Fried v National Australia Bank Ltd

COMPACK PACKAGING EMPLOYEE SHARE PLAN PTY LTD (ACN 062 925 393)

EVATAB INVESTMENTS PTY LTD (formerly TED Engineering Investment Pty Ltd) (ACN 006 392 972)

AND: NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937)

THE COURT ORDERS THAT: 1. The applicants be given leave to amend their further amended statement of claim by deleting from each of pars 13, 14 and 15 the words "the Firm by its partner" and by deleting from par 82 the reference to pars 13, 14 and 15. 2. The respondents be given leave to amend their defences and cross-claims to the extent necessary to meet the amendments made pursuant to order 1. 3. Any amendments made pursuant to order 2 be filed and served before 4 August 2000. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

COMPACK PACKAGING EMPLOYEE SHARE PLAN PTY LTD (ACN 062 925 393)

EVATAB INVESTMENTS PTY LTD (formerly TED Engineering Investment Pty Ltd) (ACN 006 392 972)

AND: NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937)

INTERLOCUTORY JUDGMENT 1 On 10 May 2000 I granted leave to the applicants to file and serve a further amended statement of claim. The background to this somewhat convoluted litigation, and my reasons for granting that leave, are set out in my judgment in Fried v National Australia Bank Limited [2000] FCA 604. The present reasons should be read in conjunction with that judgment. 2 The trial of this proceeding commenced on 22 May 2000. Some days later, after the applicants had opened their case, they foreshadowed that they would again seek leave to amend their statement of claim. The eleventh respondent, Bendigo Bank, immediately indicated that it would oppose any application for leave to amend. The present ruling deals with the question whether the applicants should be granted leave, which they now formally seek, to amend their statement of claim. 3 It is necessary to set out in full the paragraphs of the further amended statement of claim which are affected by the proposed amendments. These amendments involve the deletion of certain words from pars 13, 14 and 15 and certain paragraph numbers from par 82. Paragraphs 13, 14 and 15, with the words to be deleted in bold, are as follows: "MISUSE OF TRUST FUNDS 13. On the dates set out in Part A of Schedule 2 and without the authority of the clients, the Firm by its partner Max Green transferred or caused or procured to be transferred from the accounts set out in paragraph 12 ("the accounts") the sums set out in Part A of Schedule 2 to the Green Account which sums were subsequently disbursed elsewhere for Green's own use. PARTICULARS Particulars of each transfer of funds including the Applicants entitled to the funds in the accounts, the bank account in which the funds were held, the date and amount of the cheque by which the funds were transferred, the bank drawing the cheque and the cheque payee are set out in Part A of Schedule 2 hereto. The circumstances in which each transfer of funds occurred is further described in Schedule 3 hereto. 14. On the dates set out in Part B of Schedule 2 and without the authority of the clients, the Firm by its partner Max Green transferred or caused or procured to be transferred from the accounts:- (a) the sums set out in Part B of Schedule 2 to the Aroni Colman Trust Account; and (b) thereafter the sums set out in Part B of Schedule 2 from the Aroni Colman Trust Account to the Green Account; which sums were subsequently disbursed elsewhere for Green's own use. PARTICULARS Particulars of each transfer of funds including the Applicants entitled to funds in the accounts, the bank account in which the funds were held, the date and amount of the cheque by which the funds were transferred, the bank drawing the cheque and the payee of the cheque are set out in Part B of Schedule 2 hereto. The circumstances in which each transfer of funds occurred is further described in Schedule 3 hereto. 15. On the dates set out in Part C of Schedule 2 and without the authority of the clients, the Firm by its partner Max Green transferred or caused or procured to be transferred the sums set out in Part C of Schedule 2 to Geddeson Finance Pty. Ltd. And D L Wolf. PARTICULARS Particulars of each transfer of funds including the Applicants entitled to funds in the accounts, the bank account in which the funds were held, the date and amount of the telegraphic transfer or cheque by which the funds were transferred, the bank drawing the cheque and the payee of the cheque are set out in Part C of Schedule 2 hereto. 4 The references to "the Firm" are to the second to ninth respondents who are the surviving partners of the former Melbourne firm of solicitors, Aroni Colman. 5 Paragraph 82, with the numbers to be deleted in bold, is as follows: "THE CLAIMS AGAINST BENDIGO BANK 81. … 82. The Applicants refer to and repeat paragraphs 6, 8 9, 11, 12, 13, 14 and 15 above." 6 The amendments which are proposed appear, at one level, to be modest and of little consequence. However, they were said by Bendigo Bank to give rise to a number of complex issues, and were strongly opposed.

The applicants' submissions 7 The applicants commenced their submissions by noting that Bendigo Bank had indicated in its written submissions that it opposed the amendments on the basis that: · the applicants' case against Bendigo Bank had always been that the Firm had caused the withdrawals to be made from the Bendigo accounts. The amendments would radically alter the entire basis of the applicants' claim, and profoundly affect the conduct of the proceeding; and · the applicants had proceeded against the Firm on the basis that the partners had caused the withdrawals to be made. They had settled with the Firm on that basis, and had thereby made an election. The amendments would result in an inconsistent claim being made against Bendigo Bank and would allow the applicants to approbate and reprobate. 8 The applicants submitted that if leave to amend were granted the nature of their case against Bendigo Bank would in no way be altered. 9 In support of that submission the applicants first drew attention to the basis upon which Bendigo Bank was joined as a respondent to this proceeding. In granting leave for that joinder on 17 May 1999, I said in my reasons for judgment: "In essence, the applicants contend that the bank acted in breach of its contractual obligations to the firm in its capacity as the applicants' trustee by permitting a number of withdrawals to be made by means of withdrawal slips which had not been signed by an authorised signatory. It appears that these slips, or the majority of them, were signed by Max Green, who had himself become a partner in the firm, but who was not himself an authorised signatory to the accounts." 10 The applicants contended that this passage demonstrated that their case against Bendigo Bank had always been predicated upon the proposition that Max Green had acted without the authority of the Firm. The amendments proposed would not alter this proposition. 11 The applicants submitted that their case was, and always had been, that when Bendigo Bank delivered to Green the bank cheques which are the subject of this proceeding, it acted in breach of the mandate of the Firm. The applicants argued that the breach of mandate occurred because Green was not, at any relevant time, an authorised signatory to the accounts from which the funds were transferred. 12 The applicants submitted that on a fair reading of their statement of claim it was perfectly clear that their case against the Firm had always been that Green withdrew the sums from the Bendigo accounts, and that the other partners of the Firm were liable, pursuant to s 9 of the Partnership Act 1958 (Vic) for his acts. In particular, the applicants submitted, it had never been contended that the other partners of the Firm had acted dishonestly or with any knowledge of the fact that Green was involved in a series of defalcations. The applicants referred to par 17 of their statement of claim which, they submitted, made this clear: "17. Wrongfully and in breach of its fiduciary duty, its contractual obligations and its duty of care referred to in the previous paragraph, the Firm failed:- (a) to hold the moneys for and on behalf of the clients; (b) to use and apply the moneys exclusively for the benefit of the clients; (c) to preserve and protect the moneys and any income derived therefrom; (d) to account to the clients for the use of and the application of moneys; (e) to take all necessary steps to protect against and prevent any wrongful use of the moneys. PARTICULARS (a) Max Green, a partner of the Firm, withdrew the sums set out in Schedule 2 on the dates set out therein. (b) Green thereafter applied the moneys for his own benefit by arranging for them to be paid as set out in Schedule 2:- (i) directly into the Green Account operated by Green as set out in Part A of Schedule 2; or (ii) into the Aroni Colman Trust Account and thereafter into the Green Account as set out in Part B of Schedule 2; or (iii) to various other persons as set out in Part C of Schedule 3. (c) Shortly after each such payment into the Green Account, Green transferred the funds or a majority of the moneys to an account in Bangkok. (d) The Firm did not take any or any sufficient care to supervise, review or audit the dealings by Green in relation to moneys held on behalf of clients. (e) The Firm did not take any or any sufficient care to detect or prevent any fraud by a partner or employee of the Firm in respect of moneys held by the Firm on behalf of the clients." (emphasis added) 13 The applicants submitted that the deletion of the words "the Firm by its partner" from pars 13, 14 and 15 would only make plain, if it were not already plain, that the withdrawals effected by Green from the Bendigo accounts involved a breach by Bendigo Bank of the mandate of the Firm. 14 The applicants denied Bendigo Bank's contention that, having proceeded against the Firm on the basis that the partners had caused the withdrawals to be made, the amendments would result in an inconsistent claim being made against Bendigo Bank. They also denied Bendigo Bank's contention that having settled with the Firm on the basis that the partners had caused the withdrawals to be made they had thereby made an election, and that the amendments would allow them to approbate and reprobate their claims. They submitted that there was no basis for the premise underlying each of these contentions because it had never been their case that the partners had relevantly caused the withdrawals to be made. Rather, they had sought to fix the partners with liability for Green's acts in connection with these withdrawals. 15 The applicants further submitted that were they to be permitted to make the amendments sought, they would not be pursuing against Bendigo Bank a different and inconsistent claim from that which they had previously pursued against the Firm. The applicants submitted that notwithstanding that they had chosen to settle their claim against the Firm on the basis of the existing pleadings, this did not constitute an election, and did not bar them from continuing with their action against Bendigo Bank. 16 The applicants submitted that there was no reason why they should not be permitted to allege that Bendigo Bank was liable to the Firm for a breach of mandate while at the same time alleging, in their claim against the Firm, that the Firm was liable to them for a misuse of trust funds. The two claims were not inconsistent. The claim against the Firm was based purely upon the partners being liable for Green's acts, and not upon any moral obloquy on their part. 17 Finally, the applicants submitted that Bendigo Bank had not pointed to any prejudice which it would suffer if leave to amend were granted. The applicants submitted that it was clear that there would be no such prejudice.

Bendigo Bank's submissions 18 Bendigo Bank submitted that were I to grant leave to amend the statement of claim in the manner sought the nature of the applicants' claims would be radically altered. Bendigo Bank contended that, contrary to what the applicants now said, the claim had always been that the Firm, by its partner Green, and not Green alone, had withdrawn the monies from the various accounts. In other words, Bendigo Bank submitted, the applicants' claim had always been that the Firm (by Green) had committed various wrongs, and that in all relevant respects Green organically was the Firm. On this scenario, the surviving partners were liable, Bendigo Bank submitted, because Green's acts were the acts of the Firm. 19 Bendigo Bank submitted that if the amendments were to be made the course of the entire proceeding would be profoundly affected. For example, the applicants would then contend, as against Bendigo Bank, that Green and not the Firm, had made the withdrawals. The necessary consequence would be that Bendigo Bank, and not the Firm, had been defrauded. That would be because Bendigo Bank would have allowed withdrawals to be made by a person who was not its customer. On that basis, the Firm would not have paid for the bank cheques which Bendigo Bank issued, and which were instead given over at no cost to the Firm. It was clear, however, that Bendigo Bank had only ever purported to sell the bank cheques. As the Firm would not have purchased them, it could never have become their true owner, or entitled to immediate possession of them. The result would inevitably be that the applicants' claims in conversion, which presently make up a significant component of their case against National Australia Bank Limited ("NAB"), must fail. 20 Bendigo Bank further submitted that the amendments would also lead to the applicants' claims for breach of fiduciary duty, as presently pleaded against the Firm in pars 16-19, being taken to be abandoned. Bendigo Bank submitted that if the Firm did not cause the withdrawals to be made it could not have acted in breach of trust. The claims for loss and damage pleaded against the Firm in pars 24-26 would also be untenable. The impact of these amendments upon the future conduct of this proceeding would be substantial. A number of the claims brought against both NAB and Bendigo Bank were derivative in nature and depended for their viability upon liability being first established against the Firm. 21 Bendigo Bank's primary submission was that leave to amend should, in any event, be refused because the applicants had elected to settle their claim against the Firm upon the basis that the Firm had withdrawn the monies from the Bendigo accounts. Bendigo Bank contended that had the Firm not acknowledged having withdrawn these monies, the Firm's insurer would, in all likelihood, have declined under the terms of the Firm's indemnity insurance policy, to meet the Firm's claim for indemnity against it. The applicants had benefited from settling with the Firm, and the applicants and the Firm had both benefited from the Firm having settled with its insurer. The applicants had received payment of $1.23 million, as part of a total amount of $2.5 million which the insurer had agreed to pay to meet all claims brought against the Firm. 22 The fact that the applicants had settled with the Firm, and obtained a consent judgment of $1.23 million on the footing that the Firm had made the withdrawals, and was liable to the applicants on that basis, meant that the applicants were not at liberty to proceed against Bendigo Bank on a different footing. Were the Court to permit the applicants to do so, it would be seen to condone approbation and reprobation.

Conclusion 23 I do not accept Bendigo Bank's contention that the proposed amendments would have the effect of altering radically the claims made against it. I am satisfied too that Bendigo Bank has understood, from the time that it was brought into this proceeding, the precise nature of those claims. 24 There is no reason, in my view, why the applicants should not be permitted to allege, as against Bendigo Bank, a breach of the mandate of the Firm while at the same time, alleging against the Firm a misuse of trust monies. These allegations are not, in my view, inconsistent with each other. 25 The allegations made against the Firm do not involve any suggestion of actual dishonesty on the part of any of the partners. When pars 13, 14 and 15, which were drafted long before Bendigo Bank was joined as a respondent, are read fairly and in context, it becomes clear that the substance of the applicants' claim is, and always has been, that Green withdrew the monies from the Bendigo accounts, and that the partners of the Firm are liable for his acts, though they did not themselves act dishonestly. 26 If Bendigo Bank is correct in its contention that the proposed amendments will lead ultimately to the applicants' claims for conversion and breach of trust being untenable, that is a matter which can be addressed by the judge who will now hear this matter commencing in October of this year. There is nothing to prevent NAB, or Bendigo Bank, from moving for summary dismissal of any cause of action pleaded by the applicants which can no longer be sustained once the amendments have been made. It should be noted, however, that the applicants do not accept any of Bendigo Bank's contentions regarding the effect of these amendments upon the causes of action which they have pleaded. 27 Turning to Bendigo Bank's submission that the applicants are barred from seeking to amend their statement of claim because they have made an election, and the amendments are inconsistent with the course of action which they have adopted, I am unable to accept that contention. I do not regard the proposed amendments as infringing the doctrine of approbation and reprobation. 28 The term "election" is used in a variety of legal contexts. Its meaning at common law was canvassed by Jordan CJ in O'Connor v SP Bray Ltd (1936) 36 SR (NSW) 248 at 257-63, and also by Mason J in Sargent v ASL Developments (1974) 131 CLR 634 at 655. Mason J observed: "A person is said to have a right of election when events occur which enable him to exercise alternative and inconsistent rights, i.e. when he has the right to determine an estate or terminate a contract for breach of covenant or contract and the alternative right to insist on the continuation of the estate or the performance of the contract." 29 Where a person has with full knowledge done an unequivocal act showing the choice of one of two inconsistent rights, he cannot afterwards pursue the other, inconsistent right: United Australia Ltd v Barclays Banks Ltd [1941] AC 1. The purpose of the doctrine of election is to prevent a person taking up inconsistent positions: Elder's Trustees and Executor Co Ltd v Commonwealth Homes and Investment Co Ltd (1941) 65 CLR 603. An example of the operation of this doctrine is when a party to a contract has a right to terminate for breach, he must elect either to terminate, or to continue performance and seek damages. Once the election has been made it is final. 30 The doctrine of approbation and reprobation is conveniently summarised in Halsbury's Laws of Australia at par [190-35] as follows: "a person may not "approbate and reprobate" meaning that a person, having a choice between two inconsistent courses of conduct and having chosen one, is treated as having made an election from which he or she cannot resile once he or she has taken some benefit from the chosen course." (Footnote omitted) 31 In Halsbury's Laws of England, 4th ed Vol 16, at par [957] a similar statement of principle appears. The authors of the English text add:

"Thus a plaintiff, having two inconsistent claims, who elects to abandon one and pursue the other may not, in general, afterwards choose to return to the former claim and sue on it; but this rule of election does not apply where the two claims are not inconsistent and the circumstances do not show an intention to abandon one of them." (Footnotes omitted) 32 In Commonwealth v Verwayen (1990) 170 CLR 394 at 421-2 Brennan J said: "Election consists in a choice between rights which the person making the election knows he possesses and are alternative and inconsistent rights. A doctrine closely related to election, and sometimes treated as a species of election, is the doctrine of approbation and reprobation. This doctrine precludes a person who has exercised a right from exercising another right which is alternative to and inconsistent with the right he exercised as, e.g., where a person "having accepted a benefit given him by a judgment, cannot allege the invalidity of the judgment which conferred the benefit". An election is binding on the party who makes it once it is made overtly - or, at all events, not later than on the communication of an election to the party or parties affected thereby. It is binding whether or not others who are affected by the election have acted in reliance on it. In this respect, election is to be distinguished from estoppel." (Footnotes omitted) 33 There can be no doubt that the doctrines of election and of approbation and reprobation are alive and well in this country. As to the application of the principles set out above see Verschures Creameries v Hull and Netherlands Steamship Co Ltd [1921] 2 KB 608 at 611; Randwick Municipal Council v Broten [1964-5] NSWR 1445; Bienvenu v Royal Society for Protection of Animals [1967] VR 656 at 664; Sea Culture International Pty Ltd v Scoles (1991) 32 FCR 275; Express Newspapers Pty Ltd v News (UK) Limited [1990] 3 All ER 376; and VACC Insurance Limited v BP Australia Limited (1999) 47 NSWLR 716 at 724-5. 34 I do not accept that the applicants' actions in having entered into a deed of settlement with the Firm upon the basis of the pleadings as they presently stand prevent them from alleging against Bendigo Bank that Green, acting without authority, withdrew the monies from the Bendigo accounts. It is clear that notwithstanding the language of pars 13, 14 and 15 of the statement of claim, the terms of the deed of settlement do not involve any acknowledgment on the part of the surviving partners of the Firm that they had acted in any way dishonestly. Nor do the terms of the deed of settlement involve any acknowledgment on their part that they permitted Green to withdraw those monies knowing, or being reckless as to, what he might do with the funds. 35 It need hardly be said that any dispute may be settled without there being any acknowledgment of liability. The partners of the Firm were all potentially liable for Green's actions irrespective of whether or not they authorised him to make the withdrawals. Any allegation that the Firm transferred the monies, or caused the monies to be transferred (assuming contrary to my findings that pars 13, 14 and 15 contain such an allegation), was unnecessary in order to give rise to liability on the part of the partners. The settlement of the dispute between the applicants and the Firm has not resulted in any finding of fact, or any admission, to that effect. 36 I regard the deed of settlement together with the various indemnity insurance policies to which I was taken by counsel for Bendigo Bank as being of peripheral relevance to the question whether leave to amend should be granted. 37 There is no inconsistency in my view between an allegation on the part of the applicants against Bendigo Bank that it committed a breach of the mandate of the Firm, and an allegation against the Firm that the surviving partners are liable for Green's defalcations. The fact that these partners are neither willing, nor able, in their own names, to take proceedings against Bendigo Bank, means that the applicants must rely on their right to enforce claims which are available to the partners in their capacity as trustees for the applicants. Procedurally, that is a course which I believe is open to them. 38 The doctrines of election, and of approbation and reprobation are closely related. Both depend for their operation upon there being an inconsistency between the rights which are available to be enforced. A choice must ultimately be made in any proceeding between rights which are, in truth, inconsistent. There being no inconsistency, however, between the rights available to the applicants against Bendigo Bank, and the rights available to them against the Firm, these doctrines are, in my opinion, inapplicable in the present case. They represent no bar to the proposed amendments. 39 Bendigo Bank did not contend that it would suffer any prejudice if the applicants were granted leave to amend their further amended statement of claim. Nor did NAB, which did not, in any event, oppose the application. The surviving partners of the Firm, who remain parties to this proceeding notwithstanding that they have agreed to settle with the applicants, do not oppose the application. 40 In the circumstances, including the fact that the trial of this proceeding will not now commence before 3 October 2000, and giving due weight to the principles which underlie O 13 r 2 of the Federal Court Rules, I propose to grant leave to the applicants to amend their further amended statement of claim by deleting from each of pars 13, 14 and 15 the words "the Firm by its partner" and by deleting from par 82 the reference to pars 13, 14 and 15. 41 The respondents will, of course, have leave to amend their defences and cross-claims in response to these amendments, if considered necessary. Any such amendments should be made on or before 4 August 2000. 42 The normal rule is that a party seeking leave to amend a pleading should pay the costs thrown away by reason of the amendment. I will, however, give the parties an opportunity to be heard before I pronounce final orders in relation to costs. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg.

Counsel for the Applicants: Mr N Young QC and Mr J Peters

Solicitors for the Applicants: Maddock Lonie and Chisholm

Counsel for the First Respondent: Mr J Karkar QC and Ms W Harris

Solicitors for the First Respondent: Mallesons Stephen Jaques

Counsel for the Eleventh Respondent: Mr R Garratt QC and Mr P Corbett

Solicitors for the Eleventh Respondent: Sparke Helmore

Counsel for the Second Cross-Respondent: Mr R Brett QC and Mr M Black

Solicitors for the Second Cross-Respondent: Moores

Counsel for the Second to Fourth, Sixth and Seventh Respondents: Mr N Fryde

Solicitors for the Second to Fourth, Sixth and Seventh Respondents: Abbott Stillman and Wilson

Date of Hearing: 15 June 2000

Date of Judgment: 7 July 2000