Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8;

Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; - HCA 1975 case summary — Zoe

[43]

22. It is in these circumstances that the Court of Appeal - differing as it did from his Honour about the right of D.P.C. Estates to maintain an action against Grey and Consul - did have to decide whether or not Consul participated in a breach by Grey of his fiduciary obligations in relation to the Clubb Street and Rozelle properties. I agree entirely with the finding that Consul did so. In my opinion the acknowledgment of 19th June 1968 is of overwhelming importance. It acknowledged what had been arranged between Grey and Consul before Consul bought the properties in question. Those arrangements - if there were more than one - provided the strongest inducement to Grey to prefer Consul to the Walton group - an inducement which may have led him to lie to Clowes about what he had actually told Walton. It was the duty of Grey to tell Walton fully and frankly of the deals he was making with Consul and if he wanted a share of profits to get Walton's permission to make profits out of any such transactions. He did not do so. It was in breach of Grey's duty to show Clowes the reports that he, on behalf of the Walton group, had obtained from Thorne, and Clowes could not have failed to realize that. Clowes' exculpatory statement that he paid no attention to Thorne's reports is a matter of no relevance whatever upon the question whether or not he knew that Grey was acting improperly in showing them to him. I am not merely suspicious of the propriety of the deals between Grey and Consul; I am satisfied that they were improper, and however little Clowes knew of Grey's duty to the Walton group, he knew that Grey was acting improperly. I consider that his Honour found that there were positive attempts on the part of Grey and Clowes to hide what was going on from Walton and there is no need to refer to the evidence that amply supports that finding. I am satisfied that this concealment and what occurred when the R. K. Grey No. 3 Account was opened was part of the understanding between Clowes and Grey. Here again there was participation by Clowes in Grey's improper conduct. At the very least Grey did not disclose to Walton what he was doing and Clowes both knew of this and himself kept hidden from Walton his dealings with Grey. (at p385)

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26. It remains to consider, however, whether D.P.C. Estates was itself entitled to the relief which was claimed in the two suits. The basis upon which they were framed was that D.P.C. Estates could itself sue because Walton would in fact have nominated it as the purchaser of the properties in question had he decided upon the purchase of those properties. I do not consider this, of itself, - if it were so - would warrant an order that Consul held the properties for D.P.C. Estates. If D.P.C. Estates obtained rights against Grey and Consul, those rights came into existence when Consul with Grey's assistance bought the properties in question. It seems to me, however, for reasons already given, that Grey did owe a duty of a fiduciary character of D.P.C. Estates itself as a member of the Walton group of companies and upon breach of this duty and in the absence of objection to the suits as framed, orders could properly be made on the basis that Consul, by participating in the fraudulent conduct of Grey, had obtained benefit at the expense of D.P.C. Estates, among others, and was accountable to it. The Court of Appeal, relying upon Rule 180 of the Equity Rules, made elaborate orders in favour of D.P.C. Estates saving the rights of the companies in the Walton group other than Ronmar so that in these suits any such company, although not a party, could intervene to assert rights against D.P.C. Estates. I do not consider that this was a case appropriate for the application of that rule but I think the appropriate order would have been simply to declare that Consul is trustee for D.P.C. Estates of the properties in question. Such an order would not preclude any other company from asserting rights against D.P.C. Estates in respect of the properties by appropriate proceedings against D.P.C. Estates. I do not think that the possibility, that D.P.C. Estates itself may be under some obligation to some other company or companies in respect of the properties in question because they too were affected adversely by the fraud of Grey, in which Consul participated, precludes a court of equity from granting to it, as one company suffering from that fraud, the declarations sought against Grey and Consul in the absence of objection to the constitution of the suits by reason of lack of parties. Upon this aspect of the case the Court of Appeal was unanimous. With the alteration necessary to give effect to the conclusion that simple declarations of trust can be made, I would affirm the decision of the Court of Appeal. (at p387)

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2. The facts of the case were very fully stated by Hope J. and, although some of his findings of fact have been challenged, it is unnecessary to repeat in full detail all the evidence which he considered in making his findings. During the years 1966-1967 Jack Westlake Walton, a solicitor, controlled a number of companies which he had established for purposes of his own. Some of those companies, including D.P.C., carried on the business of buying dilapidated properties, renovating or reconditioning them, and selling them with vacant possession. Another of the companies, Ronmar Investments Pty. Limited ("Ronmar"), was used as a service or managing company; amongst other things, it employed and paid the staff of most of the companies in the group, but it did not deal in real estate. Walton showed a fine disregard for the requirements of the Companies Act and the articles of association of the various companies, whose management was replete with irregularities. In May 1966 Grey was engaged by Walton as manager of his companies and, although he was never formally appointed by D.P.C. to be its manager, he thereafter carried on much of the business of the companies, including D.P.C. On 22nd August 1966 he entered into a written agreement with Ronmar to serve that company as working manager of the business of that and eight other companies (including D.P.C.). By this agreement Grey undertook that he would not divulge "any information concerning the business or finance of the company or of the associated companies or any of their dealings transactions or affairs which may come to his knowledge during or in the course of his employment" and that he would not "be concerned or interested directly or indirectly except as such manager in the business of real estate other than with the consent of the Managing Director". On 20th December 1966 D.P.C. purported to appoint Grey to be one of the directors; Grey assumed to hold this position until he resigned from it in December 1967. Hope J. held that this purported appointment was invalid by reason of irregularities in the conduct of the company's affairs and this finding has not been challenged. One of Grey's duties was to find properties that might be suitable for purchase. He did this by reading advertisements in the newspapers, by keeping his eyes open for "for sale" notices and also by seeking information from estate agents, solicitors, and other persons whom he knew. Once he had found a property that appeared to warrant consideration he would arrange for a Mr. Thorne to inspect and report upon it (at Ronmar's expense) and would submit Thorne's report with his own recommendation to Walton who would decide whether any and if so what offer should be made for its purchase. If an offer was made and accepted Walton would decide (usually at about the time when the contract was being prepared) which of the companies would make the purchase. During the years 1966 and 1967, of sixteen purchases made by Walton's companies, ten were made by D.P.C., and if Walton had caused the Rozelle properties and the Clubb Street property to be bought in 1967 it is probable that the purchases would have been made in the name of that company. (at p389)

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16. The decision in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 that the rule in Barnes v. Addy (1874) 9 Ch App 244 applies to agents of company directors who have received money of the company does not go quite far enough to resolve the present case, since Consul did not receive any property of D.P.C. However, in my judgment, the principle under discussion extends to the case where a stranger has knowingly participated in a breach of fiduciary duty committed by a person who is not a trustee even though nothing that might properly be regarded as trust property - even property stamped with a constructive trust - has been received. The strict rule of equity that forbids a person in a fiduciary position to profit from his position appears to be designed to deter persons holding such a position from being swayed by interest rather than by duty (see Bray v. Ford (1896) AC 44, at p 51 ); it is "a rule to protect directors, trustees, and others against the fallibility of human nature": Costa Rica Railway Co. Ltd. v. Forwood (1901) 1 Ch 746, at p 761 . If the maintenance of a very high standard of conduct on the part of fiduciaries is the purpose of the rule it would seem equally necessary to deter other persons from knowingly assisting those in a fiduciary position to violate their duty. If, on the other hand, the rule is to be explained simply because it would be contrary to equitable principles to allow a person to retain a benefit that he had gained from a breach of his fiduciary duty, it would appear equally inequitable that one who knowingly took part in the breach should retain a benefit that resulted therefrom. I therefore conclude, on principle, that a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation. This conclusion is supported by Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 , Karak Rubber Co. Ltd. v. Burden (1972) 1 WLR 602 , and the earlier similar case of Gray v. Lewis (1869) LR 8 Eq 526 (reversed on other grounds: (1873) LR 8 Ch App 1035 ), although it represents a slight extension of those cases, since in all of them the defendants had obtained possession of what was regarded as trust property. A case which in some respects seems to me to be even closer to the present is Cook v. Deeks (1916) 1 AC 554 . In that case directors of the Toronto Company, while ostensibly acting for that company, obtained for themselves a contract which they should have obtained for the company. It was held that the defendant directors could not retain the benefit of the contract for themselves, but must be regarded as holding it on behalf of the company (1916) 1 AC, at p 563 , and they were ordered to account for the profits which they had made out of the transactions. However the directors had formed a second company, the Dominion Construction Company, which had taken over the contract. The Judicial Committee said (1916) 1 AC, at p 565 , that they had in the course of their judgment referred to the claim as one against the directors, and went on: "But it was not, and it could not be, disputed that the Dominion Construction Company acquired the rights of these defendants with full knowledge of all the facts, and the account must be directed in form as an account in favour of the Toronto Company against all the other defendants". Although their Lordships spoke of the directors holding the contract on behalf of the Toronto Company, this was not a case of the misuse by trustees of trust property, but one in which persons in a fiduciary position obtained for themselves something which they ought to have got for the company, and no order declaring any of the defendants to be constructive trustees was ever made. (at p398)

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17. I respectfully agree with what was said in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 as to the meaning of "dishonest and fraudulent" for the purposes of the rule. This expression is to be understood by reference to equitable principles and, as I have already indicated, in my judgment it includes a breach of trust or of fiduciary duty. On behalf of Consul, it was submitted that the further conclusion reached in the Selangor Case, that to render a stranger liable for breach of fiduciary duty it is not necessary to show that he has had actual knowledge that what was done was in breach of the duty, was erroneous. On this point the Selangor Case was said to be inconsistent with the later decision of the Court of Appeal in Carl Zeiss Stiftung v. Herbert Smith (No. 2) (1969) 2 Ch 276 . That decision depended on the view that knowledge of a claim made against the client of a solicitor by the other party was not sufficient to amount to notice to the solicitor of a trust or of misapplication of moneys; or as Sachs L.J. said (1969) 2 Ch, at p 296 : "no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properly assess." The case was in my opinion distinguishable from the Selangor Case (1968) 1 WLR 1555 and did not finally decide the question now under consideration. It may be that it is going too far to say that a stranger will be liable if the circumstances would have put an honest and reasonable man on inquiry, when the stranger's failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognizing an impropriety that would have been apparent to an ordinary man. However, for reasons that will appear, it is unnecessary for me to express any concluded view on these questions and I assume for the purposes of this case, but without finally deciding, that the formulation of principle on this point in the Selangor Case was correct. (at p398)

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18. It then becomes necessary to apply the principles which I have been discussing to the circumstances of the present case. As I have said, Grey committed a breach of the fiduciary duty that he owed to D.P.C., amongst others. Consul assisted him to commit that breach of duty by buying the properties and arranging to give him a share of the profits resulting from the purchase. The crucial question in the case is whether Consul assisted in that breach of duty "with knowledge", so as to render Consul liable. Whatever knowledge Clowes had must be imputed to Consul. Clowes was aware that Grey stood in a fiduciary position and was of course aware of the arrangements entitling Grey to share in the profits. The fact that Clowes endeavoured to hide the transactions from Walton clearly shows that Clowes knew that Walton (and therefore D.P.C.) did not have full knowledge of the transactions and had not assented to them. If it has been proved that Clowes knew, or that an honest and reasonable man with knowledge of the facts known to Clowes would have thought, that Grey was acting in breach of his fiduciary duty in arranging for Consul to buy the properties and to share in the profits, enough will have been established (on the assumption made above) to render Consul accountable to D.P.C. In those circumstances it would not matter that D.P.C. might not have been able to buy the properties, and that in fact D.P.C. might have suffered no loss. However, according to findings which cannot be disturbed, Clowes believed that the Walton companies were in financial difficulties and were not interested in buying the Rozelle properties. The question then is whether Grey would have been acting in breach of his duty in buying those properties, or in arranging for someone else to buy them and to share the profits with him, once he had been informed that the Walton companies were not interested in them. It has not been proved that Grey's position with the Walton companies gave him the opportunity to buy the properties or that he availed himself of any information of a confidential kind in deciding to recommend the purchases to Consul. Did the fact that he was employed to find properties for purchase by the Walton companies mean that he would have been acting in breach of his duty if he had participated in the purchase of a property once those companies had (uninfluenced by him) decided not to buy it? Could a conflict between interest and duty be involved in such a purchase? The answer to questions of this kind may of course vary in the different circumstances of particular cases. In the circumstances of the present case, I have concluded that Grey would not have been in breach of his fiduciary duty to any of the Walton companies in buying a property which Walton had decided not to buy, assuming that the decision made by the Walton companies had not been induced by Grey, but had been forced upon them by their financial straits, and also that in making his decision to buy Grey was not acting on information gained from his position with the companies. If Walton had decided not to buy the property, in these circumstances, it seems to me that Grey was entitled to buy it for himself. He might have been lacking in candour, and perhaps in moral sensibility, in acting behind Walton's back, but once Walton had decided not to buy the property there was no possibility that if Grey considered buying it he would be faced with a conflict between interest and duty - the property would have been removed from the ambit of his duties. It follows that on the facts which Clowes believed to exist, Grey was not acting in breach of his fiduciary duty in participating in the purchase of the properties. Therefore Clowes did not knowingly participate in Grey's breach; he neither actually knew, nor had reason to believe, that Grey was violating his duty, and in the circumstances an honest and reasonable man would not have thought it necessary to inquire further. On behalf of D.P.C. it was argued that the arrangements made for Grey to share in the profits of the properties were tantamount to bribes, and that Clowes must have known that Grey was acting improperly in accepting them. In my opinion this argument cannot be accepted. Assuming Clowes' honest belief that the Walton companies were not interested in the properties, there was nothing calculated to divert Grey from his duty in arranging to share with him the profits and losses involved in the purchase. Although the acknowledgment of 19th June 1968 referred only to a sharing of profits, the evidence of Clowes, which Hope J. apparently accepted, was that separate arrangements were made during the course of each transaction, and that pursuant to these arrangements Grey became subject to obligations as well as entitled to rights. That circumstance weakens the argument that the arrangements partook in any way of the nature of a bribe, but the vital matter on this aspect of the case is that it was not shown that Clowes was endeavouring to persuade Grey to act in any way contrary to his duty. Finally therefore I have reached the conclusion that in relation to the Rozelle properties there has been a failure to establish that Consul (through Clowes) had knowledge - using that term in the wide sense accepted in the Selangor Case (1968) 1 WLR 1555 - that Grey was committing any breach of his fiduciary obligations. (at p400)

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19. In relation to the Clubb Street property there is a further complication. Grey did not expressly inform Clowes that Walton had said that he was not interested in this property. If this had been an isolated transaction, this fact would have been of great importance. As things were, however, there had been two earlier transactions, closely connected both in their nature and in point of time. Grey had told Clowes, and Clowes believed, that the properties at Dulwich Hill and Rozelle were not of interest to Walton because of his difficulties with finance. Clowes knew that in truth Walton was in considerable financial difficulties. The learned trial judge did not expressly find that Clowes assumed that Walton had disclaimed any interest in the Clubb Street property also. He said that in respect of this property Clowes did not have "any particular reason for believing that Mr. Grey was not committing a breach of the duty he believed Mr. Grey owed the companies, unless it be the fact that Mr. Grey told him he heard about the property from a solicitor, or unless he was relying upon his general belief that Mr. Walton's companies were not interested in buying properties because of their financial position". Although this passage is, with respect somewhat obliquely phrased, it is I think clear that the judge intended to find that Clowes had the general belief to which he referred. Further, the explanation given by the judge for the belief of Clowes that there was something wrong in relation to the transactions was intended to exclude the suggestion that Clowes thought that Grey had acted in breach of his fiduciary duty. I think that consistently with these findings it must be concluded that Clowes believed that in the case of this property, as in the case of the other properties, the Walton companies were not interested in making a purchase. It is true that the purchase price of the Clubb Street property was comparatively small, but Walton's financial difficulties were by no means trivial, and it was not unreasonable to believe that the companies could not afford to buy the property. In this case also it has not been established that Clowes knew or should have known that Grey was in breach of his duty, nor has it been established that an honest and reasonable man in the position of Clowes would have felt bound to make further inquiries to confirm the assumption that the Walton companies could not afford to buy the Clubb Street property and were not interested in it. Had Clowes inquired from Grey, there can be no doubt that Grey would have confirmed him in his belief, but assuming his own honesty and his belief in Grey's honesty, and having regard to what had occurred in relation to the two former transactions, he was not bound to inquire. (at p401)

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27. In Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) (1969) 2 Ch 276 , the Court was again, as in the earlier cases to which I have referred, concerned with a solicitor, a stranger to the trust but employed as the agent of the trustee, who had received trust moneys but had not so acted as to constitute himself a trustee de son tort. Danckwerts L.J. regarded a passage in Halsbury's Laws of England, 3rd ed., vol. 38, par. 1450, founded upon Barnes v. Addy (1874) 9 Ch App 244 , as correctly stating the law when it requires a stranger, before he may become a constructive trustee, knowingly to have assisted in a trustee's dishonest and fraudulent act. Sachs L.J., after remarking (1969) 2 Ch, at p 296 that until the judgment of Ungoed-Thomas J. in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 there was no modern judicial decision examining what exactly is needed in the way of knowledge or notice to fix a stranger with trusteeship of assets although he has not intermeddled with them so as to become trustee de son tort, proceeded to state his conclusion that a stranger, aware only of a doubtful equity, of "a disputed claim the validity of which he cannot properly assess", did not thereby become a constructive trustee. His Lordship was careful to state that this proposition owed nothing to the fact that the defendants received the moneys in question as agents or as solicitors but was applicable to any ordinary stranger receiving trust moneys. He concluded (1969) 2 Ch, at p 298 that for a stranger to a trust to be made liable as constructive trustee an element of dishonesty or of consciously acting improperly must be present as opposed to an innocent, albeit negligent, failure to make proper inquiry; there must be both knowledge of the trust and of the breach of trust, or a wilful shutting of the eyes to the obvious. Edmund Davies L.J. took a like view, insisting upon the need for there to be established a " 'want of probity', a feature which recurs through and seems to connect all those cases drawn to the court's attention where a constructive trust has been held to exist" (1969) 2 Ch, at pp 300-301 . His Lordship concluded that the authorities showed that nothing short of want of probity would do, not even gross negligence sufficing, in its absence, to render a stranger liable as constructive trustee. Want of probity was, he thought, the hallmark of constructive trusts, however created. (at p410)

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39. I have treated Clowes as no more than a participant in Grey's dishonesty. It was said on behalf of the respondent that even if Clowes had no actual knowledge of that dishonesty nevertheless his conduct amounted to more than mere participation; he actively encouraged Grey's dishonesty by his offer to share with Grey in the anticipated profits from these land dealings thus inducing Grey to depart from his duty to the Walton Group; the analogy of a bribe was referred to. Even were this so I doubt whether, in the absence of knowledge by Clowes, the plaintiff would be entitled to equitable relief; however in my view the facts as found by Hope J. lend no support to this submission but, on the contrary, point in the opposite direction. Clowes did not agree prospectively to share all anticipated profits with Grey; instead three distinct oral agreements were made, one in respect of each of the transactions and Hope J. found that two of these were made after Grey first brought the properties to Clowes' attention, as to the third it seems a proper inference from his Honour's account of events that it too was made after that property was first recommended by Grey to Clowes. Again there is no evidence that Clowes took the initiative in approaching Grey to obtain his assistance, on the contrary, it seems that it was Grey who on each occasion initiated the proposal. Moreover what might be thought to be agreements containing terms suspiciously generous to Grey turn out on examination to impose upon him substantial obligations; each oral agreement was in the same terms and included an obligation on Grey's part to share any losses, to find finance for the purchase, to help in the management of the property and to pay half of any outgoings to the extent that they might exceed income. The large purchase of properties at Rozelle was the only one involving any substantial outlay and it emerges from the cross-examination of Clowes that Grey did in fact arrange finance for the purchase of these properties, he and his wife becoming personal guarantors in respect of the three mortgages by means of which that finance was procured. (at p414)

At a glance

Court

Decision date

Before

Source

Judgment (131 paragraphs)

Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373 (26 February 1975)

Parties

Cases Cited (5)