ADAMS v ALEMITE LUBREQUIP PTY LTD

Court of Appeal (NSW)|1994-08-30|Before: Smart J, Gleeson CJ, Kirby P, Sheller JA

GLEESON CJ, KIRBY P and SHELLER JA 29-30 August 1994, 30 September 1994

TRUSTS - breach of - investors deposit funds with chartered accountants - premature payment to promoter who absconds - held: accountants in breach of trust - liable TRUSTS - relief - Trustee Act 1925, s85 - held: trustee's action unreasonable - relief denied CONTRACT - conditions precedent and subsequent.

TRUSTS - breach of trust - payment of moneys of investors in breach of trust - investors pay moneys into trust account of chartered accountants - chartered accountants acting as accountants and auditors for tax sheltered investment scheme

receive and controlled funds from investors - funds paid out to promoter who absconds - primary judge (Smart J) finds payment made in breach of trust to investors - on appeal - held (Gleeson CJ; Kirby P and Sheller JA concurring): (1) The accountants held the deposited funds in trust for the investors and not or not solely for the promoter; (2) Breach of trust was properly found; (3) Relief under the Trustee Act 1925, s85 was properly denied as the chartered accountants were properly found not to have acted reasonably. Trident General Insurance Co Ltd v MeNiece Bros Pty Ltd (1988) 165 CLR 107 applied.

TRUSTS - trustee - breach of trust - innocent breach - whether trustee should be relieved under Trustee Act 1925, s85 - trustee pays out large sum deposited in trust account by investors to promoter who absconds - whether breach of trust found should be excused as an honest but mistaken misapplication of trust funds - held (affirming Smart J) (Gleeson CJ; Kirby P and Sheller JA concurring): (1) The trustee had failed to act reasonably. In particular, it had failed to check if necessary consent had been given and failed adequately to check whether the rental acceleration notice required had been given; (2) Appeal dismissed.

CONTRACT - conditions of contract - conditions precedent and subsequent - distinction between conditions precedent to formation of contract and conditions precedent to obligations of performance - held: Certain conditions in a syndicate deed governing the investment of funds by depositors and payment of management and like fees to a promoter were conditions precedent to the payment of management fees or rental to the promoter - funds having earlier been paid by accountants to the promoter who absconded, such funds were paid in breach of the conditions of the syndicate deed and thus in breach of the accountant's trust obligations.

Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; Perri and Anor v Coolangatha Investments Pty Ltd (1982) 149 CLR 537 applied. Trustee Act 1925, s85. ORDERS

Appeal dismissed with costs; and
Matter remitted to the Common Law Division (Smart J) to determine the amount of damages payable by the defendants to the plaintiffs.

Gleeson CJ This is an appeal, by leave, from a decision of Smart J, who decided the issue of liability in the case in favour of the respondent plaintiffs, but who has not yet dealt with the issue of damages.

The appellants are the members of Price Waterhouse ("PW"), a firm of chartered accountants. The respondents are investors who paid monies into a PW trust account in connection with a certain business venture. The total amounts received were in excess of $1.5 million. The claim made by the respondents was that the money was held by PW upon trust for the investors, that it was paid out by PW in breach of trust, and that it was thereby lost to the investors. The money was paid out of the PW trust account to interests associated with the promoter of the business venture, a woman named Mrs Roche, who later absconded. The proposed business venture never got underway, and the investors now seek to recover their money from PW. The essence of the complaint against PW is simple. PW, it is alleged, in breach of trust, disbursed the money before satisfaction of the conditions which had to be fulfilled before they were entitled to do so. There is no suggestion that the conduct of PW was in any respect dishonest, and it is accepted that they acted in good faith. However, it is contended that they paid the money to the Roche interests when they were not entitled to do so according to the terms of the trust upon which they held the money. That being so, and the money having been lost to the investors, the investors say that they are entitled to look to PW to make good the loss (cf Re Dawson [1966] 2 NSWR 211 at 214-216; Target Holdings Ltd v Redferns [1994] 2 All ER 337). This is not an action against PW for professional negligence; nor is it a claim based upon complicity in a breach of trust by a third party (cf Consul Development Pty Ltd v DPC Estates Pty Ltd (1976) 132 CLR 373). It is a claim against trustees for paying away money in breach of trust.

The action is defended upon three principal grounds. First, the appellants deny that PW held the money upon trust for the investors. It is argued that, if PW held the money on trust for anyone, it was held upon trust for the Roche companies. Second, it is argued that, even if the money were held upon trust for the investors, the terms upon which it was held were such that there was no breach of trust involved in the payments. Third, if there were a breach of trust, then relief is sought under s85 of the Trustee Act 1926. Smart J resolved the first two issues adversely to the appellants, and declined to grant relief under s85.

Before coming to each of those issues, it is convenient to state, in summary form, the relevant facts. The primary facts were not the subject of substantial dispute, and there has been no significant challenge to the findings of Smart J.

The amounts that were raised from investors, and paid into the PW trust account, were received, as to part, in May and June 1982, and as to the remainder, in July and August 1982. Of the money thus received, approximately $700,000 was paid out of the PW trust account on 13 May 1982, approximately $140,000 was paid out on 25 June 1982, approximately $370,000 was paid out on 28 July 1982, and the remainder was paid out in August and early September 1982.

The investors believed that they were investing in a tax-sheltered business venture which would make profits out of the growing of turf. Mrs Roche, or companies controlled by her, owned the land and they were to grow the turf. The profits of the venture were to be received over a period of 10 years. The amounts of money subscribed by the investors were to be expended, at the outset of the venture, in the payment of rental and management fees. Income was to be received by them, over 10 years, in the form of rental; such rental was to be based in part upon the profits of the turf growing business to be conducted by one of Mrs Roche's companies upon the subject land. The land, which was owned by Roche interests, was to be the subject of a lease to a Roche company, a sub-lease

URJ ADAMS v ALEMITE LUBREQUIP PTY LTD (Gleeson CJ) 3

to syndicates of investors, and a sub-sub-lease to another Roche company, which would carry on the turf growing business and pay rental to the investors. In effect, the investors would der*e income in the form of rental receipts based upon the profits of the turf growing business. They expected to obtain allowable deductions by reason of their rental payments under the sub-lease, and payments of management fees. The scheme was structured in such a way that the rental payments and the management fees were to be paid at an early stage. The provisions of the relevant contractual documents, which envisaged early payments of management fees and the acceleration of rental payments, will be referred to below. It seems fairly clear that investors were encouraged to believe that amounts subscribed to the venture during the year ended 30 June 1982 would be dealt with in such a way as to entitle them to tax deductions during that year.

The venture was originally proposed by Mrs Roche in late 1981 and early 1982. From her point of view, she was setting out to raise money for turf farming. She conceived the idea that a good way of doing that would be to market the project amongst persons interested in obtaining tax benefits. She sought the advice of tax experts, and consulted a firm of solicitors, Dawson Waldron (DW) and a partner of PW, Mr Crossman. DW and PW, in turn, obtained the advice of senior counsel.

In January 1982 Mr Crossman took detailed instructions from Mrs Roche about the project, which was to have 200 investors who would make payments of $7,000 in rental and $1,100 in management fees. There was discussion about appointing PW to be accountants and auditors in respect of the project, and Mr Crossman made a diary note to the following effect:

"Tf Price Waterhouse is to accept appointment it must -

(a) be satisfied with the financial and taxation aspects of the project;

(b) become involved closely (rather like a prospectus) in putting together and marketing the project".

Neither DW nor PW doubted the integrity or business acumen of Mrs Roche.

Later in January 1982 Mrs Roche, and another partner of PW, Mr Lennon, agreed on the wording of a draft private placement memorandum, which was to include the following information:

"Accountants and auditors are Messrs Price Waterhouse and Co, who will be keeping a register of investors, auditing and accounting for the investors, the partnership and the management and leasing companies. They will attend management committee meetings and oversee the income distribution to the Investors and land owner and will send audited statements regularly to investors".

Mr Lennon understood that the memorandum was to be used in promoting the sale of units, and he appreciated the importance of the reference in it to PW, with its reputation for competence and integrity. In the succeeding months, when the scheme was being marketed, representations were made to investors that the application of funds paid by investors would be supervised and controlled by PW, but the fact that those specific representations were made did not become known to PW until 1983. On the other hand, it was clearly understood by PW that the monies raised from investors were to be paid into a PW trust account, and further reference will be made below to the evidence as to the understanding and intention of various members or employees of the firm in relation to that matter.

On 7 May 1982 the following documents were executed. (It is convenient to discuss the matter by reference to one syndicate only.) First, there was a lease of the subject land from one Roche company to another Roche company for a

period of 10 years and 2 days. Second, there was a Syndicate Deed. The parties to the deed were a syndicate of investors, the Roche leasing company, and the Roche management company. Third, there was a sub-lease from the Roche leasing company to the syndicate for a period of 10 years and 1 day. Fourth, there was a sub-sub-lease from the syndicate to a Roche company for a period of 10 years. Fifth, there was a deed of partnership between two Roche companies relating to the carrying on of the business of turf farming on the subject land.

Under the Syndicate Deed, each investor was to contribute a total of $8,100 as capital of the syndicate. This was to be paid, as to $4,400, on execution, and, as to $3,700, in July 1982. The Roche management company was appointed manager of the syndicate for 10 years, and was to manage the affairs of the syndicate in the best interests of the members. The management company was to make payments out of syndicate capital or rental received by the syndicate, pursuant to the sub- sub-lease, as necessary to ensure compliance by the syndicate with its covenants under the sub-lease. The manager was entitled to retain, out of the syndicate capital, management fees of $900 and $200 respectively, per unit, on payment of the respective amounts of $4,400 and $3,700. There was to be a management committee to supervise and report on the performance by the manager of its obligations.

The Syndicate Deed contained the following provision:

"1(c) This Deed and the obligations of the parties hereunder (apart from this sub-clause) are subject to and conditional upon the consent of Australia and New Zealand Banking Corporation Ltd to the sub-lease and the sub-sub-lease and this Deed shall, if such consent shall not be obtained within sixty (60) days after the date hereof, be void ab initio".

The bank was the mortgagee of the subject land, and that was why its consent was required.

The sub-lease provided for yearly rental to be payable monthly in advance, the first month's rent to be paid on the signing of the sub-lease. However, there was also a provision entitling the sub-lessor, at any time within 30 days after the date of the sub-lease (which, it may be noted, was necessarily a period that would expire before 30 June 1982), to serve a written notice accelerating the obligation to pay the balance of the rent in such a way that half of it would be payable prior to 30 June 1982, and the other half payable in the following income year. This acceleration of rental obligations would have had tax advantages for the investors.

In the events that occurred, for reasons which remain unexplained, (and which may involve nothing more than incompetence or inattention to detail on the part of Mrs Roche) the consent of the ANZ bank, referred to above, was never obtained, and no notice requiring acceleration of rental payments was ever given. Additionally, no turf farming ever took place. Nevertheless, PW paid out of the PW trust account, to the relevant Roche companies, all the management fees required under the Syndicate Deed, and all the rental payments that would have been payable under the sub-lease if a notice of acceleration had been given. That, according to the investors, involved a breach of trust.

The investors were told that PW would receive and control the funds they were subscribing. However, as was noted, PW were not at the time aware that this precise representation was being made. On the other hand, PW were well aware that the investors were being told that they should pay their subscription money

URJ ADAMS v ALEMITE LUBREQUIP PTY LTD (Gleeson CJ) 5

to PW. It came as no surprise to PW when they began to receive the cheques. Those cheques were paid into a PW trust account.

The officers of PW who were involved in this aspect of the matter included Mr Lennon, Mr Ward and Mr Barber. Mr Lennon, in his oral evidence, acknowledged that it was his understanding that when the money was put into the PW trust account, it was being held on trust for the persons who sent in the money, until some event occurred to alter that position. In an affidavit he said: "The moneys were put through the PW Trust Account because it suited Mrs Roche and Price Waterhouse in that it was convenient in enabling Price Waterhouse to set up a proper investors register for the distribution of income in the Turf Farm operation in later years".

However, Mr Lennon also said that it was his understanding that PW's only obligation to the investors was to see that the money received from them was paid to the Roche companies. As a matter of law, that understanding was wrong.

The investors were all told to make their cheques payable to Price Waterhouse's Trust Account.

Mr Ward of PW was away on leave from 6 May to 23 May 1982 and during his absence he asked Mr Barber to look after the matter. Mr Barber said in his evidence that his understanding was that he had to receive the moneys, bank them into the Price Waterhouse trust account, and await the confirmation from the lawyers involved (ie DW, who were Mrs Roche's lawyers) that certain matters had been dealt with before releasing the funds. Those matters, he said, included the giving of a notice. It is clear that, in that connection, he was referring to the rental acceleration notice.

In the events that occurred, Mr Barber paid out, on 13 May 1982, approximately $610,000 to the Roche leasing company, by way of rent, and approximately $85,000 to the Roche management company, by way of management fees. It seems that, after that payment was made, it occurred to Mr Barber that he should check to see that the rental acceleration notice had been given. In truth, the notice had not been given. Mr Barker never saw any such notice, and never called for a copy of it. However, a solicitor from DW told him, erroneously, on 17 May, that such a notice had been given. The solicitors, in that respect, were evidently relying upon Mrs Roche to have done that which she ought to have done.

So far as appears from the evidence, there is no clear explanation of why Mrs Roche did not give the rental acceleration notice. It does not seem to have been in her interests to refrain from giving the notice. The notice was, of course, of considerable practical importance to the obtaining of tax benefits which had been held out to the investors. It is understandable that PW and DW would have taken the attitude that they knew of no reason why the notice would not have been given. Nevertheless, the fact is that it was never given, and PW did not ask to see it before releasing the rental payments upon the assumption that they had been duly accelerated.

Nobody in PW adverted to the matter of the ANZ Bank's consent. As was noted above, it was never obtained.

Although Mr Barber did not seek or obtain confirmation of the rental acceleration notice before he made his payment on 13 May, he did obtain, by way of a letter from DW, confirmation of the execution of the various contractual documents listed above.

Smart J was clearly correct in holding that the amounts of money received from the investors, and paid into the PW trust account, were held upon trust for the investors. There has never been any suggestion that they belonged beneficially to PW. The investors had been told to make out their cheques in favour of the PW trust account, and they had also been told that PW would control the disbursement of the money. Thus, the intention of the investors was clear. As to the intention of PW, it is clear that PW understood that the money was being held on trust, and, as was noted, Mr Lennon in the course of his evidence acknowledged an understanding that the money was being held on trust for the investors unless and until something further happened. Furthermore, PW acted in a manner that was consistent with that understanding. PW did not simply hand over the money to Mrs Roche or her companies. They disbursed the funds in accordance with what they assumed to be the obligations of the investors under the relevant contractual arrangements. They paid management fees to the Roche management company, and they paid rental to the Roche leasing company. They satisfied themselves that the contract documents had been duly executed before they paid the amounts over, and, belatedly and ineffectually, they endeavoured to satisfy themselves that the rental payments were, in fact, due and owing.

I would reject the argument that PW were nothing more than a conduit pipe between the investors and the Roche companies, or that, when they received the funds, they held them on trust for the Roche management company. It was submitted on behalf of the appellant that, because the Syndicate Deed required the management company to receive and disburse the capital of the relevant syndicate, it was therefore the contemplation of the parties, including the investors and PW, that the funds would be received and held by PW on trust for the management company. As Smart J observed, that provision in the Syndicate Deed has to be read in the context of all the relevant documentation and communications. There is no doubt as to the intention of the investors. It had been specifically represented to them that their money would be controlled by PW. The evidence as to the understanding and intention of PW is referred to above. The amounts in question were held in trust for the investors.

It then becomes necessary to consider the terms of the trust upon which the money was held in the PW trust account. There was no instrument of trust. The terms of the trust depend upon the intention of the parties which are to be inferred or imputed from the nature of the transaction and the surrounding circumstances. (Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987)165 CLR 107 at 121.)

The money was paid to PW in the context of a business venture in respect of which PW were to be the accountants and auditors. It was the understanding of the investors, and of PW, that under the contractual arrangements established in respect of the business venture, the investors would become obliged, at an early stage of the venture (late in the financial year ended 30 June 1982, and early in the following financial year) to pay to Roche companies, by way of management fees and accelerated rental payments, the whole of the amounts subscribed to the venture. That was the context in which the amounts were paid into the PW trust account.

From those circumstances, I would conclude that PW held the money upon trust to apply it in accordance with the contractual obligations of the investors. That is consistent with the manner in which PW attempted to conduct themselves.

URJ ADAMS v ALEMITE LUBREQUIP PTY LTD (Gleeson CJ) 7

The claim against PW is not framed in negligence. If, as I consider to be the case, they held the money on trust to pay it in discharge of the liabilities of the investors, and not otherwise, the question whether there was a breach of trust is to be determined by asking whether, when the payments were made, there was a contractual obligation of the part of the investors to make such payments. That is only another way of asking whether, at the time of the receipt by the Roche management company and the Roche Leasing Company of the payments in question, those companies were contractually entitled to receive them. Except in the context of the claim for relief under s85 of the Trustee Act, the honesty or reasonableness of the behaviour of PW is irrelevant. As will appear when I come to the matter of relief, I do not consider that the behaviour of PW was reasonable. However that may be, if and to the extent to which they paid away the amounts they held on trust for the investors, at a time when the investors were not obliged to pay those amounts, and the Roche companies were not entitled to demand them, then there was a breach of trust.

In the Statement of Claim the allegation made is that the money was held on trust not to pay it until certain conditions were fulfilled but the conditions referred to are related back to the contractual obligations of the investors. That amounts, in substance, to the same thing.

In my view, the difficulty in the case lies in determining whether the breach of trust applied to the whole of the payments, or only to the major part.

Leaving to one side for the moment the significance of the failure to obtain the consent of the ANZ Bank, referred to in CL1(c) of the Syndicate Deed, the position as to rental was as follows. No acceleration notice was ever given. However, according to the terms of the sub-lease, some (much smaller) rental payments were due. Indeed, the first rental payment was due on 7 May 1982.

Smart J took the view that, in any event, by reason of CL1(c) of the Syndicate Deed, and the failure to obtain the consent of the ANZ Bank, in the events that occurred there never were any monies payable to either the Roche management company or the Roche leasing company.

An examination of this question requires a closer consideration of the provisions of two of the contractual documents earlier mentioned, that is to say, the Syndicate Deed and the sub-lease to the syndicate. Both of the documents were entered into on 7 May 1982.

The Syndicate Deed recited that the syndicate members wished to form a syndicate and that the syndicate was going to negotiate for, and take a sub-lease of, the relevant land, in the form of a draft sub-lease, a copy of which was annexed. It also recited the proposed sub- sub-lease and the proposal to carry on a business of turf growing on the land.

CL1 provided that the members would constitute a syndicate and that syndicate units would be allocated in certain proportions. There then appeared CLIl(c), which is set out above.

Other provisions of the deed were, so far as is relevant, as follows. The Manager was appointed manager of the syndicate for a period of 10 years from the date of the deed. The duties of the manager were set out. The manager was to be entitled to retain, out of syndicate capital, a management fee of $900 per syndicate unit in respect of the initial contribution of capital ($4,400 per unit) and a further $200 on receipt of the second contribution ($3,700 per unit). The management fee was payable forthwith upon the making by the syndicate members of the contributions of capital required. A management committee was to be established, which was to include representatives of syndicate members.

The manager covenanted with the members to develop the subject land for turf farming in the manner which the manager considered most beneficial to the interests of the members. The manager was to be responsible for the distribution of the income (the rental payments received under the sub-sub-lease), in accordance with the entitlements of syndicate members.

"16(a) The Lessee shall pay to the Lessor 'a fixed rent' which shall be a fixed yearly rental of the amount calculated in accordance with the formula referred to in Ptl of the first Schedule hereto for the period from the date hereof to 30 June 1984, monthly in advance, the first month's rental to be paid in advance on the signing hereof AND shall pay the amount calculated in accordance with the formula referred to in Pt2 of the Schedule hereto for the balance of the term, such rent to be payable annually in arrears forthwith upon receipt of the minimum rent payable to it pursuant to CL15(a) of the sub-sub-lease. And in addition

(b) The Lessee shall pay to the Lessor additional rent in respect of each financial year calculated in accordance with the provisions of Pt3 of the Schedule hereto, such additional rent to be due and payable forthwith by the Lessee upon receipt by the Lessee of the rent payable to it under the sub-sub-lease, or in the event that no such rent is payable, upon the receipt by the Lessee of the net income.

(c) Notwithstanding the provisions of para(a) and para(b) hereof the Lessor may at any time within thirty (30) days after the date hereof serve a written notice on the Lessee requiring the Lessee to pay in advance half of the balance of the fixed rental for the period from the date hereof to 30 June 1984, such payment being due and payable by the Lessee to the Lessor within forty eight (48) hours of the service of such notice. The balance of such rental shall be payable in two (2) equal instalments, the first instalment due and payable on 31 July 1982, and the second instalment due and payable on 31 August 1982.

(h) The Lessee shall under no circumstances be entitled to a refund of any rent paid to the Lessor".

Smart J reasoned as follows. He said that it was an implied term of the sub-lease that it commenced to operate when the Syndicate Deed took effect. Furthermore, he said, CL1(c) of the Syndicate Deed should be understood as a condition precedent. Because the condition precedent was never satisfied, the Syndicate Deed never took effect, and neither did the sub-lease. Hence, no management fees and no rental ever became payable. On that basis, all of the money was paid in breach of trust.

The position is complicated by a matter that I have not so far mentioned, and concerning which the findings of Smart J are not entirely clear. (On the approach taken by his Honour, it was unnecessary for him to investigate the matter in detail.)

In his judgment Smart J dealt, relatively briefly, with what he called "the title position". It appears that the appropriate arrangements were never made for the purpose of vesting title to the subject land in the company that was to grant the head lease to the company that would in turn grant a sub-lease of the land to the syndicate. Of course, the absence of Mrs Roche made any full investigation of this subject rather difficult, and the evidence revealed the existence of an unregistered transfer of part of the land dated 30 April 1982, which was not registered until 14 October 1983.

URJ ADAMS v ALEMITE LUBREQUIP PTY LTD (Gleeson CJ) 9

As was observed by Mr Bathurst QC, for the appellants, there are considerable difficulties about treating CL1(c) as a condition precedent rather than a condition subsequent. The Syndicate Deed and the sub-lease were both executed at the same time. The sub-lease required the first payment of rental to be made forthwith upon its execution. A number of important things were, according to the documents, to happen prior to the expiration of the period of 60 days referred to in CLI(c).

It was argued that the nature of the condition was such that it fell within the principles referred to in Suttor v Gundowda Pty Ltd (1960) 81 CLR 418 at 441. There it was said that a condition to the effect that, if the Treasurer's consent to a contract had not been obtained within a certain time the contract was deemed cancelled, merely rendered the contract voidable at the election of either party or both parties (depending on whether there was default of one party in failing to obtain the consent). However, the judgment in that case makes it clear that the question is ultimately one of the construction of the contract.

Furthermore, as Mason J explained in Perri v Coolangatta Investments Pty Ltd ((1982)149 CLR 637 at 661-662) it is often important to distinguish between conditions precedent to the formation of a contract, and conditions precedent to obligations of performance.

The Syndicate Deed and the sub-lease were clearly inter-dependent. It cannot have been the intention of the parties that the sub-lease would subsist even if the venture collapsed and the syndicate came to an end. Nor can it have been intended that the leasehold arrangements would operate in point of contract even if the Syndicate Deed was void. The entire purpose of the leasehold arrangements was to give effect to the syndicate venture. The leasehold arrangements being for 10 years, the refusal or failure of the mortgagee to give the consent necessary to permit registration went to the heart of the venture.

In the present context, I would not construe the expression "shall... be void ab initio" as meaning "shall... be voidable at the election of either party". Here, the word "void" means what it says. However, the expression "void ab initio" indicates that the condition goes to the performance of obligations under the deed rather than to the initial formation of the contract.

This approach is reinforced, rather than contradicted, by CL15(h) of the sub-lease. It can hardly have been intended by the parties that the syndicate members could have been obliged to pay the accelerated rental, which they could never recover, even though the venture might never be able to be put into operation because the mortgagee would not give the necessary consent.

In my view, on the true construction of the Syndicate Deed and the sub-lease, they were inter-dependent, and unless and until the condition referred to in CLI(c) was satisfied, the investors were not obliged to make any payments of management fees or rental. The failure to obtain the consent within the period of 60 days meant that, at the end of that period, the syndicate deed and sub-lease became void ab initio.

It is unnecessary to consider the consequences of the title problem, but these may provide an additional reason for coming to the same conclusion.

In the result, Smart J was right to conclude that no management fees and no rental ever became payable.

Smart J declined to grant relief, and I see no error in his Honour's reasoning in this respect.

He pointed out that this was a case where a trustee paid money, other than to the beneficiaries, under the erroneous belief that the payee was entitled to the money. This was an honest, but mistaken, mis-application of trust funds. Furthermore, his Honour found that PW failed to act reasonably. In particular, they failed to check on whether the ANZ Bank's consent had been given, and the steps they took about enquiring as to whether the notice of rental acceleration had been given were inadequate. Those steps, for example, fell far short of the steps they would have been required to take in their capacity as auditors. Indeed, it seems to have been steps which they later took as auditors which brought to light the failure to give the acceleration notice. In my view, his Honour was correct in his refusal to excuse the breach of trust

The appeal should be dismissed with costs. The matter should be remitted to Smart J to determine (failing agreement between the parties) the amount of damages payable.

Sheller JA In this matter I have had the benefit of reading judgment preparedby the Chief Justice. I agree with the orders he proposes and in substance with the reasons for them. There is however one matter about which I wish to add some comments.

I agree with his Honour's conclusion that Price Waterhouse held the money paid into its trust account upon trust to pay it out in accordance with the contractual obligations of the investors to make such payments. As his Honour observes the difficulty in the case lies in determining whether the breach of trust applied to the whole of the payments or only to the major part. The Syndicate Deed was central to the proposed business venture. Pursuant to it the syndicate was constituted, the manager appointed and its free fixed. The sub-lease was from the Roche Leasing Co to the syndicate so constituted. The Syndicate Deed and the sub-lease were interdependent. By CLI(c) of the Syndicate Deed, the Deed and the obligations of the parties thereunder (apart from the sub clause) were subject to and conditional upon the consent of the ANZ Bank to the sub-lease and the sub-sub-lease. If such consent was not obtained within sixty days after the date of the Syndicate Deed, 7 May 1982, the Syndicate Deed was to be "void ab initio". CL15(a) of the sub-lease, which was executed on the same day as the Syndicate Deed, provided that the first month's rental was to be paid in advance by the lessee on the signing of the lease. In terms of the trust upon which it held the money received, the question is whether Price Waterhouse was justified in paying any part of the rent on behalf of the investors as members of a Syndicate to the Roche Leasing Company or any part of the management fee to the manager even though the mortgagee's consent to the sub-lease had not been obtained.

Such payments would be in breach of the trust if CL1(c) made the obtaining of the mortgagee's consent a condition precedent to the formation of a binding contract between the parties. I do not think it can be so regarded. To say that for a period of up to sixty days duration after the date of the Syndicate Deed the various obligations apparently undertaken by the parties had no force or effect is unrealistic. It is not easy to understand what was contemplated by the provision that the deed should, in the event of the mortgagee's consent not being obtained within sixty days, "be void ab initio", that is to say devoid of the legal results contemplated (see per Windeyer J in Brooks v Bums Philp Trustee Co Ltd (1969) 121 CLR 432 at 459) from the date it was entered into and throughout its

URJ ADAMS v ALEMITE LUBREQUIP PTY LTD (Sheller JA) 11

existence; see In re Carter and Kenderdine's Contract [1897] 1 Ch 776 at 779 and 782. Whatever its precise effect, the clause seems to have been intended to make an otherwise operative deed inoperative retroactively to the date it was entered into. Until the expiry of the period of sixty days the deed operated to create enforceable obligations.

On the other hand I have no doubt that CL1(c) made the obtaining of the mortgagee's consent a condition precedent to the performance by the parties of some of the obligations they had undertaken. The question is which obligations. In Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 all members of the High Court accepted that the special condition, whereunder the contract was subject to the purchasers' completing the sale of their property, was a condition upon which their obligation to complete the purchase of the vendor's property depended. Their Honours also accepted that, even so, a binding contract had come into existence upon execution and from that time the parties were subject to some obligations. Gibbs CJ, at 541 and Wilson J at 557, said that the purchasers were obliged to pay the deposit and make reasonable efforts to bring about a sale of their property. Mason J at 552 distinguished between enforceable rights with respect to the subject matter of the transaction and the enforceability of the obligation not to prevent fulfilment of the condition. Brennan J, with whose judgment Stephen J agreed, approached the matter in a way which is more easily applicable to the present case. At 566 he referred to the remedy of specific performance and said:

"But where the occurrence of an event upon which the obligations to complete are contingent is not promised, the mere non-occurrence of the event is no breach of contract, and the court will not decree completion of the contract absolutely. In such a case, a decree must be limited to the performance of any promise affecting the occurrence of the contingency, and further performance decreed only subject to the contingency: see Brown v Heffer (1967) 116 CLR 344."

In my opinion until the expiration of sixty days or such earlier time as the mortgagee's consent was obtained the investors' obligations under the Syndicate Deed and the sub-lease were limited to an obligation not to prevent the obtaining of such consent. I do not think that Mason J expressed an opinion inconsistent with this. If in Perri's case, in accordance with the reasons given by Gibbs CJ and Wilson J, the purchasers were under a further enforceable obligation to pay the deposit I do not think in the present case the obligations to pay rent in advance or the manager's fee were analogous. Whether the deposit be treated as an earnest for performance or a part payment of the purchase price it was an amount which the parties had agreed should be paid before the event upon the happening of which the obligation to complete was contingent. By contrast in the present case the payment of rent depended upon the agreement for sub-lease which in tum, together with the payment of the manager's fee, depended upon the constitution of the syndicate. The obtaining of the mortgagee's consent was a condition precedent to the performance of the obligations of the parties under the Syndicate Deed, other than such as affected the occurrence of the contingency, and in consequence to the performance of the sub-lease and in particular the obligation to pay rent.

In my opinion the orders proposed by the Chief Justice should be made.

Matter remitted to the Common Law Division (Smart J) to determine the amount of damages payable by the defendants to the plaintiffs.

Counsel for the appellant: TF BATHURST QC/N PERRAM Solicitors for the appellant: MALLESONS STEPHEN JAQUES Counsel for the respondent: DE GRIEVE QC/CE ADAMSON Solicitors for the respondent: VANDENBERG REID

At a glance

Court

Decision date

Before

Source

Judgment (89 paragraphs)

Parties

Cases Cited (7)

Cited By (2)