Modification of Einstein J's Order 4
119 I agree that Einstein J's order 4 cannot stand. Before Mr Carantinos could hold 43 Riverside Crescent on trust for the partnership, it would be necessary for Mr Carantinos to have either legal or full equitable ownership of that property - for there cannot be a trust without there being trust property that is held by the trustee. For the reasons given by Hodgson JA, there is an open question whether Mrs Carantinos had any beneficial interest in No. 43. It was wrong to declare that Mr Carantinos held No. 43 on trust for the partnership without resolving that question.
120 To the extent to which Mrs Carantinos had any such beneficial interest, the result of the decision of Einstein J, not appealed against, is that she holds it without any obligation to account to the partnership concerning it. It is a further effect of the judgment of Einstein J that she has no obligation to account to the partnership concerning her joint legal ownership of that property. But that does not affect how the beneficial interests in the property lie as between Mr and Mrs Carantinos. If, as between Mr and Mrs Carantinos, Mr Carantinos has a beneficial interest in the property, that beneficial interest is held by him for the benefit of the partnership. Declaration 4 as proposed by Hodgson JA does not say anything about Mrs Carantinos' interest in the property; it relates only to Mr Carantinos' interest, whatever it might prove to be.
121 While I accept that a plaintiff's cause of action and the scope of any account or inquiry must be established at the trial, there are some types of trial that lead to wider enquiries than others. The cases upon which Handley AJA relies to conclude that the inquiry in the present case should not extend to the assets of Mrs Carantinos when no right to any of those assets was established at the trial, seem to me to be distinguishable.
122 McGrory v Alderdale Estate Company Limited [1918] AC 503 concerned a vendor's suit for specific performance of an open contract for the sale of land. The trial judge made an order for specific performance of the contract, if a good title could be made to the land the subject of the inquiry. The judge also ordered an inquiry as to whether a good title could be made. At that inquiry, the purchaser adduced evidence of three defects in title. The vendor gave evidence, over objection, that the purchaser knew of these defects prior to entering the contract. Upon the matter being returned to the trial judge, he held that the evidence of the vendor should not have been allowed, and that if the vendor relied upon waiver of the obligation to make a good title in any respect that ought to have been brought forward at the hearing and embodied in the decree.
123 The Court of Appeal reversed that decision, but the House of Lords restored it. It was an essential part of the decision in the House of Lords that the terms of the Court's decree established the terms of the contract that had been ordered to be specifically performed, and that if there were to be a waiver in any respect of the purchaser's right to receive a good title that would amount to altering the decree itself. Thus, Lord Finlay LC said, at 509:
"The effect of the judgment of the Court of Appeal would be that, having got judgment on a particular contract from the Court, they are to be allowed to adduce evidence before the registrar for the purpose of varying its effect as to title."
124 Viscount Haldane said, at 511:
"The terms of the decree have, in the eye of the law, superseded and excluded all other evidence, and it is too late, if the decree remains unaltered, to try to import new terms in the course of inquiries which follow merely consequentially on the rights which the purchaser has been given as the result of the trial."
125 Similarly, Lord Shaw of Dunfermline said, at 511-512:
"In cases of this kind you start with the decree for specific performance. The time for modification or alteration of the subject-matter of that decree has gone past; if such modification or alteration by reason of alleged waiver or otherwise was desired as being in accordance with the true intention of parties to the contract, that issue should have been the subject of contest in the proceedings for specific performance, and the alteration or modification, whether upon subject-matter or upon title, should have appeared on the face of the decree. Otherwise the decree must stand, with all that the law implies therein, namely, that a good title to the entire subject-matter of the contract shall be given."
126 In the present case, conducting an account in accordance with the orders proposed by Hodgson JA would not involve any variation or qualification of any finding or order of the trial judge.
127 Poulton v Adjustable Cover and Boiler Block Company [1908] 2 Ch 430 was an action brought by a patentee for infringement of the patent. The defendants alleged the patent was invalid, but failed in that defence, in consequence of which the plaintiff obtained an order for an inquiry as to damages. Before that inquiry was heard, the defendant, in reliance upon instances of prior user of the invention of which they had been ignorant at the time of the trial, obtained a revocation of the patent. The substantial question for decision was whether the subsequent revocation of the patent showed that the plaintiffs had sustained no damage. Both Parker J at first instance, and the Court of Appeal, held that substantial damages could be recovered notwithstanding the revocation. The reason by which all judges of the Court of Appeal (Vaughan Williams LJ at 438, Fletcher Moulton LJ at 438-439, Buckley LJ at 440-441) reached that conclusion was that the judgment in the action established the validity of the patent as res judicata between the parties to the action.
128 In the present case, conducting an account in accordance with the orders proposed by Hodgson JA would not involve the calling into question of anything established as a res judicata.
129 In Re Wrightson [1908] 1 Ch 789 was an action brought by some of the beneficiaries of a deceased estate against the trustees seeking a declaration that a particular investment was a breach of trust, an order for administration of the estate by the court, accounts and inquiries concerning the estate, and removal of the trustees. At the trial of the action the trustees admitted the breach of trust. The order of the court was that the trustees pay costs, that the trusts of the will be carried into execution, that "what are usually referred to as the common accounts and inquiries in an administration action should be taken and made" (at 793), that further consideration be adjourned, and any of the parties were to be at liberty to apply. The question arose of whether some of the beneficiaries were entitled, in the taking of accounts, to allege breaches of trust that had not been alleged in the pleadings. Warrington J said, at 799:
"Plainly not. The rules require that in cases of breach of trust particulars shall be alleged in the pleadings, and without amendment it would have been hopeless for the plaintiffs to have sought to charge the trustees with a breach of trust other than that alleged in the pleadings.
Is it the practice of the Court where one breach is proved to direct some roving inquiry with a view of ascertaining whether there are any other breaches of trust? I think plainly not. No instance of the sort has been cited, and if it were the practice the rules requiring particulars to be given would be ridiculous and absurd. It seems to me that, in regard to a breach of trust, that is to say, an active breach of trust, in its active and proper sense, the plaintiffs are not entitled to relief at the trial, except in regard to that which is alleged in the pleadings and proved at the trial."
130 His Honour went on, at 799, to distinguish the situation where an active breach of trust was alleged from that in which accounts were sought on the basis of wilful default.
131 Meagher Gummow and Lehane's Equity Doctrines and Remedies, 4th ed (2002), Butterworths LexisNexis, par [25-035] explains that accounting on the basis of wilful default:
"… means that the defendant must account not only for all receipts and payments actually made by him but also for all moneys which he would have received if he had managed the property prudently."
132 The learned authors go on to say that, other than in the case of a mortgagor seeking an account from a mortgagee in possession,
"… the plaintiff, in order to be entitled to accounts on the basis of wilful default, must allege in his pleading and prove at least one example of wilful default on the part of the defendant, even if the pleading contains such an allegation only as the result of an amendment made at the trial: Sleight v Lawson (1857) 3 K & J 292; 69 ER 1119; Job v Job (1877) 6 Ch D 562; Mayer v Murray (1878) 8 Ch D 224; Re Symons (1882) 21 Ch D 757; Re Youngs (1885) 30 Ch D 421; White v City of London Brewery (1889) 42 Ch D 237; Re Wrightson [1908] 1 Ch 789; Re Wells [1962] 2 All ER 826; [1962] 1 WLR 874."
133 The different bases for taking accounts has also been explained by Giles JA (with whom Sheller and Beazley JJA agreed) in Meehan v Glazier Holdings Pty Ltd [2002] NSWCA 22; (2002) 54 NSWLR 146 at [13]-[14]. Giles JA said that under an order for taking accounts in common form:
"… the accounting party accounts only for what has actually been received and disposed of. The other party to the accounting can challenge the accounting party's account by asserting that more was received (in the old terminology, surcharging) or by asserting that less was disposed of (in the old terminology, falsifying).
There is an alternative basis for taking accounts. An order may be made for taking accounts on the basis of wilful default (sometimes the words are wilful neglect and default). Under such an order the accounting party must account not only for what has actually been received, but also for what should have been received: that is, for what would have been received if the relevant duties of the accounting party had been properly discharged. Thus in Partington v Reynolds (1858) 4 Drew 253 at 256; 62 ER 98 at 99 it was said that on this basis an executor or administrator must account "not only for what he has received, but also for what he might, without his wilful neglect or default have received, although he has not received it"."
134 In Wrightson, an argument was put, that just as a single pleaded and proved example of wilful default in the administration of a trust justified the court in ordering an accounting on the basis of wilful default, in the course of which other examples of wilful default could be alleged, so a single pleaded and proved (or, as in Wrightson, admitted) breach of trust should allow an accounting of the affairs of the trust in the course of which breaches other than those pleaded and proved could be alleged. Warrington J rejected that argument at 799, saying:
"It is well known, of course, that in a case of wilful default, which is quite distinct from active breach of trust, if wilful default is pleaded and if a case is established, then the accounts are directed on that footing. But why is that? It is because there are two perfectly distinct classes of accounts which are directed in cases of this kind - one is the common account, and the other is the account on the footing of wilful default; and if it is shewn that a trustee has been guilty of wilful default, then the second of those forms of account is adopted, and not the first. That is all. If I may put it shortly, what I mean is that there is a kind of character attaching to a trustee which is referred to by the expression "wilful default"; and, if it is proved that he is a trustee coming under that character, then that particular form of account is directed, and not the other. But in the case of a breach of trust there is no general form of account which is substituted for the common account. In cases of breach of trust relief is given in respect of those specific breaches of trust which are proved, and in respect of those only; and it seems to me that is the true distinction between the line of authorities which have been cited with regard to wilful default and those which apply to the present case. As to the former class of cases, there is no question that the rule is that, if wilful default is alleged and if an instance is proved, then the trustees are not in a position to claim to have against them the ordinary account only, but the account must be directed on the footing of wilful default. In my judgment that rule does not apply to cases of breach of trust."
135 The cases in which Warrington J was denying that there could be a "roving enquiry" were ones where an active breach of trust was alleged, and it was sought in an inquiry to allege other and different breaches of trust. Indeed, the power of the court to order an accounting on the basis of wilful default when only one wilful default has been alleged and proved, and yet for other wilful defaults to be alleged in the course of the inquiry, shows that scope of the inquiry is not in all cases restricted to inquiry into matters that have been proved at the trial.
136 In National Broach and Machine Co v Churchill Gear Machines Ltd [1965] 1 WLR 1199 the English Court of Appeal distinguished In Re Wrightson. National Broach was an action brought by the licensor of intellectual property relating to gear shaving machines against a former licensee, alleging that the former licensee had manufactured and marketed its own gear shaving machines by using confidential information that had been supplied to it by the licensor. At the trial, the licensor pleaded, particularised and established over 100 instances of wrongful user of confidential information. The trial judge, Cross J, granted an injunction restraining the former licensees from using confidential information of any kind the property of the plaintiffs, and from offering for sale any machines or parts made with the assistance of the plaintiffs' confidential information. He also directed an inquiry as to the damages suffered by the licensor, but limited that inquiry to damages suffered by them by reason of the use of the confidential information contained in the drawings specified in the further and better particulars. The Court of Appeal removed that restriction on the inquiry. Willmer LJ said, at 1202-1203:
"… Cross J thought that the inquiry should be limited to breaches of confidence that had already been proved and admitted, and that it would be wrong to direct a roving inquiry to ascertain whether the defendants had committed any further breaches. In reaching that conclusion he based himself on the words used by Warrington J in In re Wrightson [1908] 1 Ch 789. What was in issue in that case was an allegation of breach of trust on the part of a trustee, and with all respect to Cross J I do not think that the decision is of much assistance in the very different context of this case. In my judgment, Mr. Aldous was well founded in submitting that this case is more analogous to a passing-off action. In such cases the settled practice is to direct an inquiry covering the same field as the injunction which is granted. That was the effect of the order made by Harman J, as recited by Roxburgh J, in Aktiebolaget Manus v. R. J. Fullwood & Bland Ltd (1949) 66 RPC 285, 286 . I would refer also to A. G. Spalding & Brothers v. A. W. Gamage Ltd (1915) 32 RPC 273, HL , where the House of Lords restored an order made by Sargant J for an inquiry "what damages the plaintiffs had sustained by reason of the acts, the repetition of which was restrained by the judgment." In my judgment, the plaintiffs here are entitled to an order in similar terms, and on this point I would allow the cross-appeal."
137 Similarly, Harman LJ, at 1204-1205 said that the course adopted by Cross J:
"… is not in accordance with the practice in actions of this nature. It is only in patent actions that the rules (Ord. 53A, r. 12) specifically direct that instances only shall be given, but a similar practice prevails in trade mark and passing-off actions where, in my experience, the scope of the inquiry as to damages corresponds to that of the injunction granted - see A. G. Spalding & Brothers v. A. W. Gamage Ltd - and it seems to me that it would unduly lengthen the trial of this kind of action for a plaintiff to be obliged to give in advance details of every instance of wrongful dealing on which he intends to rely on the inquiry. The plaintiffs here proved all, or practically all, the instances given in the particulars, and I think that the inquiry into damages in those circumstances ought to follow the form of the injunction, which is perfectly general in its terms, that is to say,
"any confidential information … in any drawings relating to the plaintiffs' … machines or any parts thereof supplied by the plaintiffs for the purpose of manufacturing under licence such machines …"
The order for delivery up is couched in similar general terms. Cross J. supported his decision by reference to In re Wrightson , a decision of Warrington J in an administration action, but that case does not seem to me to be in point. There, the plaintiff had taken a common decree for administration, the defendant admitting a breach of trust alleged in the statement of claim. All inquiries were stayed. Subsequently the plaintiff took out a summons to proceed with the inquiries and for certain further inquiries based on breaches of trust not mentioned in the pleadings. Warrington J refused to accede to that claim on the footing that no claim on a wilful default basis had been made, and, in the absence of that, no breach of trust not alleged in the pleadings could be relied on. I do not find that that decision in any way covers the present case, and I would vary the order by directing an inquiry corresponding to the terms of the injunction."