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[2002] NSWCA 375
respondent. Appeal dismissed with costs; application for leave to appeal refused with costs.
The Court of Appeal dismissed Citibank's appeal. The respondents paid five cheques to a man (Brachmanis) who induced the payments by false representations about Sears franchises and property investments. The court found pervasive fraud and that no genuine contracts justified the payments. Because the drawer remained the true owner of the cheques, Citibank's collection of the proceeds into the fraudster's account amounted to conversion. Citibank could not rely on the Cheques Act defence because it failed to prove it acted without negligence. The appeal was dismissed and leave to appeal refused.
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1,773 words · generated 07/08/2026
This is an appeal from a primary judgment awarding the respondents, Mr Steven Papandony and Gannemon Pty Limited, approximately $993,792 plus interest and costs, against Citibank Limited for conversion of the proceeds of five cheques. The cheques were drawn by the first respondent on a St George Bank account funded by Lotto winnings and handed to one Timothy Brachmanis. Brachmanis presented and deposited the cheques into his personal Citibank account. The cheques were cleared and Citibank credited his account. Large withdrawals depleted the account and the respondents received no benefit corresponding to the amounts paid.
1 cited instrument linked from this judgment.
The primary judge (Gzell J) found that the cheques had been procured by fraud and that no concluded contracts entitled the payees to retain the cheques or their proceeds. He therefore held Citibank liable for conversion and rejected the bank’s statutory defence under s 95(1) of the Cheques Act 1986 (Cth) because the bank had not proved it acted without negligence.
Citibank appealed, challenging findings of fraud, findings that there were no concluded contracts, the primary judge’s refusal to re-open the evidence to admit additional documents, and the rejection of the s 95 defence. The Court of Appeal (Hodgson JA, with Meagher JA and Heydon JA agreeing as to outcome) dismissed the appeal and refused leave to appeal further (paras 1–5, 69). Hodgson JA’s reasons are the principal text analysed here.
The Court’s decision rests on two linked strands:
Factual findings that supported an inference of a pervasive, all-embracing fraud by Brachmanis. Hodgson JA set out the central facts: cheques totaling nearly $1 million were all paid into Brachmanis’ personal account which was overdrawn prior to the transactions; no other deposits were made into that account in the period and the funds were rapidly dissipated; the respondents obtained no corresponding benefit (no shops opened; Parramatta property never transferred to Brachmanis or his entities; Duffys Forest purchased only months later by a different Brachmanis company at a different price) (paras 59–63). The documentary arrangements the respondents relied on (territory reservation agreements, shareholders' agreements, investment summaries, mortgages) were held to be illusory, uncertain, or not imposing obligations on the entities to which cheques were purportedly payable (paras 54–56, 61–62).
Legal application of the established rule that where a cheque is procured by fraud and there is no concluded contract, the drawer remains the true owner and is entitled to immediate possession; a collecting bank that pays the proceeds to the fraudster converts the drawer’s property (paras 36, 64–66). Hodgson JA explained that, given the facts pointing to comprehensive fraud and illusory consideration, the respondents were not reduced to pursuing rescission of voidable contracts but could, on learning the true state of affairs, demand immediate return of the cheques; Citibank’s collection and crediting of proceeds was therefore conversion (paras 64–66).
On the statutory defence, Hodgson JA emphasised the Cheques Act provision (s 95(1)) that relieves a collecting bank of liability only where it received payment in good faith and without negligence. The bank failed to call evidence about its procedures and the manner of deposit; the evidence allowed a reasonable inference that bank procedures were not followed and that the teller accepted deposits without superior approval. The Court therefore rejected Citibank’s s 95 defence (paras 43–44).
The Court also commented (obiter) on a contested legal point: whether subsequent rescission of a voidable contract can convert a previously authorised dealing into an actionable conversion. Hodgson JA adhered to the approach in Shirlaw v Lewis, that rescission should not retrospectively create conversion, and expressed respectful disagreement with Hunter BNZ v Maloney to the extent that it suggests otherwise (paras 67–68). He treated detailed resolution of that question as unnecessary to decide the appeal on these facts (para 66).
Before this judgment, authorities such as Bute (Marquess) v Barclays Bank Ltd, Australian Guarantee Corporation Ltd v State Bank of Victoria, and Hunter BNZ Finance Ltd v ANZ (Victorian decisions) were available to support the proposition that a drawer who has been induced to make payment by fraud remains the true owner where no concluded contract exists. Competing precedents (notably Hunter BNZ v Maloney in New South Wales) have been read to permit relation-back principles to allow a rescinding plaintiff to sue for conversion where the funds have passed to third parties.
After this decision, the Court of Appeal in Citibank v Papandony reaffirmed the rule that, in cases of pervasive fraud and absent concluded contractual entitlement, the drawer retains title and can treat the cheque as property subject to immediate recovery or to seek injunctive relief to prevent presentation. The Court made clear that a collecting bank must prove absence of negligence to invoke s 95(1). The decision also signalled the appellate bench’s reluctance to allow subsequent rescission to be used to manufacture retrospective conversion against otherwise intervening third parties, at least as an obiter preference for Shirlaw’s approach over Hunter BNZ v Maloney. Hodgson JA did not fully decide the point but strongly indicated the policy concerns that militate against retrospective conversion of otherwise lawful dealings (paras 67–68).
Para 59: "All cheques were paid into Mr Brachmanis' personal account ... over $900,000 was dissipated ... the respondents received no benefit." Plain-English: The money went straight into the fraudster’s personal account, and almost all of it vanished; the people who paid it got nothing for their money.
Para 65: "If the respondents had learned the true facts before the cheques had been presented for payment, they could, without first avoiding any contract, have demanded immediate return of the cheques ... there was no concluded contract that could justify retention." Plain-English: Because there were no real contracts backing the payments, the cheque drawer could simply ask for their cheques back and stop them being cashed, they did not need to undo any contract first.
Para 44: "The bank has not established that it acted without negligence and I reject the statutory defence." Plain-English: Citibank did not show it followed proper procedures and therefore cannot rely on the statutory protection that would otherwise shield a bank who honestly and carefully collected a cheque.
Paras 67–68: "If ... there had been voidable contracts ... there would still be problems for the appellant ... if what the appellant did at the time had been no conversion ... I do not think subsequent rescission could change this into a conversion." Plain-English: Even if the transactions were only voidable (not void), the bank might still have problems; but if the bank’s actions were lawful when they happened, a later rescission by the drawer should not turn that earlier lawful conduct into conversion.
This decision is triggered where:
Large-value cheques are paid to a single intermediary who deposits them into a personal account, especially where that account was overdrawn or otherwise not a proper recipient account (paras 21, 31, 59).
The transactional documentation is illusory, uncertain, or fails to impose enforceable obligations on the purported recipients (paras 54–56, 61–62).
The payee or recipient is the perpetrator of the fraud and no genuine contractual entitlement to funds exists at the time of payment (paras 31, 64–66).
A collecting bank cannot explain or justify how it handled deposits, and the evidence allows an inference that proper procedures were not followed (paras 41–44).
In such fact patterns the drawer may retain title and be able to sue for conversion, and a bank’s defence under s 95(1) will fail if the bank cannot demonstrate good faith and absence of negligence.
This decision is a Court of Appeal authority in New South Wales and hence persuasive (and binding on lower courts in NSW) on the points of conversion and the statutory defence under the Cheques Act where facts are similar. Hodgson JA applied and distinguished prior authorities (notably Bute and the Victorian authorities) and indicated an obiter preference for the Shirlaw approach over Hunter BNZ v Maloney on the effect of rescission. Where later courts face similar fact patterns, pervasive fraud, illusory documents, funds paid into a fraudster's personal account, and unexplained bank handling, Citibank v Papandony provides clear guidance: treat the payments as property of the drawer unless the bank proves it acted without negligence.
Practitioners should therefore expect courts to examine with care whether: (a) the recipient had a real contractual entitlement at the time; (b) the collecting bank followed procedures; and (c) the funds were dissipated in a way consistent with fraud rather than business failure.
The precise outer boundaries of when a rescinding plaintiff can recover by way of conversion against a bank or bona fide third-party remain unresolved. Hodgson JA expressed disagreement with Hunter BNZ v Maloney and favoured Shirlaw v Lewis, but he did not have to decide the point squarely (paras 67–68). A future case with the critical facts on that specific legal question would be necessary to settle it definitively.
The case leaves for future decision finer questions about when documents said to create rights are merely "illusory" versus being "voidable" and how that classification affects third-party rights. Hodgson JA’s analysis rests heavily on the absence of enforceable obligations and the pattern of dissipation (paras 54–63), but other fact patterns might require more granular assessment.
The statutory defence under s 95(1) depends on the bank proving it acted in good faith and without negligence. Citibank failed the burden here because it did not call evidence. The judgment does not set out a closed list of practices that suffice to establish absence of negligence; banks must ensure detailed, contemporaneous procedural records to make out that defence.
The role of agency and apparent authority where the recipient is simultaneously the director/agent of a putative corporate payee but is the perpetrator of the fraud remains delicate. Hodgson JA held the agent-perpetrator's appropriation did not vest title in the payees here (paras 31, 61–62), but the boundaries between effective agency, apparent authority, and fraudulent self-dealing can require careful, fact-specific analysis.
Final note: This analysis is based solely on the text of Citibank Limited v Papandony & Anor. [2002] NSWCA 375 as provided above. It explains the Court of Appeal’s reasoning, the legal rules applied, and potential issues that would matter in similar factual patterns. This is general legal information, not legal advice; I can make mistakes. Before you act on, rely on, or use any draft or interpretation here, get a qualified Australian lawyer to check it.
CITATION : Citibank Limited v. Papandony & Anor. [2002] NSWCA 375 FILE NUMBER(S) : CA 40685/02 HEARING DATE(S) : 1 November 2002 JUDGMENT DATE : 21 November 2002
Citibank Limited - appellant PARTIES : Steven Papandony - 1st respondent Gannemon Pty. Limited - 2nd respondent JUDGMENT OF : Meagher JA at 1; Heydon JA at 2; Hodgson JA at 3
LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT SC 50148/01 FILE NUMBER(S) : LOWER COURT Gzell J JUDICIAL OFFICER :
COUNSEL : Mr. P.M. Wood for appellant Mr. B. McClintock SC with Ms. K. Traill for respondents SOLICITORS : Coudert Brothers, Sydney for appellant Christopher Levingston & Associates, Sydney for respondents CATCHWORDS : BANKING - BILLS OF EXCHANGE - Cheques - Conversion - Drawing procured by fraud - No concluded contract - Drawer remains true owner and entitled to immediate possession. LEGISLATION CITED : Cheques Act 1986 (Cth), s.95(1) Associated Midland Corporation Ltd. v. Bank of New South Wales [1983] 1 NSWLR 533 Australian Guarantee Corporation Ltd. v. State Bank of Victoria [1989] VR 617 Bavins v. London & South Western Bank Ltd. [1900] 1 QB 270 Bute (Marquess) v. Barclays Bank Ltd. [1956] 1 QB 202 Hunter BNZ Finance Ltd. v. ANZ Banking Group Ltd. [1990] VR 41 CASES CITED: Hunter BNZ Finance Ltd. v. C.G. Maloney Pty. Ltd. (1988) 18 NSWLR 420 Midland Bank PLC v. Brown Shipley & Co. Ltd. [1991] 1 Lloyds LR 576 Orix Australia Corporation Ltd. v. M. Wright Hotel Refrigeration Pty. Ltd. (2000) 155 FLR 267 Pioneer Construction Material Pty. Ltd. v. Millsom [2002] NSWCA 258 Shirlaw v. Lewis (1993) 10 ACSR 288 Tate v. The Wilks & Dorset Bank Ltd. (1899) Vol 1 Legal Decisions Affecting Bankers 286 DECISION : Appeal dismissed with costs. Application for leave to appeal refused with costs.
IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40685/02 SC 50148/01
MEAGHER JA HEYDON JA HODGSON JA
Thursday 21 November 2002 CITIBANK LIMITED V. PAPANDONY & ANOR. Judgment 1 MEAGHER JA: I agree with Hodgson JA. 2 HEYDON JA: I agree with paragraphs [3]-[66] and [69] of Hodgson JA's reasons for judgment, leaving the issues discussed in [67]-[68] to a case in which it is necessary to decide them. 3 HODGSON JA: On 14 May 2002, in proceedings brought by the respondents Steven Papandony and Gannemon Pty. Limited against the appellant Citibank Limited, Gzell J gave reasons for judgment in which he indicated an intention to give judgment for the respondents for $993,792.00 plus interest, and to order the appellant to pay the respondent's costs; and he directed the parties to bring in Short Minutes of Orders to that effect. 4 Before the primary judge made orders, the appellant applied to re-open certain issues dealt with in the reasons for judgment, seeking leave to lead further evidence and to cross-examine the first respondent, and also seeking an order for further discovery. On 2 August 2002, the primary judge dismissed that application; and it appears that final orders were made in accordance with the judgment of 14 May 2002 on 5 August 2002. 5 The appellant appeals against the orders made on 5 August 2002, challenging certain identified aspects of the judgments of 14 May 2002 and 2 August 2002.
CIRCUMSTANCES 6 I will begin by outlining the facts of the matter which are either undisputed or clearly proved. 7 In doing so, I will include reference to ten exhibits to an affidavit of the first respondent which were not tendered during the hearing before the primary judge. The appellant sought to introduce these documents into the case in its application to re-open, and it challenges the primary judge's decision on that application principally on the basis that those documents should have been admitted into evidence, and the judgment then reconsidered having regard to those documents. It is the contention of the appellant that the case should have been determined on the basis that those documents were in evidence, and that the appeal should be determined on that basis. 8 In my opinion, it is convenient to consider the appeal as if those documents were in evidence: if the view is reached that the appeal fails on that basis, that will be the end of the matter. Otherwise, it will be necessary to consider whether the primary judge erred in refusing to allow those documents to be tendered. 9 The respondents' claim was for the conversion of five cheques drawn as follows by the first respondent on an account with St. George Bank in the name of the second respondent: Date Payee Amount 24 August 1998 Brac Enterprises P/L $ 25,000.00 27 August 1998 Sears $225,000.00 30 September 1998 Brac Property P/L $212,307.00 30 September 1998 Brac Holdings P/L $281,485.00 30 September 1998 Sears $250,000.00
10 The first respondent had won Lotto on 8 January 1998, receiving a little over $2.2 million. He then incorporated the second respondent, and deposited his Lotto winnings into the account with St. George Bank on which the cheques were drawn. 11 The companies Brac Enterprises Pty. Limited (Enterprises), Brac Property Pty. Limited (Property) and Brac Holdings Pty. Limited (Holdings) were companies of which one Timothy Brachmanis was the sole director and secretary. Mr Brachmanis became a customer of the appellant in June 1998, and opened an account in his own name. Each of the cheques was deposited into that account by Mr. Brachmanis, two days after drawing in the case of the first cheque, the day after drawing in the case of the second cheque, and on the day of drawing in the case of the remaining three cheques. The appellant accepted the cheques as collecting bank, collected the proceeds from St. George Bank, and credited the amounts to the account of Mr. Branchmanis. 12 The first, third and fourth cheques related to distributorship businesses proposed by Mr. Brachmanis in respect of products of Sears International Marketing Inc. (SIMI), a USA corporation engaged in marketing and selling power tools and garden equipment bearing trade marks owned by Sears & Roebuck & Co. (referred to generally as Sears). It appears that on 26 May 1997, SIMI entered into an agreement with Enterprises whereby SIMI appointed Enterprises (called the Distributor) to act as distributor of certain Sears products (called the Authorized Products) in Australia "on an exclusive basis" until 31 December 1999. Sections 1.3 and 1.4 of this agreement were in the following terms: 1.3 Exclusivity Subject to Distributor's compliance with the terms of this Agreement, including but not limited to fulfilment of the requirements described in Section 2.1 below, Distributor's appointment under this Agreement is exclusive with respect to sales of Authorized Products to customers within the Territory.
For so long as Distributor's appointment continues on an exclusive basis: (a) SIMI shall not appoint any other person or entity to distribute any Authorized Product in the Territory; and (b) SIMI8 shall not directly sell or ship any Authorized Products to any other purchaser who requests delivery of Authorized Products within the Territory.
Distributor acknowledges that the restriction of SIMI's sales and deliveries of Authorized Products in the Territory shall not apply to, and SIMI shall not be held responsible for, sales of any Authorized Products in the Territory by parties other than SIMI, including but not limited to sales by Sears.
1.4 No Sales Outside Territory Distributor acknowledge that its rights under this Agreement are restricted to the purchase of Authorized Products for resale to purchasers in the Territory for use in the Territory. Distributor shall not sell any Authorized Products in circumstances where the Distributor knows or reasonably believes that such Authorised Products are intended for use outside the Territory or are to be resold outside the Territory. In the event that SIMI believes that such unauthorized sales by Distributor have occurred or are reasonably likely to occur, SIMI shall have the right, in addition to any other rights and remedies which it may have under this Agreement or applicable law, to immediately suspend or cease deliveries to Distributor (even as to orders which have already been accepted and shipments already in transit) and to terminate this Agreement pursuant to Section 5.1(c) below. 13 Part IV of the agreement dealt with trademarks and trade names, and sections 4.1 and 4.2 were in the following terms: 4.1 Reservation of Rights Sears and SIMI reserve all rights in and to (a) the trademarks affixed to the Authorized Products and/or their packaging or otherwise included in the materials accompanying such Authorized Products including, but not limited to, Craftsman, Sears Craftsman, and all other Sears trademarks, (collectively, the "Marks") and (b) all of the trade names under which Sears and/or SIMI does business, including but not limited to: Sears, Sears Roebuck, Sears, Roebuck and Co., Sears International Marketing, Inc. and SIMI (collectively, the "Trade Names").
4.2 Distributor's Use of Marks a. Distributor acknowledges that the good will associated with the Marks and Trade Names has inherent value which inures solely to the benefit of Sears and SIMI. Accordingly, Distributors shall (i) have no rights in any of the Marks and/or Trade Names other than the limited right to use the Marks solely to market and sell the Authorized Products in the Territory in accordance with the terms of this Agreement, (ii) not attack or otherwise contest the validity of Sears rights in the Marks and/or Trade Names and (iii) not make application for registration of the Marks or Trade Names. Distributor shall not incorporate any Mark or Trade Name as part of any corporate or trade name of Distributor. Distributor shall obtain such licenses (sic), permits and authorizations relating to its use of the Marks as may be necessary or advisable under the laws of the Territory.
b. Distributor shall always use the Marks in such a manner as to maintain their goodwill, prestige, and reputation. SIMI or Sears may from time to time issue guidelines or instructions regarding the use of the Marks by Distributor. Distributor shall comply with any such guidelines and instructions. Distributor shall use the Marks only in the style as instructed by Sears in the Territory or in a form or style specifically approved by SIMI in writing. Distributor shall not use any Mark with any prefix, suffix or other modifying trademarks, logos, words, terms, designs, or symbols or use any Mark in any modified form.
c. Distributor shall not use any Marks except as set forth in Exhibit B (the "Approved Marks"). Distributor shall repack and relabel the authorized Products, manuals and cartons to incorporate only the Approved Marks and shall remove all other trademarks until such time as Sears directs in writing to Distributor and provides an amended Exhibit B. Distributor shall provide samples of any Authorized Product to SIMI for inspection by SIMI at any time upon SIMI's request. Distributor shall immediately comply with all directives from SIMI regarding use of the Marks or Tradenames (sic), including but not limited to the quality of the repacking and relabeling (sic) of the Authorized Products. 14 Exhibit B showed certain of the marks associated with particular items of equipment. 15 Sections 7.10 and 7.18 were in the following terms: 7.10 Relationship Distributor and SIMI are acting as independent parties under this Agreement, and Distributor is not an employee or agent of SIMI. Nothing herein is intended to make either party a general or special agent, legal representative, subsidiary, joint venturer, partner, fiduciary, employee or servant of the other party for any purpose. Distributor is not authorized or empowered to act as an agent of SIMI or Sears, nor to accept legal service of process for or on behalf of SIMI or Sears, nor to bind SIMI or Sears in any manner whatsoever. Distributor shall not do or omit to do anything that might imply or indicate that Distributor is an agent or representative of SIMI, Sears, or a branch, division, or affiliate of either of them, or that SIMI or Sears is in any was responsible for Distributor's acts or obligations.
7.18 Assignability Distributor and each of the Principals acknowledges that its rights and duties under this Agreement are personal and that SIMI has entered into this Agreement in reliance upon SIMI's perceptions of the individual or collective character, business skill, aptitude and financial capacity of Distributor and its Principals. Accordingly, neither Distributor nor any of the Principals shall assign or otherwise transfer any of their respective rights or obligations under this Agreement, whether voluntarily or by operation of law, without the prior written consent of SIMI in its sole discretion, and any assignment without obtained such consent shall be void and of no force and effect. Any of the following events shall be deemed a prohibited assignment by Distributor, if made without SIMI's prior written consent: (a) the sale of all or substantially all of the assets of Distributor used in performing its obligations hereunder; (b) the sale of more than twenty percent (20%) of the total equity interest in Distributorship to any party; (c) a merger or consolidation of Distributor with any other entity or firm, regarding of whether Distributor is the surviving company; (d) the issuance of additional securities representing an ownership interest in Distributor; (e) the reincorporation of Distributor or of any parent company of Distributor in a jurisdiction different from those where they are incorporated as of the Effective Date; or (f) any transaction or arrangement which effectively transfers control of the management of Distributor to any party other than the Principals. In addition, any of the following transfers of any Principal's interest in Distributor shall be deemed a prohibited assignment: (x) transfer in a divorce, insolvency, corporate or partnership dissolution proceeding or otherwise by operation of law; or (y) transfer in the event of the death or disability of a Principal by will, declaration of transfer in trust, or under the laws of intestate succession; provided, however, that a transfer of a Principal's interest in Distributor which is made to a third party approved by SIMI within six (6) months after the Principal's death or permanent incapacity shall be deemed a permitted assignment under this Section 7.18. 16 It appears that, pursuant to this agreement, a store selling Sears products was or was to be opened at Homebase, Prospect. It appears that one Greg Whited, a friend of the first respondent's brother Harry, became interested in becoming involved in a "franchise" to sell Sears products. In July 1998, Mr. Whited gave the first respondent a document containing a proposal for a store selling Sears products at Parramatta. The first respondent became interested, and a meeting was held between the first respondent, his brother, Mr. Whited and Mr. Brachmanis at the first respondent's home at Riverstone on 24 August 1998. 17 The first respondent, who was not cross-examined, gave the following account of what Mr. Brachmanis said at this meeting. According to the first respondent, Mr. Brachmanis said: I have the contract to open Sears Hardware franchises in Australia. I will give you 49% of the franchise with an option to purchase the rest. It will cost you the sum of $250,000.00 … You need to pay a Territory Reservation Fee of $25,000.00 for the Parramatta area. … Sears have incredible buying power and will take on Bunnings, Mitre 10, BBC Hardware and all the other major hardware chains." 18 The first respondent read a document called the Investor Copy of the Disclosure Document, and then he had a conversation with his brother and Mr. Whited; and then he said to Mr. Brachmanis: "We all agree this is a good business venture. I will write you a cheque now in the sum of $25,000.00". Mr. Brachmanis then said "Will you make the cheque out to Brac Enterprises Pty. Limited as Brac Enterprises Pty. Limited has the distribution agreement with Sears". 19 The first respondent then wrote out the first cheque, and the four persons present signed a document entitled "Territory Reservation Agreement" between Brac Retail Pty. Limited (in the agreement called Brac) and the respondent, his brother and Mr. Whited (in the agreement called the Potential Dealer). This document was one of the documents not tendered before the primary judge. It was in the following terms: In consideration of the payment of the sum of $25,000, the receipt of which is hereby acknowledged Brac gives to the Potential Dealer or its nominee a right of first refusal on the terms set out in this agreement to enter into a Dealer Agreement with Brac for the area set out on the attached map ("the Territory") whereby the Potential Dealer would have the right to engage in a Brac Dealer store marketing it's (sic) range of power, hand and garden equipment including "Sears" branded products ("the Products) on the terms set out in any documents Brac may decide to use.
If Brac wishes to offer a Dealership for the sale of Products in the Territory, Brac must give written notice of that fact to the Potential Dealer.
Brac must send with the notice all documents which it requires to be signed by the Potential Dealer or its nominee and any related parties ("the Required Documents"). The notice will constitute an offer to establish a Dealership on the terms and conditions contained in the Required Documents. To accept the offer, the Potential Dealer or its nominee must ensure that the Required Documents properly signed are received by Brac within 28 days from the date of receipt of the documents. In this respect time is of the essence.
If the Potential Dealer or its nominee does not accept the offer in accordance with clause 3, Brac may offer the Dealership and this reservation is rescinded.
Brac may not grant a Dealership for the sale of Products in the Territory to a third party on term which are materially more favourable to a third party than those contained in the notice to the Potential Dealer pursuant to clause 2 without: a) giving the Potential Dealer another notice; and b) following the procedure set out in clause 3 and giving the Potential Dealer or its nominee 28 days within which to accept that offer.
The Potential Dealer acknowledges that any acceptance by it or its nominee of an offer in accordance with clause 3 is conditional upon the Potential Dealer or its nominee, as the case may be, satisfying all Brac's criteria for its Dealers, including financial, psychological and training criteria.
If the Potential Dealer or its nominee enters into a Dealer agreement for the Territory with Brac: within 90 days from the date of this agreement, the amount paid by the Potential Dealer to Brac under this agreement will be deducted form (sic) any amount payable to Brac in relation to the grant of the Dealership.
If the Potential Dealer or its nominee does not enter into a Dealer agreement for the Territory with Brac, and satisfy the conditions referred to in clause 6, within 90 days form the date of this agreement, this right of first refusal terminates and Brac will repay to the Potential Dealer the sum of $25,000.00. 20 According to the first respondent, he gave no verbal instruction to Mr. Brachmanis to the effect that he could pay the cheque into his personal account; he did not know or expect that Mr. Brachmanis could pay it into his personal account; and he would not have paid the cheque if he had known this. The first respondent gave evidence to similar effect in relation to each of the five cheques. 21 The cheque was paid into Mr. Brachmanis' account on 26 August 1999: immediately prior to that payment, Mr. Brachmanis' account was overdrawn $16,476.42. 22 On 27 August 1999, there was another meeting between the first respondent and Mr. Brachmanis, and apparently also the first respondent's brother and Mr. Whitehead. The first respondent had read a "disclosure document" giving some information concerning dealership agreements, and a conversation ensued as follows. Mr. Brachmanis said: "Have you gone over the documents?" The first respondent said: "Yes. There doesn't seem to be any problem." Mr. Brachmanis said: "Have you the balance of the money for the franchise?" The first respondent said: "Yes". The first respondent, his brother, Mr. Whited and Mr. Brachmanis signed a document entitled "Shareholders Agreement", another document not tendered before the primary judge. This document purported to be prepared by solicitors, and was expressed as being between the respondent, his brother and Mr. Whited as "Investor", and Brac Retail Pty. Limited (called in the agreement "Brac Retail"). The agreement contained the following recitals: A. Brac Retail has the benefit in Australia of rights granted by Sears International Marketing Inc ("Sears") to distribute in Australia Sears hardware, lawn and garden products.
B. Brac Retail intends to grant dealerships in respect of such products to persons in Australia.
C. The Investor is interested in obtaining such a dealership ("'the Dealership").
D. Brac and the Investor have agreed to form and jointly own and manage a company which is intended to have the benefit of such a dealership subject to and on the terms set out in this Agreement. 23 Paragraphs 2.1 to 3.1 of the agreement were in the following terms: 2. PRELIMINARY MATTERS 2.1 The Investor will on the making of this Agreement pay Brac Retail a deposit of twenty-five thousand dollars ($25,000.00).
2.2 Within twenty-eight (28) days of the making of this Agreement Brac Retail will provide the Investor with a copy of the terms of the Dealership Agreement and the Sub-Lease and any security documents or other agreements required from the Company and the Investor pursuant to the Dealership Agreement and Sub-Lease.
2.3 The Investor will advise Brac Retail in writing within fourteen (14) days of receipt of the Dealership Agreement and Sub-Lease and other documents referred to in clause 2.2 whether or not it wishes to proceed with the formation of the Company.
2.4 Brac Retail will advise the Investor in writing within twenty eight (28) days of the making of this Agreement whether or not it wishes to proceed with the formation of the Company.
2.5 If either the Investor or Brac Retail give written notice to the other pursuant to clause 2.3 or clause 2.4 respectively that it does not wish to proceed with the formation of the Company this Agreement will be automatically terminated.
2.6(a) If this Agreement is terminated pursuant to clause 2.5 because the Investor has given Brac Retail notice under clause 2.3, Brac Retail will within seven (7) days of receipt of such notice return twenty thousand dollars ($20,000.00) of the deposit to the Investor. Brac Retail will be entitled to keep the balance of the deposit of five thousand dollars ($5,000.00). (b) If this Agreement is terminated pursuant to clause 2.5 because Brac Retail has given the Investor notice under clause 2.4, Brac Retail will within seven (7) days of the giving of such notice return, all of the twenty-five thousand dollar ($25,000.00) deposit to the Investor.
FORMATION, REGISTRATION AND SHAREHOLDING OF COMPANY 3.1 Registration of Company If this Agreement is not terminated pursuant to clause 2.5 the Investor and Brac Retail will as soon as possible form and register the Company on the following basis: (a) the Company will be called , or if this name is not available, such other name agreed by the Parties; (b) the Parties will cause the Company to allot one hundred (100) Shares in the Company as follows: (i) fifty-one (51) Shares to Brac Retail at an issue price of one dollar ($1.00) per share; (ii) forty-nine (49) Shares to the Investor at an issue price of one dollar ($1.00) per share and at a premium of five thousand one hundred and one dollars ($5,101.00) per share. The Shares will be called "ordinary shares" and each such share will have the same rights, including but not limited to voting and dividend rights, notwithstanding that the Shares to be allotted to the Investor are allotted at a premium. (c) The full issue price and premium in respect of each Share will be paid on allotment. 24 At Mr. Brachmanis' request, the first respondent made the cheque for $225,000.00 out in the name of "Sears". The cheque was paid into Mr. Brachmanis' account on 28 August 1998. 25 There is in evidence a business card showing Mr. Brachmanis as "President" of Brac Enterprises Pty. Limited, exclusive Australian distributor of Sears power, hand and garden equipment; this card bearing the word "Sears" in very large capital letters, considerably larger than any other printing on the card. 26 On 30 September 1998, the first respondent again met Mr. Brachmanis. According to the first respondent, there was the following conversation. Mr. Brachmanis said: "I have revised plans to purchase the premises at Parramatta. You can be involved and own some of the site if you want to." The first respondent said: "That sounds like a good option." Mr. Brachmanis said: "Negotiations regard the Parramatta Church Street site were in progress and that a final offer consisted of $810,000.00 with a sixty day settlement which had been accepted by the vendor who owned premises at 5/552 Church Street, Parramatta." Mr. Brachmanis then showed the first respondent a document with facts and figures relating to the purchase of the premises, showing a purchase price of $810,000.00, with stamp duty and other expenses, bringing the total acquisition costs up to $849,230.00. The first respondent and Mr. Brachmanis then signed a document entitled "Investment Summary" and a Real Property Act mortgage form. These two documents were not in evidence before the primary judge. 27 The Investment Summary showed property address as 5/552 Church Street, Parramatta; amount of purchase $849,230.00; amount of investment $212,307.50; term of investment as "until sale"; % ownership by investor as 25%; name of investor as Mr. Steven Papandony; address of investor as 21 Hunter Street, Riverstone, NSW; security for investor as second mortgage after settlement; frequency of dividend payments as quarterly; and amount of dividend payments as 25% of net rental plus 25% net profit from sale. This document was signed by the first respondent as investor and Mr. Brachmanis as joint venture partner. The mortgage document showed the land mortgaged as 5/552 Church Street, Parramatta, NSW; the mortgagor as Tim Brachmanis, and the mortgagee as Mr. Steven Papandony. The amount of $212,307.50 was set out as the first encumbrance noted in the mortgage. There was no Real Property Act title reference, no other identification of the amount secured, and no other terms of the mortgage. 28 Mr. Brachmanis told the first respondent that the cost of his 25% of the venture would be $212,307.00, and asked him to make the cheque payable to Brac Property. 29 Also at the meeting, Mr. Brachmanis said: "I have recently purchased a property at 6 Joalah Road, Duffys Forest. You can be involved in developing and re-selling the premises at Duffys Forest if you like … I have purchased the premises and I am going to develop the property and sell it for a large profit. I will give you 20% of the premises. It will cost you $281,485.00." Similar documents were signed in relation to this property as in relation to the Parramatta property, the purchase price of the property again being shown $810,000.00. In relation to the cheque, Mr. Brachmanis said: "Can you please amend the cheque and make in payable to Brac Holdings Pty. Limited as the property is in that name?" 30 According to the first respondent, at the same meeting, Mr. Brachmanis also asked if he would like "to own the Prospect Sears store as well", saying it would be opening in November 1998, just like the Parramatta store. Mr. Brachmanis said it would cost him $250,000.00 for a 49% share in the store. The first respondent then signed similar documents in relation to Prospect as in relation to the Parramatta store, except that it was only the first respondent, and not his brother or Mr. Whited, who were involved as an investor. In relation to this transaction, the first respondent provided a cheque for $250,000.00 made payable to Sears. 31 The three cheques handed over on 30 September 1998 were paid into Mr. Brachmanis' account on that day. Immediately prior to that payment in, the account stood at $24,435.92. By 16 November, cheques drawn on that account had reduced it to a little over $130,000.00; and by 30 November 1998, it was down to about $60,000.00, after which the bank began dishonouring his cheques. There were no amounts other than the subject cheques credited to the account in the period 28 August 1998 to 30 November 1998, apart from interest. 32 There was evidence before the primary judge from a relationship manager of the appellant, who dealt with Mr. Brachmanis, that on a number of occasions between June and September 1998, Mr. Brachmanis asked to draw against cheques as soon as they were deposited; and that on one occasion he was agitated concerning a cheque in the name of a company not being accepted for the personal account, saying that he needed the funds from these cheques. 33 During October 1998, the first respondent received documents concerning a company in relation to the Parramatta store, annexing minutes of a meeting purporting to be between himself, his brother, Mr. Whited and Mr. Brachmanis at Brighton-Le-Sands. The first respondent had not attended any such meeting, and he refused to sign any of the documents. 34 During October, Mr Brachmanis said he was going to the United States. The first respondent went to the estate agent dealing with the Duffys Forest property, who told him that property had not been sold; and he went to an estate agent dealing with the Parramatta property, and was told that there was concern about "long drawn-out negotiations". In fact, the Parramatta property was never transferred to Mr. Brachmanis or any entity associated with him. The Duffys Forest property was transferred to a company called Brac Housing Pty. Limited in about the middle of 1999, the price on the transfer being stated as $1.1 million. 35 There was further contact between the first respondent and Mr. Brachmanis in November and December 1999, when Mr. Brachmanis told the first respondent that the shops would be opening shortly. However, it appears that the shops did not open, and in February 1999 the first respondent went to the police alleging fraud against Mr. Brachmanis.
DECISION OF PRIMARY JUDGE 36 Before the primary judge, the respondents claimed that the cheques had been procured by Mr. Brachmanis by fraud, that the first respondent therefore remained the true owners or entitled to immediate possession of the cheques, and that the cheques were converted by the appellant in collecting the proceeds of the cheques and crediting them to Mr. Brachmanis' account. 37 The appellant did not admit that the cheques had been procured by fraud; and submitted that, even if they had been, the cheques came into the hands of the payees by delivery to their agent Mr. Brachmanis, and the payees thereby became the true owners with whom the bank dealt prior to any avoidance of any avoidable transactions between the respondents and Mr. Brachmanis. The appellant submitted it had acted to its detriment before any avoidance of the transactions, so that thereafter the contracts could not be rescinded. 38 The primary judge referred to a number of cases and statements in texts to the effect that, if a cheque has been obtained by fraud and there is no one with a better title to it, the drawer is the true owner, relying particularly on Bute (Marquess) v. Barclays Bank Ltd. [1956] 1 QB 202, Australian Guarantee Corporation Limited v. State Bank of Victoria [1989] VR 617, and Hunter BNZ Finance Ltd. v. ANZ Banking Group Ltd. [1990] VR 41. He noted a distinction drawn in the authorities: In Cundy v Lindsay (1878) 3 App Cas 459 at 461 Lord Penzance in the course of argument observed: "Is there no distinction between the case of a man who, being deceived, enters into a contract, and that of a man who, being also deceived, does not enter into a contract?"
The answer was given by the Lord Chancellor, Lord Cairns, at 466: "The result, therefore, my Lords, is this, that your Lordships have not here to deal with one of those cases in which there is de facto a contract made which may afterwards be impeached and set aside, on the ground of fraud; but you have to deal with a case which ranges itself under a completely different chapter of law, the case namely in which the contract never comes into existence."
That the distinction applies equally to cheques and other negotiable instruments is suggested by Lord Davey's reference to Cundy in Great Western Railway v London and County Banking Co [1901] AC 414 at 420. It was held to apply by a Divisional Court in Tate v Wilts and Dorset Bank (1899) 1 Legal Decisions Affecting Bankers 286. In that case the plaintiff drew a cheque on its bank payable to the order of one Dixon crossed "'not negotiable" in part payment for scrap iron to be delivered. Dixon's real name was Laidman. He took the cheque to the defendant bank which opened an account in the name of Laidman to which the amount of the cheque was credited. The defendant allowed Laidman to draw upon the funds at once. The proceeds were collected in due course. Darling J concluded that there was, de facto, a contract and upon the assumption that the defendant was the agent of Laidman, the rule in Holland v Russell 4 B & S 14 (122 ER 365) applied and the plaintiff could no longer repudiate the contract. In the latter case it was said that A being only an agent, of which B was aware, and having, without notice of B's intention to repudiate the contract, paid over to his principal the amount received from underwriters, B was not entitled to recover back from A his amount of the insurance. 39 The primary judge came to the following factual conclusions: 18 Brachmanis was a fraudster. He had no right to sell Sears franchises in Australia. I find that the drawing of the cheque was procured by the fraud of Brachmanis. I further find that the above transaction did not give rise to a concluded contract. The cheque was not handed over to Brachmanis in completion of their arrangements. It was a down payment. The first plaintiff had not seen the contract granting Brachmanis Enterprises Pty Ltd the franchise, let alone the contract between that company and him or the second plaintiff to acquire the 49% interest in the franchise for the Parramatta area. To use the words of Lord Penzance, this was a case of a man who, being deceived, did not enter into a contract. The submission of the defendant that there was a concluded contract is against the commercial realty of the situation.
19 Similar considerations arise with respect to the other cheques. Three days later the first plaintiff met Brachmanis outside a store at Prospect selling Sears power, hand and garden equipment. The first plaintiff said he had gone over the documents and there did not appear to be any problems. He wrote the cheque on the second plaintiffs account for $225,000 made out to Sears. Again, the negotiations were not finalised. The first plaintiff had still not seen the agreement granting the franchise to Brac Enterprises Pty Ltd or the agreement by which he or the second plaintiff was to acquire the 49% interest.
23 I find that there was no concluded agreement with respect to the interest in the Church Street property, the Duffys Forest property or the Prospect property. There was no transfer of the part interest in the title to either of the first two properties, nor the acquisition of shares in the company owning the Prospect store. I also find that the drawing of the cheques was procured by the fraud of Brachmanis. 40 He made the following finding on the submission concerning the agency of Mr. Brachmanis for the payees: 31 Having concluded that there were no contracts when the first plaintiff handed the cheques to Brachmanis, it does not matter that Brachmanis was the sole director and secretary of the Australian companies or that he was their agent. If by reason of fraud, the intention of the drawer of the cheques is thwarted and the cheques are drawn in favour of unintended recipients, it matters not that the person to whom the cheques are handed would, objectively, be regarded as the agent of the ostensible payees of the cheques. In this case the putative agent is the perpetrator of the fraud. 41 He made the following finding as to the meaning of "Sears" on two of the cheques: 36 The Cheques Act 1986 (Cth), s.19(1) provides that a person shall not be taken to be specified in a cheque as payee or indorsee unless the person is named, or otherwise indicated with reasonable certainty, in the cheque and is not a fictitious or non-existing person. Mr Epstein submitted that the two cheques made out to "Sears" fell within this provision and, there being no payee, Brachmanis was the bearer and the true owner of the cheques when handed to him by the first plaintiff. I reject this submission. Sears Roebuck & Co is referred to in the information memorandum. A letter of 2 August 2000 was addressed to the first plaintiff by the managing director of Sears International Marketing Inc and Sears, Roebuck and Co, the letterhead containing in large type single word "SEARS". The company was also referred to in the distributorship agreement. I find that there was a sufficient identification of Sears, Roebuck and Co to constitute it the payee of the cheques. 42 He dealt further with the question of title to the cheques, pursuant to provisions of the Cheques Act 1986 (Cth) as follows: 38 In terms of the Cheques Act 1986 (Cth), s 22, because the cheques in question were not payable to order they were bearer cheques. The cheques were crossed "not negotiable". Section 55 provides, in those circumstances, that if the cheque is transferred by negotiation, the recipient does not receive and is not capable of giving a better title to the cheque than the title the transferor had. It is not contested that anyone who takes a cheque crossed "not negotiable" does so at risk that the person from whom it is negotiated had no title because, for example, it was stolen (Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457 at 467). Since Brachmanis had no title to the cheques, the defendant's payment of the proceeds to his account was conversion and the defendant is liable to the true owner of the cheques, the second plaintiff. 43 He considered the effect of s.95(1) of the Cheques Act, which is in the following terms:
95(1) Where: (a) a financial institution (the collecting institution ), in good faith and without negligence: (i) receives payment of a cheque for a customer; or (ii) receives payment of a cheque and, before or after receiving payment, credits a customer's account with the sum ordered to be paid by the cheque; and (b) the customer has no title, or has a defective title, to the cheque; the collecting institution does not incur any liability to the true owner by reason only of having received payment of the cheque. 44 He made the following findings concerning an attempt by the appellant to rely on this defence: 41 The defendant did not call evidence as to how the third party cheques came to be deposited to the account of Brachmanis. The evidence before me leads to the inference that the bank's procedures were not followed and the teller accepted the deposits to the account without seeking approval from a superior. In my view the bank has not established that it acted without negligence and I reject the statutory defence. 45 The primary judge noted authorities to the effect that contributory negligence cannot be relied on as a defence to conversion of cheques; and noted that only a formal submission was made for the appellant to the effect that these authorities were incorrect.
GROUNDS OF APPEAL 46 The appellant's Notice of Appeal identified the parts of the judgments appealed from, and set out the grounds of appeal, as follows: The appellant appeals from: a) those parts of the judgment of Gzell J delivered on 14 May 2002 in which his Honour held: (i) that the subject five cheques were not provided on the basis of or as a consequence of concluded contracts, (ii) that the drawing of the subject five cheques was procured by the fraud of Mr Brachmanis that the contracts or transactions in respect of which the subject five cheques were drawn and provided were void and not voidable, and as a consequence it was unnecessary to consider the arguments concerning rescission, conversion on the basis of doctrine of relation back and detrimental change of position, (b) those parts of the judgment of Gzell J delivered on 2 August 2002 in which his Honour held: (i) that leave should be refused to re-open the judgment delivered on 14 May 2002 on the issues of fraud and concluded contracts, and to re-call or supplement that judgment, (ii) that leave should be refused to tender Exhibits SP1 to SP10 to the affidavit of the First Plaintiff sworn 18 February 2002, being the documents numbered 2 to 11 in the Agreed Bundle of Documents. GROUNDS A. Judgment delivered on 14 May 2002 1. His Honour erred in holding that the drawing of the cheque dated 24 August 1998 for $25,000 was procured by the fraud of Mr Brachmanis.
His Honour erred in holding that the transaction in respect of which the cheque for $25,000 was drawn did not give rise to a concluded contract.
His Honour erred in holding that the cheque for $25,000 was a down payment.
His Honour erred by not taking into account the evidence of the First respondent contained on page 42 of his affidavit sworn 15 April 2002, that the cheque for $25,000 was a deposit for 49% of the Parramatta Sears franchise, paid to secure the territory of Parramatta, and that a territory reservation document was signed at the time of the drawing the cheque by the First respondent, Mr Whited and Mr Harry Papandony.
His Honour erred in holding that cheque for $25,000 was not handed over in completion of arrangements.
His Honour erred in holding that the First respondent had not seen the contract between Brac Enterprises and the First respondent or the Second respondent to acquire the 49% interest in the Sears franchise for the Parramatta area.
His Honour erred by not taking into account the evidence of the First respondent: (a) contained on page 41 of his affidavit sworn 15 April 2002, that the First respondent read the revised document from Brac Enterprises involving the Sears Store at Parramatta which proposed a 49% shareholding in the Sears franchise at Parramatta prior to drawing the cheques for $25,000 and $225,000, (b) contained on page 44 of his affidavit sworn 15 April 2002, that the First respondent signed the investors disclosure document relating to the Parramatta store.
His Honour erred in holding that the drawing of cheque for $225,000 dated 27 August 1998 was procured by the fraud of Mr Brachmanis.
His Honour erred in holding that the negotiations in relation to the acquisition of the 49% interest in the franchise for the Parramatta store (to which the cheque for $225,000 related) were not finalised prior to the drawing of the cheque for $225,000.
His Honour erred in holding that the transaction in respect of which the cheque for $225,000 was drawn did not give rise to a concluded contract.
His Honour erred in holding that the First respondent at the time of drawing the cheque for $225,000 still had not seen the agreement by which he or the Second respondent was to acquire the 49% interest in the Parramatta franchise.
His Honour erred by not taking into account the evidence of the First respondent: (a) contained in paragraph 8 of his affidavit sworn 18 February 2002, that he signed a shareholders agreement at the time of drawing the cheque for $225,000, (b) contained on page 41 of his affidavit sworn 15 April 2002, that he, together with Mr Whited and Mr Harry Papandony, signed a shareholders agreement for 49% of the Sears franchise at Parramatta at the time of drawing the cheque for $225,000.
His Honour erred in holding that the cheque for $225,000 was not handed over in completion of arrangements.
His Honour erred in holding that the drawing of the cheque dated 30 September 1998 for $212,307 was procured by the fraud of Mr Brachmanis.
His Honour erred in finding fraud in respect of the cheque for $212,307 in the absence of a finding, or reasoned finding, that any representation made to the First respondent was false.
His Honour erred in holding that there was no concluded agreement with respect to the interest in the Church Street Parramatta property (to which the cheque for $212,307 related).
His Honour erred in holding that the cheque for $212,307 was not handed over in completion of arrangements.
His Honour erred in holding that the drawing of the cheque dated 30 September 1998 for $281,485 was procured by the fraud of Mr Brachmanis.
His Honour erred in finding fraud in the absence of a finding, or a reasoned finding, that any representation made to the First respondent was false.
His Honour erred in holding that there was no concluded agreement with respect to the interest in the Duffys Forest Property (to which the cheque for $281,485 related).
His Honour erred in holding that the cheque for $281,485 was not handed over in completion of arrangements.
His Honour erred in holding that the drawing of the cheque for $250,000 dated 30 September 1998 was procured by the fraud of Mr Brachmanis.
His Honour erred in holding that the transaction in respect of which the cheque for $250,000 was drawn did not give rise to a concluded contract.
His Honour erred in holding that the cheque for $250,000 was not handed over in completion of arrangements.
His Honour erred, in relation to the cheques for $212,307, $281,485 and $250,000, in overlooking the nature of executory contracts or confusing the performance of contracts with the existence of contracts.
His Honour erred in failing to hold that the subject five cheques were handed to Mr Brachmanis as the agent of the payees of the cheques or as the sole director and secretary of the payees or the companies with whom the First respondent contracted.
His Honour erred in distinguishing the present case from Harrisons Group Holdings Limited v. Westpac Banking Corporation (1989) 51 SASR 36, Hunter BNZ Finance Ltd v. C G Maloney Pty Lid (1988) 18 NSWLR 420 and Associated Midland Corporation Ltd v. Bank of New South Wales [1983] 1 NSWLR 533.
His Honour erred in not concluding: (a) that the subject contracts were not void or voidable, (b) that, in the alternative, if the subject contracts were voidable, they were not and could not be by the commencement of these proceedings, rescinded by the respondents, (c) that, in the alternative, a right to sue a bank for conversion of a cheque cannot accrue under the principle of relation back following rescission of the contract to which the cheque relates, (d) that the conduct of the appellant in allowing funds to be withdrawn from the account into which the proceeds of the subject five cheques were paid constituted alteration of the position of the appellant to its detriment with the result that the rescission of the subject contracts was unavailable and that the appellant was immune from a suit in conversion.
B. Judgment delivered on 2 August 2002 31. His Honour erred in failing to refer to, and act upon, the express concession made in relation to Exhibits SP1 to SP10 to the affidavit of the First respondent sworn 18 February 2002, being the documents numbered 2 to 11 in the Agreed Bundle of Documents ("the documents"), in the written submissions of the respondents that: "First, these documents were in evidence as attachments to Mr Papandony's affidavit. If for some reason this is wrong, they were certainly treated by both parties as being in evidence. Both counsel, for example, addressed argument to the Court based on these documents. If, for some reason however, the documents were technically not before the Court, the Plaintiff has no objection to the position being regularised so that the documents form part of the record for the purposes of an appeal, for example."
SUBMISSIONS ON APPEAL 48 As appears from the grounds of appeal, there was no challenge to the finding of the primary judge that the appellant had not established that it acted without negligence, and that accordingly it did not have the benefit of the protection given to banks by s.95(1) of the Cheques Act. 49 Mr. Wood for the appellant first submitted that there were errors of fact made by the primary judge in relation to the first two cheques. He submitted that the first respondent plainly did see and in fact signed the agreement by which he was to acquire a 49% interest in the Parramatta dealership. There were plainly concluded contracts. Cheques were handed over pursuant to those contracts, and were not mere down-payments. He submitted that there were errors of fact also in relation to the third and fourth cheques: there were concluded agreements, fixing the terms on which the respondents were to invest in the Parramatta and Duffys Forest properties. In relation to the fifth cheque, he submitted, the position was the same as with the first two cheques. 50 Next, Mr. Wood submitted that there was no proper basis for any findings of fraud against Mr. Brachmanis. He submitted that, in relation to the property transactions, there was no identification of any misrepresentation made: there was no evidence that Mr. Brachmanis had not reached a verbal agreement at least in relation to the purchase of the Parramatta property, and he did through one of his companies purchase the Duffys Forest property. In relation to the franchises, Mr Wood submitted that arranging sub-distributorships within particular areas was consistent with and indeed authorised by Enterprises' agreement with SIMI. Mr. Wood submitted that, even if fraud had not been actively challenged below, it was denied in the pleadings and not conceded in submissions; and the appellant could rely on a claim that there was insufficient evidence on appeal: Pioneer Construction Material Pty. Limited v. Millsom [2002] NSWCA 258 at [14]-[15]. 51 In any event, Mr. Wood submitted, even if the transactions had been induced by fraud, the cheques were delivered to the payees and received by the payees by their agent Mr. Brachmanis; and the payees thus became the true owners and entitled to immediate possession of the cheques, even if the transaction pursuant to which the cheques had been paid were voidable. Mr. Wood submitted that this was clear in the case of the Brac companies. In the case of the cheques made payable to "Sears", this was a trading name used by Mr. Brachmanis or Properties, as shown by the business card and other documents in evidence; and it was plainly understood by the respondents to be an entity associated with Mr. Brachmanis to which the consideration for the dealerships was payable. The cheques were delivered to Mr. Brachmanis as agent for that entity, and this was effective to pass title or right to immediate possession: Associated Midland Corporation Limited v. Bank of New South Wales [1983] 1 NSWLR 533, at 535, 544, 549; Midland Bank PLC v. Brown Shipley & Co. Limited [1991] 1 Lloyds LR 576 at 583. 52 If there had been fraud, Mr. Wood submitted, an effective rescission would have given the respondents an entitlement to be repaid, but this did not assist them. There had been no communication to Mr. Brachmanis of an election to rescind, and no evidence that Mr. Brachmanis could not be contacted. Furthermore, the rights of third parties had intervened, specifically in that the appellant had acted to its detriment in allowing Mr. Brachmanis' account to be depleted; and accordingly rescission was now unavailable to the respondents: Bavins v. London & South Western Bank Limited [1900] 1 QB 270 at 277; Tate v. The Wilks & Dorset Bank Limited (1899) Vol 1 Legal Decisions Affecting Bankers 286 at 289; Orix Australia Corporation Limited v. M. Wright Hotel Refrigeration Pty. Limited (2000) 155 FLR 267 at [39]-[40]. 53 Furthermore, Mr. Wood submitted, if what the appellant did was not conversion at the time, it would not be made into conversion retrospectively: Shirlaw v. Lewis (1993) 10 ACSR 288 at 295. To the extent that a different view was expressed in Hunter BNZ Finance Limited v. C.G. Maloney Pty. Limited (1988) 18 NSWLR 420 at 439-40, that case should not be followed.
DECISION 54 The judgment below was incorrect, on the material now before us, in holding that the first respondent had not seen an agreement by which he was to acquire a 49% interest in dealerships. However, the Territory Reservation Agreements are subject to the comment that they provided illusory consideration, in that they contemplated dealing with Brac Retail Pty. Limited on the terms of any document it may decide to use; and, in relation to the Parramatta dealership, the Territory Reservation Agreement was with Brac Retail Pty. Limited, not Brac Enterprises Pty. Limited to whom the $25,000.00 cheque was made out. As regards the alleged concluded contracts concerning the 49% interest in the dealerships, these contracts required payment of $250,000.00 only to companies yet to enter into agreements for the dealerships, and in one case not named, in return for allotments of shares. 55 It is also correct that the first respondent did sign an agreement setting out the terms of an investment in each of the Parramatta property and Duffys Forest property, and a mortgage purporting to be in relation to those properties. However, although the agreement in each case may have been sufficiently certain to constitute the terms of investment if and when "Brac Property" acquired the Parramatta property and Brac Holdings Pty. Limited acquired Duffys Forest, in each case for $810,000.00, there were no terms purporting to oblige Brac Property or Brac Holdings Pty. Limited to acquire either property, even by implication, because there was no basis for determining precisely what obligations either entity had to pursue the acquisition. In fact, Parramatta was not acquired by any entity associated with Mr. Brachmanis and Duffys Forest was acquired for $1.1 million, not $810,000.00, by a different Brachmanis company. In each case, the mortgages were nullities. Mr. Brachmanis, who signed the mortgages as mortgagor, never owned either property nor was there ever any intention that he would own either property. 56 There were in my opinion misrepresentations concerning Sears franchises. The agreement of Enterprises with SIMI authorised no more than the sale of specified Sears products in Australia, under their brand name. It prohibited other use of the Sears name, so that for Mr. Brachmanis to describe what he was selling as Sears franchises, or what were to be opened as Sears stores, involved breaches of the agreement, as did the use of a business card highlighting the name Sears. Accordingly, in my opinion the statements by Mr. Brachmanis that he had the contract to open Sears hardware franchises in Australia, and that Sears would take on large hardware chains, were false. It was open to be inferred that Mr. Brachmanis knew the truth about these matters, and that accordingly that these misrepresentations were fraudulent. No submissions were made below against the inference of fraud, and it was appropriate that that inference be drawn. 57 The inference was available also that there were misrepresentations concerning the property investments. The representation that a final offer had been accepted by the vendor of the Parramatta property could be inferred to be untrue from the circumstance that no purchase proceeded and that the money paid by the respondents was applied by Mr. Brachmanis for other purposes. The statement "I have recently purchased property at Duffys Forest" was untrue, in that the only purchase of the Duffys Forest property occurred many months later, by a different Brachmanis company from that to which the cheque was made out, and at a different price. Again, it could be inferred that Mr. Brachmanis knew these representations were false. 58 If those matters were the only matters of fraud, there would be force in Mr. Wood's submissions that money was paid over pursuant to voidable transactions, so that the payees became the true owners and entitled to immediate possession of the cheques, at least unless and until the transactions were avoided. But there were and are grounds for inferring a more all-embracing fraud, inducing the payments, in circumstances where there never were any genuine contracts justifying the making and retention of such payments. If the matter is considered, as the appellant asks the Court to do, in the light of the documents which were not in evidence before the primary judge, it is also appropriate to have regard to the circumstance that, when the application to re-open was made, there was evidence that the appellant was in contact with Mr. Brachmanis and able to call him to give evidence, but did not do so. 59 In the first place, there were the compelling circumstances affecting all transactions that all cheques were paid into Mr. Brachmanis' personal account at a time when Mr. Brachmanis had no possible claim to any of the cheques, this account was overdrawn by over $16,000.00 at the commencement of the transactions, there were no other payments into the account in the period 28 August 1998 to 30 November 1998, and over $900,000.00 was dissipated during that period; and that the respondents received no benefit whatsoever for nearly $1 million paid to Mr. Brachmanis. In particular, shops were not opened as promised, the Parramatta property was not purchased, and the Duffys Forest property was purchased by a different company with which the respondents had no dealings. 60 Secondly, there was the illusory nature of the rights granted by the documents actually created, as discussed earlier, and their tenuous relationship to the moneys actually paid. 61 Although, if Brac Retail chose to offer a dealership in the relevant area, each Territory Reservation Agreement would have obliged Brac Retail to offer it to the Potential Dealer, the Agreement did not require any such offer to be made, and permitted any such offer to be made on any terms Brac Retail wished; and as noted earlier, the initial cheque for $25,000.00 was not in any event in favour of Brac Retail but in favour of Enterprises. 62 As regards the agreements for the 49% interest, they provided for payment of $250,000.00 in return for the issue of shares by a company whose business was to be the operation of a dealership under agreements which had not yet been entered into and the terms of which were not determined. The respondents received documents falsely recording meetings of a company in relation to the Parramatta dealership, but they received no benefit by way of shares in either company or involvement in any agreement concerning any dealership or participation in any dealership business. The cheque in each case was made payable to "Sears", this being entirely fictional if, as the primary judge found, the word referred to Sears Roebuck & Co.; and unauthorised if it is interpreted as being a trading name used by Mr. Brachmanis or any of his companies. 63 As regards money paid in respect of land, there were no agreed terms obliging Mr. Brachmanis or his companies to buy any land, and the only agreed terms related to the position if the Brachmanis company referred to did actually buy land at the price specified; and the mortgages were nullities. In relation to those payments, the absence of any benefit to the respondents is particularly telling: although it could be argued that the lack of return from a business venture is explicable by a change of circumstances and the failure of the business, a nil return for over $490,000.00 paid for interests in property, and dissipated within two months, is strongly suggestive of thorough-going fraud. 64 In my opinion, those circumstances support a conclusion that the payments were not pursuant to merely voidable transactions, which would need to be avoided before there was entitlement to recovery; but rather, were induced by a thorough-going fraudulent scheme, in respect of which any purported consideration was non-existent or illusory. The primary judge in effect came to that conclusion, and in my opinion he was justified in doing so on the material before him. I would myself come to the same conclusion on that material, and also on the material before this Court. 65 In those circumstances, in my opinion, if the respondents had learned the true facts before the cheques had been presented for payment, they could, without first avoiding any contract, have demanded immediate return of the cheques and if necessary sought orders to restrain their presentation. The drawing of the cheques had been induced by fraud, and there was no basis for Mr. Brachmanis or the payees or any bearer to assert any entitlement to retain them: there was no concluded contract that could justify retention, which needed to be avoided. In my opinion therefore the cases relied on by the primary judge of Bute and the two Victorian cases referred to above applied, and the respondents remained the true owners and entitled to immediate possession of the cheques; and the dealings of the appellant with the cheques amounted to conversion of their property. 66 In those circumstances, the appeal should be dismissed. It is not necessary to determine the questions relating to delivery of the cheques to payees or bearer, or the effect of the rescission of voidable contracts. However, I would make some comments on those matters. 67 If there had been voidable contracts in relation to the dealerships pursuant to which another party, until avoidance, was entitled to payment, there would still be problems for the appellant. As mentioned earlier, the initial $25,000.00 was payable under the relevant agreement to Brac Retail, not Enterprises or Mr. Brachmanis. $250.000.00 was payable to a company in which Brac Retail was to be a shareholder, and not to either "Sears" or Mr. Brachmanis. Even if "Sears" were taken as a name representing the company which was to conduct the dealership, and assuming that this company was actually in existence when the cheques were dealt with, there is no reason to suppose that Mr. Brachmanis was then the sole director or managing director of that joint venture company, having actual authority on behalf of that company to authorise himself to appropriate the cheques. Thus, even assuming that ownership or right to possession of the cheques passed to that company because Mr. Brachmanis can be regarded as an agent of that company to receive the cheques, his appropriation of the cheques for his own purposes involved conversion of the cheques by both him and the appellant, which at the time was actionable by that company. Later rescission by the respondents of any contract they had with the company, with the result that they could be considered entitled to the cheques at the time of the conversion, would in my opinion give them the right to sue for conversion, as contemplated by Hunter BNZ v Maloney. The rights of the appellant would not in my opinion affect this: the only change would be as to the identity of the person entitled to sue the appellant in conversion. 68 On the other hand, if what the appellant did at the time had been no conversion at all because authorised by the then true owner, I do not think subsequent rescission could change this into a conversion: in that respect, I would adhere to what I said in Shirlaw v. Lewis; and if Hunter BNZ v. Maloney suggests the contrary, I would respectfully disagree. If a subsequent rescission could have this effect, it would mean that, if A transfers property to B pursuant to a contract induced by B's fraudulent misrepresentation, and B transfers some of this property in turn to C, a bona fide purchaser for value, and A subsequently rescinds the contract (being content to recover from B such property as B then retained), C might retrospectively become guilty of conversion. I do not accept that this could be so. In those circumstances, the intervention of C's rights would not in my opinion preclude rescission by A, but would prevent A recovering such a title to the property in question as would defeat C's title or make C guilty of conversion.
CONCLUSION 69 For the reasons I have given, in my opinion the appeal should be dismissed with costs, and the application for leave to appeal should be refused with costs.
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(1988) 18 NSWLR 420
(2000) 155 FLR 267
(1914) 19 CLR 457
(1989) 51 SASR 36
(1993) 176 CLR 300
Appeal dismissed with costs; application for leave to appeal refused with costs.