Duffy: 'I guarantee that you will get your money back. We will all make money out of this. I will not let you down.'"
24 Mr Felice's evidence is consistent with these accounts.
25 Mr Jacobsen's evidence is that, after the meetings at which the conversations reported by him took place, he engaged in correspondence with Mr Duffy and the plaintiff's solicitor in relation to the preparation and signing of an agreement between the parties. He recalls that once the form of the agreement was settled, it took some time to get Mr Duffy to execute it. He cannot recall the precise circumstances of the signing of the agreement but does recall that the agreement was signed before the plaintiff paid any money to Kidz.net. Mr Righi also refers to the signing of the agreement and says (in paragraph 36 of his affidavit):
"I would not have entered into the Agreement, or agreed that Frontier pay any money to Kidz.net, unless all of the following conditions were contained in the Agreement:
(a) Kidz.net would only expend Frontier's money to form the US entity and to prepare, operate, distribute and promote the Kidz.net business in the US; and
(b) Frontier would receive at least 20 percent of the shares in the US entity; and
(c) Frontier's money would be repaid within 18 months, together with interest; and
(d) if Frontier's money was not repaid within 18 months, Frontier would receive 5 percent of the share capital of Kidz.net or 50,000 Kidz.net shares, whichever was the greater; and
(e) the US entity would receive the exclusive right and interest to operate the Kidz.net business in the US, South America and Canada; and
(f) Frontier would be given the first right of refusal to operate the Kidz.net business in the UK and Asia."
26 The argument advanced by the plaintiff is that the various representations made by Mr Duffy on behalf of Kidz.net are actionable in their own right on the basis of ss.51A and 52 of the Trade Practices Act. The plaintiff's case is that the statements that the funds would only be used for specified purposes, that a sum equal to that paid would be restored by the US entity with interest by 14 February 2000 failing which the plaintiff would receive shares in Kidz.net, that Kidz.net would arrange for the plaintiff to have 20% of the shares in the US entity, that Kidz.net would grant to the US entity the exclusive right to operate the Kidz.net business in the territories and that Kidz.net would give the plaintiff the first right to refusal in relation to the United Kingdom and Asia were all representations by Kidz.net with respect to future matters as referred to in s.51A. As a result, the plaintiff contends, an absence of reasonable grounds on the part of Kidz.net for the making of the representations caused them to be misleading (s.51A(1)), so that, under s.51A(2), the burden in any proceedings would be upon Kidz.net to show that it had reasonable grounds. From there, the plaintiff argues that, because, in this case, the defendants do not attempt to put forward any such reasonable grounds, the representations are placed by s.51A within the ambit of s.52 and the non-correspondence between the subject matter of the representations and the events which eventually unfolded means that a breach of s.52 is established and the various statutory consequences, in terms of orders of the court, would be available, including orders requiring payment of $585,562.78 by Kidz.net to the plaintiff.
27 Representations embodied in a contract and having contractual force may also be the source of liability under s.52 and corresponding State provisions. Thus, Kearney J said in Holt v Biroka Pty Ltd (1988) 13 NSWLR 629 at pp.634-5:
"As to acts within a contractual relationship not being capable of misleading a person already entitled to have the company perform its contractual obligations the distinction is drawn in L Grollo Darwin Management Pty Ltd v Victor Plaster Products Pty Ltd (1978) 33 FLR 170; 19 ALR 621; (1978) ATPR 40-072 and in Ransley v Medical Benefits Fund of Australia Ltd (1980) ATPR 40-160, between the bare making of a contract and representtations or promises as to the carrying into execution of such contract. If a party to a contract additionally represents that he will carry out the contract
and that it will be carried out in a particular manner, as has happened in the present case, I consider that such representations or promises are capable of constituting the requisite conduct under s 42. The mere fact that there is a remedy under the general law for breach of contract and a remedy under the Fair Trading Act in relation to representations or promises made within a contractual context, merely means that there is an overlap so as to give the Act a concurrent operation with the common law."
28 But as Ormiston J pointed out in Futronics International Pty Ltd v Gadzhis [1992] 2 VR 217 at p.238, it does not follow that every unfulfilled contractual promise amounts to misleading or deceptive conduct. His Honour said (at p.239):
"In my opinion the mere acceptance of the promise by a promisee cannot ordinarily be characterised as being led into error. In the usual case the consequence would be that the promisee has enforceable rights. It is hard to believe that normally any promisee with ordinary contractual rights would then describe himself as having been deceived or misled. It is only when it becomes apparent that the promise cannot be enforced, because, for example, it is either unenforceable or the promisee's rights are valueless or diminished, that one may return to the original promise to inquire whether that promise was of so little substance that it can be concluded that the promisee was indeed misled or deceived in the first place, at the time of his acceptance of the promise. Thus it may then be seen that the promisor originally had no intention to perform his promise or that he originally had no capacity or ability to perform it. Now, however, by reason of s10A (and S51A) the inquiry is apparently broader for one must also inquire whether at the relevant time the promisor had reasonable grounds for making any implicit representation (where relevant) that he intended in the future to perform his contractual promise, and for this purpose the onus of proof is reversed. Nevertheless the section does not say in what circumstances a representation as to a future matter shall be implied from a contractual promise."
29 The matter was recently summed up by the High Court (Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ) in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 79 ALJR 190 as follows (at p.194):
"Since the enactment of s 51A, there has been authority that a breach of promise may contravene s 52 in its operation with s 51A if there is an implied representation by the promisor of an intention or capacity to perform the promise, and there are no reasonable grounds for making that representation."
30 In the present case, the evidence indicates quite clearly that the various representations were representations as to what Kidz.net was prepared to offer by way of contractual promise and accept by way of contractual obligation. The representations were made in the context of a business negotiation between persons who clearly saw a formal contract as the expected culmination of the negotiation. The contract was in due course prepared and executed. Mr Jacobsen deposed that when, in the last conversation quoted by him, Mr Duffy said that Kidz.net needed the money from the plaintiff "as soon as possible", he replied, "Not until we get a signed contract". The plaintiff thus put store by incorporation of the various representations into a contract so that the plaintiff would have the benefit of contractual promises. Mr Righi's evidence also makes clear the importance that the plaintiff attached to the incorporation of the representations into a contract. I quote again the opening words of paragraph 36 of his affidavit:
"I would not have entered into the Agreement, or agreed that Frontier pay any money to Kidz.net, unless all of the following conditions were contained in the Agreement :" [emphasis added]
31 These aspects of the evidence of both Mr Jacobsen and Mr Righi lead, in my opinion, to two important conclusions: first, that the several representations made by Kidz.net through Mr Duffy were pre-contract representations as to what Kidz.net was willing to undertake by way of contractual obligation in the form of specific contractual promises, as distinct from representations as to the future conduct of Kidz.net; and, second, that the representations were received and relied upon by the plaintiff for that purpose alone. The plaintiff, in entering into the contract, paying over money in conformity with it and declining to pay except under an executed contract, did not act on the faith of or by reference to the pre-contract representations. It relied upon the fact that it had extracted from Kidz.net contractual promises in terms of the representations. As Mr Righi said, he would not have allowed the plaintiff to pay over the money except in the context of a contract containing provisions binding on Kidz.net in terms corresponding with the various statements made on Kidz.net's behalf in the course of negotiations. In short, the plaintiff, in the person of Mr Jacobsen and Mr Righi, distrusted the pre-contract representations and wanted to see them turned into contractual terms (as they in due course were). Such lack of reliance on them is, of itself, enough to deprive the plaintiff of the ability to obtain statutory relief in reliance upon ss.51A and 52 of the Trade Practices Act by reference to the representations: see Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2005] NSWCA 68 where the well-known approach in Gould v Vaggelas (1985) 157 CLR 215 was applied.
32 It remains to consider the trust-based case advanced by the plaintiff briefly outlined at paragraph [10] above. The payments of A$166,666.66 and A$250,000 were made by the plaintiff to Kidz.net in conformity with the contract. As I have already noted, Kidz.net was bound by contract not to expend those funds otherwise than as stated in clauses 9.1, 9.2 and 9.3. It is the plaintiff's contention that, in the circumstances, Kidz.net not only became subject to that contractual promise with respect to the application of the funds but also became a trustee of the funds under principles most often associated with Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. The nature of such a trust was described by Lord Millett in Twinsectra Ltd v Yardley [2002] 2 AC 164 at p.186:
"It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. As North J explained in Gibert v Gonard (1884) 54 LJ Ch 439, 440:
'It is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.'
The duty is not contractual but fiduciary."
33 Lord Millett regarded a Quistclose trust as "an entirely orthodox example of the kind of default trust known as a resulting trust" (at p.186). He continued:
"The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and insofar as he does not it is held on a resulting trust for the lender from the outset. Contrary to the opinion of the Court of Appeal, it is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower's power or duty to apply the money in accordance with the lender's instructions. When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower's mandate while it is still capable of being carried out, must depend on the circumstances of the particular case."
34 In the present case, as I have already said, the relationship of the plaintiff and Kidz.net was not that of lender and borrower. In conceptual terms, the plaintiff may be regarded as having settled funds on Kidz.net so that Kidz.net might apply them in the manner stated. This, to my mind, reinforces the applicability of the resulting trust principles referred to in Twinsectra. The plaintiff paid money to Kidz.net (and Kidz.net accepted it from the plaintiff) for a stated purpose, so that Kidz.net came to hold the money upon trust to apply it for that purpose and, in default, to hold it for the plaintiff. Clearly implicit in the trust was a duty on the part of Kidz.net not to apply the money otherwise than in fulfilment of the stated purpose. That duty was accordingly a fiduciary duty.
35 The subject matter of the trust and the concomitant fiduciary duty was each of the sums in Australian dollars actually paid over by the plaintiff, being the sum of A$166,666.66 paid on or about 14 August 1998 and the sum of A$250,000 paid on or about 17 September 1998. The evidence shows that A$123,280.27 was applied otherwise than for the purpose for which the moneys were paid by the plaintiff and received by Kidz.net. This is the sum that, on Mr Reardon's evidence, was applied for the purposes of the Kidz.net business in Australia, a purpose foreign to that stated in clause 9 of the agreement. According to Mr Reardon's evidence, A$232,852.07 was applied for the clause 9 purpose. The balance (that is, the difference between the total of A$416,666.66 paid by the plaintiff to Kidz.net and the total of A$356,133.34 positively identified by Mr Reardon) may or may not have been applied towards the stated purpose. That is something that Mr Reardon was unable to determine and since, in a proceeding of this kind, the party challenging the rejection of the proof of debt bears the onus of showing the amount for which that party should be admitted as a creditor, I cannot take the view that there was a breach of trust as to that balance. The breach of trust must therefore be regarded as consisting of (and being confined to) Kidz.net's having applied $123,280.27 otherwise than for the clause 9 purpose.
36 The default of Kidz.net as a fiduciary must be approached in a context where the part of the trust property to which the breach relates (in the form of A$123,280.27 out of the total funds paid by the plaintiff to Kidz.net) has been dissipated. The circumstances are therefore not such as to warrant any proprietary remedy by way of restitution or account. They require an award of equitable compensation, the purpose of which, as stated by Tadgell J in Hill v Rose [1990] VR 129 at p.143 (in a passage approved by the Victorian Court of Appeal in Edmonds v Donovan [2005] VSCA 27), is "to place the party who suffers following the breach of duty as nearly as possible in a position in which he would have stood had there been no breach". His Honour also said:
"The method of calculation of monetary compensation will vary according to the nature of the fiduciary obligation whose breach is to be redressed. It might be appropriate to compensate the plaintiff's loss by reference to the defendant's gain, as in McKenzie v McDonald [[1927] VLR 134]. Compensation may be awarded, however, in an appropriate case whether or not the defendant has made any pecuniary gain."
37 Equitable compensation would, in this case, be assessed as the wrongfully dissipated sum together with an interest factor. The interest factor would recognise and recoup for the plaintiff the benefit that Kidz.net may be taken to have obtained (by way of avoiding the need to find funds elsewhere) by appropriating the sum in question. The interest element would appropriately be calculated at Supreme Court rates for the period from the later advance (which should be taken to be 17 September 1998) to the date of commencement of the winding up.
38 The appropriate disposition of the plaintiff's s.1321 appeal in respect of the liquidator's decision to reject the proof of debt in the sum of $585,562.78 is that the court should modify the decision so that the rejection applies to only so much of the sum of $585,562.78 as exceeds the aggregate of $123,280.27 and interest thereon computed in the way I have described.
39 I direct that, within fourteen days, the parties file short minutes of orders giving effect to this decision. Submissions on costs should be exchanged between the parties and forwarded to my Associate within 28 days.
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