Virginia Surety Company Inc v Dumbrell
[2011] VSC 602
•17 October 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
S CI 2009 10686
| VIRGINIA SURETY COMPANY INC (ABN 63 080 339 957) | First Plaintiff |
| - and - | |
| THE WARRANTY GROUP AUSTRALASIA PTY LTD (ACN 005 004 446) | Second Plaintiff |
| v | |
| KEITH ALFRED DUMBRELL, AUSTRALIAN DEALER INSURANCE PTY LTD (ACN 139 226 154), AUTOMOTIVE DEALER INSURANCE PTY LTD (ACN 104 054 266) GARRY LAKELAND DUMBRELL | Defendants |
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JUDGE: | Efthim AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 29 July 2011 | |
DATE OF JUDGMENT: | 17 October 2011 | |
CASE MAY BE CITED AS: | Virginia Surety Company Inc & Anor v Dumbrell & Ors | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 602 | |
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PLEADINGS – Leave to file amended statement of claim – AON Risk Services v Australian National University considered – Pleading of fiduciary relationship.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M. Pearce SC with Mr A. Segal | Macpherson & Kelly |
| For the Defendants | Mr J. Peters SC with Mr T. Warner | Corrs Chambers Westgarth |
HIS HONOUR:
The plaintiffs apply for leave to amend their statement of claim pursuant to r 36.04(1)(b) of the Supreme Court Rules and to add Guy Bernard Stephens and Marino Angelini to the proceeding pursuant to r 9.06 of the Supreme Court Rules as the sixth and seventh defendants.
Background
The plaintiffs, Virginia Surety Company Inc (“Virginia Surety”) and The Warranty Group Australasia Pty Ltd (“TWG”) and the third defendant, Automotive Dealer Insurance Proprietary Limited (“old ADI”) entered into an agreement called the Program Agreement on 5 December 2008.
Old ADI was known as Australian Dealer Insurance Limited and changed its name on 13 October 2009 to Automotive Dealer Insurance Limited and then on 30 April 2010 changed its name to Automotive Dealer Insurance Proprietary Limited.
Pursuant to the Program Agreement, old ADI was to use its best endeavours to promote the sale of insurance policies and warranty service contracts so as to achieve and maintain the highest levels of sales in Australia.[1] It could delegate its obligations to approved dealers appointed pursuant to Approved Dealers Agreements.
[1]Clause 2.1(f) of the Program Agreement.
The second defendant, Australian Dealer Insurance Pty Ltd (“new ADI”) was incorporated under the name Parkside Pty Ltd. The registered offices of old ADI and new ADI were at Level 1, 60 Toorak Road, South Yarra.
The first defendant, Keith Alfred Dumbrell, was a director of old ADI and since 2 September 2009 has been a director of new ADI. The fourth defendant, Garry Lakeland Dumbrell, was a director of old ADI up until about 11 August 2010. The fifth defendant, Avea Insurance Limited (“Avea”) formerly known as Fortron Insurance Group Limited until 1 February 2010, in the Australian underwriting market has been and remains a competitor of Virginia Surety.
The proposed sixth defendant, Guy Bernard Stephens, was a managing director of old ADI in the period from about June 2006 to on or about 12 October 2009 when he ceased employment with the old ADI. He has since been a director and Chief Executive Officer of Avea. The proposed seventh defendant, Marino Angelini, was a director of old ADI until on or about 11 August 2010 and was the accountant for old ADI and is now the accountant for new ADI.
The second further amended statement of claim pleads that on or about 13 October 2009 a consortium of eight people associated with old ADI, including Guy Stephens, Marino Angelini, Paul Dumbrell (the son of Garry Dumbrell and a nephew of Keith Dumbrell), Peter Carroll and David Pemberton (both of whom had been directors of old ADI until about April 2006) acquired all the shares of Avea. It is alleged that there was a concerted plan to divert Virginia Surety’s business and business opportunities to Avea.
The causes of action contained in the existing further amended statement of claim are breach of contract, tortious procurement of breach of contract, and contraventions of the Trade Practices Act 1974 (Cth).
The proposed pleading contains allegations that old ADI owed fiduciary duties to Virginia Surety, and it breached those duties and that in so breaching those duties it had a dishonest and fraudulent design. The concerted plan by eight individuals has been raised for the first time in this pleading. The pleading of the concerted plan forms the basis of the claims made against the individual defendants under what is known as the second limb of Barnes v Addy[2] (that they both participated in old ADI’s breach of fiduciary duty with knowledge of its dishonest and fraudulent design).
[2](1874) LR 9 Ch App 244.
The defendants oppose the plaintiffs’ application on two grounds:
-That the evidence put to the Court by the plaintiffs is not sufficient to satisfy the Court that the requisite circumstances exist to warrant the plaintiffs being granted leave to amend in the context of Aon Risk Services v Australian National University.[3]
-The proposed pleading does not adequately plead or particularise true fiduciary duties and the essential elements of the individual natural person defendants “actual knowledge of fraud”.
[3](2009) 239 CLR 175.
The discretion to allow the amendment
In Aon, French CJ referred to the factors that should be taken into account by a court in exercising its discretion in an application for adjournment or amendment. His Honour said:[4]
In the proper exercise of the primary judge’s discretion, the applications for adjournment and amendment were not to be considered solely by reference to whether any prejudice to Aon could be compensated by costs. Both the primary judge and the Court of Appeal should have taken into account that, whatever costs are ordered, there is an irreparable element of unnecessarily delaying proceedings. Moreover, the time of the court is a publicly funded resource. Inefficiencies in the use of that resource, arising from the vacation or adjournment of trials, are to be taken into account. So too is the need to maintain public confidence in the judicial system. Given its nature, the circumstances in which it was sought, and the lack of satisfactory explanation for seeking it, the amendment to ANU’s statement of claim should not have been allowed. The discretion of the primary judge miscarried.
[4]Ibid at [5].
Gummow, Hayne, Crennan, Kiefel and Bell JJ also referred to discretionary factors that a court should take into account when a party wishes to amend its pleadings. Their Honours stated:[5]
An application for leave to amend a pleading should not be approached on the basis that a party is entitled to raise an arguable claim, subject to payment of costs by way of compensation. There is no such entitlement. All matters relevant to the exercise of the power to permit amendment should be weighed. The fact of substantial delay and wasted costs, the concerns of case management, will assume importance on an application for leave to amend. Statements in JL Holdings which suggest only a limited application for case management do not rest upon a principle which has been carefully worked out in a significant succession of cases. On the contrary, the statements are not consonant with this Court’s earlier recognition of the effects of delay, not only upon the parties to the proceedings in question, but upon the court and other litigants. Such statements should not be applied in the future.
…
Critically, the matters relevant to a just resolution of ANU’s claim required ANU to provide some explanation for its delay in seeking the amendment if the discretion under r 502(1) was to be exercised in its favour and to the disadvantage of Aon. None was provided.
[5]Ibid at [111]-[114].
In considering Aon[6], Vickery J in Namberry Craft v Watson[7] summarised the factors raised by the High Court as follows:
[6][2011] VSCA 16, per Warren CJ, Ashley J and Nettle JJA.
[7][2011] VSC 136 at [38].
Nevertheless, there are to be limits placed upon re‑pleading. The High Court in Aon referred to a range of other considerations which need to be weighed in the balance in the exercise of the discretion to grant an amendment to a pleading. The High Court made reference to the following factors:
(a)Whether there will be substantial delay caused by the amendment;
(b)The extent of wasted costs that will be incurred;
(c)Whether there is an irreparable element of unfair prejudice caused by the amendment, arising, for example, by inconvenience and stress caused to individuals or inordinate pressures placed upon corporations, which cannot be adequately compensated for, whatever costs may be awarded;
(d)Concerns of case management arising from the stage in the proceeding when the amendment is sought, including the fact that the time of the court is a publicly funded resource, and whether the grant of the amendment will result in inefficiencies arising from the vacation or adjournment of trials;
(e)Whether the grant of the amendment will lessen public confidence in the judicial system; and
(f)Whether a satisfactory explanation has been given for seeking the amendment at the stage when it is sought.
A factor of critical importance in considering whether leave will be given for pleadings to be amended is the explanation provided for the delay in seeking the amendment. In that regard, the plaintiff relies on an affidavit of Rolland David Burt, the plaintiffs’ solicitor in support of the application. The defendants in opposition rely on the affidavit of John William Fogarty, their solicitor.
These affidavits raise the following facts.
-the proceeding was instituted on 15 December 2009;
-the plaintiffs have filed three separate statements of claim;
-on 15 October 2010 some paragraphs of the further amended statement of claim were struck out and the plaintiffs were given leave to file an amended further statement of claim by 5 November 2010;
-on 11 November 2010, the plaintiff filed a further amended writ and further amended statement of claim. New allegations were contained against Avea;
-on 20 July 2011, the proposed second further amended statement of claim was provided to the defendants.
-on 14 January 2011, the defendants’ defence was filed and served;
-on 14 April 2011, McPherson & Kelly Solicitors filed a Notice of Change of Solicitor;
-on 27 June 2011, the plaintiffs’ proposed second further amended statement of claim was forwarded to the defendants;
-on 4 July 2011, the defendants’ solicitors advised the plaintiffs’ solicitors that no explanation was given by the plaintiffs as to why they were to raise further serious allegations against their clients contained in their proposed second further amended statement of claim.
The defendants submit that a party making an application for an amendment to a statement of claim under r 36.04(b) of the Supreme Court Rules, must provide “an explanation with very good reason” as to why it is seeking to amend its case and without the Court’s acceptance that the application possesses very good reasons for any amendment, any such application must fail.
The defendants in support of their submissions also rely on the views of Croft J in a paper titled “Aon and its Implications for the Commercial Court”.[8] In relation to the importance of providing an explanation his Honour emphasised the following:[9]
A requirement emphasised in the Aon decision is that significant importance will attach to any explanation or justification, or lack thereof, which is offered by an applicant seeking the benefit of a court’s discretion to grant a procedural indulgence. As recognised by the plurality:
Not only will they need to show that their application is brought in good faith, but they will also need to bring the circumstances giving rise to the amendment to the court’s attention, so that they may be weighed against the effects of any delay and the objectives of the Rules.
Again, it would appear to accord with basic common sense that a party should furnish a court with reasons and justification for seeking orders that will result in waste of the resources of the opposing litigant and the public (and hence the position of other litigants in other proceedings). However, as identified in the joint judgment in Aon, there has been a tendency of litigants to perceive the granting of a procedural indulgence as ‘something approaching a right’ without need of adequate explanation. In Australia, no doubt, this tendency was fuelled by J L Holdings. The Trial Judge in that case made mention of the fact that no satisfactory explanation was provided by the applicant as to why the application was being sought so late in the proceedings. The High Court, at that time, clearly thought the lack of explanation to be of lesser importance than the mere existence of an arguable case. The High Court’s view has now changed. Litigants should now assume that a court will conduct some rigorous inquiry into whether any waste of time or resources has been adequately justified by the applicant in the context of the particular proceedings.
[8]A paper presented at the Commercial Court of the Supreme Court CPD and CLE Seminar (19 August 2010).
[9]Ibid at p 11.
Mr Burt has sworn that McPherson & Kelly Solicitors commenced acting for the plaintiffs in this proceeding from April 2011. Following a review of the matter, the further amended writ and second further amended statement of claim were prepared. In that regard I note that new senior counsel and junior counsel have been engaged.
Mr Burt lists the changes to the pleading as follows:
-Paragraphs 7A – 7K plead further terms of the Program Agreement.
-Paragraphs 8A – 8K plead relevant provisions of the Corporations Act.
-Paragraphs 9(d) & (e) plead the acquisition of Avea by a consortium including the proposed sixth and seventh defendants (Guy Bernard Stephens and Marino Angelini), and the redirection of insurance business of the Virginia Surety to Avea.
-Paragraphs 22-60 plead new fiduciary claims, key parts of which are as follows:
27.The plaintiffs allege that old ADI owed Virginia fiduciary duties to protect and promote Virginia Surety’s business goodwill in Australia and not to use its position, knowledge or power to damage the goodwill.
29.The plaintiffs plead a “Concerted Plan” by all defendants to divert Virginia’s business and business opportunities to Avea, setting out the steps constituting the Concerted Plan.
32-38.The plaintiffs plead that because he was managing director of old ADI and participated in the Concerted Plan, Guy Stephens was aware of the breach of fiduciary duties by old ADI, and that because he is CEO of Avea, that knowledge is imputed to Avea, and that Avea received the diverted business with that knowledge, and therefore Avea holds the business on trust for Virginia.
39-45.The plaintiffs plead that because he was a director of old ADI and participated in the Concerted Plan, Keith Dumbrell was aware of the breach of fiduciary duties by old ADI, and that because he was the sole director of the new ADI, that knowledge is imputed to new ADI, and that new ADI received the diverted business with that knowledge, and therefore new ADI holds the commissions and premiums it generates from this business on trust for Virginia.
46-60.The plaintiffs allege a dishonest and fraudulent design on the part of old ADI, participated in by each of Garry Dumbrell, Keith Dumbrell, Guy Stephens and Marino Angelini.
Mr Burt deposes that the factual and legal allegations set out in the proposed second further amended statement of claim have a proper basis. He states that the matters raised by the amendments, allegations of breach of fiduciary duty, knowing participation in such breach or knowing receipt of trust property, and of dishonest and fraudulent design, have a proper basis. He also considers that the proposed sixth and seventh defendants are necessary parties in the proceeding.
The only explanation for the amendments is the change of legal representation and the review of the matter by the new legal representation of the plaintiffs. There is no doubt, as submitted by the plaintiffs, that additional work will be involved in responding to the new allegations and that there is a prospect of wider professional ramifications for individual defendants if there are any findings of dishonesty or fraud.
I am required to balance the interests of all the parties. In Namberry Craft Pty Ltd, Vickery J made it clear that the object of doing justice between the parties should not be ignored. His Honour said:[10]
This is not to say that the object of doing justice between the parties is to be ignored. In fact, it is quite the contrary – a just resolution of proceedings between the parties remains a critically important consideration, which will necessarily include as part of that process, a proper opportunity being given to the parties to plead and re‑plead their respective cases, should that need arise and the circumstances are present to warrant the discretion being exercised in favour of the grant of the amendment. The principle that a civil trial should be conducted fairly to the parties is beyond controversy. It is a human right enshrined in s 24(1) of the Charter of Human Rights and Responsibilities Act 2006.
[10]Supra at [37].
The plaintiffs have given the reason for an amendment as the engagement of new legal representatives who have considered what the appropriate pleading should be. The plaintiffs’ new legal representatives believe the amendments are important and need to be raised. The application has not been made at the commencement of the trial as was the case in Aon. Here the matter was not set down for trial. The amendment may cause stress to individuals but if there has in fact been dishonesty, the plaintiffs should have the right to bring such an application before the Court. There would be no erosion of public confidence in the judicial system if a pleading which alleges dishonesty and fraudulent behaviour is allowed to be put before a court. The contrary could occur if such allegations were not allowed to be aired and determined.
There may well be inefficiencies and there may be some waste of costs but those costs should not be great as the plaintiffs will be ordered to pay costs thrown away. The object of doing justice to the parties in the circumstances before me is consistent with the comments of the High Court in Aon.
The Second Further Amended Statement of Claim
The defendants submit that the pleading ought not to be permitted to proceed on the basis that:
-it fails to plead any fiduciary relationship (which if pleaded, would be open to challenge in the event);
-it pleads fiduciary duties the nature of which are not recognised in Australia; and
-it does not adequately plead and/or particularise the individual defendants’ actual knowledge of the dishonest or fraudulent design.
The plaintiffs submit that Avea has made admissions regarding the conduct that has been pleaded. They rely on a copy of the financial statements and reports lodged on 20 May 2010 with the ASIC. In the notes to the financial statements for the financial year ended 30 June 2009 under the heading Accounting Policies (a) Going Concern, the follow statement appears:
As a consequence of the change in ownership, the new owners have signed a new agent which will direct insurance business through AVEA/AIA. This is a significant injection of premium. The directors believe this will significantly improve the profitability of the company.
Later in the report the auditors of Avea, Grant Thornton, state that:[11]
To determine the fair value of AVEA Insurance Agency Pty Ltd, the Directors commissioned an independent valuation of AVEA Insurance Agency Pty Ltd as at 30 June 2009. As described in note 36 to the financial statements, all of the issued capital of the Parent entity was sold to a consortium on 13 October 2009. As a consequence of the change in ownership, the new owners will redirect certain insurance business from Australian Dealer Insurance Pty Ltd (“ADI”) to AVEA Insurance Agency Pty Ltd which had previously been put through another underwriter. In determining the fair value of AVEA Insurance Agency Pty Ltd at 30 June 2009, the independent valuer has included in the valuation the projected additional business that will result from ADI’s forecasted income streams for the next three years.
[11]Ibid at p 60.
The fiduciary relationship
Paragraphs 22 to 26 of the second further amended statement of claim plead the fiduciary relationship. It is alleged that:
-Pursuant to the Program Agreement old ADI was the agent and the trustee of Virginia Surety;[12]
[12]Clauses 2.6, 2.1(c), 5.1 and 8.3 of the Program Agreement.
-Old ADI was entrusted with the protection and promotion of Virginia Surety’s business goodwill in Australia.
- By virtue of the provisions of the Corporations Act, Virginia Surety was liable for the actions of approved dealers appointed by old ADI;[13] and
- Virginia Surety is said to be based in the United States of America with limited representation and presence in Australia and limited ability to protect and promote its own business goodwill in Australia.
[13]Clause 2.1(f) and 8.2 of the Program Agreement.
The plaintiffs submit that the fiduciary relationship that has been pleaded was recognised by Mason J in Hospital Products Limited v United States Surgical Corporation.[14] In that case, the United States manufacturer of surgical products had a distribution agreement with an Australian based company. The Australian distributor bought products and sold them to its customers. The Australian company, after a period of time, commenced manufacturing the products locally and deferred filling orders from the United States manufacturer’s products so that it could provide its own products.
[14][1984] 156 CLR 41.
The majority, Gibbs CJ, Wilson and Dawson JJ held that there was no fiduciary relationship between the parties. Gibbs CJ said:[15]
… the fact that the arrangement between the parties was of a purely commercial kind and that they had dealt at arm’s length and on an equal footing has consistently been regarded by this Court as important, if not decisive, in indicating that no fiduciary duty arose …
[15]Ibid at p 70.
The plaintiffs rely on the judgment of Mason J who found that there was a fiduciary duty between the parties. In considering whether the Australian distributor was in a fiduciary relationship his Honour said:[16]
The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf. Phipps v Boardman (25)), viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions “for”, “on behalf of”, and “in the interests of” signify that the fiduciary acts in a “representative” character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.
It is partly because the fiduciary’s exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed …
That contractual and fiduciary relationships may co‑exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. 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.
[16]Ibid at p 96.
In Hospital Products, Gibbs J doubted whether it was fruitful to attempt to make a general statement of the circumstances in which a fiduciary relationship was found to exist. His Honour was of the view that fiduciary relationships were of different types, carrying different obligations.[17] His Honour arrived at his conclusion by examining all the circumstances to determine that the relationship was not a fiduciary one.
[17]Ibid at p 69.
In News Ltd v The Australian Rugby Football League,[18] the Full Court of the Federal Court referred to Hospital Products in considering whether a fiduciary relationship existed between the parties in the case before the Court. Lockhart, Von Doussa and Sackville JJ said:[19]
The overreach of the fiduciary principle helps to explain an earlier extra‑judicial comment by Sir Anthony Mason, that the “fiduciary relationship is a concept in search of a principle”: A F Mason, “Themes and Prospects” in P D Finn (ed), Essay in Equity (1985), p 246. The comment also reflects the difficulty of formulating a comprehensive principle suitable for application to very different relationships, operating in very different circumstances and for different purposes.
This difficulty was acknowledged by Gibbs CJ in Hospital Products v USSC. His Honour noted (at CLR 68) that the authorities contain much guidance as to the duties of one who is in a fiduciary relationship, but provide no comprehensive statement of the criteria by which the existence of such a relationship may be established. Of course, as his Honour recognised, there are classes of persons who normally stand in a fiduciary relationship to one another. These include trustee and beneficiary, solicitor and client, principal and agent, director and company, employer and employee, and partners. Although “[t]here is no reason to suppose that these categories are closed”, the Chief Justice thought that it was not (at CLR 69; ALR 432), “fruitful to attempt to make a general statement of the circumstances in which a fiduciary relationship will be found to exist”.
The fact that the situation in the present case – the conduct of a sporting competition and associated activities by the League, ARL and the clubs – does not fit within any clearly established category of fiduciary relationships is not necessarily a barrier to fiduciary duties being imposed. UDC v Brian clearly demonstrates that undertakings described as “joint ventures” may attract fiduciary duties. And this is so notwithstanding the reluctance of the majority in Hospital Products v USSC to apply fiduciary principles to “purely commercial transactions:, at least in the context of a contractual arrangement between a supplier of foods and its distributor (156 CLR at 70, 118, 149). Business relationships (leaving aside partnerships) clearly can attract fiduciary obligations. The categories are not mutually exclusive: Kelly v CA & L Bell Commodities Corp Pty Ltd (1989) 18 NSWLR 248 (CA(NSW)) at 258.
[18](1996) 139 ALR 193.
[19]Ibid at p 311.
The categories of fiduciary relationship are not closed. The plaintiffs should be given the right to argue that there is a fiduciary relationship, at trial or, if need be, to have the opportunity to raise this matter before the Court of Appeal. It would not be appropriate to strike out this pleading on the facts before me at this stage. The pleading is clear as to how there is a fiduciary relationship in existence. The facts in Hospital Products differ to the facts in this proceeding and the plan in Hospital Products is different to the concerted plan pleaded in the current matter before the Court.
The fiduciary duty
Paragraph 27 of the second further amended statement of claim pleads the fiduciary duty as follows:
By reason of the foregoing matters set out in paragraph 22-26, old ADI owed Virginia Surety fiduciary duties:
(a)to protect and promote Virginia Surety’s business goodwill in Australia; and
(b)not to use its position, knowledge or power to damage Virginia Surety’s business goodwill in Australia.
The defendants submit that paragraph 27(a) is a positive duty to protect and promote the business interests of Virginia Surety and that paragraph 27(b), although cast as a negative duty, is of a character which has not been recognised by the High Court.
The defendants submit that the proscriptive fiduciary duties are not recognised as part of the law in this country. In support of that submission they rely on Breen v Williams,[20] where Gaudron and McHugh JJ observed:[21]
One commentator has recently pointed to the vast differences between Australia and Canada in the understanding of the nature of fiduciary obligations. One significant difference is the tendency of Canadian courts to apply fiduciary principles in an expansive manner so as to supplement tort law and provide a basis for the creation of new forms of civil wrongs. The Canadian cases also reveal a tendency to view fiduciary obligations as both proscriptive and prescriptive. However, Australian courts only recognise proscriptive fiduciary duties. … In this country, fiduciary obligations arise because a person has come under an obligation to act in another’s interests. As a result, equity imposes the fiduciary proscriptive obligations – not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interest of the person to whom the duty is owed.
[20](1996) 186 CLR 71.
[21]Ibid at 112.
In Pilmer v Duke Group Limited,[22] the majority, McHugh, Gummow, Hayne and Callinan JJ referred to Breen v Williams and repeated that fiduciary obligations are proscriptive rather than prescriptive in nature. They said that there is no quasi tortious duty imposed upon fiduciaries to act solely in the best interests of their principals.[23]
[22][2001] 207 CLR 165.
[23]Ibid at 198.
The pleading in paragraph 27(a) of the second further amended statement of claim pleads a positive duty to “protect and promote” Virginia Surety’s business goodwill in Australia. Paragraph 27(a) should therefore be struck out.
Paragraph 27(b) pleads a prescriptive fiduciary duty, not to use their position, knowledge or power to damage the Virginia Surety’s business goodwill. The defendant argues that it has not been recognised by the High Court. The fiduciary duties is also said not to be pleaded in accordance with the terms of the contract.
Pursuant to the contract, old ADI was required to use its best endeavours to promote the sale of products so as to achieve and maintain the highest level of sales in Australia. With that obligation imposed on the defendants, it is arguable that they should not use their position, knowledge or power to damage Virginia Surety’s business goodwill in Australia. The plaintiffs should have the right to put before the Court that pleading albeit that the defendants state it has not been recognised. The circumstances of each case need to be examined at trial.
In Pilmer,[24] McHugh, Gummow, Hayne and Callinan JJ referred to the words of Frankfurter J in Securities and Exchange Commission v Chenery Corporation,[25] where Frankfurter J said:
But to say that a man is a fiduciary only begins analysis; it gives direction to further enquiry. To whom is a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge those obligations? And what are the consequences of the deviation from duty?
[24]Supra.
[25](1943) 318 US 80.
In the second further amended statement of claim, that is precisely what the plaintiffs have endeavoured to do.
Barnes v Addy
In Barnes v Addy,[26] Lord Selbourne LC said:
Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de so tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
[26](1874) LR 9 Ch App 244 at 251.
The two limbs, of Barnes v Addy, knowing receipt of property[27] and knowing participation,[28] apply where there has been a fiduciary duty. The plaintiffs must first that a fiduciary relationship existed and then that there has been a breach of the duty.
[27]Farah Constructions Pty Ltd v Say‑Dee Pty Ltd (2007) 230 CLR 89.
[28]Warman International Ltd v Dwyer (1995) 128 ALR 201.
The breach of duty is pleaded in paragraphs 30 and 31 of the second further amended statement of claim. Paragraph 30 pleads that old ADI by reason of its change of name, failure to promote Virginia Surety’s business and permitting approved dealers to sell Avea’s policies, participated in a concerted plan thereby breaching its fiduciary duties to Virginia Surety. Paragraph 31 pleads old ADI is therefore liable to compensate Virginia Surety for the business diverted to new ADI in the concerted plan.
Knowing participation in breach of fiduciary duty
Paragraph 46 of the second further amended statement of claim pleads that in breaching its fiduciary duties Virginia Surety had a dishonest and fraudulent design. The particulars provided by the plaintiffs state that old ADI’s dishonest and fraudulent design can be inferred from the dishonest and fraudulent design of the concerted plan as disclosed by manipulation of corporate structures by the substitution of new ADI for old ADI; the use of deceptively similar company names; the deliberate concealment of relevant information from approved dealers, the intention to divert Virginia Surety’s business opportunities to Avea, breaches of the Program Agreement by old ADI and contravention of s 916C of the Corporations Act by approved dealers caused by new ADI.
In Farah Constructions v Say-Dee Pty Ltd,[29] Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ stated that it was conventionally understood in Australia that the second limb of Barnes v Addy, knowing participation, makes the defendant liable if that defendant assists a trustee or fiduciary with knowledge of dishonest and fraudulent design on the part of the trustee or fiduciary.
[29](2007) 230 CLR 89 at [163].
Paragraph 49 of the second further statement of claim pleads that Garry Dumbrell participated in old ADI’s breach of fiduciary duty with knowledge of its dishonest and fraudulent design. Particulars are given that the knowledge can be inferred from Garry Dumbrell’s participation and concerted plan and the dishonest and fraudulent nature of the plan. The same pleading alleged against Keith Dumbrell in paragraph 52.
There is a pleading of actual knowledge on behalf of the defendants. In Montclare v Metlife Insurance the requirements of a pleading of “knowledge” was stated by Harper J as follows[30]:
In my opinion, the rules of pleading, which have not changed materially as between their 1996 and their present (2005) form, should be construed so as to ensure that pleadings reveal the real issues in dispute and avoid surprise. This is unlikely to be achieved in the absence of relevant particulars, especially where an allegation of knowledge is made by one party and denied by the other. Every particular by which the party pleading knowledge intends to support that allegation should be included in the pleading if there is any prospect that its absence will take the other party by surprise when evidence is given at trial. If particulars cannot be given, then it may be that the allegation of knowledge will be susceptible of objection as being embarrassing, or as prejudicial to the fair trial of the proceeding. This may be the occasion for an order for the removal of untenable claims.
[30]Montclare v Metlife Insurance [2009] VSC 402 at 9.
It is unclear whether the requisite actual knowledge is said to be inferred by reason of the individual defendants’ involvement in the concerted plan and the dishonest and fraudulent design of the concerted plan, or the dishonest and fraudulent design of the breach of fiduciary duty. In my view this is not a point of any real significance. It is clear how the plaintiffs plead knowledge. Knowledge is inferred by reason of the individual defendants’ involvement in the concerted plan and the dishonest and fraudulent design of the concerted plan.
The defendants also submit that the concerted plan is not separately alleged to be dishonest and fraudulent. It is conceded that by sifting through the pleading it is possible to sense the nature of the allegation and the general confusion caused by the pleading highlights inadequacy of the allegation of actual knowledge of fraud. I do not accept that submission. It is clear how the pleading is made. By considering paragraphs 29 and 46 of the statement of claim the defendants know what is pleaded against them.
The defendants note that paragraph 30 of the further amended statement of claim which pleads breach is alleged to flow from the concerted plan. They submit that no attempt is made to set out how matters which in paragraph 30 accumulatively form the crucial alleged breach of fiduciary duty was actually known to Garry Dumbrell at paragraph 49 or Keith Dumbrell at paragraph 52 or, alternatively, at paragraph 20 itself. It has been pleaded that Garry Dumbrell was a director of old ADI, is the brother of Keith Alfred Dumbrell who was a director of old ADI and new ADI and both parties were parties in the concerted plan. There is no need for any further pleading. The defendants know the case they will have to meet at trial. They can plead to this statement of claim. I do not accept this pleading is unfair, vague and lacks sufficient particularity to put the defendants on notice of the true basis for the allegations that are made.
Knowing assistance
Paragraph 32 pleads that Guy Stephens was aware of old ADI’s fiduciary duty to Virginia Surety. Guy Stephens’ knowledge is to be inferred from his position as the managing director of old ADI which required awareness of the Program Agreement and how it operated in order to carry out its duties in a competent and professional manner. Paragraph 33 pleads Guy Stephens participated in the concerted plan by resigning from old ADI and participating in a consortium which acquired Avea, becoming the CEO of Avea, and discharging the duties as CEO of Avea. Guy Stephens’ knowledge is said to be imputed to Avea which knowingly received property in consequence of old ADI’s breach of duty.
There is a similar pleading relating to Keith Dumbrell being aware of old ADI’s breach of fiduciary duties to Virginia Surety and that Keith Dumbrell’s knowledge being imputed to new ADI.
The pleading of knowledge is similar to that for the pleading in knowing participation. This pleading will not take the defendants by surprise. There is nothing further that is able to be pleaded.
The proposed defendants
The pleading in relation to the two added defendants, Mr Stephens and Mr Angelini alleges that Guy Stephens and Marino Angelini knowingly participated in the breach of fiduciary duty. It is the equivalent pleading to that relating to Keith Dumbrell and Gary Dumbrell. The plaintiff seeks equitable compensation from them. The pleading is appropriate and they will be joined as defendants.
Conclusion
The plaintiffs will be given leave to file and serve a second further amended statement of claim without the inclusion of paragraph 27(b).
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