Chan v Zacharia

[1984] HCA 36

High Court of Australia|1984-06-07|Before: Dawson JJ, Dixon J, Parker J

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Source facts

Court

High Court of Australia

Decision date

1984-06-07

Before

Dawson JJ, Dixon J, Parker J

Source

Original judgment source is linked above.

Judgment (68 paragraphs)

[1]

High Court of Australia Gibbs C.J. Murphy, Brennan, Deane and Dawson JJ. Chan v Zacharia [1984] HCA 36

[2]

The facts of this case are fully stated in the judgment of my brother Deane which I have had the advantage of reading.

[3]

There can be no doubt that if the agreement to grant Dr. Chan a lease of the partnership premises at Mansfield Park had been made before the partnership had been dissolved, Dr. Chan would have held any interest which he acquired under that agreement on a constructive trust for the partnership between himself and Dr. Zacharia. It is firmly established by a line of authorities which includes Featherstonhaugh v. Fenwick [14] , Clegg v. Fishwick [15] , Clegg v. Edmondson [1] , and In re Biss; Biss v. Biss [2] that a partner who, without the consent of his co-partner, obtains a renewal of a lease of the partnership premises in his own name, prima facie holds the lease on a constructive trust for the partnership. The expression "renewal" in this statement includes the grant of a new lease, whether or not there was a right of renewal of the lease originally held by the partners. The Court of Appeal in In re Biss; Biss v. Biss drew a distinction between two classes of cases - one (of which trustees form a notable example) whose members are absolutely incapable of retaining for themselves the benefit of a renewal, and the other (which includes partners) in which there is no more than a rebuttable presumption of fact that the person concerned is incapable of retaining that benefit. If, as the judgment of Romer L.J. [3] in that case suggests, the second class consists of persons who do not clearly occupy a fiduciary position, it is difficult to see why partners should fall within it, since, as Dixon J. said in Birtchnell v. Equity Trustees, Executors and Agency Co. Ltd. [4] : "The relation between partners is, of course, fiduciary." However, the distinction between the two classes is well recognized in the authorities and may be drawn, not between persons who owe a fiduciary duty and those who do not, but because of the nature of the particular fiduciary duty in question. That seems to be the view of so distinguished an equity lawyer as Parker J., who, in Griffith v. Owen [5] , explained very clearly the principles involved:

[4]

The principle of Keech v. Sandford [6] is primarily applicable to renewal of leases, and depends partly on the nature of leasehold property and partly on some fiduciary relationship or duty existing on the part of the person whom it is sought to declare a trustee towards the persons who seek to have the trust declared. In the case both of leases renewable by right or custom and of leases not so renewable the renewal is prima facie considered to have been obtained by virtue of the interest which the person obtaining the renewal has in the property, and accordingly the renewed lease is prima facie looked on as a graft on the original interest and subject to the same trusts or limitations. In some cases the person who obtains the renewal is allowed, in others he is not allowed, to shew that, in spite of the nature of the property, there is in the particular circumstances nothing inequitable in his claiming the renewed lease for his own benefit. Whether he is or is not allowed to do this depends on the particular fiduciary relationship or duty existing on his part: see the judgment of Collins M.R. in In re Biss. Thus a trustee is never allowed to do this, but a mortgagee is. I think it clear, however, that when once the fiduciary relationship or duty is established on the part of the person obtaining the renewal the onus of proving that there is nothing inequitable in his claiming to retain the benefit for himself rests with him. The onus that lies on a partner of rebutting the presumption is not easily discharged: see Clegg v. Edmondson [7] cited in In re Biss; Biss v. Biss [8] . The presumption could not be rebutted unless the partner who had obtained the renewal could at least show that it was obtained without any breach of the obligations which were cast on him by the partnership relation. 1. (1810) 17 Ves. 298, at p. 311 [34 E.R. 115, at p. 120]. 2. (1849) 1 Mac. & G. 294, at pp. 298-299 [41 E.R. 1278, at p. 1280]. 3. (1857) 8 De G. M. & G. 787, at pp. 806-807 [44 E.R. 593, at p. 601]. 4. [1903] 2 Ch. 40, at pp. 56-57, 61-62. 5. [1903] 2 Ch., at p. 61. 6. (1929) 42 C.L.R. 384, at p. 407. 7. [1907] 1 Ch. 195, at pp. 203-204. 8. (1726) Sel. Cas. t. King 61 [ 25 E.R. 223]; 2 W. & T. (7th ed.), p. 693. 9. (1857) 8 De G. M. & G., at p. 807 [44 E.R., at p. 601]. 10. [1903] 2 Ch., at p. 62.

[5]

In the present case, the new lease was obtained after the partnership had been dissolved but before the affairs of the partnership had been wound up. After the dissolution, the obligations of the partners continued so far as was necessary to wind up the affairs of the partnership: see s. 38 of the Partnership Act 1891-1975 S.A., as amended. In those circumstances the obligation of "perfect fairness and good faith" which is owed by one partner to another continued: see Lindley on Partnership, 14th ed. (1979), p. 430. In Thompson's Trustee v. Heaton [9] Pennycuick V.-C. said that it follows "that where the property of a dissolved partnership includes a leasehold interest, then subject to any other arrangement which may be made between the partners concerning that interest, each of the former partners owes the same obligation to the other former partner in respect of that interest as he did while the leasehold interest remained the partnership property ". That statement is, in my respectful opinion, correct if it is understood to be limited to the case of a partnership which has not been completely wound up, and in which the leasehold interest remains the property of the former partnership. Thompson's Trustee v. Heaton concerned the purchase of a reversion of a lease, which may stand on a different footing from the renewal of a lease, but whether or not the conclusion reached by Pennycuick V.-C. in that case was correct, a matter on which I need express no opinion, I consider that after the dissolution of a partnership which has not been fully wound up, a partner is under the same restrictions with regard to the renewal of a lease which remains a partnership asset as if he were still a partner. I cannot accept the correctness of the statement of the learned editors of Jacobs' Law of Trusts in Australia, 4th ed. (1977), p. 236, par. 1308, n. 30, where, after saying that there is no irrebuttable presumption of law that a partner taking a renewed lease is a constructive trustee of it for the partnership, but a presumption of fact which may be rebutted, the learned editors continue: "Where the partnership has been dissolved or abandoned there is an a fortiori case, and not even a presumption to rebut." Nicholson v. Gander [10] , which is cited as authority, does not support that proposition. It is doubtful whether that was a case of partnership [11] but, if it was, the enterprise had been abandoned and nothing remained to be wound up, and the authority to enter land for the purpose of prospecting for minerals, which was the subject of the proceedings, was not founded on or connected with an earlier authority which had belonged to the parties to the enterprise and which had expired before the new authority was granted.

[41]

There is no suggestion in the present case that the partnership was insolvent. That being so, both before and upon its dissolution, each of the two doctors had an undivided beneficial interest in the totality of the general assets of the partnership. After the dissolution, each was entitled to insist that those general assets be applied in the winding up of the partnership in accordance with the provisions of the Act and, as regards any surplus after payment of debts, liabilities and expenses, the partnership agreement. Subject to the effect of particular provisions of the partnership agreement (e.g., cl. 21 as to "chattels of the partnership" and cl. 26(a) as to goodwill) which are not presently in point, neither doctor had a separate ascertained beneficial share or interest in any particular partnership asset: see, generally, Livingston v. Commissioner of Stamp Duties (Q.) [17] ; Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. [18] . Neither was entitled to claim for himself the benefit of either the residue of the current lease or of the option for a further lease. The beneficial interest in the rights under the lease was partnership property which, under the complementary provisions of the partnership agreement, the Act and the general law, was, if possible, to be disposed of by sale in the winding up of the partnership (see Hugh Stevenson & Sons Ltd. v. Aktiengesellschaft Fur Cartonnagen-Industrie [19] ; s. 39 of the Act, and cl. 26 (above) of the partnership agreement): "wherever the legal estate may be, whether it is in the partners jointly or in one partner or in a stranger it does not matter, the beneficial interest belongs to the partnership, with an implied trust for sale for the purpose of realising the assets and for the purpose of giving to the two partners their interests when the partnership is wound up and an account taken": per Romer L.J., In re Bourne; Bourne v. Bourne [20] . After the dissolution of the partnership, the two doctors held the legal rights under the lease, including the option, as trustees for those entitled to share in the proceeds of the realization of partnership assets: see In re Fuller's Contract [21] and Spence v. Federal Commissioner of Taxation [22] .

[43]

It was submitted on behalf of Dr. Chan that the above conclusion that the doctors held the legal rights under the lease as trustees was inconsistent with the comments of Lord Westbury in Knox v. Gye [23] to the effect that the surviving partner in that case was not, after the dissolution of the partnership upon the death of his partner, a trustee of any of the partnership assets vested in his name or received by him and that "[t]here is nothing fiduciary between the surviving partner and the dead partner's representative, except that they may respectively sue each other in Equity". Those comments must, however, be understood in the context of Lord Westbury's view that a surviving partner became the owner of the whole of the partnership assets "both at Law and in Equity" and that the only right of the representative of a deceased partner was to an account and payment of "that portion of the clear balance that accrues to the deceased's share and interest" [24] . So understood, his Lordship's comments find no real support in the speeches of any of the other members of the House who constituted the majority (see per Lord Colonsay [25] and per Lord Chelmsford [26] ) and should not now be followed even in the context of a case of dissolution of partnership by death. It is now established, under the general law as reinforced by the provisions of Partnership Acts and in the absence of overriding provisions of a particular partnership agreement (see Attorney-General v. Boden [27] ), that the legal representative of a deceased partner has "an unascertained interest in every single asset of the partnership, and it is not right to regard him as being merely entitled to a particular sum of cash ascertained from the balancesheet of the partnership as drawn up at the date of his death": per Romer J., Manley v. Sartori [28] ; cited, with approval, by Rich and Williams JJ., in Trustees Executors and Agency Co. Ltd. v. Federal Commissioner of Taxation [29] . In that regard, subsequent elucidation of partnership law has confirmed that the "convincing reasoning" of Lord Hatherely L.C. in his dissenting speech in Knox v. Gye should be accepted as correct: see e.g., per Lord Atkinson, Hugh Stevenson and Sons Ltd. v. Aktiengesellschaft Fur Cartonnagen-Industrie [30] ; In re Falk [31] ; Rees v. Duncan [32] . Notwithstanding the strictures of authorities as eminent as Lord Westbury and Sir Frederick Pollock (see Pollock's Law of Partnership, 13th ed. (1937), pp. 141-142), there is neither metaphor nor inaccuracy in the description, in the ordinary case, of a partner or of surviving a partner as a trustee of a particular item of partnership property which is legally vested in his name but the "beneficial interest" in which "belongs to the partnership": In re Bourne [33] ; and see, generally, Gordon v. Gonda [34] .

[54]

The variations between more precise formulations of the principle governing the liability to account are largely the result of the fact that what is conveniently regarded as the one "fundamental rule" embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the "use of fiduciary position" doctrine is but an illustration or part of a wider "conflict of interest and duty" doctrine (see, e.g., Phipps v. Boardman [45] ; N.Z. Netherlands Society "Oranje" Inc. v. Kuys [46] ), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee: see Keith Henry & Co. Pty. Ltd. v. Stuart Walker & Co. Pty. Ltd. [47] . That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed. In some, perhaps most, cases, the constructive trust will be consequent upon an actual breach of fiduciary duty: e.g., an active pursuit of personal interest in disregard of fiduciary duty or a misuse of fiduciary power for personal gain. In other cases, however, there may be no breach of fiduciary duty unless and until there is an actual failure by the fiduciary to account for the relevant benefit or gain: e.g., the receipt of an unsolicited personal payment from a third party as a consequence of what was an honest and conscientious performance of a fiduciary duty. The principle governing the liability to account for a benefit or gain as a constructive trustee is applicable to fiduciaries generally including partners and former partners in relation to their dealings with partnership property and the benefits and opportunities associated therewith or arising therefrom: see Birtchnell v. Equity Trustees [48] ; Consul Development Pty. Ltd. v. D.P.C. Estates Pty. Ltd. [49] .

[62]

In In re Biss, Collins M.R. [64] included partners in "the class of cases" in which the relevant presumption is "a rebuttable presumption of fact". It has been suggested (see, e.g., S. Cretney The Rationale of Keech v. Sandford, The Conveyancer and Property Lawyer, vol. 33 (N.S.) (1969), 161, at pp. 175-176 ) that his comments to that effect were the result of an erroneous view that the relationship between partners is not a fiduciary one. No real basis for that suggestion is, however, to be found in the Master of the Rolls' judgment since he neither expressed the view that the partnership relationship was not fiduciary nor propounded the fiduciary nature of a relationship as determinative of whether the presumption was irrebuttable. The closest he came to seeking to identify a criterion for determining whether the presumption was irrebuttable was his reference [65] to "possession" with "the oppor tunity of renewal acting upon the goodwill that accompanies it". On the other hand, Romer L.J. [66] remarked that the relevant presumption was irrebuttable if the "person obtaining the renewal occupies a fiduciary position" and indicated [67] his acceptance of the observation of Turner L.J. in Clegg v. Edmondson [68] that he was "not prepared to say that in no case can a partner during the continuance of the partnership contract for a new lease to be granted to himself of property which is in lease to the partnership without the new lease being held to be subject to trusts for the benefit of the partnership". It would seem to follow that Romer L.J. did not see the partnership relationship as a fiduciary one. Such a conclusion is difficult to reconcile, however, with his Lordship's actual references to the nature of the partnership relationship: "in ordinary cases concerning the carrying on of the partnership business he is an agent for the partners"; "he clearly owes a duty to his co-partners not to acquire any special advantage over them by reason of his position" and "partners, between whom the utmost good faith is required by a Court of Equity" [69] . It may be that the solution is to be found in the difficulty which occasionally exists in determining whether the fiduciary obligations of a partner extend to particular property or to what is not obviously a partnership endeavour and in Romer L.J.'s distinction [70] between a case where it could be said that the person renewing the lease "clearly occupied a fiduciary position in the matter " (emphasis added) and the case where it could not. Notwithstanding the difficulties and differences in and between the judgments of Collins M.R. and Romer L.J. in In re Biss, there are clear statements in both judgments (with each of which Cozens Hardy L.J. agreed) which support the conclusion that the presumption that a partner holds a renewed lease as constructive trustee - or, as I would enunciate the primary rule in Keech v. Sandford [71] the presumption that the renewed lease was obtained by use of the partner's fiduciary position - is a rebuttable one. Those statements are consistent with overall authority and should be accepted as correct and applicable both to the case where the renewed lease is obtained by a partner in a subsisting partnership and the case where the renewed lease is obtained by a member of a partnership which has been dissolved but whose assets are in the course of realization: see Clegg v. Fishwick [72] where Lord Cottenham L.C. held that the legal representative of a deceased partner had a "prima facie case" to assert an interest in a renewal of a lease obtained by the surviving partners after the partnership had been dissolved by the death; Featherstonhaugh v. Fenwick [73] ; Clegg v. Edmondson; Metlej v. Kavanagh [74] ; but cf. Thompson's Trustee v. Heaton [75] .

[65]

Many of the statements of the general principle requiring a fiduciary to account for a personal benefit or gain are framed in absolute terms - "inflexible", "inexorably", "however honest and well-intentioned", "universal application" - which sound somewhat strangely in the ears of the student of equity and which are to be explained by judicial acceptance of the inability of the courts, "in much the greater number of cases", to ascertain the precise effect which the existence of a conflict with personal interest has had upon the performance of fiduciary duty: see per Lord Eldon, Ex parte James [76] ; per Rich, Dixon and Evatt JJ., Furs Ltd. v. Tomkies [77] . The principle is not however completely unqualified. The liability to account as a constructive trustee will not arise where the person under the fiduciary duty has been duly authorized, either by the instrument or agreement creating the fiduciary duty or by the circumstances of his appointment or by the informed and effective assent of the person to whom the obligation is owed, to act in the manner in which he has acted. The right to require an account from the fiduciary may be lost by reason of the operation of other doctrines of equity such as laches and equitable estoppel: see, e.g., Clegg v. Edmondson [78] . It may still be arguable in this Court that, notwithstanding general statements and perhaps even decisions to the contrary in cases such as Regal (Hastings) Ltd. v. Gulliver [79] and Phipps v. Boardman [80] , the liability to account for a personal benefit or gain obtained or received by use or by reason of fiduciary position, opportunity or knowledge will not arise in circumstances where it would be unconscientious to assert it or in which, for example, there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interests of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed: cf. Peso Silver Mines Ltd. (N.P.L.) v. Cropper [81] . In that regard, one cannot but be conscious of the danger that the over-enthusiastic and unnecessary statement of broad general principles of equity in terms of inflexibility may destroy the vigour which it is intended to promote in that it will exclude the ordinary interplay of the doctrines of equity and the adjustment of general principles to particular facts and changing circumstances and convert equity into an instrument of hardship and injustice in individual cases: see Canadian Aero Service Ltd. v. O'Malley [82] ; Cretney, loc. cit., pp. 168ff; Oakley, Constructive Trusts (1978), pp. 57ff. There is "no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them": per Lord Selborne L.C., Barnes v. Addy [83] .