WILSON and COMMISSIONER FOR CONSUMER PROTECTION
[2012] WASAT 200
•5 OCTOBER 2012
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL
STREAM: VOCATIONAL REGULATION
ACT: SETTLEMENT AGENTS ACT 1981 (WA)
CITATION: WILSON and COMMISSIONER FOR CONSUMER PROTECTION [2012] WASAT 200
MEMBER: JUSTICE J A CHANEY (PRESIDENT)
MR J MANSVELD (MEMBER)
MS C WINSOR (SESSIONAL MEMBER)
HEARD: 27 JUNE 2012
DELIVERED : 5 OCTOBER 2012
FILE NO/S: VR 130 of 2011
BETWEEN: HUGH WILSON
First Applicant
GAYE WILSON
Second ApplicantTANYA ARMSTRONG
Third ApplicantKATHLEEN ELDER
Fourth ApplicantTILAI MORRISSEY
Fifth ApplicantGRAHAM THOMSON
Sixth ApplicantTRACEY TRAYNOR
Seventh ApplicantVANESSA WILLIAMS
Eighth ApplicantCHOONG KIONG BOEY
Nineth ApplicantBOON KEE NG
Tenth ApplicantPAUL MORRISSEY
Eleventh ApplicantFASTPACE INVESTMENTS PTY LTD
Twelth ApplicantRENNELK & SAMOHT PTY LTD
Thirteenth ApplicantBRUCE MORGAN
Fourteenth ApplicantDEE ELECTRICAL SERVICES PTY LTD
Fifteenth ApplicantMARTIN IHMS
Sixteenth ApplicantNICOLE IHMS
Seventeenth ApplicantPALMHEIGHTS PTY LTD
Eighteenth ApplicantAND
COMMISSIONER FOR CONSUMER PROTECTION
Respondent
Catchwords:
Settlement agents - Fidelity guarantee fund - Purchase of proposed strata lots - Release of deposit prior to settlement - Contract condition permitting early payment of deposit to vendor - Statutory provision requiring retention of deposit in trust until issue of title - Whether payment of deposit from trust prior to issue of titles constitutes defalcation - Whether interest paid on borrowed funds recoverable from fidelity guarantee account
Legislation:
Legal Practitioners Act 1981 (SA)
Law Practitioners Act 1982 (NZ)
Petroleum Retail Marketing Franchise Act 1980 (Cth), s 7(1)
Real Estate and Business Agents Act 1978 (WA)
Settlement Agents Act 1981 (WA), s 3, s 49(4), s 49(5), Pt 5, s 93, s 93(1), s 95(2), s 95(3)
Strata Titles Act 1985 (WA), Pt V, s 70, s 70(1), s 70(3), s 70(5), s 70A, s 70B
Result:
Respondent's rejection of claims for loss of deposits set aside and applicants' claims allowed
Respondent's rejection of claim for interest affirmed
Category: B
Representation:
Counsel:
First Applicant : Mr I Matthews
Second Applicant : Mr I Matthews
Third Applicant : Mr I Matthews
Fourth Applicant : Mr I Matthews
Fifth Applicant : Mr I Matthews
Sixth Applicant : Mr I Matthews
Seventh Applicant : Mr I Matthews
Eighth Applicant : Mr I Matthews
Nineth Applicant : Mr I Matthews
Tenth Applicant : Mr I Matthews
Eleventh Applicant : Mr I Matthews
Twelth Applicant : Mr I Matthews
Thirteenth Applicant : Mr I Matthews
Fourteenth Applicant : Mr I Matthews
Fifteenth Applicant : Mr I Matthews
Sixteenth Applicant : Mr I Matthews
Seventeenth Applicant : Mr I Matthews
Eighteenth Applicant : Mr I Matthews
Respondent: Ms F Vernon
Solicitors:
First Applicant : Chew & Matthews
Second Applicant : Chew & Matthews
Third Applicant : Chew & Matthews
Fourth Applicant : Chew & Matthews
Fifth Applicant : Chew & Matthews
Sixth Applicant : Chew & Matthews
Seventh Applicant : Chew & Matthews
Eighth Applicant : Chew & Matthews
Nineth Applicant : Chew & Matthews
Tenth Applicant : Chew & Matthews
Eleventh Applicant : Chew & Matthews
Twelth Applicant : Chew & Matthews
Thirteenth Applicant : Chew & Matthews
Fourteenth Applicant : Chew & Matthews
Fifteenth Applicant : Chew & Matthews
Sixteenth Applicant : Chew & Matthews
Seventeenth Applicant : Chew & Matthews
Eighteenth Applicant : Chew & Matthews
Respondent: Department of Commerce
Case(s) referred to in decision(s):
Bontempo v Mirvac (WA) Pty Ltd [2012] WASC 104
Caltex Oil (Australia) Pty Ltd v Best (1990) 170 CLR 516
Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371
Florence v New Zealand Law Society [1989] 1 NZLR 132
Hungerfords v Walker (1989) 171 CLR 125
Mirvac (WA) Pty Ltd v Yeo [2011] WASC 162
Public Trustee v The Attorney General for the State of South Australia and The Law Society [2000] SASC 184
Real Estate and Business Agents Supervisory Board v Cohen [2004] 28 WAR 475
Walker v Clough Property Claremont Pty Ltd [2009] WASC 367
REASONS FOR DECISION OF THE TRIBUNAL:
Summary of Tribunal's decision
Each of the applicants contracted to purchase proposed strata lots off the plan. The vendors had not yet completed the purchase from the owner of the land to be subdivided. The contracts contained a special condition permitting the deposits paid to be released to the vendors for the purpose of acquisition and development of the land to be subdivided. That condition was inconsistent with s 70 of the Strata Titles Act 1985 (WA) which requires that deposits be held in trust until the issue of titles for the proposed strata lots.
The applicants' deposits were placed in a trust account of a settlement agent who then released the funds to the owners of the land. The vendors completed the purchase of the land, but it was never subdivided, the vendors went into liquidation and the applicants lost their deposits. They made a claim on the settlement agents fidelity guarantee account claiming that the deposits should not have been released contrary to the requirements of the Strata Titles Act, that the special condition permitting the release was of no effect and that the release of the deposits therefore constituted a 'defalcation' for the purposes of a claim against the fund. They also sought to recover the amount of interest that they had paid on money borrowed to pay the deposits.
The Tribunal considered the proper construction of the contracts and concluded that, on their proper construction, the contracts required that the deposits be held in trust pending issue of titles for the proposed lots. It concluded that the payment of the deposits amounted to a defalcation and that the deposits were recoverable from the guarantee fund. The Tribunal affirmed the respondent's decision to reject the claims for interest paid on borrowed funds.
The application
Part V of the Settlement Agents Act 1981 (WA) (SA Act) provides for the establishment of the settlement agents fidelity guarantee account (the fund). The monies held in the fund can be applied to meet losses suffered by clients of settlement agents as a result of defalcation by a settlement agent. Each of the applicants made a claim against the fund in respect of their respective losses of a deposit of, and in all but two cases, $45,000 paid under a contract for the purchase of future strata lots 'off the plan'. The contracts all contained a provision to the effect that the deposits could be released to the vendor to enable it to purchase the land upon which the strata title development was to be undertaken. The deposits were paid to the trust account (Trust Account) of Shoalwater Settlements (Shoalwater) but were paid out from the trust account in advance of settlement of the respective purchase contracts. The purchases ultimately did not proceed to settlement because the development failed, the strata lots were never created, the vendors were liquidated and the deposits were lost by each applicant.
The claims by the applicants against the fund were rejected by the respondent, and the applicants seek a review of that decision. The primary issue which falls for determination in these proceedings is whether the conduct of the settlement agent in releasing funds in advance of settlement, in the circumstances in which it occurred, comes within the meaning of 'defalcation' by the settlement agent. A secondary issue is, if there was a defalcation, whether that was the cause of the losses. There is also an issue between the parties as to whether interest incurred by the claimants on monies borrowed to pay the deposits might be included as part of the loss recoverable from the fund.
The facts
The facts in this case were not in issue. Most facts were agreed or are found in the applicants' witness statements or derived from document bundles which were tendered by consent.
At all relevant times, Shoalwater held a settlement agents licence and a triennial certificate issued pursuant to the SA Act. Shoalwater employed a Ms Stephanie Hamling (Hamling) as a conveyancer.
Fraser Schemes
Between 2006 and 2008, Mr Ken Fraser and Frasers – The Project Managers Pty Ltd (FTPM), with the involvement of Mr Fraser’s wife, Mrs Morag Fraser and others, promoted to the general public schemes for the purchase and subdivision of land (Fraser Schemes).
A number of the Fraser Schemes involved:
(a)the purchase of land pursuant to a contract (initial contract) by a company of which Mr Rateb Jneid was the sole director;
(b)the sale of the same land pursuant to a further contract (primary contract) by the relevant Jneid Company to another purchasing company for a higher price than the price for which it had been purchased;
(c)the sale of future lots to be subdivided from the land to purchasers pursuant to further contracts (secondary contracts) providing for:
(i)the payment of deposits in respect of those future lots into a trust account; and
(ii)the disbursement of the purchasers’ deposits prior to settlement on the secondary contract for use in the acquisition of the relevant land under the primary contract; and
(d)the payment of some or all of the deposits paid under the secondary contract to the relevant Jneid Company prior to settlement of the sale and purchase of the land under the primary contract.
Ms Hamling, before and during her employment with Shoalwater, had acted for Jneid Companies, on Mr Jneid’s instructions, on the settlement of initial contracts and primary contracts. Shoalwater Settlements (Shoalwater) had not acted for any purchasers under secondary contracts.
The Thornlie Scheme
The purchase and attempted subdivision for sale of the Spring Road Lots described below (Thornlie Scheme) was the only Fraser Scheme to involve the sale of proposed strata titled lots.
A Jneid Company, R&Z Investments Pty Ltd (R&Z), entered into contracts (R&Z Initial Contracts):
(a)to purchase Lot 100 Spring Road, Thornlie and Lot 104 Spring Road, Thornlie for $1.8 million on or about 24 November 2006; and
(b)to purchase Lot 106 Spring Road, Thornlie for $390,000 on or about 30 January 2007;
Shoalwater acted as R&Z’s settlement agent in respect of the R&Z Initial Contracts.
The Station at Thornlie Pty Ltd (TSAT), a company of which Mrs Fraser was the sole director, entered into contracts (TSAT Purchase Contracts):
(a)to purchase Lot 100 and Lot 104 from R&Z for $2.295 million on 21 December 2006; and
(b)to purchase Lot 106 from R&Z for $540,000 on 19 February 2007;
R&Z nominated Shoalwater as its settlement agent on the TSAT Purchase Contracts.
In June 2007, the ASIC issued notices under s 30 of the Australian Securities and Investments Commission Act 2001 (WA) to certain of the Purchasing Companies requiring the production of documents relating to alleged contraventions of the Corporations Act 2001 (WA).
On 11 July 2007, the TSAT Purchase Contracts were cancelled by letter to 'Westwide Developments' from Brook & Co, FTPM’s solicitors.
On 20 July 2007, R&Z settled on the purchase of Lot 100, Lot 104 and Lot 106 under the R&Z Initial Contracts.
On 20 July 2007, TBoase Investments Pty Ltd (TBI), a company whose sole director was Mr Tim Boase (Boase), entered into a contract to purchase Lot 104 and Lot 106 from R&Z for $1.125 million. R&Z nominated Shoalwater as its settlement agent. Shoalwater acknowledged such appointment on 30 July 2007.
On 20 August 2007, that contract was purportedly varied by changing its date to 20 August 2007 (TBI Purchase Contract) and TBI nominated Brook & Co as its representative.
Under the TBI Purchase Contract the settlement date was 28 days from acceptance, namely 18 September 2007, and the deposit was $40,000.
On 16 October 2007 the TBI Purchase Contract was varied to extend the settlement date from 18 September 2007 to 25 October 2007 in consideration for the deposit being increased by $225,000 and immediately released to R&Z (TBI Variation).
On 20 July 2007, MKT Thornlie Nominees Pty Ltd (MKT), a company whose sole director was Mr Michael Dryka (Dryka), entered into a contract to purchase Lot 100 from R&Z for $2.25 million (MKT Purchase Contract). R&Z nominated Shoalwater as its settlement agent and Shoalwater acknowledged that appointment on 30 July 2007.
On 20 August 2007, the contract to purchase Lot 100 from R&Z was purportedly varied by changing the date of the contract to 20 August 2007. MKT nominated Brook & Co as its representative.
On 20 September 2007, Shoalwater was informed that Brook & Co was no longer acting for MKT and TBI in respect of the MKT Purchase Contract and the TBI Purchase Contract and that Digital Settlements were instead acting for MKT and TBI.
On 24 September 2007, MKT entered into a further contract to purchase Lot 100 from R&Z for $2.25 million (V3 MKT Purchase Contract). R&Z nominated Shoalwater as its settlement agent and MKT nominated Digital Settlements as its settlement agent on the V3 MKT Purchase Contract. Under the V3 MKT Purchase Contract, the settlement date was 28 days from acceptance, namely 22 October 2007, and the deposit was $85,000.
On 9 October 2007, the V3 MKT Purchase Contract was varied to extend the settlement date from 22 October 2007 to 30 October 2007 in consideration for the deposit being increased by $800,000 and immediately released to R&Z (MKT Variation).
Sale of interests to applicants
Each applicant signed a document entitled 'Expression of Interest' (EOI) in respect of the Thornlie Scheme.
The EOIs required payment of an expression of interest fee of $6,000 (EOI Fee) to MKT or TBI and provided that payment of the EOI Fee was subject to a 14 day cooling off period; that is if a purchaser withdrew from the Thornlie Scheme within 14 days the EOI Fee paid would be refunded in full. Conversely, withdrawal after the 14 days rendered the EOI Fee non-refundable.
Certain of the applicants (the MKT Applicants) entered into contracts to purchase proposed strata titled lots in the Thornlie Scheme from MKT (the MKT Strata Contracts) as follows:
(a)On or about 5 September 2007, MKT entered into a contract with Ms Vanessa Williams for the sale of proposed Strata Lot 10;
(b)On 6 September 2007, MKT entered into a contract with Mr Graham Thomson as trustee of the Traynor Thomson Family Trust for the sale of proposed Strata Lot 7;
(c)On 6 September 2007, MKT entered into a contract with Mr Thomson as trustee of the Traynor Thomson Family Trust for the sale of proposed Strata Lot 11;
(d)On 7 September 2007, MKT entered into a contract with Ms Tanya Armstrong for the sale of proposed Strata Lot 9;
(e)On 7 September 2007, MKT entered into a contract with Choong Kiong Boey and Boon Kee Ng (Boey & Ng) for the sale of proposed Strata Lot 13;
(f)On 7 September 2007, MKT entered into a contract with Ms Kathleen Elder for the sale of proposed Strata Lot 26;
(g)On 13 September 2007, MKT entered into a contract with Ms Elder for the sale of proposed Strata Lot 14;
(h)On 10 September 2007, MKT entered into a contract with Mr Paul Morrissey for the sale of proposed Strata Lot 21;
(i)On 10 September 2007, MKT entered into a contract with Fastpace Investments Pty (Fastpace) for the sale of proposed Strata Lot 22;
(j)On 13 September 2007, MKT entered into a contract with Rennelk & Samoht Pty Ltd (R&S) for the sale of proposed Strata Lot 12; and
(k)On 26 September 2007, MKT entered into a contract with Mr Bruce Morgan for the sale of proposed Strata Lot 27.
Certain other applicants (the TBI Applicants) entered into contracts for the purchase of proposed strata titled lots in the Thornlie Scheme from TBI (the TBI Strata Contracts) as follows:
(a)On 5 September 2007, TBI entered into a contract with Dee Electrical Services Pty Ltd as trustee for the Dempsey Family Trust (Dee Electrical) for the sale of proposed Strata Lot 1;
(b)On 6 September 2007, TBI entered into a contract with Mr Hugh Wilson and Mrs Gaye Wilson (Wilsons) for the sale of proposed Strata Lot 19;
(c)On or about 10 September 2007, TBI entered into a contract with Ms Tilai Morrissey (T Morrissey) for sale of proposed Strata Lot 16;
(d)On 11 September 2007, TBI entered into a contract with T Morrissey for the sale of proposed Strata Lot 18;
(e)On 13 September 2007, TBI entered into a contract with Mr Martin Ihms and Mrs Nicole Ihms (the Ihmses) for sale of proposed Strata Lot 17; and
(f)On 27 September 2007, TBI entered into a contract with Palmheights Pty Ltd (Palmheights) for sale of proposed Strata Lot 3.
Terms of Strata Contracts
With the exception of the Boey & Ng Contract, each of the Strata Contracts contained the following term:
A deposit of $51,000 of which $6,000 is paid now and $45,000 to be paid within 14 days of acceptance to be held by Shoalwater Settlements Trust Acct ('the deposit holder').
The Boey & Ng Contract contained the following term:
A deposit of $51,000 of which $8,000 is paid now and $43,000 to be paid within 14 days of acceptance to be held by the Shoalwater Settlements Trust Acct ('the deposit holder').
The special conditions of the Strata Contracts (Special Conditions) contained a provision (Special Condition 3) which provided:
The Buyer agrees that the deposit monies paid under this contract are released to the Seller and may be utilised by the Seller with respect to the acquisition and development of the Land prior to a new title being issued for the Property and the settlement of this Contract.
Shoalwater was not named as the purchasers’ settlement agent on the Strata Contracts.
The Strata Contracts incorporated the 2002 Joint form of General Conditions for the Sale of Land (General Conditions) so far as they were not varied by or inconsistent with the conditions or Special Conditions.
Clause 1.3(a) of the General Conditions provided that:
Where the Contract relates to the sale of a proposed strata lot in a proposed Strata Scheme, the Deposit must be paid to and held by a solicitor, Real Estate Agent or Settlement Agent in accordance with Section 70 of the Strata Titles Act until registration of the Strata Plan.
Payments of Deposits into Trust Account
Save for Armstrong, Boey & Ng, R&S and T Morrissey under the Second T Morrissey Contract:
(a)the applicants each paid a Strata Deposit of $45,000 per Strata Lot by giving Boase cheques payable to the Trust Account; and
(b)Boase deposited the cheques directly into the Trust Account.
With respect to Armstrong:
(a)On 7 September 2007, Armstrong paid a Strata Deposit of $51,000 by giving Boase a cheque for $51,000 payable to the Trust Account; and
(b)Boase deposited the cheque directly into the Trust Account.
With respect to Boey & Ng:
(a)Boey & Ng paid a Strata Deposit of $43,000 by giving Boase a cheque for $43,000 payable to the Trust Account; and
(b)Boase deposited the cheque directly into the Trust Account.
R&S paid a Strata Deposit by arranging for $45,000 to be electronically transferred directly into the Trust Account on 14 September 2007. T Morrissey paid the Strata Deposit payable under the Second T Morrissey Contract by arranging for $45,000 to be electronically transferred directly into the Trust Account on 15 October 2007.
Shoalwater did not receive the EOI Fees and EOI Fees were not deposited into the Trust Account.
By no later than 2 October 2007 Shoalwater held $898,000 of the applicants’ funds in the Trust Account, which included the Strata Deposits paid by each of the purchasers under the MKT Strata Contracts and the TBI Strata Contracts.
On 14 September 2007, at the request of Jneid, Ms Hamling sent a facsimile letter (September 2007 Letter) to TBI and MKT’s finance broker, Mr Phil Adamson, stating, in effect, that Shoalwater held $420,000 in the Trust Account to be applied to the purchase under the TBI Purchase Contract.
At the time Ms Hamling sent the September 2007 Letter, Ms Hamling knew, or ought to have known, that $583,000 was recorded as being held in the Trust Account in relation to the TBI Purchase Contract.
On 2 October 2007 Ms Hamling sent a facsimile letter to Mr Adamson (October 2007 Letter) stating, in effect, that Shoalwater held $920,000 in the Trust Account to be applied to the purchase under the MKT Purchase Contract (Trust Balance Representation).
At the time Ms Hamling sent the October 2007 Letter, Ms Hamling knew, or ought to have known, that no money was recorded as being held in the Trust Account in relation to the MKT Purchase Contract, or alternatively that, whilst no money was recorded as being held in the Trust Account in relation to the MKT Purchase Contract, she had been instructed that $673,000 initially recorded as being held in the Trust Account in relation to the TBI Purchase Contract should be recorded as being held in relation to the MKT Purchase Contract.
In subsequent proceedings brought in the Tribunal, on 29 August 2011, in matter VR 97 of 2011 (Disciplinary Proceedings), Shoalwater:
(a)admitted, in effect, that the Trust Balance Representation was misleading in breach of Rule 15 of the Settlement Agents Code of Conduct 1982 (WA) (Code) in that:
(i)at the time the October 2007 Letter was sent Ms Hamling knew that no money was held in the Trust Account for the MKT Purchase, alternatively, that $673,000 was held in the Trust Account for the MKT Purchase; and
(ii)in the context of the September 2007 Letter, the October 2007 Letter implied that Shoalwater held $1,360,000 in total on trust for the MKT Purchase and the TBI Purchase, when, at the time the October 2007 Letter was sent, Ms Hamling knew that no more than $898,000 was held in the Trust Account for the MKT Purchase and the TBI Purchase; and
(b)said that, in sending the October 2007 Letter, Ms Hamling acted without the knowledge or approval of Shoalwater’s directors or the person in bona fide control of Shoalwater’s business.
By 5 October 2007 Shoalwater knew that:
(a)MKT and TBI together proposed to subdivide Lots 100, 104 and 106;
(b)the Trust Balance represented deposits paid by third party purchasers pursuant to contracts for the purchase of lots in that proposed subdivision.
By the morning of 11 October 2007 Shoalwater had received copies of the Strata Contracts (including the Special Conditions) for five of the MKT Applicants and five of the TBI Applicants, and on that morning Ms Hamling, on behalf of Shoalwater, opened settlement files in the names of those applicants.
By facsimile sent at 11.29 am on 11 October 2007 Jneid, on behalf of R&Z, provided a copy of the MKT Variation to Ms Hamling and instructed Ms Hamling to release $673,000 as follows:
(a)$373,000 to be deposited into a Bankwest account for R&Z (Bankwest Account); and
(b)$300,000 to be deposited into a Bank SA account (a division of St George Bank) (St George Account).
The instruction was headed 'RE: 100 Spring Road Thornlie WA'. Ms Hamling very promptly prepared and signed two cheques drawn on the Trust Account as follows:
(a)$373,000 payable to R&Z (R&Z Trust Cheque); and
(b)$300,000 payable to Angas Securities (Angas Securities Trust Cheque).
Just after 1 pm on 11 October 2007 a Shoalwater employee delivered the R&Z Trust Cheque to R&Z by depositing the R&Z Trust Cheque into the Bankwest Account.
On a date unknown, but prior to 9.30 am on 12 October 2007, Shoalwater received copies of the Strata Contracts for Williams, Armstrong, Elder and Fastpace, all MKT Applicants.
During the morning of 12 October 2007, Ms Hamling, on behalf of Shoalwater, opened settlement files in the name of those MKT Applicants
On 12 October 2007, a Shoalwater employee delivered the Angas Securities Trust Cheque to Angas Securities by depositing the Angas Securities Trust Cheque into the St George Account.
On 2 November 2007, Shoalwater paid $225,000, including the TBI Strata Deposits other than the Second T Morrissey Deposit, to R&Z’s nominee, Angas Securities.
Payment to Ms Susan Boase
Boase’s sister, Ms Susan Boase, purchased a Strata Lot from MKT and paid a deposit of $45,000 (Susan Boase Deposit) by way of cheque dated 3 September 2007, which was subsequently banked into the Trust Account.
At all material times after 11 October 2007, the balance recorded in the Trust Account ledgers as being held in respect of the MKT Purchase was nil.
On 14 October 2007, Boase emailed Dryka and Ms Hamling requesting, in effect, that Dryka authorise Ms Hamling to release the Susan Boase Deposit to MKT in order that MKT could refund it to Ms Boase.
On 15 October 2007, Dryka forwarded the email referred to in [60] above to Ms Hamling.
On 18 October 2007, Shoalwater paid to MKT, by cheque drawn on the Trust Account, an amount of $45,000 being the funds provided in relation to the Second T Morrissey Deposit.
Applicants’ Dealings with Shoalwater
As already noted, on 11 and 12 October 2007, Shoalwater received various Strata Contracts entered into by the applicants. Shoalwater subsequently wrote to each of the applicants confirming receipt of instructions to act on the settlement and requesting that a written authority to act, enclosed with the letter, be signed and retuned to Shoalwater. With the exception of R&S and Dee Electrical, each applicant signed and returned the authority to act. The date of the letters to each applicant and the dates upon which the authorities to act were returned as shown in the following table.
In addition, on various dates each applicant, or a representative of each applicant, signed a document (Confirmation) stating:
I wish to confirm and authorise that Annexure A Condition 3 of the above property (sic) allows the deposit moneys paid to be released to the Seller and may be utilized by the Seller with respect to the acquisition and development of the land prior to a new title being issued for the property and settlement.
The dates on which each Confirmation was signed is also shown in the table below.
| Applicant | Vendor | Date of receipt of contract | Date of letter from Shoalwater | Date of return of authority to act | Date of Confirmation |
| Williams | MKT | 12/10/2007 | 12/10/2007 | Unknown but by 26/10/2007 | 29/10/2007 |
| Thomson | MKT | 11/10/2007 | 22/10/2007 | Unknown but by 5/11/2007 | 25/10/2007 |
| Armstrong | MKT | 12/10/2007 | 15/10/2007 | Unknown but by 19/10/2007 | 18/10/2007 |
| Boey & Ng | MKT | 11/10/2007 | 15/10/2007 | Unknown but by 18/10/2007 | 18/10/2007 |
| Elder | MDT | 12/10/2007 | 15/10/2007 | Unknown but by 26/10/2007 | 18 & 19/10/2007 |
| P Morrissey | MKT | 11/10/2007 | 12/10/2007 | No evidence on this point | 18/10/2007 |
| Fastpace | MKT | 12/10/2007 | 15/10/2007 | No evidence on this point | 31/10/2007 |
| R&S | MKT | 12/10/2007 | R&S did not appoint Shoalwater | No appointment | 25/10/2007 |
| Morgan | MKT | 11/10/2007 | 15/10/2007 | No evidence | |
| Dee Electrical | TBI | 11/10/2007 | 15/10/2007 | Not returned Another settlement agent appointed | 18/10/2007 |
| Wilsons | TBI | 11/10/2007 | 12/10/2007 | Unknown but by 16/10/2007 | 24/10/2007 |
| T Morrissey | TBI | 11/10/2007 | 15/10/2007 | Unknown but by 11/12/2007 | 18/10/2007 |
| Ihmses | TBI | 11/10/2007 | 15/10/2007 | Unknown but by 17/10/2007 | 18/10/2007 (unsigned) |
| Palmheights | TBI | 11/10/2007 | 15/10/2007 | No evidence | 18/10/2007 |
The circumstances under which each applicant came to sign a Confirmation varied. Most received an email from Ms Hamling which read:
Please find attached and (sic) approval to the condition of Annexure A Condition 3.
We require this form to confirm that you know about the release of the deposit monies.
Can you please sign and return this as soon as possible.
Others received the Confirmation in the mail with no covering letter or note. Others received phone calls from Ms Hamling asking them to complete the Confirmation, and some applicants could not recall how they came to receive the Confirmation for signing.
None of the applicants was told by Ms Hamling, or anyone else, that a substantive proportion of the funds had already been released before they received the Confirmation document, nor were they given any information as to the precise purpose for which the remaining funds were to be disbursed.
It can be noted that, at the time Shoalwater released funds to the R&Z trust account and Angas Securities in relation to the V3 MKT Purchase Contract, Shoalwater had no signed authorities to act for the MKT Applicants, and in all cases, unknown to the MKT Applicants, their deposits had been released before they signed, or had even been requested to sign, the Confirmations.
At no time did Shoalwater recommend to any of the applicants that they seek the advice of a solicitor with respect to the Strata Contracts, Special Condition 3, the STA or the Confirmations.
Shoalwater did not, prior to seeking the Confirmations from them, disclose to any of the applicants that:
(a)the MKT Strata Deposits had been paid to R&Z and Angas Securities on 11 and 12 October 2007 respectively; and
(b)such payments had been made following receipt of a written request by Jneid.
Settlement of TBI and MKT Purchase Contracts
Settlement of the sale and purchase of Lot 104 and Lot 106 pursuant to the V2 TBI Purchase Contract took place on 5 November 2007.
Settlement of the sale and purchase of Lot 100 pursuant to the V3 MKT Purchase Contract took place on 20 November 2007.
On 19 November 2007, MKT entered into a document entitled 'Deed of Loan and Charge' providing, in effect, that $645,083, being the purchase price for Lot 100 less:
(i)the amounts paid to Shoalwater by the applicants and others and released to R&Z on 11 and 12 October 2007; and
(ii)the amounts of external finance arranged by Mr Adamson and provided by financial institutions, would remain outstanding following settlement.
Dryka guaranteed the obligations of MKT pursuant to the Deed of Loan and Charge.
Contracts avoided pursuant to Strata Titles Act
By letter dated 1 July 2008, addressed to MKT and TBI, the applicants’ solicitors terminated the Strata Contracts pursuant to s 70(3) of the Strata Titles Act 1985 (WA), (ST Act ), other than the R&S Contract.
By letter dated 1 July 2008, addressed to Shoalwater, the applicants’ solicitors demanded that Shoalwater repay the MKT and TBI Strata Deposits to a number of the applicants pursuant to s 70(5) of the ST Act.
Shoalwater has not paid any moneys to the applicants.
On 9 July 2008, TBI was placed into liquidation. On 14 July 2008, MKT was placed into liquidation. No dividends have been paid by the liquidators of MKT or TBI.
Further findings of the Tribunal in Disciplinary Proceedings
On 29 August 2011, in the Disciplinary Proceedings, the Tribunal found that proper cause for disciplinary action against Shoalwater existed by reason of Shoalwater’s admissions that:
(a)certain of the TBI Strata Contracts and MKT Strata Contracts contravened s 70(1) of the ST Act because those contracts:
(i)contained a clause which provided that the deposit paid under the contracts was released to the seller prior to the contracts being issued; and
(ii)did not provide that money paid by the purchasers under those contracts pursuant to the contracts prior to the registration of a strata/survey strata plan be held on trust for that purchaser by a solicitor, real estate agent or settlement agent until the strata/survey strata plan was registered;
(b)in the circumstances it was necessary or prudent that Shoalwater recommend to each of the purchasers under those contracts, on or about 15 October 2007, to seek the advice of a solicitor with respect to the matters referred to in (a) above and the release of the applicants’ deposits prior to settlement; and
(c)Shoalwater’s failure to make the recommendation referred to in (b) above constituted a breach of Rule 11 of the Code.
(d)between on or about 15 October 2007 and 20 November 2007, Shoalwater acted for certain of the applicants in settlement of their Strata Contracts and also acted for R&Z in the settlement of the MKT Purchase Contract and TBI Purchase Contract;
(e)in the circumstances a conflict of interest arose, or foreseeably could have arisen, between those applicants and R&Z contrary to Rule 9 of the Code; and
(f)the withdrawal from the Trust Account and payment to MKT of the Second T Morrissey Deposit by Shoalwater was in breach of s 49(4) and s 49(5) of the ST Act.
Relevant Statutory provisions
The right to recover from the fidelity fund is governed by s 93(1) of the SA Act. That section provides:
Subject to this Act, the Account shall be held and applied for the purpose of reimbursing persons who may suffer pecuniary loss or loss of property by reason of any defalcation by a licensee during any period when he was the holder of a current triennial certificate, but reimbursing only to the extent of the defalcation of the licensee.
Thus it must be found a person has suffered 'pecuniary loss or loss of property', and that loss has occurred 'by reason of any defalcation', and the reimbursement for the loss is limited 'to the extent of the defalcation of the licensee'.
'Defalcation by a licensee' is expressed in s 3 of the SA Act to include criminal or fraudulent conduct of a licensee or a servant or agent of the licensee 'in the course of the business of the licensee and from which arises pecuniary loss or loss of property to any other person'.
Section 95(2) and s 95(3) are relevant for present purposes. Those subsections provide:
(2)A person is not entitled to recover from the Account an amount greater than the balance of the actual loss suffered by him after deducting from the total amount of his loss, the amount or value of all money or other benefits received or receivable by him from any source other than the Account in reduction of his loss, including any benefits received by reason of services rendered or payments made by the defaulting licensee.
(3)No amount shall be charged or be chargeable to the Account as interest on the amount of any judgment obtained or of any claim admitted against the Account.
Central to the applicants' position in this case are the provisions of the ST Act, and in particular s 70, s 70A and s 70B. Those sections provide:
70. Holding of deposit and other contract moneys when a lot is presold
(1)No person shall sell a lot in a proposed scheme before the strata/surveystrata plan is registered under Part II unless the contract of sale provides that any deposit and all other moneys payable by the purchaser prior to the registration of the strata/surveystrata plan are to be paid to a solicitor, real estate agent or settlement agent, who shall be named or specified in the contract, to be held by that solicitor, real estate agent or settlement agent on trust for the purchaser until the strata/surveystrata plan is registered.
(2)Any deposit and other moneys payable and paid by the purchaser prior to the registration of the strata/surveystrata plan under any such contract as is referred to in subsection (1) shall be paid by the purchaser to the solicitor, real estate agent or settlement agent named or specified in the contract of sale.
(3)In the event of a contravention of subsection (1) or subsection (2), the purchaser may at any time before the strata/surveystrata plan is registered avoid the sale.
(4)If the strata/surveystrata plan is not registered -
(a)within such period after the date of the contract as is agreed in writing by the purchaser and the vendor; or
(b)in the absence of any such agreement, within 6 months after that date,
the purchaser may avoid the sale at any time before the plan is registered.
(5)Where a purchaser avoids a sale under this section, all moneys, including the deposit, shall be recoverable by him from the solicitor, real estate agent or settlement agent or other person to whom they were paid, but the purchaser shall be liable to pay an occupation rent for any period during which he was in occupation of the lot or entitled to receive the rents and profits of the lot.
[(6), (7)deleted]
(8)In this section -
date of the contract means the day on which the contract of sale referred to in subsection (1) was signed or, if the parties signed it on different days, the last of those days;
real estate agent means a person licensed as a real estate agent under the Real Estate and Business Agents Act 1978;
settlement agent means a person licensed as a settlement agent under the Settlement Agents Act 1981.
70A. Contracting out prohibited
(1)A contract or arrangement is of no effect to the extent that it purports to exclude or restrict the operation of this Part or the rights and remedies conferred on a purchaser by this Part.
(2)A purported waiver of a right, remedy or benefit conferred on a purchaser by this Part is of no effect.
70B. Saving
Except as provided by sections 69D, 70(3) and (4) and 70A, this Part does not apply so as to render any contract illegal or void or to empower any party to avoid the contract.
Those sections fall within Pt V of the ST Act which is entitled 'Protection of purchasers'. That part also sets out requirements for certain information to be given to purchasers of lots or proposed lots in a strata scheme, and provides for a capacity of a purchaser to avoid a contract where the required information has not been given.
The intent and effect of s 70 of the ST Act has been the subject of comment in recent decisions of the Supreme Court. In Walker v Clough Property Claremont Pty Ltd [2009] WASC 367. Kenneth Martin J said at [15] and [17]:
15Section 70 of the STA 1985 is a Pt V provision of particular protective importance for purchasers of 'off-the-plans' strata units. That section imposes a requirement for the deposit and any other moneys paid by a purchaser prior to registration of a strata plan - to be paid into a trust account and held there, either by a solicitor, a real estate agent, or settlement agent, until the time that the strata plan is registered. The consequence of a contravention of the obligation to hold a purchaser's 'moneys in trust', is (once again) potential avoidance of the contract of sale - at an innocent purchaser's election made prior to registration of the strata plan; see s 70(3) of the STA 1985.
…
17Examination of the protective provisions found within the STA 1985, particularly in Pt V, renders it crystal clear that from 1985, the Western Australian Parliament clearly recognised the existence of the phenomenon of 'off-the-plans', or 'pre-sales' of proposed strata lots. Part V of the STA 1985 demonstrates by its content that whilst seeking to inject measures of protection for purchasers of 'off the plans' strata lots to be created, that the Parliament plainly did not seek to prohibit that practice. Part of Parliament's prescribed protection under Pt V involved a sensible measure of securing in trust any purchaser's moneys paid to acquire a future strata lot in a proposed subdivision - in the period prior to a strata plan being registered for the strata subdivisional development.
His Honour are also dealt with Pt V of the ST Act in Mirvac (WA) Pty Ltd v Yeo [2011] WASC 162 at [34] - [35] where he said:
34The words used in s 70 carry a clear message from the Legislature, in my view. The provision seeks to protect monies payable by a purchaser, in the period prior to registration of a strata plan. In a context of arrangements involving 'off the plans' sales of units not yet constructed, and possibly not to be completed for some considerable period, a clear intent in the Legislature to lay down a workable regime of protection for purchaser's funds placed in a vendor's hands - prior to creation of a purchased lot - is understandable.
35In s 70A of the STA, there is observed to be provided an entrenched protection against contractual attempts to exclude or restrict a purchaser's rights or remedies, conferred under Part V of the STA. This protection is followed by s 70A(2), another observed constraint against a 'waiver' by a purchaser of a right, remedy or benefit conferred under Part V. Once again, this section demonstrates the Legislature's tangible concern that its statutory protections intended for such a category of purchasers not be given up, fettered or whittled away. Contracts of adhesion, under which vendors' legal advisers draft voluminous and elaborate terms and conditions, then present them for signature to a purchaser on a 'take it or leave it basis', could represent a situation where such statutory protections could be threatened or jeopardised by 'clever drafting'.
More recently, his Honour said in Bontempo v Mirvac (WA) Pty Ltd [2012] WASC 104 at [57]:
Interesting questions may have arisen if the Bontempos sought to terminate the Acquisition Contract pursuant to s 70(3) of the Strata Titles Act prior to the registration of the strata plan. That could have been a protected scenario of termination under s 70B. Termination in that window would have been on the basis that the bank guarantee was the deposit and was wrongly provided to the Seller. The argument would be that that was in violation of the policy rationale within s 70 which protects deposits as well as all other moneys from being received by vendors in an off the plans construction and acquisition scenario before registration of a strata plan eventuates. Such moneys must be held on trust for the purchaser before registration.
The meaning of defalcation
An inclusive definition of the expression 'defalcation by a licensee' is found in s 3 of the SA Act. That section provides:
defalcation by a licensee includes criminal or fraudulent conduct -
(a)of a licensee; or
(b)of any one or more of the servants or agents of the licensee; or
(c)of a person who is a partner in the business of the licensee; or
(d)where the licensee is a firm and a body corporate is a partner in the firm or where the licensee is a body corporate, of any one or more of the directors, officers, servants, or agents of the body corporate,
in the course of the business of the licensee and from which arises pecuniary loss or loss of property to any other person;
The parties were agreed that the word 'defalcation' as used in the SA Act was not confined in its meaning to criminal or fraudulent conduct. The case was argued on the basis, which we accept, that the word should be given the meaning explained by Gibbs CJ, with whom Wilson and Dawson JJ agreed, in Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 (Daly) at 380 - 381, where his Honour said:
The etymology of the word supports the view that a wrongful diminution or reduction of the amount of the moneys held in trust or in a fiduciary capacity can properly be called a defalcation even if the deficiency was not due to dishonesty. In the United States the word has been held capable of including any failure by a person acting in a fiduciary capacity to account for trust funds … The provisions of the Securities Industry Acts which deal with fidelity funds appear to have been intended to afford a relief which the law did not provide and should be given a liberal construction. It would seem consonant with the object of those provisions that a person who had suffered loss as a result of a failure to account for funds entrusted to a firm as trustee should be able to recover from the fund even if the failure was due, e.g., to negligence rather than dishonesty.
In the course of argument, the parties adopted the description 'general law defalcation' to a defalcation of the kind explained by Gibbs CJ in Daly, and the description 'statutory defalcation' to defalcation of the kind referred to in s 3 of the SA Act.
Did the payments to R&Z and Angas Securities breach the terms of trust
It was not in issue that, if the payments to R&Z and Angas Securities made by Shoalwater from its trust account beached the terms of the trust upon which those funds were held, the payments would constitute a general law defalcation. It is therefore necessary to examine and determine the terms upon which the funds were held in trust.
Section 49(4) and s 49(5) of the SA Act govern the withdrawal of funds from a settlement agent's trust account. Those sections provide:
(4)Settlement moneys received by a settlement agent in the course of arranging or effecting a settlement shall not be withdrawn from a trust account except for the purpose of completing the settlement, or in accordance with the contract entered into between the parties to the transaction, or as otherwise authorised by this Act, or by the prior written consent of all parties to the transaction involved.
(5)A settlement agent shall pay moneys withdrawn from a trust account to the person or persons lawfully entitled or authorised to receive them.
(5a)If -
(a)a settlement of a real estate transaction or a business transaction is completed; and
(b)the settlement agent who arranged or effected the settlement received moneys in respect of the real estate transaction or business transaction in the course of arranging or effecting the settlement; and
(c)the settlement agent is authorised in writing by the vendor to make a payment from those moneys to an agent as payment of the whole or part of the commission, reward or remuneration to which the agent is entitled for arranging the real estate transaction or business transaction to which the settlement relates,
the settlement agent may, despite subsections (4) and (5), pay to the agent from those moneys such sum as the settlement agent is so authorised to pay.
(5b)In subsection (5a) -
agent means an agent as defined in section 4(1) of the Real Estate and Business Agents Act 1978 who is entitled to a commission, reward or remuneration for arranging the real estate transaction or business transaction to which a settlement relates;
vendor means the person or persons lawfully entitled to receive the purchase price in respect of a real estate transaction or business transaction.
Thus, the entitlement to withdraw funds from a trust account, and thus the terms of the trust upon which the monies are held, are governed by the contract entered into between the parties to the transaction in respect of which the settlement is to take place. In this case, the various deposits were paid in relation to the strata contracts between the respective applicants and either MKT or TBI. Each of those contracts contained Special Condition 3, and incorporated by reference cl 1.3(a) of the General Conditions which had the effect of requiring that the trust funds be held in accordance with s 70 of the ST Act. Those two provisions are obviously inconsistent.
The respondent argues that the payments out of trust by Shoalwater did not breach the terms of the trust upon which it held the funds because it was authorised by Special Condition 3 of the relevant Strata Contracts. Although the respondent does not rely upon the Confirmations signed by each of the applicants as constituting, by itself, authority to disburse the funds, it contends that they are confirmation that the applicants knew and understood that the basis upon which the funds were held was as contemplated by Special Condition 3. The respondent argues that cl 1.3(a) of the General Conditions, and in turn s 70 of the ST Act, did not apply to the Strata Contracts because it was varied by or inconsistent with the Special Condition 3.
The applicants contend, on the other hand, that, by reason of s 70A of the ST Act, Special Condition 3 is of no effect since it 'purports to exclude or restrict the operation of [Pt V] of the ST Act or the rights or remedies conferred on a purchaser' by that Part. The applicants argue that if Special Condition 3 is of no effect, there is nothing in the Strata Contracts which is inconsistent with cl 1.3(a) of the General Conditions, and thus the terms of the contract which governed the trust upon which the deposits were held required that the funds be held in the trust account until settlement.
The respondent drew our attention to the decision in Caltex Oil (Australia) Pty Ltd v Best (1990) 170 CLR 516 (Caltex Oil), a case concerning s 7(1) of the Petroleum Retail Marketing Franchise Act 1980 (Cth) which said:
[A] provision in any agreement is void to the extent that it purports to exclude, limit or modify, or is otherwise inconsistent with, the operation of a provision of this Act or any right or remedy based on or arising out of a provision of this Act.
In that case, the plurality said that inconsistency between contract and statute is not confined to literal conflicts between contractual provisions and the statutory provisions, but arises wherever there is a conflict between the operation of a contractual provision and the purpose or policy of the statute. Their Honours said at [522]:
So, if the operation of a contractual provision defeats or circumvents the statutory purpose or policy, then the provision is inconsistent in the relevant sense and falls within the injunction against contracting out.
The respondent contends that, while the decision in CaltexOil might lead to a conclusion that Special Condition 3 was inconsistent with the operation of the ST Act, s 70A does not contain the word 'inconsistent' but uses the words 'exclude or restrict' and 'waiver'. It submits that those words are more limited in their operation than the words of s 7(1) of the Petroleum Retail Marketing Franchise Act 1980. It further submits that the consequences of a failure to comply with the requirements of s 70(1) of the ST Act which are found in s 70(3) and s 70(5), render it unnecessary to render a merely inconsistent contractual provision of no effect.
We do not agree.
Section 70A operates to render ineffective contractual provisions which have either of two effects. It renders ineffective contractual provisions which either 'exclude or restrict the operation of this Part' or which 'exclude or restrict … the rights and remedies conferred on a purchaser by this Part.' Notwithstanding the fact that the applicants in this case may have retained their rights to avoid the sales pursuant to s 70(3) or s 70(4), or to recover funds pursuant to s 70(5), Special Condition 3 clearly operated to exclude the operation of s 70(1).
Section 70B does not affect that conclusion. The fact that, unless avoided pursuant to s 70(3) and s 70(4) and subject to s 70A, Pt V does not apply so as to render any contract illegal or void, and does not rob s 70A of its efficacy. That is clear from the fact that s 70A is an exception to the operation of s 70B.
It follows that, in our view, the Strata Contracts were governed by s 70 of the ST Act which required funds paid on deposit to be held in trust until registration of the strata plan.
The respondent contends that, even if Special Condition 3 was, as a matter of law, ineffective, the contract as executed by the parties still determined the basis of the trusts on which Shoalwater held the deposits. It argues that:
•as the applicants specifically agreed that the deposits could be used to purchase the land prior to its subdivision; and
•as 'Shoalwater released the deposits in precisely the way those contracts, and the parties to those contracts, had contemplated',
Shoalwater complied with the duty to release the funds in accordance with the direction of the beneficiary. Accordingly, it argues that the release of the funds was not wrongful or a breach of trust.
A number of responses may be made to that contention. The first is that, as we have found, the Strata Contracts, properly construed, required compliance with s 70(1) of the ST Act. The payments of the deposits were thus not what the Strata Contracts, properly construed, contemplated. Second, the respondent itself brought, and succeeded in, disciplinary proceedings against Shoalwater on the basis that it was necessary and prudent for Shoalwater to have recommended that the purchasers seek independent legal advice about the release of the deposits prior to settlement. That contention is necessarily premised on the fact that Shoalwater should have been alive to the effect of s 70 of the ST Act, and should have made that recommendation before disbursing the funds. The attempt, though wholely inadequate, to address that issue by obtaining signatures to the confirmation documents supports an inference that Ms Hamling was aware of s 70. In fact, the funds were released in relation to the MKT Purchase Contact before Shoalwater held any instructions to act for any of the strata purchasers, on whose behalf (at least jointly with TBI and MKT) they held those funds.
In the disciplinary proceedings, the respondent alleged, and the Tribunal found, that the payments of the deposits out of the Trust Account of the MKT deposits and the Second T Morrissey Deposit amounted to a breach of s 49(4) and s 49(5) of the SA Act. In our view, in light of the facts set out above, and our conclusions as to the terms of the trust upon which Shoalwater held the funds, the same conclusion can be reached in relation to the TBI Applicants' deposits.
It is not necessary, in order to find a general law defalcation, that the wrongful payment of the funds was intentional or dishonest. The payments should not have been made prior to the issue of the proposed strata titles. In our view, it is consistent with the object of the provisions of the SA Act dealing with the fidelity fund, and consistent with a liberal construction of those provisions, to conclude that the payments from trust by Shoalwater was defalcation.
The payments out of trust to R&Z and to Angas Securities were payments made in breach of the terms upon which Shoalwater held the funds in trust. Whilst those payments did not constitute fraudulent or criminal conduct, they amounted to defalcation as explained in Daly.
Authority to release funds
Putting aside for one moment the effect of s 70A of the ST Act on Special Condition 3, it can be noted that Special Condition 3 authorised the release of deposit monies to the 'seller' so that the monies could be utilised by the seller with respect to the acquisition and development of the relevant land. The agreed facts do not disclose any communication or relationship between MKT, or its sole director, Mr Dryka, with Shoalwater. It would appear from the agreed facts that collection of the deposits for both the MKT Strata Contracts and the TBI Strata Contracts (except for the R&S Contract and the Second T Morrissey Contract) was undertaken by Mr Boase, the Principal of TBI. It was Mr Boase who paid those cheques into the Shoalwater Trust Account. Ms Hamling, and Shoalwater, were instructed as settlement agents by R&Z in respect to the sale of Lot 104, Lot 106 and Lot 100 to TBI and MKT respectively. Shoalwater was not the settlement agent for TBI or MKT on those purchases.
The release of the funds held in trust to R&Z and Angas Securities was done on the instructions of Mr Jneid, the Principal of R&Z. It was not in issue that at no time did Shoalwater receive any communication from Mr Dryka or MKT directing it to release any funds to R&Z.
The respondent contends that, Mr Dryka's instruction is found in the V3 MKT Variation, which was apparently signed by Mr Dryka, and was included in the fax from Mr Jneid to Shoalwater concerning payment of $673,000. We do not accept that contention. The MKT Variation recorded a variation in the amount of deposit and the settlement date. Mr Jneid's covering letter did not specify that the funds were to be released as part payment of the deposit on the varied V3 MKT Purchase Contract. There is nothing in the evidence to support a finding that Ms Hamling knew the purpose of the payment. In itself, the payment of $673,000 was insufficient to satisfy the consideration for the extension of the settlement date. It is reasonable to infer (especially having regard to the Trust Balance Representation) that Ms Hamling was content to act solely on the instruction of Mr Jneid, for whom she had acted in a series of transactions of a similar character. The funds which she held in trust were not Mr Jneid's to deal with as he saw fit.
Even if Special Condition 3 is given its full force and effect, it did not permit the release of deposit funds to R&Z directly, on the instructions of R&Z, and without proper authority and direction from MKT and TBI, the parties to whom the funds could be released under Special Condition 3. Furthermore, it must have been known to Ms Hamling that the funds held in trust came from deposits paid by the applicants under the Strata Contracts. At the time the funds were released in relation to the V3 MKT Contract, Shoalwater held no authorities to act for the MKT purchasers.
The applicants rely, as a separate ground for finding a defalcation to have occurred, that there was no direction from MKT in relation to the release of the deposits. They do not make the same submission in relation to an absence of direction from TBI, presumably because of Mr Boase's involvement in the collection and deposit of the funds. For the reasons just traversed, we would uphold the submission that the payment of the deposits in relation to the MKT Strata Contracts was payment without authority, and amounted to defalcation for the purposes of s 93 of the SA Act
Second T Morrissey Deposit
The respondent conceded that the payment from the trust account of the Second T Morrissey Deposit, in the sum of $45,000, to MKT in order that MKT could refund Ms Susan Boase, was not a payment authorised by Special Condition 3, and amounted to defalcation. We agreed that that concession was correctly made.
Were the losses of deposits 'by reason of' the defalcation?
The respondent contended, however, that the defalcation in relation to the Second T Morrissey Deposit did not cause a loss to Mr Morrissey. It also argued that if, contrary to its contentions, the payments of all deposits held in trust amounted to a defalcation, such defalcation did not cause a loss to the applicants. The respondent accepted, however, that if the Tribunal were to conclude, as we have, that the deposits should not have been released prior to the issue of strata titles, it would follow that the deposits were lost by reason of the defalcation.
The Thornlie Scheme was never completed, and the Strata Scheme never registered. Both TBI and MKT subsequently went into liquidation. The applicants received no land, and have received no repayment of their deposit monies from any of TBI, MKT or Shoalwater. There would appear to be no prospect of any such recovery.
As already noted, the respondent accepted that, if the release of the funds prior to the registration of the strata plan was not authorised, and accordingly Shoalwater's release of the funds was a defalcation, then the applicants' losses were suffered by reason of that defalcation. In our view, that concession is rightly made. Our conclusion is that s 70 of the ST Act required the retention of the deposits until such time as the relevant strata plan was registered. It would not have made any difference whether the deposits were released in advance of the settlement of the purchases of land by MKT and TBI from R&Z, or whether they were paid over at settlement of those transactions. Because Special Condition 3 was of no effect, any payment out of the deposit monies prior to registration of the strata plan amounted to a defalcation.
It follows that the applicants' loss of deposits were caused by reason of the defalcation. Had the defalcation not occurred, the funds would have remained in trust and would have been available to be returned to the applicants upon termination of the Strata Contracts pursuant to s 70 of the ST Act.
The claims for interest
The applicants claim interest on the money borrowed to pay the deposits in the amounts set out in the following table:
| Claimant's Name | Date to which interest calculated | Amount of Interest Claimed |
| Tanya Armstrong | 14 June 2012 | $17,499.83 |
| Martin and Niclole Helen Ihms | 11 June 2012 | $14,643.57 |
| Palmheights Pty Ltd | 15 June 2012 | $14,604.42 |
| Graham Thomson and Tracey Traynor as trustees for Traynor Thomson Family Trust | 12 June 2012 | $28,175.34 |
| Hugh Gilchrist Wilson and Gaye Wilson | 12 June 2012 | $17,059.64 |
| Fastpace Investments Pty Ltd | 11 June 2012 | $14,577.71 |
| Dee Electrical Services Pty Ltd | 14 June 2012 | $14,355.45 |
| Vanessa Williams | 14 June 2012 | $14,491.34 |
| Paul Joseph Morrissey | 13 June 2012 | $14,148.07 |
| Tilai Elizabeth Beryl Morrissey | 12 June 2012 | $29,081.88 |
| Choon Kiong Boey and Boon Kee Ng | 11 June 2012 | $15,265.59 |
| Rennelk and Samoht Pty Ltd | 11 June 2012 | $20,647.62 |
| TOTAL | $214,550.46 |
The respondent denies that the applicants are entitled to payment of any amount in the nature of interest from the fund.
Section 95(2) and s 95(3) of the SA Act are set out above. Those subsections limit the recovery from the fund to no more than 'an amount greater than the balance of the actual loss suffered' and specify that no amount shall be charged or chargeable as interest on any claim admitted against the account.
The question of recovery of an amount including a lost opportunity to earn interest on money stolen from a real estate trust account was considered in Real Estate and Business Agents Supervisory Board v Cohen [2004] 28 WAR 475 (Cohen). That case concerned provisions of the Real Estate and Business Agents Act 1978 (WA) which contained provisions relating to the Real Estate and Business Agents Fidelity Fund which were relevantly identical to the provisions of the SA Act. The respondent in Cohen sought to recover interest which would have been earned on the funds misappropriated by the real estate agent. Murray ACJ, with whom the other members of the Court agreed, accepted that the concept of causation under the statutory provisions reflected the concept generally recognised by the law. Having made that observation, his Honour continued (at [32]):
But there are important words of limitation contained in the statute. By s 116(1), the reimbursement may be 'only to the extent of the defalcation of the licensee'. The extent of the reimbursement in a case such as this, where one is dealing with pecuniary loss, may not exceed the total sum taken or lost as a result of the criminal or fraudulent conduct of the licensee. Consistent with that approach is the provision in s 117(3) that the Fidelity Fund may not be charged with interest on the amount of any judgment obtained or claim admitted against the Fund. There may, in other words, be no compensation in that way for the claimant upon the Fund being kept out of their money up to the time of reimbursement as a result of the pecuniary loss caused by the licensee ….
His Honour added that 'No process allied to the assessment of damages for deceit or any other cause of action is involved in the determination of the extent of the liability to make reimbursement from the Fund'.
The applicants seek to distinguish Cohen. They do so on the basis that the applicants provided witness statements deposing to the fact that they had borrowed monies with which to pay the strata deposit, and deposing as to the amount of interest which has accrued, or will accrue, on those borrowings until they are repaid. They note the distinction made by the High Court in Hungerfords v Walker (1989) 171 CLR 125, between interest which would have been earned by a safe investment of the money lost (which they term forgone interest) and interest which was in fact paid upon borrowings which, had the loss not occurred, would have been unnecessary or retired (paid interest). The applicants contend that the interest discussed in Cohen was foregone interest, whereas the interest claimed by the applicants in this case is paid interest. The applicants contend that, while interest cannot be recovered by claimants who have not borrowed, and actually paid interest on, the funds entrusted to the account holder, interest can be recovered by claimants who have borrowed, and actually paid interest on, the funds entrusted to the account holder.
In support of that contention, the applicants rely upon a South Australian decision in Public Trustee v The Attorney General for the State of South Australia and The Law Society [2000] SASC 184 (Public Trustee v AGSA) and a New Zealand decision of Florence v New Zealand Law Society [1989] 1 NZLR 132 (Florence).
Public Trustee v AGSA concerned a claim under the Legal Practitioners Act 1981 (SA) against a fidelity fund which limited claims to 'the actual pecuniary loss suffered by the claimant in consequence of the fiduciary default'. Gray J (with whom the other members of the Court agreed) concluded that, in the context of a wide definition of 'fiduciary or professional default' under the relevant legislation, interest on investment accounts which were 'existing choses in action giving rise to then existing present and real entitlements to interest' was recoverable as 'actual pecuniary loss'.
Florence concerned a claim under the Law Practitioners Act 1982 (NZ) which provided for the fidelity fund 'reimbursing persons who may suffer pecuniary loss by reason of [the default]', and contained a provision materially the same as s 95(3) of the SA Act. The Court considered that the New Zealand provision was not limited to reimbursement of the money entrusted to the practitioner, but that the natural and ordinary meaning of the words of the section extended the right of reimbursement to anything which may fairly be described as pecuniary loss suffered by reason of the theft of money entrusted to a solicitor.
In our view, the distinction between foregone interest and paid interest does not provide a basis to distinguish the decision in Cohen. Both Public Trustee v AGSA and Florence concern the construction of the particular statutes under consideration. In neither case did the relevant provision contain the concluding words of s 93(1) of the SA Act which limit reimbursement 'only to the extent of the defalcation of the licensee', or any words to that effect. In our view, that is a critical distinction.
The applicants argued that the proviso to s 93(1) 'has no higher meaning than the word 'actual' in [Public Trustee v AGSA]'. We do not agree. The proviso to s 93(1), in its ordinary and natural meaning, limits the reimbursement to the amount of the defalcation, regardless of what might be construed as the 'actual pecuniary loss' suffered by the claimant.
The claim by each of the applicants for interest paid on the funds borrowed to provide the deposits to Shoalwater is not recoverable from the fund.
Conclusion
It follows that the decision by the respondent to disallow the claims of each of the applicants should be set aside, and the claims of the applicants should be allowed as follows:
i)The claim by Choong Kiong Boey and Boon Kee Ng should be allowed in the sum of $43,000;
ii)The claim by Ms Tanya Armstrong should be allowed in the sum of $51,000;
iii)The claim by Mr Graham Thornton as trustee of the Traynor Thomson Family Trust should be allowed in the sum of $90,000;
iv)The claim by Ms Kathleen Elder should be allowed in the sum of $90,000;
v)The claim by Ms Tila Morrissey should be allowed in the sum of $90,000;
vi)The claims by each of the remaining applicants should be allowed in the sum of $45,000.
The decision of the respondent to disallow the claims of the applicants to interest on the deposits paid by them respectively to the Shoalwater Settlements Trust Account is affirmed.
Costs
In the application for review lodged in these proceedings, the applicants sought an order that the respondent pay their legal costs of applying to the respondent for compensation. No argument on the question of costs was offered at the hearing. There should be liberty to apply for directions in relation to costs.
I certify that this and the preceding [134] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
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JUSTICE J A CHANEY, PRESIDENT
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