to time, and a greater rate of interest for the amount by which the overdrawn sum exceeded that prescribed amount. The respective rates of interest also varied from time to time. Interest was always compounded with monthly rests. I will give some examples of interest rates. On 1 July 1998 the interest charged by the bank was 9.7 per cent per annum on overdrawn amounts up to $50,000 and 12.45 per cent on overdrawn amounts to the extent that they exceeded that sum. On 1 January 1999 the sum was $99,999 but the respective interests rates remained the same. On 1 July 1999 the sum was $300,000 and the interest rates remained the same. On 1 July 2000 the interest rate was 9.7 per cent for overdrawn sums up to $300,000 and 13.95 per cent thereafter. On 1 July 2001, the rate was 7.35 per cent on sums up to $849,999 and 13.45 per cent thereafter, and on 1 July 2002, the lower rate was 7.35 per cent on overdrawn amounts up to $1,199,999 and 13.2 per cent thereafter. The difference between the lower and upper rates of interest at any one time varied from 2.75 per cent up to 6.35 per cent. For 56 of the records for the first of each month from July 1998 to February 2004, except where the record was not tendered in evidence, the overdrawn sum was under the prescribed amount for the lower rates of interest on 34 occasions and above it so as to attract greater rates of interest on the other 22 occasions.
Finally, my analysis reveals that if the overdrawn amounts in the cheque account on the first day of each month from July 1998 until February 2004 (excepting those months between August 2002 and July 2003 which are not in evidence) had been greater by the amount that Mr Kossman should at that date have paid the plaintiff for 25 per cent of the average Tasmanian market price payable to him with respect to abalone taken under the 28 quota units, the account would always have been substantially in overdraft and well above the prescribed amount at which the higher rate of interest became payable.
The plaintiff does not seek interest by way of compensatory damages. It seeks interest as part of its claim for an account of profits, based on the principle that a party who breaches a fiduciary duty may be forced to account for the profits or benefits made by that party out of the breach. The plaintiff points to evidence, to some of which I have referred, that establishes that for most if not all of the material time the second defendant has been a borrower of money on commercial terms and that by means of Mr Kossman's breaches of fiduciary duty, substantial sums of money, ultimately amounting to 1.75 million dollars or more, have been withheld from the plaintiff. On the face of the evidence, absent any explanation from the defendants, the commercial borrowings of the second defendant would have been substantially greater if the money due to the plaintiff had been paid on time. As part of a profit-stripping award, the plaintiff seeks interest based largely on the higher of the two rates of interest payable from time to time on the second defendant's overdraft, because the second defendant would always have had to pay it if the overdraft had been increased for the purposes of making the payments due to the plaintiff.
Support for the plaintiff's case is to be found in Warman International Ltd v Dwyer (supra). At 557 – 558 the High Court said:
"A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. (See Jones, 'Unjust Enrichment and the Fiduciary's Duty of Loyalty', Law Quarterly Review, 84 (1968) 472. In the United States, the accountability of a fiduciary is influenced by the doctrine of unjust enrichment.) The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves 'at a level higher than that trodden by the crowd, Meinhard v Salmon (1928) 164 NE 545 at 546, per Cardozo CJ. The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage. Chan v Zacharia (1984) 154 CLR at 198 – 199.
Thus, it is no defence that the plaintiff was unwilling, unlikely or unable to make the profits for which an account is taken or that the fiduciary acted honestly and reasonably. Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 409; Furs Ltd v Tomkies (1936) 54 CLR 583 at 592; Consul Development (1975) 132 CLR at 394; Industrial Development Consultants Ltd v Cooley [1972] WLR 443; [1972] 2 All ER 162; Canadian Aero Service Ltd v O'Malley [1974] SCR 592; (1973) 40 DLR (3d) 371."
If the loss suffered by a plaintiff exceeds the profits made by the fiduciary, the plaintiff may instead elect to have a compensatory remedy against the fiduciary. In this case the plaintiff has made no such election, which if made, would have bound it. Warman at 559, 560, 569 – 570. It is for a defendant to establish that it is inequitable to order an account of the entire profits. Warman at 561. Where money has been used for the purpose of a transaction of a commercial character, the court should assume, in the absence of evidence to the contrary, that the transaction has been profitable to the wrongdoer and he will be accountable for the profit which he has made, or which he is assumed to have made, from the use of the money. Wallersteiner v Moir (No 2) [1975] 1 All ER 849 at 863.
Counsel for the defendants did not submit that the transactions involved in this case were not of a commercial kind and accepted that interest at a mercantile rate, as opposed to a lower rate, would be appropriate and he did not submit that interest should not be compounded. However, he submitted that an account of profits and an award of interest were alternative remedies. I do not agree, nor do I agree with the submission that the rate of interest to be awarded should reflect the 90 day bank bill rate available for depositors, that is to say available to the plaintiff if the money due to it had been paid on time. I emphasise that the plaintiff is entitled to a profit stripping award rather than a compensatory award.
Upon a consideration of the second defendant's overdraft cheque account statements, I determine that the defendants should account to the plaintiff with interest on the sums otherwise payable to it, calculated from the date upon which the respective sums were payable. If there is any doubt as to the dates to which I am referring, I will hear further submissions and make a ruling. The rate of interest is to be calculated upon the basis of the lower rate payable by the second defendant from time to time to its bank on its overdrawn cheque account plus two-thirds of the difference between that rate and the higher rate payable by it. I will explain that by reference to an example. In June 1999, the second defendant was required to pay interest at 9.7 per cent per annum on overdrawn amounts up to $300,000 and 12.45 per cent on amounts above that. Two-thirds of the rate difference (12.45 - 9.7 = 2.75 x 2 ¸ by 3) is 1.83 per cent. The rate payable as at that time will therefore be 11.53 per cent per annum (9.7 + 1.83). Interest is to be compounded monthly. If during the relevant period the second defendant did not have an overdrawn cheque account which can be used to calculate the relevant rates of interest, I will hear further submissions and make a ruling.
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