Edgewater Homes Pty Ltd v Donohoe

The questions

1. The separate question raises the following questions: 1. Does the release by a party, wronged by an errant fiduciary, of those who have knowingly received the fruits of the fiduciary's breach of duty or to have knowingly assisted the fiduciary, also release the errant fiduciary? And; 2. Does the release by an employer, wronged by an employee's breach of his or her contractual duty of fidelity, of those alleged to have induced that breach, also release the employee?

Decision

1. The answer to these questions is: 1. Yes; and 2. No.

The claim for breach of fiduciary duty

1. For convenience, I shall refer to each of NDH Building Services, and the other released parties, as the "Assistants", unless the context otherwise requires.
2. In their submissions, Mr Ashhurst SC, and Mr Pritchard SC, who appeared with Mr Glasson and Mr Macauley for Mr Donohoe drew a distinction between the Assistants' obligation to compensate Edgewater for the loss it suffered by reason of their knowing assistance on the one hand, and their obligation to account to Edgewater for the money they knowingly received on the other.
3. I shall do the same. Each of the corporate Assistants both knowingly assisted Mr Donohoe's breach of fiduciary duty and knowingly received the fruits of that breach of duty. The individual Assistants knowingly assisted Mr Donohoe's breach of fiduciary duty, but did not themselves receive any of its fruits.
4. The principles governing actions for knowing receipt and knowing assistance are well established. There was no dispute about them before me.
5. They were summarised by Emmett AJA in Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118; (2018) 355 ALR 703 as follows (at [183]-[187]): "[183] There was no issue as to the relevant principles of liability based on Barnes v Addy. Thus, under the first limb, persons who receive trust property acquired in breach of trust become chargeable if it is established that they have received it with notice of the breach of trust. A claim on that basis may be made against not only a trustee who misapplies trust property but also a fiduciary who deals with property in respect of which he or she owes fiduciary obligations, in breach of such obligations. The elements of such a claim are as follows: ● the existence of a trust or a fiduciary duty with respect to property; ● the misapplication of such property by the trustee or beneficiary; ● the receipt of such property by the third party; and ● knowledge by the third party, at the time he or she received the relevant property, that it was property with respect to which a trust or fiduciary duty existed and that it was being misapplied or, in the case of breach by a fiduciary, that the property was transferred pursuant to a breach of fiduciary duty. [184] The knowledge sufficient to attract liability under the first limb is: ● actual knowledge of the trust or the existence of fiduciary duty and the misapplication of the relevant property or transfer pursuant to a breach of fiduciary duty; ● wilfully shutting one's eyes to those things; ● abstaining in a calculated way from making such enquiries as an honest and reasonable person would make; or ● knowledge of facts that to an honest and reasonable person would indicate the existence of the trust and the fact of misapplication. [185] Under the second limb, liability will also be imposed if the following are established: ● the existence of a fiduciary duty; ● a dishonest and fraudulent design by the fiduciary; ● the assistance in that design by the person to be made liable with knowledge of that design. [186] The categories of knowledge that are necessary are as follows: ● actual knowledge; ● wilfully shutting one's eyes to the obvious; ● wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; or ● knowledge of circumstances that would indicate the facts to an honest and reasonable person. [187] Liability under the second limb of Barnes v Addy is confined to cases where the breach of fiduciary duty amounts to a dishonest and fraudulent design. Thus, there must be dishonesty on the part of the fiduciary. Dishonesty amounts to a transgression of ordinary standards of honest behaviour. It is not necessary to demonstrate that the person thought about what those standards were." (Citations omitted.)

Joint and several with Mr Donohoe?

1. In Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 the Full Court of the Federal Court (Finn, Stone and Perram JJ) observed that there "are subsisting uncertainties as to whether and/or when the liabilities of the knowing assistant or recipient are only several, or are joint and several, with those of the delinquent fiduciary or trustee" (at [553]).
2. However, before me it was common ground that a defaulting fiduciary and a knowing assistant are jointly and severally liable to compensate for loss sustained by reason of breach of fiduciary duty.
3. Thus Mr Ashhurst commenced his submissions stating: "The starting proposition is we assume a [defaulting] fiduciary and an accessory to that default are jointly and severally liable as our friends have submitted."
4. A different view has been expressed by the authors of the latest edition of Meagher, Gummow & Lehane's Equity: Doctrines & Remedies, who state that "the liability of a knowing participant for loss suffered by the principal is now several only": J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) at [23-555] fn 419, citing the observations of the High Court in Michael Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [106].
5. In that passage the High Court said: "…this court has held that liability to account as a constructive trustee is imposed directly upon a person who knowingly assists in a breach of fiduciary duty. The reference to the liability of a knowing assistant as an 'accessorial' liability does no more than recognise that the assistant's liability depends upon establishing, among other things, that there has been a breach of fiduciary duty by another. It follows…that the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. So, for example, the claimant may seek compensation from the defaulting fiduciary (who made no profit from the default) and an account of profits from the knowing assistant (who profited from his or her own misconduct). And if an account of profits were to be sought against both the defaulting fiduciary and a knowing assistant, the two accounts would very likely differ."
6. I do not see that passage as providing authority for the specific proposition set out at [25].
7. Rather the passage is authority for the more narrow proposition set out in Grimaldi at [557]: "[T]he fiduciary and the third party will ordinarily be only severally liable for the profits each makes in consequence of the breach of fiduciary duty or breach of trust in which it participated/was a recipient… Each is not responsible for the other's profits…".
8. Nonetheless, the Full Court said that they were inclined to the view that a knowing assistant's obligation to "restore the trust fund by way of monetary compensation" was several, rather than joint and several with that of the "wrongdoing trustee" (at [559]).
9. However, Mr Pritchard pointed to a good deal of authority pointing to the proposition that the liability is joint and several including: 1. McLelland J in United States Surgical Corporation v Hospital Products International [1982] 2 NSWLR 766 at 817; 2. Young CJ in Eq in New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781 at [32] and [34]; 3. Lewison J in Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) at [1600]; 4. Scott VC (with whom Buxton LJ and Gage J agreed) in Trustor AB v Smallbone [2000] All ER D 624 at [97]-[98]; 5. Turner J (delivering the judgment of the New Zealand Court of Appeal also comprising North P and Woodhouse J) in Efstratiou, Glantschnig and Petrovic v Glantschnig [1972] NZLR 594 at 600.
10. There is also considerable academic support from the proposition that the relevant liability is joint and several, for example: 1. D Hayton, P Matthews and C Mitchell, Underhill and Hayton Law of Trusts and Trustees (19th ed, 2016, LexisNexis) at [98.70]; 2. A Gurr, "Accessory liability and contribution, release and apportionment" (2010) 34 MULR 481 at 488; 3. P Ridge, "Justifying the Remedies for dishonest assistance" (2008) 124 LQR 445 at 457; and 4. S Elliott and C Mitchell, "Remedies for dishonest assistance" (2004) 67 MLR 16 at 23; and 5. C Mitchell, "Assistance", in P Birks and A Pretto (eds), Breach of Trust (2002, Hart Publishing) at 157.
11. I need not resolve this vexed question. That is because even if the general rule is that the liability of a knowing assistant or recipient to compensate the victim is merely several with that of the errant fiduciary, there is an exception where the fiduciary and the assistant acted "in concert to secure a mutual benefit".
12. That exception was described by the Full Court in Grimaldi at [558] as follows: "[T]here may well be a further exception to the above general principle [that the defaulting fiduciary and knowing assistant or recipient are liable only severally for the profit each made]. It is that, if the fiduciary and the third party assistant or recipient act in concert to secure a mutual benefit, be this to misappropriate trust property for a particular mutually beneficial purpose or to participate in a breach of fiduciary duty to secure a mutual advantage (eg a business opportunity), they are jointly and severally liable to the wronged beneficiary/principal to restore the trust or to account for the profits made."
13. In this case, Edgewater alleges that Mr Donohoe and the Assistants did, in effect, act "in concert". Edgewater claims that Mr Donohoe made the payments to the corporate Assistants "as part of a dishonest and fraudulent design" and that the Assistants "knew, or ought to have known" of that dishonest and fraudulent design. If Edgewater's allegations about Mr Donohoe's conduct were made out, it is hard to see how the Assistants, or at least some of them, could have resisted a finding that they actually knew of that design.
14. Mr Donohoe and the Assistants did not "secure a mutual benefit" in the sense of each receiving the same benefit from the scheme. The Assistants received some 73 per cent and Mr Donohoe with some 27 per cent of the proceeds of the scheme. But each achieved the "mutual benefit" of receiving a payment from Edgewater to which they were not entitled.
15. In light of this authority and material, and in view of Mr Ashhurst's concession, I proceed on the basis that the Assistants' liability to Edgewater was joint and several with that of Mr Donohoe.

Release of a party under a joint and several liability

1. At common law, the general rule is that a release granted to a party jointly and severally liable with others, releases those others.
2. Thus, in Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574; [1996] HCA 38, Gummow J (with whom Gaudron J agreed) said at 608: "In general, a release given to, and an accord and satisfaction effected with, one of a number of parties jointly or jointly and severally liable, contractually discharges the others. This is so even though, in the latter case, the obligation was joint and several, a result described as 'perhaps surprising'." (Citing Halsbury's Laws of England (4th ed, vol 9) pars 627-629.)
3. The liability in question in Thompson was in tort, the question being whether two television channels were joint tortfeasors by reason of a broadcast of allegedly defamatory material.
4. Thus, in the same case, Brennan CJ, Dawson and Toohey JJ (at 581) quoted with approval (as did Gummow J at 609) in Smith LJ's dictum in Duck v Mayeu [1892] 2 Q.B. 511 at 513: "[A] release granted to one joint tortfeasor, or to one joint debtor, operates as a discharge of the other joint tortfeasor, or the other joint debtor, the reason being that the cause of action, which is one and indivisible, having been released, all persons otherwise liable thereto are consequently released."
5. The operation of the common law rule in relation to joint tortfeasors has been ameliorated by statute, albeit not in a manner presently relevant by (in NSW) s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).
6. The common law rule identified by Gummow J in Thompson, and applied in that case in relation to joint tortfeasors, also applies to parties jointly liable in contract: Walker v Bowry (1924) 35 CLR 48; [1924] HCA 28 at 56 (Isaacs ACJ with Rich J agreeing) and at 57-58 (Starke J).
7. In that case, Starke J said at 58 that it was a well-established common law rule that when a creditor released one of two or more sureties who had contracted jointly and severally, the others were discharged, because the joint suretyship is the "essential condition of the liability" of each and "part of the consideration of the contract of each". By releasing one surety, the creditor "has broken the essential condition of liability of the other sureties and thereby discharged them".
8. The Victorian Court of Appeal has recently held that the reasoning in Thompson governing the position of joint, or joint and several tortfeasors applies equally to joint or joint and several debtors; Harplex Pty Ltd v Konstandellos (2018) 54 VR 174; [2018] VSCA 67 at [60] (McLeish and Hargrave JJA and McDonald AJA).
9. Thus, at common law, a release of a party jointly and severally liable in tort or in contract "contractually discharges the others".
10. The question is whether that principle should also apply here, with the effect that Edgewater's release of the Assistants, being parties jointly and severally liable with Mr Donohoe in respect of his breach of fiduciary duty, had the effect of releasing Mr Donohoe.

Defaulting fiduciary - release of a knowing assistant or knowing recipient

1. There is no direct binding authority on the question.
2. Mr Ashhurst submitted that there was no "principled" reason why the common law rule concerning the release of joint tortfeasors and persons jointly liable in contract should also apply in a case of breach of fiduciary duty.
3. There is, however, academic and other support for the proposition that the release by a beneficiary of the primary wrongdoer releases those with whom the primary wrongdoer would otherwise be jointly and severally liable.
4. Thus in P Birks and A Pretto (eds), Breach of Trust (2002, Hart Publishing) Prof Mitchell stated in his chapter on "Assistance", 139 at 208: "If a claimant releases the primary wrongdoer or affirms or acquiesces in the primary breach, then this too will debar him from suing the dishonest assistant. The reason for this is that dishonest assistants are jointly and severally liable with the wrongdoing trustees or fiduciaries in whose breaches of duties they assist, with the consequence that the release of one operates to release the others as well."
5. Similarly, the learned authors of Lewin on Trusts, (19th ed, 2015, Thompson Reuters) said at p 1904 [39-100]: "If the beneficiary releases the principal in a breach of trust of fraud so as to extinguish any liability, he cannot afterwards take proceedings against other parties who would have been jointly and severally liable."
6. Lewin cites as authority of that proposition Thompson v Harrison (1787) 2 Bro. CC 164; 29 E.R. 94. In that case Thurlow LC held that the release by the beneficiary of the trustee had the result that "it seemed impossible to give him any relief" against knowing recipient of the trust property.
7. In Yeshiva Properties No. 1 Pty Ltd v Marshall [2005] NSWCA 23 Bryson JA, with whom Mason P and Beazley JA agreed, said in obiter at [80]: "To my mind it is doubtful whether an equitable remedy against an alleged accessory should be granted to a plaintiff who has given the alleged defaulting trustee or fiduciary a release, or has decided not to sue the trustee or fiduciary. Doing equity as between the plaintiff and the accessory, who is not the person principally liable, seems to me to be possible only if the plaintiff also pursues his claim against the person principally liable. A plaintiff who seeks an equitable remedy commits himself to a suit in which all equities in the controversy will be resolved together, and the court should not allow the plaintiff to decide which party to sue and which party to ignore or give a release", perhaps for forensic advantages related to assessed readiness to contest the claim". (Emphasis added.)
8. McLaughlin AsJ appears to have reached an inconsistent conclusion in Coulton v Coulton [2008] NSWSC 910, albeit in the context of a summary judgment application and in circumstances where it appears that Bryson JA's observations in Yeshiva were not drawn to McLaughlin AsJ's attention.
9. If, as these authorities suggest, the release of the primary wrongdoer releases his or her assistant, I see no reason why the converse should not apply.
10. A knowing assistant or recipient should not necessarily be seen as being less culpable or blameworthy than the defaulting fiduciary he or she is assisting.
11. As Prof Ridge pointed out in the article to which I referred at [31(c)] above, depending on the facts, the knowing assistant may well be the "instigator of the breach" of fiduciary duty. The role of the assistant and the fiduciary can doubtless vary greatly. The applicable general principle should not depend on competing levels of culpability in the facts at hand.
12. The liability of a knowing assistant has been described as "ancillary" to or "derivative of" that of the defaulting fiduciary. However, as I have mentioned at [26], the High Court has pointed out in Michael Wilson & Partners Ltd v Nicholls at [106] that "does no more than recognise that the assistant's liability depends upon establishing, among other things, that there has been a breach of fiduciary duty by another".
13. In those circumstances, I accept Mr Pritchard's submission that there is "no principled reason (in light of the liability being joint and several) why any distinction should be drawn between the operation of a release in favour of the defaulting fiduciary and a release in favour of a third party accessory".
14. Accordingly, my conclusion is that, so far as concerns Mr Donohoe's liability to compensate Edgewater for loss suffered by reason of his breach of fiduciary duty, the release by Edgewater of the Assistants had the effect of releasing Mr Donohoe.

The Assistants' liability to account to Edgewater for profits obtained from the breach of fiduciary duty

1. Mr Pritchard accepted that in respect of benefits or profits derived from a breach of fiduciary duty, the position differs from the liability to compensate for loss arising from the same breaches.
2. Mr Pritchard accepted that, generally speaking, a defaulting fiduciary, a knowing assistant and a knowing recipient are only severally liable for the profits that each of them, in fact, earned or made from the breach of the fiduciary duty.
3. However, as Mr Pritchard submitted, this principle is a general one only, and is subject to the "in concert to secure a mutual benefit" exception to which I have referred at [32] to [35] above.
4. It follows that, consistently with Grimaldi, Mr Donohoe and the Assistants were jointly and severally liable to Edgewater to account for the profit each made.
5. It follows from that, that the release by Edgewater of the Assistants of their obligation to account, has also released Mr Donohoe from his corresponding obligation.

The claim for breach of contract and of inducing breach of contract

1. On Edgewater's case, Mr Donohoe acted in breach of his contract of employment and the Assistants committed the tort of inducing that breach of contract.
2. I do not see how a release by Edgewater of its claim of inducing breach of contract against the Assistants has any effect on its claim of breach of contract against Mr Donohoe.
3. Mr Pritchard in effect accepted that the liabilities of Mr Donohoe for breach of contract and the Assistants for inducing that breach of contract were not joint liabilities. Thus Mr Pritchard, without demur, cited Young J's evident approval of the statement of McLaughlin M to that effect in Sky Channel Pty Ltd v Tszyu [2000] NSWSC 838 at [4].
4. In light of Sky Channel Mr Pritchard accepted that: "In light of the above, there may be no room for the operation of the common law principle regarding the effect of a release of one joint and several tortfeasor on other tortfeasors…".
5. In oral submissions the only basis upon which Mr Pritchard sought to justify the proposition that the release by Edgewater of the Assistants of the inducing breach of contract claim operated to release Mr Donohoe from his liability for breach of contract was that both the Assistants' tort and Mr Donohoe's breach of contract had caused the same loss to Edgewater.
6. But concurrent tortfeasors "are persons whose acts concur to produce the same damage" (Baxter v Obacelo Pty Ltd (2001) 205 CLR 635; [2001] HCA 66 at [18]), and yet their liability is several not joint.
7. It must follow, as Mr Ashhurst submitted, that the mere fact that the Assistants' inducement of breach of contract and Mr Donohoe's breach of contract caused the same damage does not affect the several nature of their respective liabilities to Edgewater.
8. Accordingly, Edgewater's release of the Assistants did not release Mr Donohoe from his liability for breach of contract.

Conclusion

1. For those reasons, my answer to the separate question is that the release by Edgewater of its claim against the Assistants has released Mr Donohoe from Edgewater's claim against him for breach of fiduciary duty, but not Edgewater's claim for breach of contract.

Amendments 11 February 2019 - Typographical error in legislation on Coversheet and [12] corrected. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 February 2019