Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd

In time, there was dispute between the parties to the building contract on the question of Construction's entitlement to payment. On 20 June 1983, Construction gave notice in writing of the dispute to Tambel. This was followed by a further notice dated 25 August 1983 which Construction gave to both Tambel and to the respondent Hexyl Pty. Ltd. ("Hexyl"). The basis upon which Construction sought to give notice to Hexyl pursuant to the arbitration clause in the building contract was that that contract had been made by Tambel on behalf of a partnership between Tambel and Hexyl and that both Tambel and Hexyl were liable under it as principals. Thereafter, Hexyl instituted proceedings in the Equity Division of the Supreme Court of New South Wales seeking a declaration that it was not a party to the building contract and that it could not, without its consent, be joined as a party to an arbitration pursuant to the terms of that contract. It also sought consequential injunctive relief against Construction and the two persons who had been nominated as arbitrators and who were joined as defendants. For its part, Construction cross-claimed for declarations that Hexyl and Tambel carried on in partnership "the business of construction" of the building, that Tambel entered into the building contract as agent for Hexyl and itself and that Hexyl and Tambel were "jointly and severally bound by the provisions" of the building contract. The nominated arbitrators entered submitting appearances.

In the Equity Division of the Supreme Court, the matter was heard by Kearney J. who held that Tambel had entered into the building contract as agent for itself and Hexyl, the latter being an undisclosed principal. His Honour declined to grant the relief sought by Hexyl and made the declarations sought by Construction in its cross-claim subject only to deleting the reference to "jointly and severally" in the declaration that Hexyl and Tambel were "bound by the provisions" of the building contract. Hexyl appealed to the Court of Appeal from his Honour's decision. In the course of the proceedings in the Court of Appeal, Tambel was added as a party and supported the declaration against Hexyl which had been made at first instance. The Court of Appeal (Moffitt P. and Mahoney J.A.; Glass J.A. dissenting) allowed the appeal, set aside the orders and declarations made at first instance and made the declarations and orders which had been sought by Hexyl on its summons. Construction now appeals, by special leave, to this Court from the judgment and orders of the Court of Appeal. The only parties who have appeared to argue the appeal on the hearing in this Court have been Construction and Hexyl.

Both at common law and under the provisions of the Partnership Act 1892 N.S.W. ("the Act"), a partner has prima facie actual authority to act as an agent of the firm and his other partners for the purposes of the business of the partnership: see, e.g., Cassels v. Stewart [1] ;Birtchnell v. Equity Trustees, Executors and Agency Co. Ltd. [2] ; the Act, s. 5. That prima facie authority can however, both at common law and under the Act, be negated or qualified by contrary agreement among the partners. Thus, under the Act the mutual rights and duties of partners may be varied by their consent (s. 19) and no act of a partner in contravention of an agreement between the partners restricting his authority shall be binding on the firm with respect to persons having notice of the agreement: s. 8.

1. (1881) 6 App.Cas. 64, at p. 79. 2. (1929) 42 C.L.R. 384, at p. 408.

The first question which arises for consideration is whether Tambel had actual authority to enter into the building contract as agent for a firm in which Hexyl and itself were the partners. There was certainly such a partnership at relevant times. Some months before the execution of the building contract, Tambel and Hexyl had become partners "for the purpose of constructing upon" the Edgecliff land "a mixed commercial/residential building (hereinafter called "the premises") and thereafter to preserve and maintain the premises as an investment for their mutual benefit ": partnership deed, recital B. The entry by Tambel into the building contract was, as the partnership deed made clear, for the purposes of the business of that partnership between Tambel and Hexyl. Prima facie, Tambel had authority to enter into that building agreement as agent for the firm. That prima facie authority could, however, be negated by contrary agreement of the partners. Examination of the partnership deed discloses that Tambel's prima facie authority in that regard was, in fact, negated by agreement between Hexyl and itself that it should enter into the building contract as sole principal and not as agent.

At the time when the partnership deed was made, Tambel was the owner of the Edgecliff land. Under the provisions of the deed, Tambel agreed to enter into a contract for the sale of the land to the firm upon terms which would result in the legal ownership of the land remaining in Tambel's name at least until the erection of the proposed building had been completed and which provided for termination of the contract and forfeiture of instalments of purchase price in the event of breach by Hexyl. The plain effect of the words of the partnership deed is that Tambel would enter into a building contract, upon terms approved by Hexyl, in its own name as principal. That does not, of course, exclude the possibility that the benefit of the contract, once made, would be held by Tambel upon trust for the partnership. In that regard, there are two basic matters which should be mentioned if only for the reason that the contrary view appears to have some currency: see Australian Law Journal, vol. 58 (1984), at p. 664. The first is that, where beneficial and legal interests do not correspond, property may be held by persons upon trust for themselves or by one person upon trust for another or others and himself. The second is that an asset of a partnership is ordinarily so held by the partner or partners in whom it is vested: the extent of the beneficial interest of a particular partner in it is determined by reference to his or her interest under the partnership and may or may not correspond with the extent of the legal interest or interests: cf. Federal Commissioner of Taxation v. Everett [3] .

One distinction between agency and trusteeship is that "the trustee does not bring his cestuis que trust into any contractual relationship with third parties, while it is the normal function of an agent to do so": Pettit, Equity and the Law of Trusts, 5th ed. (1984), p. 24; Cave v. Mackenzie [4] . A trustee contracts as principal for the benefit of a cestui que trust. An agent contracts for a principal or principals of which he may himself be one. That being so, the effect of the partnership deed was to negate Tambel's prima facie authority to act as agent for Hexyl as an undisclosed principal in the making of the building contract. Tambel's authority was, at most, to enter into the building contract as principal acting as trustee for the partnership of Hexyl and itself. Neither the provisions of the building contract nor the circumstances of its formation suggest that Tambel acted otherwise than within the strict letter of that authority.

The building contract is essentially in the standard 1976 form approved by The Royal Australian Institute of Architects and The Master Builders' Federation of Australia Inc. On its face, it was made between Tambel and Construction alone. Having identified Tambel as "the proprietor" and Construction as "the builder", it contains a number of provisions which would seem inappropriate if Tambel was contracting for some undisclosed principal in addition to itself. Thus, it refers to certain things being "impracticable in the opinion of both the Proprietor and the Builder" (cl. 13(a)) and provides that the builder may determine its employment under the agreement if "the Proprietor commits an act of bankruptcy or executes a Deed of Assignment or Deed of Arrangement or enters into a composition or other arrangement with his creditors or being a company goes into liquidation whether compulsory or voluntary": cl. 17(a). In the arbitration clause, it refers to disputes or differences arising "between the Proprietor, or the Architect on his behalf, and the Builder".

It has not been suggested that Construction entered into the building contract under any belief that Tambel was acting as agent for the firm of which Hexyl and Tambel were members. To the contrary, it is conceded that Construction did not, at the time the building contract was made, even know of the existence of the partnership or, for that matter, of Hexyl. At the cost of some repetition, the circumstances may be summarized in four propositions: (i) Tambel did not have authority to contract for Hexyl as an undisclosed principal; (ii) Tambel did not represent to Construction that it was making the contract for Hexyl as an undisclosed principal; (iii) the actual building contract is, in its terms, a contract between Construction and Tambel alone and contains provisions which would be inappropriate if Tambel had been acting as agent for Hexyl, as an undisclosed principal, and itself, and (iv) Construction, for its part, did not believe that Tambel was contracting for Hexyl or anyone else as an undisclosed principal.

For Construction, particular reliance was placed on the provisions of s. 5 of the Act. That section provides:

Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member, binds the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.

It can be seen that s. 5 comprises two distinct limbs. The first deals with actual authority. It provides not that every partner is deemed to be an agent of the firm and his other partners for the purposes of the partnership business but that every partner is an agent of the firm and his other partners for that purpose. The actual authority to which it refers is, however, but prima facie in that it may be negated or qualified by contrary agreement of the partners: see above and Act, s. 19. In substance, that first limb states the common law. Construction can obtain no solace from it in the present case since, as has been seen, any prima facie authority of Tambel to contract as agent for the partnership was effectively negated by the provisions of the Partnership Deed.

The second limb of s. 5 deals with ostensible authority. Even though actual authority be lacking, the act of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member binds the firm and his partners unless the other party "either knows that he has no authority, or does not know or believe him to be a partner". Again, this limb effectively states the common law. Again, Construction can gain no solace from it since it is conceded that Construction neither knew nor believed Tambel to be a partner.

There is a further reason why the provisions of s. 5 of the Act do not, in the circumstances, have the effect that Hexyl is liable to Construction as an undisclosed principal under the building contract. The provisions of that section are, as has been seen, concerned with the actual or ostensible authority of a partner to bind his firm. They do not produce the consequence that a partner who has authority to enter into a contract as agent for his firm cannot enter into a contract as trustee for himself and his partners. Even if the effect of s. 5 had been that Tambel had actual or ostensible authority to enter into the building contract on behalf of Hexyl as an undisclosed principal and itself, the fact would remain that it did not, on the material before the Court, contract in that capacity. As between Tambel and Hexyl, the material before the Court indicates that the building contract was entered into by Tambel in pursuance of the partnership deed, that is to say, as principal acting, at most, as trustee for the partnership. In so far as Construction was concerned, the building contract was made between Tambel and itself as the only principals. That being so, it would not be to the point to establish that Tambel had had actual or ostensible authority to contract for Hexyl and itself as principals. The fact would remain that it had not purported to exercise that authority and that it had not been understood by the other party to the contract as exercising any such authority.