It has become common to describe the first limb as involving "knowing receipt" and the second limb as involving "knowing assistance". Lord Selborne LC did not use the expression "knowing receipt". It seems to have been employed first in 1966 by the editors of Snell's Principles of Equity (26 ed, p 202)… However, in 1972 Brightman J adopted the expression in Karak Rubber Co Ltd v Burden [No 2] [1972] 1 WLR 602 at 632 - 633. He said that the labels "knowing receipt or dealing" and "knowing assistance" employed by Snell were "an admirable shorthand description of their different natures". Those labels have been commonly used since then. In contrast, Lord Selborne LC's expression was "receive and become chargeable" (at 251). Persons who receive trust property become chargeable if it is established that they received it with notice of the trust.
31 It will be appreciated that in the instant case the relevant property was not trust property as such, but was partnership property. What is, however, being alleged against the First, Second, Third, and Fourth Defendants is that as partners they were in breach of the fiduciary obligations owed by them to another member of the partnership - the Plaintiff. To that extent, it is asserted by the Plaintiff that the principles relating to the breach of fiduciary obligations and the knowing assistance of another person in a dishonest and fraudulent design on the part of those owing such fiduciary obligations has equal application to the circumstances of the instant case.
32 Such a submission is clearly arguable, and, if ultimately accepted, would, by extension of the principles compendiously referred to as the second limb in Barnes v Addy, affect the beneficial ownership of the property transferred to and now held by the Fifth Defendant.
33 If the Plaintiff can ultimately establish an entitlement to relief against the Fifth Defendant consequent upon her knowing assistance in the breach of the fiduciary obligations of the other Defendants to the Plaintiff, then the concept of a constructive trust falls to be considered.
34 Where a plaintiff is able to establish a cause of action, a Court of Equity can always mould to the circumstances of the case, the relief to which that successful plaintiff is entitled. As was recognised by Deane J in Muschinski v Dodds (1985) 160 CLR 583, at 616,
The principal operation of the constructive trust in the law of this country has been in the area of breach of fiduciary duty. Some textwriters have expressed the view that the constructive trust is confined to cases where some pre-existing fiduciary relationship can be identified: see, e.g., Lewin on Trusts , 16th ed. (1964: Mowbray ed.), p. 141. Neither principle nor authority requires however that it be confined to that or any other category or categories of case: cf., generally, Professor R. P. Austin's essay on "Constructive Trusts" in Essays in Equity , (Finn ed.) (1985), esp. at pp. 196-201; Waters, op. cit., p. 28ff. Once its predominantly remedial character is accepted, there is no reason to deny the availability of the constructive trust in any case where some principle of the law of equity calls for the imposition upon the legal owner of property, regardless of actual or presumed agreement or intention, of the obligation to hold or apply the property for the benefit of another: cf. Hanbury and Maudsley, op. cit, p. 301; Pettit, op. cit, p. 55.
35 It will be appreciated that the imposition upon a defendant of a constructive trust in favour of a successful plaintiff does not offend against the principles of indefeasibility of title. The legal title in the subject property continues in the person or entity who is the registered proprietor. Nevertheless, that registered proprietor will hold the legal estate for the benefit of the person in whose favour the constructive trust is imposed.
36 It is alleged by the Plaintiff that the Fifth Defendant received the real property with full notice of the breach of fiduciary duty owed to the Plaintiff by the Fourth Defendant, and that in consequence the Fifth Defendant is the constructive trustee of the real property, such a consequence constituting an in personam exception to the Fifth Defendant's indefeasibility of title.
37 In Farah Constructions, supra, the High Court of Australia had occasion to consider instances in which a constructive trust will operate as an in personam exception to indefeasibility. Their Honours said, at 171,
The essential point on which Ashley A-JA differed from the majority in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 at 166 was put thus:
"The proposition that an equity may be recognised and enforced so long as it involves no conflict with the indefeasability [sic] provisions has not prevented the High Court from imposing constructive trusts so as to recognise equities in cases where the transfer of real property was effected at different stages in the course of events giving rise to the equities."
He referred to Bahr v Nicolay [No 2] (1988) 164 CLR 604, Muschinski v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137. Earlier, Ashley A-JA had said, at 162, that the "necessary balance" between personal equities and indefeasibility was "disclosed by the judgment of Wilson and Toohey JJ in Bahr v Nicolay [No 2] " (1988) 164 CLR 604 at 637-638. However, as Pullin J pointed out in LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517 at 571, in those cases "the defendant was the primary wrongdoer, attempting to ignore an obligation to share or convey the land with or to the plaintiff. In none of those cases was the defendant a party who merely had notice of an earlier interest or notice of third party fraud". There is no analogy between the constructive trusts involved in those cases and that which can arise from application of the first limb of Barnes v Addy .
38 Whether or not it can be established that the Fifth Defendant was the primary wrongdoer in the sense in which that phrase was used in, for example, LHK Nominees Pty Ltd v Kenworthy, at 571 is a matter which must be determined by evidence at a final hearing.
39 If it be established that the Fifth Defendant gave knowing assistance to the breach of the fiduciary obligations owed by the other partners to their co-partner, the Plaintiff, then, consonant with the principles recognised by the High Court of Australia regarding the concept of a constructive trust, in such cases as Muschinski v Dodds, supra, and Baumgartner v Baumgartner (1987) 164 CLR 137, then it is at least arguable that the property legally held by the Fifth Defendant would be impressed with such a constructive trust in favour of the Plaintiff
40 As I have already observed, it is not essential, in an application of the nature of that with which I am presently dealing, that the Plaintiff persuade the Court that she must of necessity succeed in establishing that she is entitled to have imposed upon the real property held by the Fifth Defendant (and the appurtenant water rights) a constructive trust of the nature which was recognised in the Court of Appeal in Chancery in Barnes v Addy and in such decisions of the High Court of Australia as Muschinski v Dodds and Baumgartner v Baumgartner. All that is necessary is that the Plaintiff establish that such a claim is arguable. I have no hesitation in expressing my conclusion that the Plaintiff does have an arguable case in this regard.
41 It was the submission of the Fifth Defendant that the water rights go with the land and cannot be severed therefrom. However, I consider that the Plaintiff' submission to the contrary, that the water rights are severable from the land, is at the least arguable.
42 In any event, I do not see how the principles of indefeasibility of title consequent upon provisions of the Water Act 1912 can be determinative of the entitlement (if she be able ultimately to establish such an entitlement) of the Plaintiff to have imposed in her favour a constructive trust in respect to the land and appurtenant water rights of which the Fifth Defendant is the legal owner.
43 There remains to be considered, however, the final submission of the Fifth Defendant, that the Plaintiff's claim should be summarily dismissed in consequence of the deed of 31 October 1995. It will be appreciated that the Fifth Defendant was not a party to that deed. However, the deed contained a release by the Plaintiff of the Fourth Defendant (who is the husband of the Fifth Defendant). By clause 5.2 of that deed, the Plaintiff,
…releases David [the Fourth Defendant] from all or any actions, suits, causes of action, costs, interest, claims and demands whatsoever at law or in equity or howsoever arising, which one or others, jointly or severally may have against him arising out of or related to any fact, matter, event or circumstance predating this Deed.
44 It is submitted on behalf of the Fifth Defendant that there is no doubt that the transfer of the properties to her was within the contemplation of the parties at the time of the execution of the deed. The relevant contracts of sale were exchanged on 25 October 1995, thus predating the deed.
45 It is submitted on behalf of the Fifth Defendant that her alleged liability in equity (consequent upon the principles in Barnes v Addy and the imposition of a constructive trust upon property of which she is the legal owner, by way of remedying the position of the Plaintiff, is a liability in equity which is at most accessorial to the alleged breach of the Fourth Defendant's fiduciary obligations to the Plaintiff. Thus, so runs the argument of the Fifth Defendant, the release of the Fourth Defendant must also release any liability in this regard of the Fifth Defendant.
46 Senior Counsel for the Fifth Defendant in presenting this argument frankly conceded that there was no judicial authority which is precisely on point. The only analogous principles upon which the Fifth Defendant here relied concerned the situation of co-trustees where there was a release from liability of one of their number. It was acknowledged on behalf of the Fifth Defendant that such was not the situation in the present application, where the Fourth Defendant was asserted to be a fiduciary and the role of constructive trustee is sought to be imposed upon the Fifth Defendant by the Court.
47 However, the Fifth Defendant relied upon a 1938 decision of the Supreme Court of Appeals of the Commonwealth of Virginia, being First and Merchants National Bank of Richmond v Bank of Waverly (8 June 1938) 170 Va 469, 197 SE 462, that being an appeal from the Circuit Court of Sussex County. In that case it was held that, while the co-trustees were jointly and severally liable, the satisfaction of the cause of action made by one discharged the other, even though the parties did not intend to discharge the other joint wrongdoer.
48 However, the equation of co-trustees with joint tortfeasors made by their Honours in the Commonwealth of Virginia in 1938 has no warrant either in law or in principle, and totally misconceives the nature of the office of a trustee.
49 The dissenting judgment of Hudgins J in that case reveals a far greater understanding of the concepts of trusts and trustees and their obligations and liabilities. His Honour said (and I would respectfully agree),
I do not think the same rule [as that applicable to tortfeasors] should be applied to the release of one of two fiduciaries for the loss of trust funds.
The principles of law controlling the relation of the parties are different.
50 I am not persuaded, first, that the judgment of the majority in the Virginia case is correct, or, even if it were, that, by analogy, the principle upon which that decision was based would have the effect of discharging the Fifth Defendant from any liability which she might have incurred in consequence of her having knowingly accepted a transfer to her of property which had been relinquished by the Plaintiff by reason (as it is alleged) of the breach by the other Defendants of fiduciary duties owed to the Plaintiff. (In any event, it needs hardly to be emphasised that the Virginia case, which I consider to have been wrongly decided, is of no binding authority upon the Supreme Court of New South Wales.)
51 As I have already observed concerning the earlier grounds relied upon by the Fifth Defendant in the present application, it is not necessary that I should be persuaded that the Plaintiff must of necessity succeed in her claim against the Fifth Defendant. It is necessary only that, at this stage of the proceedings, I be satisfied that the Plaintiff has an arguable case. I am far from being persuaded that the inevitable consequence of the release of the Fourth Defendant is that the Fifth Defendant, if a knowing participant in the breach of the Fourth Defendant's fiduciary obligations to the Plaintiff is also thereby released from the consequences of her such knowing participation.
52 I am satisfied that the claim of the Plaintiff against the Fifth Defendant is arguable, and is not doomed to failure. It follows, therefore, that the present application of the Fifth Defendant must be dismissed.
53 It will be recalled that at the outset of the hearing the Plaintiff sought to file a further amended statement of claim. The Fifth Defendant opposed that application, not because of the form of that document, but because of its substance, which (so the Fifth Defendant argued) did not remedy any of the asserted defects of the Plaintiff's case against the Fifth Defendant, as identified in the present pleading. Since, in my conclusion, the Fifth Defendant has not succeeded in having dismissed the substantive claim brought against her, there is no reason why the Plaintiff should not, if she now so desires, file a further amended statement of claim, subject, of course, to any costs consequences which may flow from the filing of such a pleading at this stage of the proceedings.