HARRIS v DIGITAL PULSE PTY LTD

(2003) 44 ACSR 390 Reported Decision : (2003) 56 NSWLR 298 (2003) 21 ACLC 934

CITATION : HARRIS v DIGITAL PULSE PTY LTD [2003] NSWCA 10 HEARING DATE(S) : 31 July 2002 JUDGMENT DATE : 7 February 2003

JUDGMENT OF : Spigelman CJ at 1; Mason P at 64; Heydon JA at 229 DECISION : See paragraph 478

CATCHWORDS : Equity - application for leave to appeal - appeal - concurrent proceedings - whether exemplary damages can be awarded for breach of fiduciary duty - punitive damages - compensatory damages - contumelious disregard for plaintiff's rights - breach of employment contract - initiation of secret business enterprise - conscious wrongdoings - exemplary damages in tort - status of exemplary damages at common law and in legislation - deterrence - rate of interest on defaulting fiduciary - equitable remedies - equitable wrongs - allowances - breach of confidence - financial loss - breach of contract - unjust enrichment - account of profits - equitable rules - criminal sanctions in equity - double punishment - fusion of common law and equity - fusion fallacy - employer's duties - penal - punitive - punishment - prophylactic - restitution - legal regulation of commerce - law reform commissions - international perspectives on exemplary damages and fiduciary relationships - The appellants were employees of the respondent company. At the beginning of their employment they signed employment contracts that contained terms preventing them from competing with the company while they remained employed. During their employment, the appellants secretly established their own business and secured contracts with prospective clients of the respondent. The respondent sued the appellants for breach of contracts of employment, breach of fiduciary duty and breach of duty under the Corporations Act 2001 (Cth). In addition to the usual remedies, the respondent also sought exemplary damages. The respondent was successful, receiving an account of profits from both appellants for breach of contracts and fiduciary duty, equitable compensation from one of the appellants for breach of duty and misuse of confidential information, and exemplary damages for breach of fiduciary duty. The appellants sought leave to appeal against the orders for exemplary damages. - Held by Spigelman CJ and Heydon JA (Mason P dissenting), granting leave and allowing the appeal: - There is no power in equity to award exemplary damages for breach of fiduciary duties by an employee. Accident Compensation Act 1982 (NZ) Australian Industries Preservation Act 1906 (Cth) Civil Liability Act 2002 (NSW) Copyright Act 1968 (Cth) Corporations Act 2001 (Cth) Crimes Act 1900 (NSW) LEGISLATION CITED : Defamation Act 1974 (NSW) Judicature Act 1873 (UK) Law Reform (Law and Equity) Act 1972 (NSW) Motor Accidents Compensation Act 1999 (NSW) Supreme Court Act 1970 (NSW) Trade Practices Act 1974 (Cth) Transport Accident Act 1986 (Vic) Workers Compensation Act 1987 (NSW) CASES CITED : See attached PARTIES : CHRISTOPHER HARRIS v DIGITAL PULSE PTY LTD FILE NUMBER(S) : CA 40301/02 COUNSEL : Claimants: Mr P B Walsh / Mr D A Allen Opponent: Mr M L D Einfeld QC /Mr A Bulley SOLICITORS : Claimants: Catalyst Partners Opponent: Dibbs Barker Gosling

LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT ED 50032/00 FILE NUMBER(S) : LOWER COURT Palmer J JUDICIAL OFFICER :

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IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40301/02 ED 50032/00

SPIGELMAN CJ MASON P HEYDON JA

7 February 2003 CHRISTOPHER HARRIS v DIGITAL PULSE PTY LIMITED Judgment 1 SPIGELMAN CJ: I have had the advantage of reading the judgments of Mason P and Heydon JA in draft. Their Honours set out the issues and submissions. For the reasons given by Mason P, leave to appeal should be given. 2 The judgment and the submissions in this case adopt the terminology of "exemplary damages". I do not find that to be appropriate. "Damages" are a remedy at common law. The issue before the Court is whether a punitive monetary award can be made in equity. Inexact use of terminology is here, as so often, prone to cause confusion of thought. The use of the word "damages" with respect to both compensatory damages and exemplary damages obscures the fact that a common law litigant who received an award of the latter has not in fact suffered any "damage" in the relevant respect. The fact that compensatory damages at common law and equitable compensation have a similar justification does not necessarily indicate that a different kind of monetary award at common law, which has come to be referred to as a form of "damages", can or should be reflected in equity. 3 I am in general agreement with the reasons of Heydon JA save in one respect. In his judgment, particularly under the subheading "The Judicial Creation of Criminal Sanctions", Heydon JA characterises the award of exemplary damages as a "criminal sanction". I would not adopt that characterisation and do not agree with those passages of his Honour's reasons. Furthermore, whilst accepting Heydon JA's analysis of the authorities, I believe the present case can be determined on a narrower basis. 4 It is, in my opinion, unnecessary and undesirable to decide this case on the basis that a punitive monetary award can never be awarded in equity. Remedial flexibility is a characteristic of equity jurisprudence. 5 The present proceedings should be determined on the basis of whether a power to make a punitive monetary award should be acknowledged with respect to the kind of fiduciary relationship in the case before the Court. That relationship can be identified at different levels of generality. The particular relationship is that of employer/employee. However, the appropriate level of generality is, in my opinion, to characterise the case as a relationship created by contract between the parties, in which one party has a fiduciary obligation to act in the interests of the other in relevant respects. Should a power to make a punitive monetary award be asserted in such a case?

Applying the Judicial Method 6 This case raises fundamental issues about the principled development of the law. The declaratory theory of the law which held that judges simply reveal the law as it has always been, rather than change it, has long since been abandoned. It was, in any event, an approach pertinent only to the common law strictly so called. The law applied by courts of equity has never been so confined. 7 In his classic lecture "Concerning Judicial Method" (Reprinted in Jesting Pilate, Law Book Co, Australia 1965) Sir Owen Dixon identified what he called (at 154) "the high technique of the common law" in the following way (at 158): "It is one thing for a court to seek to extend the application of accepted principles to new cases or to reason from the more fundamental of settled legal principles to new conclusions or to decide that a category is not closed against unforeseen instances which in reason might be subsumed thereunder. It is an entirely different thing for a judge, who is discontented with a result held to flow from a long accepted legal principle, deliberately to abandon the principle in the name of justice or social necessity or of social convenience. The former accords with the technique of the common law and amounts to no more than an enlightened application of modes of reasoning traditionally respected in the courts. It is a process by the repeated use of which the law is developed, is adapted to new conditions, and is improved in content. The latter means an abrupt and almost arbitrary change." 8 The orthodox approach to developing the law of equity has never been more pithily stated than it was by Bagnall J in Cowcher v Cowcher [1972] 1 WLR 425 at 430: "I am convinced that in determining rights, particularly property rights, the only justice that can be obtained by mortals, who are fallible and are not omniscient, is justice according to law; the justice which flows from the application of sure and settled principles to proved or admitted facts. So in the field of equity the length of the Chancellor's foot has been measured or is capable of measurement. This does not mean that equity is past child bearing; simply that its progeny must be legitimate - by precedent out of principle. It is well that this should be so; otherwise no lawyer could safely advise on his client's title and every quarrel would lead to a law suit." 9 The terminology of legitimacy was also employed by Deane J in Muschinski v Dodds (1984-85) 160 CLR 583 at 615 where his Honour said: "The fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice. As an equitable remedy, it is available only when warranted by established equitable principles or by the legitimate processes of legal reasoning, by analogy, induction and deduction from the starting point of a proper understanding of the conceptual foundation of such principles." 10 Although the use of the word "legitimate" does beg the question to a certain degree (see M J Tilbury Civil Remedies Vol 1 Butterworths, Sydney, 1990, p11), each of the formulations of Bagnall J and of Deane J, which I understand to be to the same basic effect as each other and that of Dixon CJ, identify the mechanisms which can be regarded as legitimate. In Bagnall J's case the formulation is "by precedent out of principle". Deane J refers to the processes of analogy, induction and deduction and the centrality of long established equitable principles. 11 The application of the traditional judicial method for decision making - in the way identified by Dixon CJ, Bagnall J and Deane J - is the principal underpinning of the institutional legitimacy of the judicial function of developing the law. Reasoning by analogy, induction and, deduction, sometimes leads to a result which differs substantially from the pre-existing understanding of the law. It is the process that is incremental, not necessarily the result. 12 One mode of reasoning that is, in my opinion, incompatible with the traditional common law judicial method - using "common law" in its broad sense - is the identification of a principle at a high level of abstraction, from which is derived a rule of particular application. Such an approach appears to me to be at the heart of the reasoning of Palmer J and of the submissions urged on this Court by the Respondent. The general principle appears to be: Persons who go beyond merely breaching their obligations to others and act in contumelious disregard of those obligations should be subject to condign punishment. From that general principle there is to be deduced, with respect to each specific field of the law of civil obligations, a rule empowering the court to award "exemplary damages" to the party to whom the obligations so breached were owed. 13 It is not, in my opinion, permissible in our system to identify a principle at a high level of abstraction - as if contained in a code of general application to civil obligations - and apply it to all aspects of the civil law. The common law, again in the broad sense which includes equity - develops from the bottom up, not from the top down (cf Richard A Posner, Overcoming Law, Harvard U.P., 1995, Chapter 5). 14 Our law is not based on a single code of civil obligations from which specific rights and duties can be deduced. Our legal tradition is much messier than that. Each of tort, contract and equity, constitute distinct bodies of doctrine with their own history. There is an interaction between each area of law and the lines are often blurred, but they remain distinct bodies of doctrine. 15 The separation of equity and common law is of greater strength in Australian jurisprudence than appears to have become the case in other nations with similar traditions, including Canada and, it appears, New Zealand. This may be due to the force and influence of extra-judicial writings on equity based on university lectures delivered by practitioners who became judges, particularly Sir Frederick Jordan's Chapters on Equity in New South Wales, reprinted in Sir Frederick Jordan Select Legal Papers Legal Books, Sydney 1983 and Meagher Gummow and Lehane's Equity: Doctrines and Remedies originally published in 1975. (The significance of the latter is emphasised by Heydon JA in "The Role of the Equity Bar in the Judicature Era" in Geoff Lindsay (ed) No Mere Mouthpiece: Servants of All, Yet of None, Butterworths, Australia, 2002 at 80-81). 16 Australia, perhaps particularly New South Wales where the judicature system was not adopted until 1970, has its own tradition in equity jurisprudence based on these publications and the education of generations of Australian lawyers. 17 Professor J H Baker has drawn attention to the significance of the professional consensus of legal practitioners as a dimension of the legal system distinguishable from formal sources of law, like reported cases and statutes. (See J H Baker The Law's Two Bodies: Some Evidential Problems in English Legal History Oxford UP 2001.) The emphasis on the distinctiveness of equity as a body of law in the common learning of the Australian legal community appears to be based on such a professional consensus. In such respects, differences between Australia and other jurisdictions with similar traditions may be expected to occur. 18 The heart of the "fusion fallacy" - as it has come to be called in Australia - is the proposition that the joint administration of two distinct bodies of law means that the doctrines of one are applicable to the other. That is no more true of equity and common law than it was and is true of tort and contract within the common law context. That is not to say that one body of law does not influence the other. It is only to say that they remain conceptually distinct. 19 In Norberg v Wynrib [1992] 2 SCR 226 at 272, in a passage quoted with approval in a four judge joint judgment of the High Court in Pilmer v Duke Group Ltd (in Liq) (2001) 207 CLR 165 at [71], McLachlin J, as her Ladyship then was, said: "The foundation and ambit of the fiduciary obligation are conceptually distinct from the foundation and ambit of contract and tort. Sometimes the doctrines may overlap in their application, but that does not destroy their conceptual and functional uniqueness." 20 Equitable remedies, including equitable compensation have elements that may be seen to be more punitive or deterrent than common law remedies available in similar factual situations. This may occur, for example, by reason of the application of different rules of liability, principles of causation or tests for remoteness. The integrity of equity as a body of law is not well served by adopting a common law remedy developed over time in a different remedial context on a different conceptual foundation. The fact that exemplary damages are awarded in tort is, in my opinion, not a basis for asking "Why not?" in equity.

Historical Continuity 21 One of the considerations relevant to any decision to develop law in a particular direction is whether or not there have been relevant changes in the economy and society which the law must serve. During the course of argument I raised the issue whether the emergence, over recent decades, of intangible property as a much more substantial proportion of the community's wealth is of this character. I have, however, concluded that this is not a proper basis for development of the law with respect to the fiduciary relationship with which these proceedings are concerned. 22 The particular situation before the Court does not give rise to anything novel. The exploitation by an employee of the relationship which employment enables him or her to develop with an employer's customers is not a new phenomenon. There has been no relevant change in economic or social circumstances. 23 The fact that the relevant behaviour has occurred in the same kind of context over the course of centuries, without equity having developed a remedy of the character now urged on the Court, of itself indicates that the development of the law in a case of this kind is inappropriate. 24 The importance of historical continuity in equity was emphasised by Viscount Simonds in Chapman v Chapman [1954] AC 429 at 444 where his Lordship said: "… the range of [Equity's] authority can only be determined by seeing what jurisdiction the great equity judges of the past assumed and how they justified that assumption … It may well be that the result is not logical, and it may be asked why, if the jurisdiction of the court extended to this thing, it did not extend to that also. But, my Lords that question is as vain in the sphere of jurisdiction as it is in the sphere of substantive law. We are as little justified in saying that a court has a certain jurisdiction, merely because we think it ought to have it, as we should be in declaring that the substantive law is something different from what it has always been declared to be, merely because we think we ought it to be so. It is even possible that we are not wiser than our ancestors. It is for the legislature, which does not rest under that disability, to determine whether there should be a change in the law and what that change should be." 25 Since his Lordship delivered that judgment, courts of appeal have assumed the right to overrule their own decisions, but there remain significant limits on the development of the law by judges. In my opinion, the assertion for the first time of a power to make monetary awards of a punitive character in equity transcends those limits in the context of conduct that has been the subject of consideration over the centuries and, to use Viscount Simonds phrase, "the great equity judges of the past" have never seen the need for any such power. 26 This is not to say that nothing must be done for the first time It is to acknowledge and respect the collective wisdom of our predecessors who, with respect to disputes of a kind that have occurred many times, have never felt the need to be able to award a monetary sum for the purpose of punishment, deterrence, denunciation or vindication. 27 There is no relevant precedent. Nor, save in one respect, is there any process of deduction, induction or analogy by the application of a permissible method of judicial reasoning which can lead to that result. The exception is an analogy with the law of tort.

Analogy with Tort or Contract? 28 The argument in this Court proceeded on the basis that in Australia exemplary damages are not recoverable for breach of contract. (See Butler v Fairclough (1917) 23 CLR 78 at 89; Whitfeld v De Lauret & Co Limited (1920) 29 CLR 71 at 81; Gray v Motor Accident Commission (1998) 196 CLR 1 at 6-7; Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157 at [142]-[143], [164]). Whether the common law of Australia should be changed in this regard is a matter for the High Court. 29 In his judgment, Mason P poses the question of whether the development of equity jurisprudence should proceed by way of analogy with tort or by way of analogy with contract. It is not apparent to me that analogical reasoning at this level of generality is appropriate. Each is a distinct body of law with its own integrity. 30 In Norberg v Wynrib, in which McLachlin J concluded that exemplary damages could be awarded in equity, her Ladyship, consistently with her earlier emphasis on the conceptual distinctiveness of different areas of the law, was cautious in her references to analogy at this level of generality. (See at 298: "Insofar as reference to tort principles may be appropriate …" and "Quite apart from analogies with tort …".) 31 Canadian law acknowledges a power to award exemplary damages in contract and equity. This has the merit of consistency. However, in this, as in a number of other fields, Canadian equity jurisprudence, perhaps under the influence of United States law, has developed in a quite different way to that of Australia. (See e.g. Breen v Williams (1996) 186 CLR 71 esp at 83, 94-95, 112-113, 137; Pilmer v Duke Corp at 194; Bodney v Westralia Airports Corporation Pty Ltd (2000) 109 FCR 178 at 200-205; Sir Anthony Mason "The Place of Equity and Equitable Remedy in the Contemporary Common Law World" 1994 110 LQR 238 at 246-248; S Dorsett "Comparing Apples and Oranges: The Fiduciary Principle in Australia and Canada after Breen v Williams" 1986 8 Bond LR 158 passim; P Parkinson "Fiduciary Law and Access to Medical Records" 1995 17 Syd LR 433 esp at 439-443.) 32 In many respects Canadian fiduciary law has developed as an addition to the law of tort. This has not happened in Australia. Canadian authorities on equity must be treated with considerable caution. (The distinctiveness of Canadian equity jurisprudence is highlighted by D Waters "The Reception of Equity in the Supreme Court of Canada (1875-2000)" (2001) 80 Can Bar Rev 620; J Berryman "Recent Developments in the Law of Equitable Remedies: What Canada Can Do For You" (2002) 33 VUWLR 51.) 33 In his reasons for preferring the tort analogy, in my opinion, Mason P has given insufficient weight to the historical development of the law of tort which was closely connected with the development of criminal law. Many torts constituted crimes and accordingly, civil litigation raised issues of public interest, particularly involving a breach of the peace. In such a context it was entirely appropriate that considerations of punishment and deterrence arose in the context of actions in tort. 34 As Windeyer J said in Uren v John Fairfax & Sons Pty Ltd (1966) 117 CLR 118 at 149-150: "Compensation is the dominant remedy if not the purpose of the law of torts today. But fault still has a place in many forms of wrongdoing. And the roots of tort and crime in the law of England are intermingled. Some things that today are seen as anomalies have roots that go deep, too deep for them to be easily uprooted." 35 As Heydon JA notes, with further references, there was no such historical "intermingling" between crime and either contract or equity. 36 To the extent that reasoning by analogy at this level of generality is appropriate, I believe that the contract analogy is more appropriate. Reasoning of the highest authority has described the imposition of fiduciary obligations in terms of 'undertaking' and 'agreement', albeit imputed by operation of law. Furthermore, I find the extra judicial writings of Finn J, one of Australia's most significant scholars on fiduciary law, to be persuasive when he identifies an expectation interest on the part of a beneficiary and states it in terms reminiscent of contract law. 37 In Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 96-97 Mason J said: "The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations … viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position." [Emphasis added] 38 This passage, including the phrases "critical feature" and "undertakes or agrees to act", was adopted in the joint judgment of Gleeson CJ, Gaudron and Gummow JJ in Concut Pty Ltd v Worrell (2000) 75 ALJR 312 at [17] and in the joint judgment of McHugh, Gummow, Hayne and Callinan JJ in Pilmer v Duke Group Ltd (In Liq) at [70]. 39 In Hospital Products Mason J went on to emphasise the significance of the contractual foundation for a fiduciary duty. His Honour said at p97: "That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction." 40 His Honour's reference to the predominance of the contractual relationship may not fully acknowledge the flexibility of equitable intervention with contractual rights and obligations. This part of his Honour's reasons has not been cited with approval in either Concut v Worrell or Pilmer v Duke Group. Nevertheless, the significance of the contractual foundation for the fiduciary duty is not questioned. 41 As to the expectation interest, Lord Hoffman said in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 at 15: "… the purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance. A remedy which enables him to secure, in money terms, more than the performance due to him is unjust." 42 A similar emphasis on 'satisfying expectations' has been adopted by Finn J in his definition of a fiduciary relationship in terms of when one person is "entitled to expect" another to act in his or her interests to the exclusion of his or her own interests. (See P D Finn "The Fiduciary Principle" in T G Youdan (ed) Equity, Fiduciaries and Trusts Carswell, Toronto, 1989 at 5, 46-47; P D Finn "Fiduciary Law and the Modern Commercial World" in E McKendrick (ed) Commercial Aspects of Trusts and Fiduciary Obligations Clarendon, Oxford 1992 at 9. 43 The fiduciary duties in the present case are derived from the existence of the contract of employment. The "undertaking or agreement" of the employees to act in the interests of the employer, and the employer's "entitlement to expect" that that will occur - imputed to the relationship by equity - is much closer to a contractual relationship than it is to circumstances creating obligations in tort. If argument by analogy of this kind is appropriate, I prefer the contract analogy. 44 Where, as here, the essential basis of the fiduciary duties is a contractual relationship this Court should not develop for the first time a remedy which is not available in the law of contract. This analysis does carry with it the corollary that the refusal to develop the law should be confined to cases of the character now before the Court, as identified above. There may be other cases in equity in which a tort analogy is more appropriate.

Precedent 45 In terms of precedent, the Respondents case lacks any sure foundation. It is the absence of precedent that highlights the novelty of the proposition advanced. The Court is called upon to develop the law of equity by asserting a power to make a punitive monetary award for the first time. 46 As both Mason P and Heydon JA conclude, the criminal jurisdiction exercised by the Court of Chancery in the 16th or 17th centuries is irrelevant to the issues which arise in the present proceedings. 47 I place no reliance on the occasional references to punishment or deterrence in a number of equity judgments to which the Court's attention was drawn. None of these references indicate anything in the nature of a principle that equitable remedies should be fashioned in order to impose punishment or to maximise deterrence, whether general or specific, or for purposes of denunciation or vindication. 48 The Respondent points to two particular areas in which equity has fashioned remedies with what could be characterised as penal consequences. The first is the determination of just allowances for a defaulting fiduciary, whose egregious behaviour is taken into account to assess such allowances on a less liberal scale, or perhaps denied altogether. The second area involves the determination of a hypothetical rate of interest - on the authorities choosing between 3% and 5% - as an amount payable to a beneficiary whose funds have been used by the fiduciary for his or her own purposes and compounding interest at yearly rests. Heydon JA has analysed the relevant authorities. I wish to add two observations. 49 The first thing to note about these lines of authority is that each is concerned with the computation of a specific monetary amount on a basis which is inherently susceptible to variation. There is no principled basis upon which a rate of remuneration or a particular interest rate could be adopted and applied. There is no single rate, or principle of computation, which reflects what it was that the beneficiary has lost, or the fiduciary has gained, by reason of the default. In each case there is a range of a legitimate choice. In such contexts it is perfectly understandable that the conduct of the fiduciary is a relevant consideration in determining where, within the relevant range, justice between the parties indicates the choice should be made. This process offers no analogy with the award of a separate and discrete remedy, over and above any damage to the beneficiary or profit to the fiduciary. 50 The second characteristic of these two lines of authority, which is pertinent for present purposes, is that each involves a balancing exercise of justice inter partes, i.e. between the fiduciary on the one hand and the beneficiary on the other hand. What should the fiduciary receive, and accordingly the beneficiary pay, as a "just" allowance for the skill exercised by the fiduciary. Can, in all the circumstances, the fiduciary be heard to say that amongst the interest rates he or she would hypothetically have earned for the beneficiary across the spectrum of risk, if the money had been properly applied, that he or she would have chosen a lower rather than a higher interest rate? The authorities do not suggest that any public interest is engaged. 51 A punitive monetary award does not involve a balancing of rights and interests between two parties. It involves the imposition of a burden upon one party for purposes unrelated to the relationship between the parties. No doubt in each case, i.e. when just allowances are assessed on the less liberal basis or the hypothetical interest rate is computed on a higher basis, the beneficiary receives an advantage by reason of the conduct of the fiduciary being regarded as especially inappropriate. However in neither case does the beneficiary receive an amount of money which bears the characteristic of a windfall, and no other characteristic. 52 Equity is concerned with the conscience of both parties, so that a balancing exercise is always required. This is an important principle, in the sense that the word is used by both Bagnall J and Deane J. It is by reason of a balancing process of what is just inter partes, that a subsidiary principle to the effect that equity does not punish can be deduced, albeit not as a principle that will be applied in a rigid way. (See esp Vyse v Foster (1872) LR 8 Ch App 309 at 333.) 53 On the one hand it is oppressive to impose burdens on a defaulting fiduciary which go beyond any benefit that he or she has received or any detriment suffered by the beneficiary. On the other hand it is not just for a beneficiary to receive a benefit in the nature of a windfall not reflecting any detriment suffered or benefit which the beneficiary ought to have received. The pertinence of the unjust enrichment of a beneficiary as a restraint on equitable remedies was emphasised in the joint judgment in Warman International Ltd v Dwyer (1995) 182 CLR 544 at 561. 54 Nevertheless there are occasions on which some such effect may occur as a result of the operation of equitable doctrine. For example when a defence of lack of clean hands or laches is made out. However, there is no example of equity providing a remedy on the sole basis of punishment, deterrence, denunciation or vindication as this Court is called upon to do. 55 The joint judgment in Lamb v Cotogno (1987) 164 CLR at 9-10 establishes that the purpose of exemplary damages is not limited to punishment or deterrence. The Court identified two other objectives. First, appeasement of the plaintiff, to "assuage any urge for revenge … and to discourage any temptation to engage in self-help likely to endanger the peace" (to which I refer as "vindication"). Secondly, "to mark the court's condemnation of the defendant's behaviour" (to which I refer as "denunciation"). Accordingly, in that case, the attenuation of the deterrent effect by reason of the existence of a scheme of compulsory insurance did not affect the power to award exemplary damages. 56 In his reasons for holding that "exemplary damages" were able to be awarded in equity, Palmer J relied on the full range of purposes which had been identified in Lamb v Cotogno. The traditional hostility of equity to penalties is not a complete answer to the Respondent's case. Nevertheless, each of the purposes identified by the High Court is primarily, if not exclusively, a public purpose. None, in my opinion, involve a balancing exercise inter partes. The closest is the element of vindication but that, as explained in Lamb v Cotogno is designed to preserve the peace.

Incompatibility 57 Another reason for rejecting the power to make a punitive monetary award in a context in which fiduciary obligations arise because of the existence of a contractual relationship of a particular character, is because such an award would be incompatible with the principles applicable to the contract both at common law and in equity. I particularly emphasise incompatibility with equity, acknowledging that the "foundation and ambit" of fiduciary obligation is "conceptually distinct" from that of contract. Issues of incoherence, which, as Mason P notes, has emerged as a concern of contemporary jurisprudence, arise. 58 I hypothesise the existence of a contract with an express term to the same effect as the order in this case: that the employer could recover, for a relevant breach, either damages or an account of profits plus $10,000. It is clear that the reference to $10,000 would be struck down as a penalty. The only question is whether equity would refuse relief on a no clean hands basis, because of the same contumelious conduct as would justify a punitive monetary award. 59 On the present state of the authorities in Australia, a penalty provision is of no legal effect from the time the contract is formed. This is a rule of law so that "the equitable jurisdiction to relieve against penalties withered on the vine". (AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 191 per Mason and Wilson JJ. See also at 176 per Gibbs CJ.) The effect is as Priestley JA said in Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1 at 39: "… any discretionary element in the granting of the equitable relief against the enforcement of the penalty vanished." 60 This line of authority is binding on the Court. There is a view that some residual equitable jurisdiction remains. (See AMEV-UDC at 195-196; Jobson v Johnson [1989] 1 WLR 1026 esp at 1040; Meagher Gummow & Lehane's Equity: Doctrines and Remedies (4th Ed) Butterworths 2002 at [18-090].) However, nothing suggests that, in the case of a contract enforceable at common law, equity would intervene to override the application of the common law doctrine of penalties on the basis of egregious behaviour on the part of the person seeking to set aside the hypothetical term as a penalty. 61 On this basis, a punitive monetary award is incompatible with the law relating to penalties in contracts of this character, in the sense that an express provision in the precise terms of the court order in the present case would be regarded as of no effect, both at law and in equity. The law should not be developed in a way that such incompatibility arises. 62 Orders 63 I agree with the orders proposed by Heydon JA. 64 MASON P: At issue is the Supreme Court's power to award exemplary damages for breach of an "equitable" duty of fidelity. 65 The duty is "equitable" in the limited sense that it traces its presumptive pre-history to principles administered exclusively in the English Court of Chancery before 1873. Assuming the duty could have been identified in 1823 it would nevertheless have been enforced by any judge of the Supreme Court of New South Wales since the 1823 Charter of Justice. Since federation it has formed part of the unified common law of Australia (Lipohar v The Queen (1999) 200 CLR 485 at 505-6). 66 The judgment of Palmer J addresses an important matter of principle. The Court has heard full argument. It is appropriate that leave to appeal be granted. 67 The respondent Digital conducts an information technology business that includes Web design. The appellants Messrs Harris and Eden were employed in marketing and web design respectively. Commencing in December 1999, they worked secretly for the benefit of their own business, which was incorporated as Juice-D Media Pty Ltd (Juice) on 27 January 2000. Using their employment as a springboard they did projects for existing or potential clients of Digital. In some cases those clients were charged a fee, being invoiced by Juice. Mr Harris was dismissed on 4 February 2000 and Mr Eden resigned the next day. 68 Digital sued the employees for breaches of contract, fiduciary duty, duties under the Corporations Act 2001 and other obligations. Their company Juice was also sued for its knowing participation in their wrongful conduct. 69 The prayers for relief included claims for compensation, account of profits and exemplary damages. 70 Palmer J held that the employees had breached their contractual and fiduciary duties of loyalty and that Mr Harris had additionally misused confidential information with respect to an Advertising Strategy document. His Honour found that certain of those breaches had caused loss to Digital as well as producing unjustified gains for the appellants and their company. The losses were not exactly commensurate with the gains, although Juice's profits were used as one integer in the assessment of the sum due by way of compensation. 71 The judgment contained findings that enabled both equitable compensation and an account of profits to be calculated, but not completely. Compensation was to be calculated on the basis of determining the gross amounts charged by Juice in the invoices it sent to the wrongly diverted customers and applying to those figures the profit margins that Digital would have realised had it carried out the work, less tax (Digital Pulse Pty Ltd v Harris & Ors [2002] NSWSC 33, 40 ACSR 587 at [98]-[107]). The figure thus arrived would appear to be something less than $10,000. In addition, Mr Harris was found liable to pay compensation in the sum of $11,000 for his misuse of the confidential information. 72 Alternatively, Digital was found entitled, at its election, to an account of profits against the three defendants jointly and severally. (Exactly why all three were liable in similar amounts is not explained.) These profits were to be calculated on the basis of the gross profits actually received by Juice from diverted projects, less provision for tax. The final orders disclose that Digital elected to take the account of profits, calculated at $13,119.51. 73 Leaving aside one minor matter, Palmer J next considered whether exemplary damages were appropriate, if available. He noted that the purposes of such damages were punishment, deterrence (both specific and general) and amelioration of the victim's sense of grievance, thereby abating the urge for self-help or violent retribution, to the danger of the public peace (citing Uren v John Fairfax & Sons Pty Ltd (1966) 117 CLR 118 at 149 and Lamb v Cotogno (1987) 164 CLR 1 at 9 ). Later he spoke of a threefold purpose of punishing the wrongdoer, deterring others of like mind from similar behaviour, and vindicating the plaintiff's outraged sense of justice (at [132]-[133]). 74 His Honour held that the conduct of the employees merited, indeed required (see at [173]), an award of exemplary damages which he fixed in the sum of $10,000 against each employee. His reasons (at [118]-[140]) concluded that the employees acted with conscious dishonesty, in breach of positions of trust and responsibility, and in a manner calculated to produce harm to their employer and profit to themselves. The subversion of Digital's business was carefully planned and clandestine. The employees' exultation in their success demonstrated contumelious disregard of Digital's rights. Probably more profit was gained than Digital had been able to uncover. Confidential information was misappropriated in the process and the employees had worked during Digital's time in the execution of their dishonest scheme. Palmer J concluded: 128. All of these circumstances, taken together, demonstrate deliberate wrongdoing for profit, in contumelious disregard of Digital's rights, deserving of special condemnation and punishment. To call a spade a spade, what Messrs Harris and Eden did was to defraud their employer of its valuable business opportunities and its confidential information. … By concealing facts which they had a duty to disclose, namely, the business opportunities which should have been Digital's, and by engaging in conduct in which they had no right to engage, namely, taking those opportunities for Juice in breach of their fiduciary and contractual duties of loyalty, Messrs Harris and Eden deprived Digital of its lawful rights, opportunities or advantages to derive business from the diverted projects. Both in a criminal court and in an equity court, the conduct of Messrs Harris and Eden bears the stigma of fraud….

132 It is often said that the award of exemplary damages is "unusual and rare": Coloca v BP (Australia) Pty Ltd [1992] 2 VR 441, at 448; Trend Management Ltd v Borg (1996) 40 NSWLR 500, at 509. But that is so because in the general run of cases it is unusual and rare to find that a defendant has been guilty of conscious wrongdoing in contumelious disregard of the plaintiff's rights. It is in that sense alone that the remedy is exceptional: Gray v Motor Accident Commission at 9. Where the Court encounters a case of conscious wrongdoing in contumelious disregard of the plaintiff's rights it must not shrink from expressing the community's disapprobation of the wrongdoer's conduct "in an emphatic and public way": Gray at 34, per Kirby J. The Court must award exemplary damages to punish the wrongdoer, to deter others of like mind from similar behaviour, and to vindicate the plaintiff's outraged sense of injustice.

134 In this case, although the damage inflicted on the Plaintiff is relatively modest in monetary terms, the character of the Defendants' dishonest conduct strikes at the heart of commercial integrity, upon which the business community, and ultimately the community as a whole, depends. Employers should feel able to entrust their business confidences to their employees with security. Employees should know that deliberate and dishonest breach of their fiduciary duties of loyalty, calculated to produce profit for themselves, will not go unpunished and that, at the end of the day, breach of those duties does not pay.

135 There is no doubt that the wrongdoing of Messrs Harris and Eden caused Mr Heil great distress. He says that when he discovered that his trusted employees had lied to him and had diverted business opportunities to Juice, he felt betrayed. The toll on his business and personal life was such that he considered closing Digital down after five years of hard work. I accept that evidence. Mr Heil's sense of injustice and outrage at the wrongdoing of Messrs Harris and Eden requires vindication by punishment of the wrongdoers.

75 His Honour also held that the employees' actions would have been in clear breach of s232 (6) of the Corporations Law (now s182 (1) of the Corporations Act 2001 (Cth)) were the appellants officers of the respondent (a matter left undecided: see [131]). 76 The appellants do not dispute that it would have been open to award the exemplary damages had their breaches been of a different juridical nature. 77 Palmer J's reasons for concluding that it was open to him to award exemplary damages for breach of fiduciary duty are set out at [141]-[172]. 78 In summary, he recognised (at [151]) that Australian law did not permit an award of exemplary damages for breach of contract (Gray v Motor Accident Commission (1998) 196 CLR 1 at 6). And he observed, correctly, that the traditional view in Australia is that exemplary damages are available only in tort or where expressly permitted by statute, and that they cannot be awarded by a court of equity. There was no decided case upon that point, however, and it was that issue which he had to consider (at [159] ). 79 His Honour observed that the clear trend in recent English law was opposed to a fixed list of tortious causes of action capable of carrying such an award. He cited Kuddus v Chief Constable of Leicester [2002] 2 AC 122 where, with the exception of Lord Scott, their Lordships held that exemplary damages served a valuable purpose in the law which precluded confinement to a limited set of causes of action. More to the point, as Palmer J observed, Australian law had already arrived at this position in Uren. 80 While acknowledging that these cases dealt only with tort, Palmer J held that it was illogical and unprincipled to confine the remedy of exemplary damages to tortious causes of action. 81 His Honour then turned to the specific question whether exemplary damages were unavailable "in equity". He observed that academic opinion was strongly divided. Reference was made to the decision of the New Zealand Court of Appeal in Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299 where the majority (Cooke P, Richardson, Bisson and Hardie Boys JJ) held that an award of such damages was an available option. 82 Palmer J cited 16th and 17th century cases in which Chancellors imposed sentences of imprisonment, fines, the pillory and irons for wrongs such as forgery and perjury (see at [164]). 83 His Honour referred to account of profits as an instance of equitable relief extending beyond compensation. And, in that context, he cited well-known cases establishing that a defaulting fiduciary may receive a greater or lesser allowance for work done depending upon the level of iniquity involved. Palmer J also referred to the deterrent rationale for the basic remedy of account as against a fiduciary, as expressed in an often cited statement of James LJ in Parker v McKenna (1874) LR 10 Ch App 96 at 124. 84 The nub of His Honour's reasoning is found at pars [168]-[170]: 168 In proposing that exemplary damages be available for breach of fiduciary duty, breach of confidence and procuring or assisting in a breach of fiduciary duty, the United Kingdom Law Commission, in its Report No.247 "Aggravated, Exemplary and Restitutionary Damages" said at para.5.55: "But despite the absence of English authorities for awarding exemplary damages for an equitable wrong, we can ultimately see no reason of principle or practicality for excluding equitable wrongs from any rational statutory expansion of the law of exemplary damages. We consider it unsatisfactory to perpetuate the historical divide between common law and equity, unless there is a very good reason to do so. Professor Waddams argues, … the availability of exemplary damages should not be determined by classification of the wrong as a common law tort or as a breach of an equitable obligation …

Indeed, we can see good reason for allowing punitive damages to be recovered against, for example, the dishonest trustee who acts in breach of his fiduciary duty or the person who dishonestly abuses another's confidence. Thus if, as we propose, punitive damages are awardable in respect of the (common law) tort of deceit, it would be anomalous if analogously wrongful conduct could not also give rise to an award, just because the cause of action originated in equity. Moreover, 'deterrence' is an aim that is not alien to courts of equity. For example it is a clear aim of the commonplace equitable remedy of an account of profits awarded for breach of fiduciary duty or breach of confidence."

169 In my opinion, the present position in Australia can be summarised thus. There is no authority which decides that exemplary damages cannot, as a matter of principle, be given by a court of equity for breach of fiduciary duty. Accordingly, to hold that wrongful conduct which would attract an award of exemplary damages in an action in tort cannot attract exemplary damages if the cause of action is equitable creates an anomaly which, in this country, is not justifiable either by precedent or by principle.

170 Consistency in the law requires that the availability of exemplary damages should be coextensive with its rationale. Where wrongful and reprehensible conduct calls for the manifest disapprobation of the community, where a punishment is called for to deter the wrongdoer and others of like mind from similar conduct and where something more than compensation is felt necessary to ameliorate the plaintiff's sense of outrage, then it should make no difference in the availability of exemplary damages that the court to which the plaintiff comes is a court of equity rather than a court of common law. 85 Finally, Palmer J drew support from the civil penalty provisions of the Corporations Act which permit the court to inflict punishment for breaches of that Act which in former times were cognisable only in equity.

Appellants' Submissions on appeal 86 The appellants correctly submitted that this case is the first in Australia in which exemplary damages have been awarded in equity. No English case has made such an award (see Law Commission (UK) Report 247, Aggravated Exemplary and Restitutionary Damages 1997 at 5.54). 87 The appellants drew attention to some of the overseas cases, including Aquaculture Corporation in New Zealand and Norberg v Wynrib [1992] 2 SCR 226 in Canada. We were invited to prefer the dissenting opinion of Somers J in Aquaculture Corporation where he said that "equity and penalty are strangers". In Bailey v Namol Pty Ltd (1994) 53 FCR 102 at 112-3 the Full Federal Court said (obiter) that there was "much to be said for" this view. 88 The appellants next submitted that exemplary damages are not available for breach of contract (Gray at [13], Addis v Gramophone Company Ltd [1909] AC 448); nor are they awarded under ss82 or 87 of the Trade Practices Act 1974 (Cth) (Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at [9]). The appellants further submitted that the analogies of breach of contract and breach of s52 of the Trade Practices Act are stronger than the analogy of tort. 89 Turning from precedent to principle, the appellants submitted that: The jurisdiction to award exemplary damages must be found in equity's original jurisdiction. Imposition of common law doctrines and principles is impermissible, for equity and law are separate and distinct, albeit administered concurrently.

In support of this dogmatic submission the appellants referred to s57 of the Supreme Court Act 1970 and s5 of the Law Reform (Law and Equity) Act 1972 . 90 The appellants submitted that the only path to the result in Aquaculture Corporation was a "frankly admitted fusion" of law and equity, a proposition treated as axiomatically fallacious. 91 Returning to equity's original jurisdiction, the appellants submitted that the jurisdiction did not exist because, if it had done, exemplary damages would have been awarded before now in England or Australia. Equitable claims and remedies "must be shown to have an ancestry in history and in the practice and precedents of the courts administering equity jurisdiction" (Re Diplock [1948] Ch 465 at 481-2; Gee v Pritchard (1818) 2 Swans 402 at 414 , 36 ER 670 at 674). 92 Exemplary damages are not only unprecedented, they are contrary to equitable principle, the appellants submitted. In particular: • Equity does not punish (citing Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 109 per Mason J). • Equity abhors penalties (citing Meagher, Gummow & Lehane Equity Doctrines and Remedies 3rd ed at [318] and Campbell Discount Co Ltd v Bridge [1962] AC 600 at 632). • Equity does not provide for vengeance. • Equity looks to conscience to do justice as between the parties. Equity corrects (citing Earl of Oxford's Case (1615) 1 Chan Rep 1, 21 ER 485). 93 Next it was submitted that the availability of an account of profits as a remedy for breach of fiduciary duty effectively exhausts equity's deterrent purpose. 94 The appellants further submitted that motivation or wrongful intent, key aspects of most awards of exemplary damages, are irrelevant to proof of breach of fiduciary duty. By placing emphasis on intent, equity's concern to impose strict obligations upon fiduciaries who might be tempted to stray will be eroded. The appellants conjured up further horrors that would follow in the train of the decision under appeal. Common law would lose its "strictness", and equity's capacity to ameliorate that strictness would be "thrown away". "Absurdities" were sure to follow (citing J R Mailman & Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80 at 99 per Meagher JA). Judges would become "free to pick, choose and create actions and remedies to reach their perception of the desired result. These judges will include Judges of the District Court of New South Wales"!! 95 The appellants raised the spectre of courts becoming overcrowded with more and more cases unable to be settled because plaintiffs included a claim for exemplary damages. We were invited to take a cue from parliament: "Statutory reforms in New South Wales indicate legislature perceives the public interest not to be met by allowing exemplary damages".

Respondent's submissions on appeal 96 The respondent supported all of the reasoning of Palmer J. 97 It particularly submitted that the power assumed by his Honour represented a legitimate development of Equity's inherent or exclusive jurisdiction to mould its relief to special circumstances. It was also pertinent that the matter at issue is a remedy as distinct from a substantive equitable right. We were reminded of Equity's fecundity in the past century and taken to situations where equity granted or moulded relief with deterrent and punitive intent. 98 I have summarised the respondent's submissions in most skeletal form. As will appear below, I accept most of them and I will, when discussing them, develop the propositions in fuller form.

"Authorities" 99 It is common ground that there are no controlling precedents, in the sense of Australian appellate decisions which either authorise or forbid the award in question. Nor does any English authority take a position on the matter. 100 One is therefore tempted to proceed directly along the lines enjoined by Vaughan CJ in Fry v Porter (1670) 1 Mod Rep 300 at 307, 86 ER 898 at 902: I wonder to hear of citing of precedents in matter of equity. For if there be equity in a case, that equity is an universal truth, and there can be no precedent in it. So that in any precedent that can be produced, if it be the same with this case, the reason and equity is the same in itself. And if the precedent be not the same case with this, it is not to be cited, being not to that purpose. 101 This advice is all the more alluring when it is seen that some of the later precedents and writings on the topic are dogmatic rather than persuasive, or invoke reasoning that is at variance with established principles of Australian law. 102 Nevertheless, the following brief comparative survey is offered.

(i) Judicial authorities 103 From material cited and my own researches, dicta or decisions directly addressing the power to award exemplary damages for breach of equitable obligation can be found in the following:

Australia: Yamabuta v Tay (1995) 16 WAR 254 (where the proposition is rejected at first instance by Commissioner Pringle QC); Tweedvale Investments Pty Ltd v Thiram Pty Ltd (1995) 14 WAR 109 at 118-9 (where the Full Court noted the issue, without deciding it).

Canada: In the past decade, the Supreme Court of Canada has endorsed the remedy without any lingering hesitation: see Whiten v Pilot Insurance Co (2002) 209 DLR (4th) 257 at 287 [67] ( "It is in the nature of the remedy that punitive damages will largely be restricted to intentional torts… or breach of fiduciary duty as in M(K) v M(H) [1992] 3 SCR 6": per Binnie J writing for the Supreme Court (Le Bel J dissenting).) See also Norberg per McLachlin and L'Heureux-Dube JJ.

New Zealand: Aquaculture Corporation ; Cook v Evatt (No 2) [1992] 1 NZLR 676 (supporting the power).

United Kingdom: Smith v Day (1882) 21 Ch D 421 at 428 (Brett LJ) (an obiter dictum supporting an exemplary award in equity).

United States: The many cases, for and against, are collected in Annot 58 ALR 4th 844 ("Punitive Damages: Power of Equity Court to Award"). See, however the warning about the use of American authorities in this area by the Hon Mr Justice Gummow in T G Youdan ed, Equity, Fiduciaries and Trusts 1989, Carswell, pp79-80. There appears to be a trend in the United States towards greater acceptance of the power, evidenced by (1) the dates of the cases cited for and against and (2) comparison between the first (1973) and second (1993) editions of Dan B Dobbs, (Handbook of the) Law of Remedies. In the later edition, the learned author states (p460, footnotes omitted): Equity . In several classes of cases punitive damages are denied or carefully limited. The traditional rule was that equity would not award punitive damages, either because equity's sole province was to provide "complete relief", and compensatory damages marked the limit of that relief, or because punishment or vengeance seemed vaguely inappropriate to a "benignant" equity. Though this rule is rejected by contemporary decisions that have addressed it as a serious issue, there are cases that still repeat it.

A similar trend is observed by Leavell, Love, Nelson & Kovacic-Fleischer, Cases and Materials on Equitable Remedies, Restitution and Damages 6th ed, 2000 p1218. See, however the judgment of White J, with whom the Chief Justice, Justice Stevens and Justice O'Connor joined in Mertens v Hewitt Associates 508 US 248, 270 (1993), which cites Dobb's earlier work and earlier decisions (including Tull v United States 481 US 412 1987) indicating clear rejection of equitable punitive damages, absent statute.

(ii) Law reform commission reports 104 At least three law reform commissions have examined the issue and have found no compelling reason why exemplary damages should not be available in a proper case. Such conclusions have, of course, only the persuasive force of their reasoning, but that reasoning cannot be dismissed out of hand merely because the subject matter of the inquiry is the possible need to "reform" (ie change) the law. Of course, the judicial role is necessarily a narrower one. 105 I acknowledge my indebtedness to the analysis and reasoning of these reports. Much has been found persuasive and appropriate for adoption by me within the parameters of judicial method. 106 The reports, in chronological sequence are:

Ontario Law Reform Commission: Report on Exemplary Damages (1991) (the Commission was divided, but the majority supported the remedy)

Law Commission (UK): Aggravated, Exemplary and Restitutionary Damages (Law Com No 247, 1997).

Irish Law Reform Commission: Report on Aggravated, Exemplary and Restitutionary Damages (LRC 60-2000).

(iii) Academic writing 107 The issue has been discussed vigorously in academic circles. 108 Those supporting the remedy include:

J Beatson: "Damages for Breach of Confidence" (1991) 107 LQR 209

Justice Paul Finn: "Equitable Doctrine and Discretion in Remedies" in W R Cornish et al, Restitution Past, Present and Future 1998 pp255, 271 (describing the "basket of remedies" approach adopted in Aquaculture Corporation as "highly commendable")

John Glover: Commercial Equity Fiduciary Relationships , Butterworths, 1995 pp271-2

Peter McDermott: Equitable Damages , Butterworths, 1994 p104 P W Mitchalik: "The Availability of Compensatory and Exemplary Damages in Equity: A note on the Aquaculture decision" (1991) 21 Vict UCL Rev 391

Dr ICF Spry: The Principles of Equitable Remedies , 6th ed, LBC Information Services, pp636-7.

Professor Michael Tilbury: Civil Remedies: Volume One, Principles of Civil Remedies (Butterworths, Sydney, 1990), pars [1014]-[1020] and also in P Parkinson ed The Principles of Equity , Chapter 22, "Equitable Compensation" pp 814-5.

Those opposed include: L Aitken: "Developments in Equitable Compensation: Opportunity or Danger?" (1993) 67 ALJ 596, 599-600

HAJ Ford and WA Lee: Principles of the Law of Trusts 3rd ed 1996 at [17120]

R Meagher, D Heydon and M Leeming: Meagher Gummow & Lehane's Equity Doctrines and Remedies , 4rd ed 2002 ( MGL ) at [2-310], [23-020] (where the reasons are stated with customary trenchantness, but marred by an unscholarly descent into personal abuse).

Professor Charles Rickett: "Equitable Compensation: Towards a Blueprint?" (paper presented to New South Wales Supreme Court Annual Conference in August 2002, to be published in Sydney Law Review in 2003) 109 I propose to approach the matter as one of principle, not overlooking the messages properly to be drawn from the novelty of the claim now pressed. It is untrue that nothing should ever be done for the first time, but judges must listen to the silence of the past, slow to infer ignorance or oversight on the part of their forebears. We must not forget that there are some principles that are so obvious that precedent affirming them cannot be found.

Clearing away false issues 110 Before true issue can be joined it is necessary to clear away much dead wood. Some of the barriers raised by the appellants as floodgates against monstrous torrents are themselves infested with illogicality and naked prejudice against the very concept of exemplary damages. The debate must proceed from true premises. 111 We are dealing with a question of power, not jurisdiction. Judges of the Supreme Court of New South Wales have had jurisdiction to entertain the present claims since at least 1823. Since 1970 any judge of this Court could exercise that jurisdiction at any time regardless of the Division to which he or she was (temporarily) assigned. It is in any event preposterous to think that Justice Jekyll will automatically switch to Mr Justice Hyde if he or she happens to sit "in equity" or to consider an equitable cause of action as one of several alternatives. 112 In my opinion, the Court is not assisted by reference to New South Wales statutes recently enacted, which, responding to a well-known public indemnity insurance crisis, seek to confine damages awards generally or to preclude the award of exemplary damages in particular circumstances. The issue presented is one that involves the common law of Australia, using common law in its broadest sense. If any statute is relevant for its gravitational pull it is the Corporations Act 2001 (Cth) which supports the respondent in penalising fiduciary misconduct, doing so in an Australian-wide context. 113 Suggestions, subliminal and otherwise, that the matter should be decided upon the basis that exemplary damages are somehow improper should be resisted. Arguments can be marshalled for and against the remedy, but it is well and truly part of the common law of Australia. The wide range of misconduct capable of attracting the remedy in Australian law is shown by Professor Luntz in Assessment of Damages for Personal Injury and Death, 4th ed, 2002 at [1.7.1]ff. In Uren, the High Court rejected the attempt in Rookes v Barnard [1964] AC 1129 to limit the remedy to fixed categories of torts or defendants. In this regard, Australian law led a trend which is now evident throughout the common law world (see Whiten for an extensive comparative review). To uphold this appeal due to lack of sympathy with exemplary damages generally would be to engage in inappropriate judicial activism. 114 Similarly, it is no part of this appeal to consider how the power in question (if it exists) should be exercised, or to assume that the power might be wrongly exercised on occasions. There are many statements confining exemplary damages to exceptional and egregious misconduct. Judges must be expected to heed them and we are all subject to appellate correction if we do not. This appeal is not the proper vehicle to decide if stricter guidelines are appropriate (cf Whiten). 115 I derive no assistance from reference to criminal jurisdiction exercised by the Court of Chancery in 16th or 17th century any more than I would by reference to the undoubted power of a 21st century judge to punish certain forms of contempt. The award of exemplary damages involves the exercise of civil jurisdiction, not criminal jurisdiction. Unlike compensatory damages or equitable compensation, the award is exceptional and in a sense discretionary, but the standard is the civil one and the proceeds of the award go into the plaintiff's pocket not to Treasury.

Key issues 116 The important arguments that have been mounted in favour of the appellants' position are:

2. The award of exemplary damages involves a "fusion fallacy".

4. Equitable remedies already contain within them sufficient capacity to be deterrent, or at least represent the limit of equity's venture into punishment and deterrence.

5. Equity should follow the analogies of breach of contract and the Trade Practices Act .

6. Novelty precludes an intermediate appellate court from approving the step taken by Palmer J. 117 The respondent contests these propositions and ranges against them a cluster of submissions based upon "coherence".

The compensatory nature of equitable compensation and the variety of other remedies for breach of fiduciary duty 118 At the forefront of the appellants' oral submissions was the proposition that the object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation (O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272-3 per Spigelman CJ, citing Nocton v Lord Ashburton [1914] AC 932 at 952; Target Holdings Ltd v Redferns [1996] 1 AC 421 at 432, 439; Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR(4th) 129 at 163). See also Re Dawson [1966] 2 NSWLR 211 at 216 and the learned academic publications cited by Spigelman CJ in O'Halloran. 119 Before I leave the authorities just cited, I observe that two of them (Professor Tilbury and McLachlin J) are firm adherents of the view that exemplary damages are available for breach of fiduciary obligations: see M Tilbury (supra) and McLachlin J (now McLachlin CJ) in Norberg, M(K) v M(H) and Whiten. This alone should caution that something is seriously awry with the appellants' starting premise. 120 In my view it is quite fallacious to seek to build an argument upon the premise that equitable compensation is compensatory. That blinding glimpse of the obvious tells you nothing about areas where equity goes further, for example, by granting an injunction, specific performance or account of profits. The authorities on equitable compensation cited do not address the present issue. 121 Equity protects many relationships, sometimes concurrently with common law sometimes exclusively. An employee's duty to serve with good faith and fidelity is both an implied contractual obligation (Robb v Green [1895] 2 QB 315) and a fiduciary one. In the present case the relief was erected upon breach of the latter relationship. 122 There are fiduciaries and fiduciaries. And the list of equitable duties imposed on an employee fiduciary is a extensive one. Depending on the circumstances, the duties may relate to the custody of entrusted property, matters of loyalty and fidelity, and confidences, to name only some. 123 With these caveats, I turn to examine aspects of the development of monetary awards for breach of the fiduciary duty infringed in the present case. "Monetary" is used advisedly, to avoid circularity of reasoning from labelling. 124 Viscount Haldane's speech in Nocton v Lord Ashburton [1914] AC 932 exposed the error of thinking that equity lacked power to award compensation for infringement of a right which was recognised exclusively in Chancery in the pre-Judicature Act era. As Dixon AJ put it in McKenzie v McDonald [1927] VLR 134 at 146, "the jurisdiction to remedy breaches of fiduciary duty extends to decreeing compensation to the person whose confidence has been abused". Since then, a trickle of cases dealing with equitable compensation has become a torrent. Equitable compensation can be awarded for a wide variety of infractions of fiduciary and other "equitable" duties. 125 The principles under which equitable compensation is payable differ in certain respects from those governing an award of compensatory damages at common law. The caselaw is extensive and developing rapidly. The rules are not necessarily uniform across fiduciary relationships, because equitable compensation protects differing interests, including restitution and reparation (Rickett, op cit). 126 Nocton and its progeny never claimed to cover the field of equitable remedies directed at defaulting fiduciaries. The ample armoury of equity includes declaration, injunction, rescission coupled with ensuing monetary orders (see Maguire v Makaronis (1997) 188 CLR 449 at 472, where this remedy is contrasted with equitable compensation), account of profits, accounting (including accounting on the basis of wilful default), orders for indemnity etc. Even that most common law remedy of money had and received is available in some circumstances (Roxburgh v Rothmans Pall Mall Australia Ltd (2001) 76 ALJR 203 at 216 [67] per Gummow J). Proprietary remedies, such as remedial liens and constructive trusts are also available in many situations. 127 The remedies go far beyond offering compensation to the plaintiff. In most circumstances, the plaintiff can elect to claim multiple or alternative remedies. These include remedies designed to strip improper gains. 128 It is therefore fallacious to move from a premise such as "equitable compensation is compensatory" as if that told you something about the limits of the monetary relief capable of being awarded in equity. Yet this circularity represents a major plank in the appellants' case, in which statements in Re Dawson [1966] 2 NSWR 211 at 214-6 and other equitable compensation cases were cited as if they had prescriptive effect in the present context. 129 A similar process impeded the development of common law, until recently. There are statements of the highest authority to the effect that damages in tort are purely compensatory (Livingstone v Rawlyards Coal Co (1880) 5 App Cas 25 at 39, Butler v Egg & Egg Pulp Marketing Board (1966) 114 CLR 185 at 191). This notwithstanding, the common law allows exemplary damages in tort. It also provides gain-based awards in exceptional circumstances such as wrongful user (see eg Gaba Formwork Contractors Pty Ltd v Turner Corp Ltd (1991) 32 NSWLR 175; Ministry of Defence v Ashman [1993] 2 EGLR 1025; Inverugie Investments Ltd v Hackett [1995] 1 WLR 713; Attorney-General v Blake [2001] 1 AC 268 at 278-80; Athanasopoulos v Moseley (2001) 52 NSWLR 262). 130 The appellants invoke authoritative dicta about the purpose of equity's relief against defaulting fiduciaries being restorative and compensatory, not punitive (see, eg Maguire at 496 (Kirby J), Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 at 224-5 (Kirby J)). But when these and earlier dicta cited in them are examined, it will be seen that they do not stand in the way of the power to award exemplary damages in a proper case. They either relate to the principles upon which equity achieves that which is "practically just" in a rescission, or the principles underpinning the assessment of equitable compensation. In none of the cases was the power to award exemplary damages in issue. And in none of them was there any discussion about alternative, non-compensatory remedies such as account on the basis of wilful default or account of profits (as to the distinction between the two, see Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (No 2) [2001] NSWSC 6 at [39]-[42] per Austin J). In these areas, no one doubts the irrelevance of pure compensation and the relevance of both specific and general deterrence. 131 I respectfully disagree with the Chief Justice's observation about a "balancing exercise" always being required in relation to equitable doctrines and remedies. Equity may insist upon a plaintiff showing standing, but it does not proceed according to some overarching doctrine of proportionality of response or balancing of rights as between plaintiff and defendant. An affected plaintiff seeking an injunction to restrain the flouting of a town-planning law is not required to demonstrate that the remedy somehow restores the parties to a right balance: the public interest in statutory compliance may be sufficient to generate a right in the individual to a stringent equitable remedy that goes beyond what the plaintiff would have lost or the defendant would have gained. Equitable remedies can vindicate public as well as private rights.

Appellants' submission that the award of exemplary damages involved a "fusion fallacy" 132 The respondent did not suggest that the fused administration of law and equity (Supreme Court Act 1970, s57) had any bearing on the issue. The appellants submitted, however, that to uphold Palmer J would involve a "fusion fallacy". 133 MGL at [2-105] describe the fusion fallacy as a particular type of error in legal reasoning which leads to an unsound result: The fusion fallacy involves the administration of a remedy, for example, common law damages for breach of fiduciary duty, not previously available either at law or in equity, or the modification of principles in one branch of the jurisdiction by concepts which are imported from the other and thus are foreign, for example, by holding that the existence of a duty of care in tort may be tested by asking whether the parties concerned are in fiduciary relations.

134 Aquaculture Corporation is branded as involving such a fallacy (MGL at [2-310]). The particulars of charge focus upon the absence of reasoning ("argument") in the majority decision of the New Zealand Court of Appeal, which MGL say held that monetary awards for breach of confidence were "fully equated with those applicable to awards of damages at common law, so that it was unnecessary to decide whether the obligation in the instant case was founded in equity or contract". This overstates the holding in Aquaculture Corporation, which, though sparse to the point of exasperation, states that "a full range of remedies should be available as appropriate, no matter whether they originated in common law, equity or statute (my emphasis). Paucity of reasoning is also a mark of Somers J's dictum that "equity and penalty are strangers", although (in justice to his Honour) that dictum is clothed in tentative terms and expressly framed as obiter. 135 But paucity of reasoning is not the badge of a fusion fallacy as defined in the passage from MGL quoted above. Rather, the vice is stated in more categorical terms, by reference to novelty ("the administration of a remedy … not previously available either at law or in equity") or borrowing ("the modification of principles in one branch of the jurisdiction by concepts which are imported from the other and thus are foreign" - my emphasis). 136 With respect to the learned authors of MGL, this fusion fallacy concept is itself fallacious and historically unsound. 137 MGL's example of a fusion fallacy based on novelty is "common law damages for breach of fiduciary duty". At one level, MGL's proposition is self-evident, but in the same breath it is quite circular. "Common law damages" is by definition a common law remedy and "breach of fiduciary duty" is by definition an equitable wrong. Never the twain shall meet, if one assumes a priori the inability of one historical system to incorporate ideas from the other or to allow remedies to cross over by discriminating and at times partial adoption. 138 MGL's second category of fusion fallacy (borrowing) has justly been described by Professor Tilbury as a concept that is "not peculiar to the law of remedies, but permeates all branches of the law" (Civil Remedies p10 n72). 139 No one to my knowledge advocates incorporation or borrowing by direct force of the enactment of the Judicature Act 1873 (UK) or its Australian counterparts. That would be a fusion fallacy of a very different sort, because there is much authority supporting the proposition that the fusion effected by the statute was of an administrative and procedural character. In Ashburner's famous metaphor (W Ashburner, Principles of Equity 2nd ed, Butterworths, London 1933 p18): … the two streams of jurisdiction, though they run in the same channel, run side by side and do not mingle their waters. 140 Like all metaphors this needs to be understood in context. But I shall not tarry over it, because MGL's "fusion fallacy" bogey is quite different in nature. In terms, it condemns law and equity to the eternal separation of two parallel lines, ignoring the history of the two "systems" both before and after the passing of the Judicature Act 1873 (UK). And it treats the permission of the statute to fuse administration as if it were an enacted prohibition against a judge exercising the fused administration from applying doctrines and remedies found historically in one "system" in a case whose roots may be found in the other "system". 141 Both "Equity" and "Common Law" had adequate powers to adopt and adapt concepts from each other's system well before the passing of the Judicature Act, and nothing in that legislation limits such powers. They are of the very essence of judicial method which was and is part of the armoury of every judge in every "common law" jurisdiction. 142 Neither system consistently and automatically ignored the other before the Judicature Act; and there is even less justification for suggesting otherwise since the fusion of the administration of law and equity. I emphasise the words "consistently and automatically". 143 MGL themselves offer many examples of the common law importing equitable doctrines (see at [1-205]). Gummow J has recently added others (see Roxburgh v Rothmans of Pall Mall Australia Ltd (2001) 185 ALR 335 at [84]). Equity has returned the compliment, and examples are usually collected under the rubrics of the maxim "equity follows the law" or equity's "concurrent jurisdiction". Amev-UDC Finance Ltd v Austin (1986) 162 CLR 170, to which Spigelman CJ refers, shows that in the area of penalties equity chose to follow the common law and, with the advent of the Judicature System, allow a discordant stream of equitable doctrine to "wither on the vine" (see per Mason and Deane JJ at 191) in the interests of coherence in the law generally. 144 The borrowings from one system by another have never been slavish and were by no means universal or unconditional. Until the Judicature Act, plaintiffs could fail completely if they knocked at the wrong door. Or they could find that one "branch" was only able to address part of the matter in issue. There were also many areas where a common law remedy could not be engrafted upon an equitable right, and vice versa. But this was not because it was self-evidently fallacious for law or equity to develop in that manner. Rather, it was because the particular borrowing was not made. 145 In some jurisdictions, such as Canada and New Zealand, there has been greater liberality in borrowing and adopting. Day v Mead [1987] 2 NZLR 443 may have gone further than an Australian court is prepared to go. This said, I would respectfully adopt the following remarks of Sir Anthony Mason (Anthony Mason, "The Place of Equity and Equitable Remedies in the Contemporary Common Law World" (1994) 110 LQR 238 at pp243-4): Putting to one side any reliance on the Judicature Acts, I suspect that, at bottom, criticism of Day v Mead rests on two unarticulated grounds. One is that the Court of Appeal was guilty of impiety in daring to pollute a traditional equitable concept with a new-fangled common law notion. The other is that it is not for the courts, under the guise of judicial development, to alter the substantive principles of law and equity on policy grounds. Neither objection can be supported. The traditional principles of equity are not so invincibly superior to the concepts of the common law that equity cannot occasionally profit from common law ideas. And, though the courts should look at policy arguments with due circumspection, it would be absurd to suggest that the courts cannot adjust or modify equitable principle on policy grounds where to do so is appropriate.

146 Mr Justice Priestley made a similar point when he wrote ("A Guide to a Companion of Australia and United States Contract Law" (1989) 12 UNSW Law Jo 4 at p29): What is in this country abjured by some respected authorities as the "fusion fallacy" is, I think, orthodoxy in many United States jurisdictions. The administration of law and equity in the one court (whether it be called a concurrent or fused administration) began a little earlier in the United States than in England or Australia and the crossover of remedies is more advanced.

147 At times, innovation seemed the hallmark of one or both systems (ie Equity and Common Law). At other times, each proclaimed itself to have reached a state of self-satisfied rigidity. Sir Frederick Jordan's view about the rules of equity having become settled (Chapters in Equity in New South Wales p15) would surprise an observer of the High Court post-1987 or thereabouts. 148 Since fusion of administration, judges have tended to use similar forms of judicial method whether administering law, equity or both. Of course, some judges have been readier to break new ground than others. Be that as it may, the fused administration of the two systems that occurred in England over 125 years ago has produced generations of judges who had understanding of both "common law" and "equity" and who practised in both fields. Barristers often specialised, but appellate courts were populated with former denizens of both "systems". Inevitably and appropriately, unnecessary barriers of separation have been broken down. Analogies have been drawn between rules operating in the two systems in the interests of coherence and simplicity. Distinctions with nothing but history to support them have, at times, been deliberately ironed out or conveniently overlooked as doctrines are passed from generation to generation. 149 Maitland forecast that: The day will come when lawyers will cease to inquire whether a given rule be a rule of equity or a rule of common law: suffice it that it is a well-established rule administered by the High Court of Justice. (F W Maitland, Equity: A Course of Lectures (1947) Cambridge at the University Press, p20).

The dream has been a long time coming. Hopefully principled integration will develop apace (see A Burrows, "We Do This At Common Law But That in Equity" (2002) 22 OJLS 51). 150 For present purposes, it is sufficient to observe that this process continues, at times haltingly. Sometimes fusion has ceased to be visible, as with the various remedies for breach of contract. At times, false fears of fusion fallacies have caused hesitation or stumbling. At other times, concepts and remedies deriving from one system have been properly rejected as unsuitable for adoption by another. 151 Alongside these legitimate products of the fusion of judicial administration there has occurred a remarkable flowering of what I shall term (for the sake of the "purists") equity jurisprudence. Post-Judicature Act developments within equity's exclusive or auxiliary jurisdiction include High Trees estoppel, Mareva orders, Anton Piller orders and injunctions in aid of the criminal law. Some of these developments may be able to trace roots back to earlier times, but many are simply novel manifestations of the "common law method" happening to reside "in equity". To the extent that they claim to look back to an ideal golden age of Chancery they may be appealing to little more than "the vibes" of pre-Judicature "Equity" (to borrow a phrase from the movie The Castle). Close analysis may show a much stronger influence from contemporary developments "at common law" and in the field of statutory law (cf the impact of s52 of the Trade Practices Act). 152 I do not assert that the Judicature system itself justifies the award of exemplary damages for breach of an equitable obligation. And I acknowledge that the reasoning in Aquaculture Corporation is open to the interpretation that this was the manner in which the Court reasoned (see also the remarks of Cooke P concerning exemplary damages in Attorney-General for the United Kingdom v Wellington Newspapers Ltd [1988] 1 NZLR 129 at 175, 172). 153 As will appear, my reasons (generally following those of Palmer J) are closely based on notions of consistency and coherence. 154 But before I leave the appellants' charge of "fusion fallacy" I state my entire agreement with the following remarks of Professor Tilbury (Civil Remedies pp11-12): But the further conclusion, inherent in the fluvial metaphor and explicit in the "fusion fallacy", that in a fused jurisdiction it is impossible, for all time, to have a "fused law" is both a non-sequitur and hard to justify in principle and policy. It is a non-sequitur because the proposition that the Judicature Acts do not authorize fusion of principles, cannot lead to the conclusion that such a fusion is prohibited . In short, there is no fallacy. Fusion can, and does, take place independently of the Acts. Indeed, constant administration alone suggests such an interaction of the rules of law and of equity as to make fusion of principle inevitable. Further, it is submitted that, both in principle and in policy, it is desirable that the jurisdictional origins of rules of law become less and less important as those rules are adapted to changing social realities by courts in fused jurisdictions, where the relationship of those rules inter se and their overall purposes in the legal system as a whole can be better appreciated. After all, what can be done with rules is much more important than where they came from. It is no answer to say that progeny must be legitimate, for this merely begs the question. As Lord Radcliffe, delivering the advice of the Judicial Committee, said in Kasumu v Baba-Egbe [1956] AC 539, 550: It must be admitted that, now that all courts endeavour to give effect to the rules of both systems with predominance for equity in the case of conflict, a distinction which is based entirely on the nature or history of the remedy sought does not seem a very satisfactory basis for a material difference in the resulting positions (of the parties). More recently, and to the same effect, are the words of Deane J Waltons Stores v Maher (1988) [164 CLR 387 at 447]. And see by analogy Hawkins v Clayton (1988) [164 CLR 539 at 584] per Deane J: [I]t is necessary for care to be taken to avoid the risk that a consciousness of past separateness of common law and equitable doctrines may lead to a tendency to discount the full substantive effects of their fusion. Knowledge of the origins and development of the common law and equity and an awareness of the ordinary and continuing distinctness of controlling equitable principles are prerequisites of a full understanding of the content of a fused system of modern law. To ignore the substantive effects of the interaction of doctrines of law and equity within that fused system in which unity, rather than conflict, of principle is now to be assumed is, however, unduly to preserve the importance of past separation and continuing distinctness as a barrier against the orderly development of a simplified and unified legal system which fusion was intended to advance. This is not, of course, to argue for the wholesale fusion of law and equity, nor indeed that such a fusion has occurred. It is simply to assert that where piecemeal fusion does take, or has taken, place, it ought not to be rejected out of hand on the basis of a backward-looking argument that such a development would not have been possible before 1875.

155 To place aside the caselaw about equitable compensation and to rebut the charge of "fusion fallacy" does not establish the legitimacy of the novel remedy awarded by Palmer J. To that I now turn.

"Equity and penalty are strangers" and the limits of equity's punitive and deterrent role 156 It is convenient to address two related arguments together. The appellants submit that "equity and penalty are strangers". They acknowledge that some equitable remedies are granted and moulded with intent to deter misdoing while stripping unauthorised profits. But they submit that a punitive intent is always absent in equity and they contend that a categorical distinction lies between a deterrent and a punitive role. 157 Somers J's dictum that "equity and penalty are strangers" in Aquaculture Corporation (at 302) expressed his tentative reservations about the existence of power to award exemplary damages for breach of confidence. In Bailey, the Full Court (Burchett, Gummow and O'Loughlin JJ) observed (at 113) that there was much to be said for this view. 158 There are undoubtedly areas where equity has deliberately held back from granting particular relief with a punitive element (see eg Rasmanis v Jurewitsch [1968] 2 NSWLR 166 at 168). See also the passage from Vyse v Foster (1872) LR 8 Ch App 309 at 333 discussed below. Other examples are given by Heydon JA. 159 With respect to the appellants, I do not think that unattributed statements about equity abhorring penalties are in this category. Such sentiments are a response to contractually agreed penalties and forfeitures that are unconscionable (Legione v Hateley (1983) 152 CLR 406 at 444-5). As indicated above, equity has chosen to fall in line with the common law in relation to contractual penalties. 160 The real question is whether a general doctrine of equity can be discerned, sufficient to keep equity entirely out of the field of punishment or at least to do so in cases such as the present. 161 An immediate difficulty for the appellants is the well-established proposition that some equitable remedies awarded against defaulting fiduciaries have undoubted deterrent purpose. These include the personal remedy of account of profits and proprietary remedies such as constructive trust and lien. Moffitt P described the policy of the law in this field as having a "penal function" (Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440 at 444). And in the same case Mahoney JA referred (at 459) to a "sanction against the conduct of a trustee when it falls below the standard required by the law". There are many statements attesting to the deterrent function of these remedies directed at recalcitrant fiduciaries. It is sufficient to note Warman International Ltd v Dwyer (1995) 182 CLR 544 where the Court said (at 557-8 citations omitted): The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves "at a level higher than that trodden by the crowd". The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage.

162 If there is a presently relevant distinction between punishment and deterrence these cases do not go far enough for the respondent. I shall later seek to demonstrate why such distinction is illusory in the context of the remedy under consideration. 163 The appellants seek to draw a firm line between deterrence and punishment. The idea that equity might be involved with the latter is said to be unprecedented and unprincipled. 164 The respondent points to areas where equity has moulded its remedies in such a way as to punish or in circumstances where no distinction can be drawn between a deterrent and a punitive intent. These include the disallowance of "just allowances" (United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 242-3); the award of interest at higher than usual or compound rates against those guilty of gross breaches of trust (R P Meagher and W M C Gummow, Jacobs' Law of Trusts 6th ed, 1997 pp666-7); and the order for the taking of accounts on the basis of wilful default (such order being "in the nature of a penalty for … misconduct" (Jones v Foxall (1852) 15 Beav 388 at 393, 51 ER 588 at 590) or "entirely grounded on misconduct": Partington v Reynolds (1858) 4 Drew 253 at 256, 62 ER 98 at 99; Glazier Holdings at [39]). 165 These instances reveal that there is no general doctrine to the effect that equity never has regard to punishment in moulding relief. I recognise that the caselaw, taken as a whole, reveals that Equity does not set out to punish as an end in itself; and that the situations where the more stringent relief is awarded involve a more vigorous application of traditional equitable remedies designed to strip profits from defaulting fiduciaries (in order to deter repetition and to preclude unjust enrichment) or to compensate their victims. I am indebted to Heydon JA's analysis of these matters. The profound learning in that judgment reveals why his Honour will be greatly missed when he leaves this Court to take up office as a Justice of the High Court of Australia. 166 But it remains true, in my opinion, that Equity reveals itself readier to select a more stringent remedy if the fiduciary's default is deserving of punishment, for example because it was deliberate and/or motivated by greed. To invoke the notion of estoppel against such a miscreant, or to withhold an "exceptional" allowance in respect of skill, expertise or expenses may mask the punitive choice, but cannot disguise it completely. When it strips a miscreant fiduciary of profits, a fortiori when it chooses a harsher alternative remedy, Equity readily trumpets its punitive/deterrent intent. For example, in Phipps v Boardman [1965] Ch 992 Pearson LJ recognised this reality when he said (at 1030): In an ordinary case, where an agent has simply made a secret profit, the rule is so to speak, good for discipline: there is a penal element calculated to deter agents from behaving in that way.

167 In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, Mason J discussed the availability of a remedial constructive trust and the scope of that remedy in a case where a fiduciary acquired a benefit in breach of duty. (He and Deane J were in the minority in concluding that a fiduciary relationship existed.) After citing Furs Ltd v Tomkies (1936) 54 CLR 583 at 592, Mason J continued (at 109-110): However, there is authority for the proposition that equity does not assume jurisdiction to punish a fiduciary for misconduct by making him account for more than he actually received as a result of his breach of fiduciary duty. In Vyse v Foster (1872) LR 8 Ch App 309 at p333, James LJ said: "This Court is not a Court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damages through failure of some equitable duty; but it has no power of punishing any one. In fact, it is not by way of punishment that the Court ever charges a trustee with more than he actually received, or ought to have received, and the appropriate interest thereon. It is simply on the ground that the Court finds that he actually made more, constituting moneys in his hands 'had and received to the use' of the cestui que trust." The decision of the Court of Appeal was affirmed by the House of Lords (1874) LR 7 HL 318 without their Lordships reflecting on the passage which I have quoted. The proposition which I have stated based on the observations of James LJ needs to be modified in order to take account of the situation where the fiduciary has so mixed an indeterminate profit with his own property as to render the identification of the gain impossible. There …. "the whole will be treated as trust property, except so far as he may be able to distinguish what is his own": Brady v Stapleton (1952) 88 CLR 322 at 336, quoting Page Wood VC in Frith v Cartland (1856) 2 H & M 417, at 420 [71 ER 525 at 526]. The proposition may also need to be modified to take account of a profit acquired by a fraudulent fiduciary through a combination of trust property and his own property or efforts. It may well be that equity in such circumstances will not seek to apportion the gain.

Deane J (at 125) expressed his general agreement with the reasoning of Mason J. 168 Mason J's endorsement of James LJ is somewhat qualified. The same cannot be said about statements of Mason CJ, Deane, Dawson and Toohey JJ in Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 at 111 and 114 to the effect that the purpose of an account of profits is not to punish the defendant but to prevent the defendant's unjust enrichment. 169 These statements do not, in terms, address the present topic. Writing extra-judicially, Sir Anthony Mason appeared to see no difficulty with Aquaculture Corporation (Anthony Mason, op cit p244). The statements in Hospital Products and Dart Industries set a boundary in relation to the remedies there being addressed, ie the profit-stripping remedies of account of profits and constructive trust. 170 Furthermore, if the statements are to be read as a universal equitable abjuration of retributive intent they must, I think, be read as directed at retribution as an end in itself, because deterrence and vindication are universally accepted functions of these equitable remedies directed at defaulting fiduciaries. 171 The functions of exemplary damages are discussed in Lamb and Gray. In Gray it is said that they are awarded "to punish the wrongdoer and deter others from like conduct" (per Gleeson CJ, McHugh, Gummow and Hayne JJ at 7). I am unaware of any authority that suggests that it is possible or desirable to segregate these functions. If it were possible to contemplate an award where punishment stood alone, or where the "punishment" of the award itself went beyond vindication and deterrence, then this might contravene some overarching equitable prohibition. The solution would be for equity to set aside an award of exemplary damages containing anything more than a "penal element calculated to deter" (to use Pearson LJ's phrase), rather than to deny the power altogether. 172 The discretionary remedies of constructive trust (or lien) and accounting of profits are part of equity's ample armoury when dealing with cases of breach of fiduciary duty. Their functions and purposes are the preclusion of unjust enrichment and deterrence, both general and specific. In one sense, the former function looks to the private rights of the parties whereas the latter expresses more general public concerns. 173 The various functions of exemplary damages also inhere in the single remedial act. The "public" function is triggered on the "private" initiative of the affected plaintiff who pockets the fruits of the award. In such a context, the distinction between deterrence and punishment is illusory. It would be entirely lost on the defendant. This is a distinction that is not drawn with regard to the award of exemplary damages generally. 174 In Gray the High Court uses the term "exemplary damages" in preference to "punitive damages". This is consonant with the opinion of Lord Hailsham in Broome v Cassell [1972] AC 1027 at 1073 where he said that he preferred the term "exemplary damages" over the alternative because: …[it] better expresses the policy of the law … It is intended to teach the defendant and others that 'tort does not pay' by demonstrating what consequences the law inflicts rather than simply to make the defendant suffer an extra penalty for what he has done …

175 The press for doctrinal coherence (see below) means that no rational basis can be advanced for excluding fiduciary duties from this form of remedial protection in an appropriate case. 176 "Appropriateness" includes compliance with the principles of restraint attendant upon the exceptional, discretionary award of exemplary damages. It also involves, in the present context, care being taken to ensure that there is no doubling up of remedial response (see Cook v Evatt (No 2) at 707, Tweedvale Investments at 119). This means that a court minded to award an account of profits plus exemplary damages must take care to ensure that the latter remedy is necessary to achieve the appropriate deterrence and vindication and that the "punishment" goes no further than necessary for those purposes. 177 Palmer J's reasoning is not attacked on this lastmentioned account. Indeed, his Honour made findings that an accounting of the profits able to be detected fell short of what was necessary to achieve a just result; and that the relatively small sums awarded against the appellants by way of exemplary damages were no more than appropriate (see judgment at [124]-[128], [132], [134], [136], [138]-[140]). 178 Having arrived at this position, it can be seen that his Honour satisfied himself that the award of $10,000 exemplary damages against the dishonest employees was necessary to ensure that "as far as possible, all matters in controversy between the parties [were] completely and finally determined" (Supreme Court Act, s63).

The analogies of Contract and the Trade Practices Act 179 Urging competing claims for coherence, the respondent presses the analogy of tort and the appellants press the analogies of contract and the Trade Practices Act. 180 Exemplary damages are clearly available in tort and have been awarded in relation to many categories of tortious misconduct (see Luntz, op cit at [1.7.2]). 181 Canadian law allows exemplary damages for breach of contract if there is a concurrent "actionable wrong" (Vorvis v Insurance Corporation of British Columbia [1989] 1 SCR 1085, Whiten at [78]ff). But only the High Court could reach such a position in this country. In Gray at 6-7 Gleeson CJ, McHugh, Gummow and Hayne JJ referred to the "apparent rule excluding an award of exemplary damages, even in cases of intentional or malicious breach of contract". 182 The contract analogy is however a weak one and it provides little support for the appellants' case. 183 According to Professor S M Waddams, The Law of Damages 2nd ed, 1991 at [11.250], the rule excluding exemplary damages for breach of contract "is based on the assumption underlying much of contract law that a breach of contract, coupled with an offer to pay just compensation, does no harm to the plaintiff, is not morally wrong, and may be desirable on the grounds of efficiency". See also Thyssen Inc v SS Fortune Star (1985) 777 F 2d 57 at 63 (Judge Friendly), cited in Gray at 7 and Law Commission (UK) op cit at 5.72. 184 There are some similarities between fiduciary duties and contractual relationships, but the differences predominate. Most notably, fiduciary obligations are imposed by law (like torts) and they arise out of a relationship and/or conduct, as distinct from merely giving effect to the negotiated private arrangement that is a contract. And there is no principle of efficient breach underpinning remedies for breach of fiduciary relationship: indeed the deterrent function of remedies like account of profits shows that equity repudiates the type of efficiency encompassed in the contractual notion of efficient breach. 185 History aside, there is greater similarity between a breach of fiduciary relationship and a tort. Each exposes the miscreant to remedies imposed by law. There are interests wider than those of the immediate parties in restraining the "wrongdoing" involved. And, since exemplary damages will only be attracted in response to misconduct attracting moral opprobrium, there are good reasons for permitting a deterrent remedy in the hope that it will modify or restrain similar behaviour in the future. Most instances of breach of fiduciary relationship that would attract an award of exemplary damages would involve conduct that is also tortious if not criminal. 186 The Trade Practices Act provides no analogy, because punitive remedies are excluded by the terms of s82 ("the amount of the loss or damage [suffered]" and s87 ("compensate" for or "prevent or reduce" loss or damage) (see Marks at 501 [9]; Nixon v Philip Morris (Australia) Ltd (1999) 95 FCR 453). 187 Since writing this portion of my reasons I have had the advantage of reading the judgment of the Chief Justice in draft. He suggests a conceptual incompatibility between equitable and contractual doctrine that would arise if the order of Palmer J stood. He posits a contract of employment in which the employee promised to pay $10,000 over and above damages or account of profits in the event of a breach of duty such as occurred in the present case. I readily agree that the promise would be struck down ab initio as a penalty. What I do not, with respect, accept is that this argument advances the present issue, because one could as easily posit a similar hypothetical contract covering a transaction or relationship breach of which could sound in tort and attract the remedy of exemplary damages. In that circumstance, the penal contract would also be struck down, but that would have no bearing upon any entitlement to exemplary damages for the tort. 188 Tort, contract and fiduciary duty are legally distinct institutions and (in the present stage of legal development) generate their own "causes of action" with sometimes differing incidents. A single relationship or transaction may confer on a plaintiff rights sounding in all three categories according to their several criteria. Those rights will at times be capable of coexistence without incoherence or incompatibility. If a plaintiff is able to rely on a particular cause of action, for example that based on breach of fiduciary relationship, then the rules governing that cause of action will ex hypothesi govern. That is why it would be fallacious to hold in the present case that simply because the plaintiff could have sued in tort for deceit and recovered exemplary damages, exemplary damages are automatically available "in equity" for the fiduciary cause of action. Similar reasoning dictates that a conceptual incompatibility cannot be erected upon positing that the plaintiff has made a different claim than the one in question. 189 In the context of the issue in this appeal, the discussion as to the competing analogies of contract and tort operates at a different level. One proceeds from the actual cause of action invoked (here breach of fiduciary duty or, perhaps, breach of fiduciary duty in an employment relationship). One then asks whether the legal (and equitable) incidents of that cause of action (and the legal policies they reflect) more closely resemble contract, which for peculiar reasons I have endeavoured to explain, rejects exemplary damages or the spectrum of torts that accept exemplary damages. This is not to suggest that the stronger force of the tort analogy ends the enquiry, but it takes it some distance towards the conclusion that I prefer. 190 I shall address the appellants' submission that the novelty of the exercise is sufficient reason to hold back, after considering the respondent's case, which urges dismissal of the appeal having regard to the principles of coherence.

Coherence, equity's remedial amplitude and the press of the tort analogy 191 The High Court and this Court have recently stressed the significance of coherence in legal doctrine (Sullivan v Moody (2001) 207 CLR 562 at 581 [55], Tame v State of New South Wales (2002) 76 ALJR 1348 at 1354 [28], 1358 [58], 1369 [123], 1381 [191], 1407 [323]; State of New South Wales v Paige [2002] NSWCA 235). 192 Coherence in this context prefers doctrinal and conceptual fit to historical fit (or pedigree). As Gummow J expressed it in Hill v Van Erp (1997) 188 CLR 159 at 231 (quoting Professor Francis Reynolds): The aim of the law should be to devise principles which provide a way of solving disputes between private persons (including of course corporations); rivalry between principles, as opposed to a study of their interaction and interrelation, is unlikely to be productive.

193 Sometimes coherence indicates that one field of law should defer to another in an area of potential overlap (see the example about the relationship between negligence and defamation discussed in the passages cited from Tame). 194 The quest for coherence also favours the breaking down of rigid categories or distinctions that cause "the reasoning and outcomes in the cases [to] become increasingly detached from the rationale supporting the cause of action" (Tame at [191] per Gummow and Kirby JJ). As indicated already, this trend explains Australian law's refusal to adopt the fixed categories for exemplary damages proposed in Rookes and later abandoned in Kuddus. 195 It also explains why Palmer J was correct in holding that it was illogical and unprincipled to confine the remedy of exemplary damages to tortious causes of action. As his Honour observed, the availability of exemplary damages should be coextensive with the rationale of the remedy. That rationale is the composite goal of punishing, deterring and vindicating a person who is the victim of wrongdoing clearly proscribed. In that context, it is, as Palmer J observed, absurd to think that a plaintiff whose life savings were stolen by a solicitor would have any different sense of outrage depending upon whether the defendant was sued at common law for deceit or in equity for breach of fiduciary duty. The defendant will have been given advance particulars of the basis of the claim (see Supreme Court Rules Part 15 r5A). Assuming that the plaintiff is able to establish the breach of fiduciary duty plus the additional elements of conscious wrongdoing necessary to trigger an award of exemplary damages, a disinterested observer would be bemused to learn that the law would say that exemplary damages should be withheld, whereas they would have been awarded if the identical facts were established had the case been pleaded in tort. See also pars [168]-[170] of Palmer J's judgment (quoted above), which I would specifically endorse. 196 Another instance, closer to the present inquiry, is the coherence achieved in those areas where "notions derived from equity have been worked into and in that sense have become part of the fabric of the common law" (Roxburgh at [100] per Gummow J). Gummow J continued: Hence the statement in Baltic Shipping [(1993) 176 CLR 344 at 376] by Deane and Dawson JJ where, after indicating that the indebitatus count for money had and received was framed in the traditional language of trust or use, their Honours continued: [I]n a modern context where common law and equity are fused with equity prevailing, the artificial constraints imposed by the old forms of action can, unless they reflect coherent principle, be disregarded where they impede the principled enunciation and development of the law. In particular, the notions of good conscience, which both the common law and equity recognised as the underlying rationale of the law of unjust enrichment, now dictate that, in applying the relevant doctrines of law and equity, regard be had to matters of substance rather than technical form.

197 It is true that coherence is achieved, in part, by equity prevailing where the rules of equity and common law conflict in the same field, in accordance with the Judicature Act provisions. But the passage approved does not suggest that this is the only source of coherence. There is no reason why appropriate assimilation of law and equity should not continue to be achieved through the principled development of equity so that it comes into line with common law if it thinks fit. To do so in the present case does not impair equity's capacity to respond flexibly or contextually. Nor does it cut across the sharpness of equitable principles touching breaches of fiduciary relationships, as perhaps do the common law rules about causation, remoteness of damages, contributory negligence etc. 198 Palmer J awarded exemplary damages in a context where he held that an accounting of profits was inadequate to achieve a just result. In particular, it would fail to reach profits probably earned but difficult or impossible to quantify; and because the heinousness of the appellants' conduct was such that mere profit-stripping through an account of profits would fail to deter the appellants or others of similar dishonesty and determination. 199 In its auxiliary jurisdiction, equity has embraced the role of supplementing the inadequacies of "common law" remedies. It has always claimed a right of intervention if appropriate to achieve a just result. Discretion and flexibility ensure that equity will not be forced to act where proprietary remedies such as a constructive trust or lien would be inappropriate or disproportionate. How strange therefore that equity should stand back coyly, keeping its hands clean by washing them like Caesar, even if the criteria for the exceptional, discretionary remedy of exemplary damages are met. 200 It is, I think, relevant to observe that the area in which this debate is occurring is that involved with remedies, not rights. 201 A leading Canadian decision that upholds exemplary damages as an available response to equitable wrongs is M(K) v M(H) [1992] 3 SCR 6. Its persuasiveness on the present point is not undermined by noting that Canada has a broader range of fiduciary relationships than Australia. In the leading judgment of La Forest J (at 81) appears the following, which I would respectfully adopt: In equity there is no capacity to award damages, but the remedy of compensation has evolved. The distinction between damages and compensation is often slight, and as I noted in Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534, the courts have tended to merge the principles of law and equity when necessary to achieve a just remedy. There I was speaking of the relationship between remedies for tortious misstatement and breach of fiduciary duty, but the underlying principles are equally applicable in this case. Of particular relevance are my comments beginning at p581, and particularly the following passages at pp581 and 586-87 respectively: The truth is that barring different policy considerations underlying one action or the other, I see no reason why the same basic claim, whether framed in terms of common law action or an equitable remedy, should give rise to different levels of redress. Only when there are different policy objectives should equity engage in its well-known flexibility to achieve a different and fairer result. The foundation of the obligation sought to be enforced … is "the trust or confidence reposed by one and accepted by the other or the assumption to act for the one by that other". That being so, it would be odd if a different result followed solely on the manner in which one framed an identical claim. What is required is a measure of rationalization. The question in this appeal is whether there are different policy objectives animating the breach of a parent's fiduciary duty as compared with incestuous sexual assault. In my view, the underlying objectives are the same. Both seek to compensate the victim for her injuries and to punish the wrong-doer. 202 See also Canson Enterprises at 587-8 per La Forest J (with whom Sopinka, Gonthier and Cory JJ concurred). 203 This is not to assert that common law damages and equitable compensation are to be equated in all respects. In some circumstances, different policies result in different rules as to causation, foreseeability etc. But in the present case, I discern no policy reasons why equity should decline always to intervene. 204 And I discern two reasons based upon established legal policies why withholding the remedy is inappropriate. The first is that to do so would be contrary to the amplitude of equitable remedial principles. The second is the analogy of tort. 205 A primary maxim is equity's claim that it will not suffer a wrong to be without a remedy. This is not an excuse for a "naked power of improvisation" (MGL at [3-025]). But it remains a beacon of intent. The concept captured in the maxim has at times induced boldness in the development of equity. The twentieth century saw new remedies being fashioned by equity to further institutions and relationships under equity's protection or in aid of the common law. These include the Mareva order, the Anton Piller order, injunctions in aid of the criminal law and the remedial constructive trust and lien. 206 The same force has been recognised in some of the overseas caselaw favouring the grant of exemplary damages in the present field. Thus, in Norberg, McLachlin J said (at 294): Equitable remedies … should not be confined within the strictures of previous situations. Where new remedies are required, equity will recognise them.

207 A similar view is found in the United States. Unlike Anglo-Australian law, there are several precedents in the United States attesting to what Professor Dobbs (supra) describes as the traditional rule which holds that punitive damages may not be recovered in a court of equity. The same learned authority has noted a current of modern decisions tending in the opposite direction. One of the cases cited by Dobbs adopting the modern American view is IHP Corp v 210 Central Park South Corp 228 NYS 2nd 883 (NY App Div 1962), affd 189 NE 2nd 812 (NY 1963). The New York appellate courts recognised the weight of tradition and precedent, but declined to follow the older cases. In response to authorities suggesting that punitive damages were incompatible with equitable principles adverse to a punitive or penal response, the Appellate Division said (at 887): … the consequence last discussed is governed by procedural forms rather than reason or principle. It is one thing to deny legal relief in a court of equity. It is quite another for the equity side of the court to reach across the invisible line and forbid the law side to grant a legal remedy to which a party is otherwise unquestionably entitled. To do so would presuppose that the traditional equitable remedies - in this case, an injunction and ancillary compensatory damages - will invariably afford complete relief. Such approach, however, would run counter to another equitable principle, of equal standing, that equity will mould its decrees to suit the needs of the particular case. Thus, while tradition and precedent might forbid the Chancellor, as such, from awarding punitive damages, an equally strong tradition would bar any unqualified rule that customary forms of equitable relief … will invariably be adequate and will always preclude accepted forms of legal relief. Such inflexibility has never been characteristic of equity jurisprudence.

I respectfully agree with the statements in the second paragraph quoted. 208 See also Cadorange Pty Ltd (in liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26 at 38 (Young J). 209 A similar point was forcefully made by Lord Goff in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 692, 696, 697: I shall begin by expressing two preliminary thoughts. The first is that, where the jurisdiction of the court derives from common law or equity, and is designed to do justice in cases which come before the courts, it is startling to be faced by an argument that the jurisdiction is so restricted as to prevent the courts from doing justice. Jurisdiction of that kind should as a matter of principle be as broad as possible, to enable justice to be done wherever necessary; and the relevant limits should be found not in the scope of the jurisdiction but in the manner of its exercise as the principles are worked out from case to case. Second, I find it equally startling to find that the jurisdiction is said to be limited to certain specific categories of case. Where jurisdiction is founded on a principle of justice, I would expect that the categories of case where it is exercised should be regarded not as occupying the whole field but rather as emanation of the principle, so that the possibility of the jurisdiction being extended to other categories of case is not foreclosed… I start with the position that the common law remedy is, in a case such as the present, plainly inadequate, in that there is no power to award compound interest at common law and that without that power the common law remedy is incomplete. The situation is therefore no different from that in which, in the absence of jurisdiction at common law to order discovery, equity stepped in to enable justice to be done in common law actions by ordering the defendant to make discovery on oath. The only difference between the two cases is that, whereas the equitable jurisdiction to order discovery in aid of common law actions was recognised many years ago, the possibility of the equitable jurisdiction to award compound interest being exercised in aid of common law actions was not addressed until the present case. Fortunately, however, judges of equity have always been ready to address new problems, and to create new doctrines, where justice so requires. … In my opinion the jurisdiction should now be made available, as justice requires, in cases of restitution, to ensure that full justice can be done. The seed is there, but the growth has hitherto been confined within a small area. That growth should now be permitted to spread naturally elsewhere within this newly recognised branch of the law. No genetic engineering is required, only that the warm sun of judicial creativity should exercise its benign influence rather than remain hidden behind the dark clouds of legal history.

210 Australian law would, I think, use the term "power" in lieu of "jurisdiction" (see Australian Securities and Investments Commission v Edensor Nominees Pty Ltd (2001) 204 CLR 559 at 590 [64]). But that is a quibble. 211 Lord Goff's speech was a dissenting one, but this did not mean that the House of Lords rejected the principles he stated in the passaged quoted. The majority were not prepared to follow Lord Goff in holding that equity could award compound interest in aid of a common law claim, but (with the exception of Lord Lloyd) only on the specific grounds of (1) refusal to tread in an area of contested policy where Parliament had considered action and refrained from intervening, and (2) procedural fairness (see at 717-8 per Lord Browne-Wilkinson, at 718-9 per Lord Slynn, at 738-41 per Lord Lloyd). 212 In my view, it is entirely consistent with equitable doctrine that "Equity" should be prepared to strive for remedial adequacy. For the reasons given elsewhere, it is appropriate that the step taken by Palmer J should be endorsed. To do so, involves no inconsistency with fundamental policies of equity. 213 To refrain from doing so, involves an unjustified rejection of the policies acceptable throughout tort law. In my view, the tort analogy is forceful and should be followed in the interests of conceptual coherence. My reasons for preferring the tort analogy to the contractual analogy have already been stated.

Novelty 214 For these reasons, the award made by Palmer J did not subvert or contradict any of equity's general doctrines. Furthermore, the decision is an acceptable response to the otherwise unmet need to deter misconduct of the kind addressed and the compelling analogy of tort law, having regard to the desirability of coherence in legal doctrine. 215 To the extent that it is proper to continue speaking in terms of "Common Law" and "Equity" in this context, it is therefore open to Equity, ever fecund, to accept this novel remedy, not merely because it exists at Common Law, but because it represents a legitimate development of Equity's inherent or exclusive jurisdiction. 216 The appellants contend that this should not happen, at least at this level of the judicial hierarchy. The silence of Anglo-Australian "equity" history is too strong and pregnant. 217 This brings me to the final issue, novelty. Is it right that a court other than the High Court of Australia should countenance this novel remedy? In my view it is, for the following reasons. 218 First, it is (within the constraints of the judicial method) open for an intermediate appellate court to recognise the legitimacy of a novel step in legal development, so long as it is not foreclosed by High Court authority (cf Nguyen v Nguyen (1990) 169 CLR 245). At its highest, the unavailability of the remedy has been assumed rather than established by any authority binding this Court. 219 Second, the present development is legitimate progeny sired by judicial method from the stock of the "common law of Australia", including its equitable line. 220 Third, this is not a field involving social or economic policy issues such as those discussed by Mason J in Government Insurance Commission v Trigwell (1979) 142 CLR 617 at 633-4. The policy issues are really in the realm of "lawyers' law", involving the structures of the law of civil obligations and the remedial response to a well-established cause of action. The issues have been well thrashed out in the reports of three law reform commissions, none of which identify any wider economic or social policy issues apart from those touching exemplary damages generally. Each commission saw no obstacle to the change proposed and made a compelling case for it based upon principles of coherence. The commissions drew the analogy between fiduciary and tortious duties, while setting contract apart for particular reasons. 221 Fourth, there is the persuasive example of similar recent development in other common law systems and the absence of compelling authorities to the contrary. For over a century Australian courts readily adopted the developments and shifts of equity as found in the English law reports. Our courts did not always wait until these shifts had been endorsed by the English Court of Appeal, let alone the House of Lords. Nor did they await the nihil obstat of the High Court. On what novelty principle, therefore should an intermediate appellate court in this country turn up its nose at decisions of the highest courts in Canada and New Zealand? 222 Fifth, it is speculation to infer that the absence of earlier Anglo-Australian authority is indicative of a consensus that the power did not exist. An alternative inference, equally open, is that no plaintiff chose to test the issue until recently. The fact that (United States apart), the issue has first surfaced in the 1990s suggests to me that it is associated with a recent upsurge world-wide in interest in exemplary damages. I am certainly unpersuaded that the silence of the past on the matter now at issue can be translated into a positive conclusion that the present situation is positively satisfactory. 223 Sixth, it is highly pertinent that we are addressing a remedial issue, not the proposed creation of a novel form of equitable right/duty. The conduct found against the appellants has been proscribed for hundreds of years at law and in equity. What is at issue is the judicial response to improper conduct where (ex hypothesi) traditional remedies have been found deficient in a specific instance. 224 Courts have traditionally been bold in such areas (cf Tringali v Stewardson Stubbs & Collett Ltd (1966) 66 SR(NSW) 335 at 344), equity particularly so. Equity has always claimed to have the capacity to fashion and mould its remedies to meet the needs of the case (see eg Hill v Rose [1990] VR 129 at 143-4). Within its auxiliary jurisdiction, equity intervenes because of the deficiencies and inadequacies of the common law. Why should equity turn coy in its exclusive jurisdiction? Equity is usually noted for its flexibility and boldness, not its timidity (cf Banque Belge pour L'Etranger Hambrouck [1921] 1 KB 321). If it is accepted, as I think it must, that the stripping of profits will (on occasions) represent an inadequate means of enforcing common decency, why should equity stand proudly apart from the common law in withholding the discretionary remedy of exemplary damages in an otherwise appropriate case? 225 Judges should not be deterred by fear of a false "fusion fallacy" charge. They should act boldly, remembering (in Lord Jessel MR's words) that the rules of equity "have been established from time to time - altered, improved, and refined from time to time" (In re Hallett's Estate (1879) 13 Ch D 696 at 710). 226 I find it unnecessary to do more than note an interesting suggestion that arose during an exchange between senior counsel for the respondent and the Chief Justice. There have always been iniquitous fiduciaries. The Chief Justice asked whether there had been any change in circumstances that might have required modern courts of equity to develop exemplary damages. Counsel embraced a suggestion, raised tentatively by the Chief Justice, that the value of intangible property had escalated to a marked degree in recent times, along with significantly greater possibilities for misuse through the ease of data transfer through computers. 227 I respectfully disagree with Heydon JA where he states that the award of exemplary damages is a "criminal sanction" and that the decision of Palmer J is tantamount to the creation of a new criminal offence (see generally W v W [1999] 2 NZLR 1 at 3). The award of exemplary damages in respect of an egregious trespass, defamation, misfeasance in public office or an act of gross negligence did not convert those torts into crimes, nor (to my knowledge) proceed on reasoning to such effect. 228 The appeal should be dismissed with costs. 229 HEYDON JA: In this matter Palmer J, sitting in the Equity Division, conducted a trial on 26-30 November 2001. He published reasons for judgment on 8 February 2002, which have been reported: (2002) 40 ACSR 487. On 20 February 2002, he made the following orders: "1. The Defendants are to pay on an indemnity basis the costs of the issues relating to the claims in respect of which it conceded liability on the last day of the trial. 2. Otherwise, the Defendants are to pay Digital's costs of the proceedings on a party/party basis. 3. The First, Second and Third Defendants jointly and severally pay to the plaintiff the account of profits in the amount of $13,119.51. 4. The First Defendant to pay to the plaintiff the sum of $11,000.00 in respect of misappropriated confidential information. 5. The First, Second and Third Defendants jointly and severally pay to the plaintiff interest on the amount in paragraph 3 in the sum of $2642.36 and the First Defendant pay to the Plaintiff interest on the amount in paragraph 4 in the sum of $2482.64. 6. The First Defendant pay the Plaintiff $10,000.00 in exemplary damages. 7. The Second Defendant pay the Plaintiff $10,000.00 in exemplary damages. 8. The First Defendant deliver up to the Plaintiff the Kodak Dec 323 Digital Camera and the Dell Diversion V350 personal computer with monitor, keyboard and mouse being property of the Plaintiff." 230 This is an application by the defendants below for leave to appeal against orders 1, 2, 6 and 7.

The nature of the controversy 231 The court has ordered that the application for leave to appeal be heard concurrently with the appeal, to the intent that full argument be presented and if leave be granted the appeal can be disposed of without further argument. 232 The defendants understandably did not challenge the factual conclusions of the trial judge, which were highly critical of their commercial behaviour and their testimonial acceptability. These factual conclusions were unquestionably correct. 233 The application raises a fundamental question of law. Can exemplary damages be awarded for breach of fiduciary duty? Realistically, the plaintiff did not oppose the grant of leave on that question.

The background 234 From 1996 the plaintiff carried on the business of providing computer-based multi-media services to clients. By 1998 it remained a very small operation. In April 1998 Mr Harris began working for the plaintiff, and in October 1999 Mr Eden began working for the plaintiff. It was an express term of their contracts of employment that each of them would not compete with the plaintiff during his employment. They both occupied positions of responsibility within the plaintiff, and it was not in issue that each owed a fiduciary duty of loyalty. 235 By November 1999 Messrs Harris and Eden decided to leave the plaintiff's employment and begin a business of their own. They did not tell Mr Heil, the controlling director of the plaintiff. 236 By December 1999 they began to carry out work in secret for their business, which they called "Juice". 237 On 27 January 2000 the third defendant was incorporated to carry on the Juice business, and its directors included Messrs Harris and Eden. 238 On 4 February 2000 the plaintiff terminated Mr Harris's employment and on 5 February 2000 Mr Eden resigned. 239 The essence of the plaintiff's claim was for damages for breach of contract, and for equitable compensation or an account of profits in relation to the profits allegedly derived from ten projects by the defendants which were wrongly diverted away from the plaintiff. The plaintiff claimed exemplary damages for breach of fiduciary duty. 240 The trial judge's reasons for judgment were long and careful. On the basis of reasoning the correctness of which is unchallenged before this Court, the trial judge found that the plaintiff had proved wrongful diversion in relation to only six of the projects, and one of them produced neither loss to the plaintiff nor profit to the third defendant. In consequence the trial judge made orders 3-5, resulting in relatively low monetary recovery. 241 However, the trial judge decided that if he had power to award exemplary damages as claimed in paragraph 1(e) of the Summons, he should exercise it against the first two defendants. His reasons for doing so afford a context for his reasoning on the power question. Since they are reported they need not be set out in full, but in outline they are as follows. 242 The trial judge commenced by setting out the distinction between "compensatory" and "exemplary, or punitive" damages: "Compensatory damages are given to place the plaintiff in as good a position, so far as money can do it, as if the wrong had not occurred. Exemplary damages are in quite a different category and serve quite different purposes: to punish the wrongdoer for reprehensible conduct; to deter not only the wrongdoer but others of like mind in the community from similar conduct; to ameliorate the victim's sense of grievance and thereby to abate the urge for self help or violent retribution, to the danger of the public peace". 243 The trial judge observed that the award of exemplary damages to "vindicate the feelings of a victim" has been recognised at least since the eighteenth century. He also said that exemplary damages are awarded where the defendant's conduct is wanton, as where it discloses fraud, malice, violence, cruelty, insolence or the like, or where the defendant acts in contumelious disregard of the plaintiff's rights. "Fraud is always included as a factor attracting exemplary damages because it is the hallmark of fraud that the wrongdoer acts consciously deliberately and dishonestly in disregard of the rights and interests of others." 244 The trial judge gave the following specific reasons for making the awards of exemplary damages. 245 The first was: "the wrongdoing of Messrs Harris and Eden was calculated both to produce profit for themselves and to cause harm to a vulnerable employer. Both Messrs Harris and Eden occupied positions of trust and responsibility within Digital. Mr Harris was entirely responsible for marketing and Mr Eden was responsible for web design, an expanding area of the company's activities. Digital was a small company, vulnerable to the abuse of the positions of trust occupied by Messrs Harris and Eden, as both must have realised. Diversion of opportunities producing even relatively modest profits was capable of doing great harm to Digital at a critical stage in its early life." 246 The second was: "their wrongdoing was consciously dishonest. This is evident from the fact that not only did they not seek Mr Heil's permission to take business opportunities for themselves, not only did they keep Juice and its operations secret from Mr Heil, but Mr Harris lied to Mr Heil on a number of occasions in reporting to him the position of certain projects." 247 The third was: "the subversion of Digital's business opportunities for the benefit of Juice was not haphazard or serendipitous - it was carefully planned. … Messrs Harris and Eden had clearly conceived a plan of lying in wait, as it were, in the employment of Digital, clandestinely and systematically diverting business opportunities from Digital to Juice until Juice was self-supporting." 248 The fourth was: "it is evident from the tone of Mr Harris' reference to securing the business opportunity from Ryan & Waldock that he and Mr Eden were both exulting in their success at having diverted that project from Digital. One may infer that they were equally delighted with the other successes which they achieved at their employer's expense. Their exultation demonstrates a contumelious disregard for Digital's rights." 249 Fifthly, the trial judge said: "the inference is very strong that the efforts of Messrs Harris and Eden to divert opportunities from Digital to Juice were even more successful than is revealed by the evidence which Digital has been able to uncover. … It is highly probable that after 5 February they developed and secured opportunities which they had been pursuing while employed by Digital - opportunities which they should have secured for the benefit of Digital but which Digital knew nothing about, either then or now, because Messrs Harris and Eden kept those opportunities to themselves." 250 Sixthly, the trial judge said: "to further Juice's interests Messrs Harris and Eden were prepared to misappropriate confidential information of Digital." 251 The seventh reason was: "it is obvious that Messrs Harris and Eden spent a great deal of the time for which they were being paid by Digital in attending to the affairs of Juice, as evidenced by the times and dates appearing on the e-mails passing between them concerning Juice's affairs." 252 The trial judge summarised the position by saying: "All of these circumstances, taken together, demonstrate deliberate wrongdoing for profit, in contumelious disregard of Digital's rights, deserving of special condemnation and punishment. To call a spade a spade, what Messrs Harris and Eden did was to defraud their employer of its valuable business opportunities and its confidential information. … By concealing facts which they had a duty to disclose, namely, the business opportunities which should have been Digital's, and by engaging in conduct in which they had no right to engage, namely, taking those opportunities for Juice in breach of their fiduciary and contractual duties of loyalty, Messrs Harris and Eden deprived Digital of its lawful rights, opportunities or advantages to derive business from the diverted projects. Both in a criminal court and in an equity court, the conduct of Messrs Harris and Eden bears the stigma of fraud."

He supported that opinion by saying that as employees of a corporation, Messrs Harris and Eden had breached s 232(6) of the Corporations Law, and were liable to a pecuniary penalty of up to $200,000. If they were officers of the plaintiff, they would have been guilty of an offence under s 176A of the Crimes Act 1900 (NSW), and liable to imprisonment for ten years. They denied that they were in fact officers. "However, it is not necessary to determine the issue for the purposes of this case. What is important is that the type of conduct engaged in by Messrs Harris and Eden - fraudulent diversion of opportunity by a person in a fiduciary relationship with a corporation - attracts the disapprobation of the community to such a degree that it is visited with substantial sanctions both under the Corporations Act and under the criminal law." 253 The trial judge said that exemplary damages were rare only in the sense that it was rare to find a defendant guilty of conscious wrongdoing in contumelious disregard of the plaintiff's rights. "Where the Court encounters a case of conscious wrongdoing in contumelious disregard of the plaintiff's rights it must not shrink from expressing the community's disapprobation of the wrongdoer's conduct 'in an emphatic and public way': Gray [v Motor Accident Commission (1998) 196 CLR 1] at 34, per Kirby J. The Court must award exemplary damages to punish the wrongdoer, to deter others of like mind from similar behaviour, and to vindicate the plaintiff's outraged sense of injustice." 254 The trial judge continued: "If exemplary damages are to fulfil their threefold purpose, they must not merely irritate, they must sting. It is the gravity and character of the Defendants' conduct which guides the Court's discretion as to the proper amount to award by way of exemplary damages. That is why there is "no necessary proportionality" between the amount awarded as compensation for the damage suffered by the plaintiff and the amount of exemplary damages awarded against the defendant. … A minimal amount of damage inflicted on a plaintiff may, if the wrongdoing was outrageous, nevertheless require heavy exemplary damages to be visited upon the defendant. … And the need for the deterrence of exemplary damages is especially strong where the defendant's wrongdoing is calculated to profit. … In this case, although the damage inflicted on the Plaintiff is relatively modest in monetary terms, the character of the Defendants' dishonest conduct strikes at the heart of commercial integrity, upon which the business community, and ultimately the community as a whole, depends. Employers should feel able to entrust their business confidences to their employees with security. Employees should know that deliberate and dishonest breach of their fiduciary duties of loyalty, calculated to produce profit for themselves, will not go unpunished and that, at the end of the day, breach of those duties does not pay. There is no doubt that the wrongdoing of Messrs Harris and Eden caused Mr Heil great distress. He says that when he discovered that his trusted employees had lied to him and had diverted business opportunities to Juice, he felt betrayed. The toll on his business and personal life was such that he considered closing Digital down after five years of hard work. I accept that evidence. Mr Heil's sense of injustice and outrage at the wrongdoing of Messrs Harris and Eden requires vindication by punishment of the wrongdoers. An important discretionary consideration in the award of exemplary damages has been whether wrongdoing deserving of punishment would go unpunished but for an award of exemplary damages. If the wrongdoer has received a substantial punishment at the hands of the criminal law, exemplary damages cannot be awarded in a subsequent proceeding for what is essentially the same conduct, since the demands of justice for punishment and deterrence will have already been satisfied. Exemplary damages in such a case would have the effect of a double punishment. … On the other hand, it will be a factor weighing in favour of an award of exemplary damages that wrongdoing deserving of punishment will otherwise go unpunished. … In the present case, as I have said, the wrongdoing of Messrs Harris and Eden would render them liable to punishment by a pecuniary penalty order if ASIC brought such proceedings under s.1317J(1) CA. There is no suggestion in the evidence that such proceedings by ASIC have been, or will be, brought. Neither is there any suggestion of prosecutions under s.176A Crimes Act . The mere possibility that such proceedings will be brought is not, in my opinion, sufficient reason to refrain from awarding exemplary damages in a proper case: Gray at 15 para.48. If such proceedings are later brought, any penalties imposed by the Court will doubtless take account of punishment already suffered by the Defendants as a result of these proceedings. For these reasons, I consider that, if the law so permits, exemplary damages for breach of fiduciary duty should be awarded against Messrs Harris and Eden." 255 The trial judge decided not to award exemplary damages against the third defendant, since that "would merely inflict further punishment indirectly upon Messrs Harris and Eden" and might prejudice the company's creditors. Having attempted to assess the financial circumstances of Messrs Harris and Eden, the trial judge awarded $10,000 exemplary damages against each of them. 256 All of the trial judge's reasoning on the above points is entirely correct provided that he was correct in his view that there was power to award exemplary damages. It is that view which is at the heart of the controversy between the parties to this appeal.

The trial judge's reasoning on the availability of exemplary damages 257 The trial judge first referred to the leading English authorities decided since 1964. In Rookes v Barnard [1964] AC 1129 at 1226 the House of Lords held that at common law exemplary damages could only be awarded in two areas: in the case of "oppressive, arbitrary or unconstitutional acts by the servants of the government"; and in the case where the defendant's conduct was "calculated … to make a profit … which may well exceed the compensation payable to the plaintiff." In Kuddus v Chief Constable of Leicestershire [2002] 2 AC 122 the House of Lords held (overruling AB v South West Water Services Ltd [1993] QB 507) that Broome v Cassell & Co Ltd [1972] AC 1027 had not limited the power to award exemplary damages to cases where the cause of action had been recognised before 1964 as justifying an award of exemplary damages. The trial judge drew attention to the opinion of Lord Slynn of Hadley in Kuddus v Chief Constable of Leicestershire that the areas in which exemplary damages should be awarded were best defined not by the cause of action relied on but by "the features of the behaviour in question", as Lord Slynn said at [26], or the "categories of conduct", as the trial judge said. The trial judge said that it followed that the court, in deciding whether to award exemplary damages, "should pay no attention to whether the plaintiff sues on a cause of action at law or a cause of action in equity". After referring to Lord Mackay of Clashfern's remarks at [38], which were similar to those of Lord Slynn, the trial judge said: "there is no logical reason to acknowledge the power of the court to award exemplary damages for wrongful conduct calculated to produce profit in cases where the cause of action is pleaded in tort, for example deceit, but to deny that power when the same conduct is pleaded as a breach of an equitable duty." (at [153]) 258 The trial judge then quoted parts of the speech delivered by Lord Nicholls of Birkenhead. He referred in particular to the statement: "the availability of exemplary damages should be coextensive with its rationale". He said that if that were so: "it is difficult to see why the remedy should be confined to causes of action in tort. Can it seriously be suggested that if my solicitor grossly deceives me in the course of his professional dealing with me and decamps with my life's savings, the law regards my sense of outrage as demonstrably greater if I sue him in a common law court for deceit than if I sue him in an equity court for breach of fiduciary duty? Is there any rational basis for believing the policy of the law in such a case will permit the common law court to vindicate my outrage by an award of exemplary damages but will prevent the equity court from doing so? My answer to both these questions would be in the negative." 259 The trial judge then noted that while the High Court (Australian Consolidated Press Ltd v Uren (1966) 117 CLR 185) and the Privy Council (Australian Consolidated Press Ltd v Uren (1967) 117 CLR 221) had denied that the limitations imposed on English law by Rookes v Barnard existed in Australian law, the traditional view remained that, statute apart, exemplary damages were only available in tort, and not in equity. He said, however, that there was "no decided case upon that point". 260 He then said: "In Bailey v Namol [ Pty Ltd (1994) 53 FCR 102] at 112, the Full Federal Court (Burchett, Gummow and O'Loughlin JJ) observed that there were authorities in Canada and New Zealand which suggested that as a general proposition exemplary damages could be awarded for breach of fiduciary duty. The court found it unnecessary to decide the point but remarked that ' there is much to be said for the contrary view ... that 'equity and penalty are strangers' : at 112-113. Extra-curial comment on the question is not wanting. The learned authors of Meagher, Gummow & Lehane 'Equity: Doctrines and Remedies' 3rd Ed, para.259, castigate the majority of the New Zealand Court of Appeal in Aquaculture Corporation v New Zealand Green Mussel Co Ltd ([1990] 3 NZLR 299) for deciding that exemplary damages may be awarded for breach of confidence, citing the case as an illustration of the errors produced by the fallacy that equity and the common law have been fused by the Judicature Acts. The authors quote with approval the statement of Somers J in that case that ' equity and penalty are strangers' . On the other hand, Dr I.C.F. Spry in 'Principles of Equitable Remedies' (3rd Ed [p 600]) says that there is no reason in principle why a court of equity should not award exemplary damages. The delphic remark of Somers J. in Aquaculture that 'equity and penalty are strangers' was not explained by his Honour nor was authority cited in support. The remark seems to be an evocation of a view, long held by some, that the concept of punishment was always foreign to the nature of the equity jurisdiction and that equity never gave a plaintiff more than that to which he or she was strictly entitled: D.B. Dobbs 'Handbook on the Law of Remedies: Damages, Equity, Restitution' West (1973) 212 note 99. However, the concept of punishment was by no means always foreign to the Chancery courts. Numerous decisions in the 16th and 17th centuries may be found which show that Chancery judges exercised a jurisdiction encompassing wrongs such as forgery and perjury, and that defendants were sometimes punished with imprisonment, fines, the pillory and irons: see, for example, in 21 ER the following cases reported by Tothill and by Cary: Barker v Ireland & Morris at 136 (1610-11); Baskervile v Guilliams at 153 (1545-46); Phillips v Benson at 108 (1578-79); Sacheverell v Sacheverell 116 (1621); Barker v Shepheard at 136 (1663); Woodcock v Woodcock 34 (1576-77); Clegge v Waberton at 38 (1577-78); Griffith v Jenkin at 40 (1579). But even in modern times it cannot be right to say that equity never gives a plaintiff more than his or her strict entitlement and never exacts a punishment from a defendant. When a fiduciary has derived profit by reason of his or her breach of duty, an account of profits is awarded in favour of the plaintiff. Allowances for the work and skill of the fiduciary in producing the profits are given in the accounting. If there has been no actual dishonesty on the part of the fiduciary in deriving the profit, the allowances are said to be on a liberal scale, but if there has been dishonesty then the Court, in its discretion, may stipulate that the scale of allowances will not be liberal and will reflect the degree of the fiduciary's dishonesty: see e.g. Phipps v Boardman [[1967] 2 AC 46] at 104, 112; Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No.2) [1984] WAR 32; Bailey v Namol at 112. A grossly dishonest fiduciary may even be deprived of his or her allowances altogether: see, e.g., Mason & Carter Restitution Law in Australia , para.1735. In USSC v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 (reversed on appeal (156 CLR 41) without affecting the present point), the Court of Appeal would have deprived the dishonest fiduciary defendant of any allowance at all for its skill and effort in building the business over which the plaintiff claimed a constructive trust. The Court, at 242, adopted as applicable to the determination of what allowance should be made to a defaulting fiduciary the following passage from Story on Equity (3rd Ed) para.697: ' On the other hand, where the party seeking relief is the sole guilty party, or where he has participated equally and deliberately in the fraud; or where the agreement which he seeks to set aside, is founded in illegality, immorality, or base and unconscionable conduct on his own part; in such cases courts of equity will leave him to the consequences of his own iniquity; and will decline to assist him to escape from the toils which he has studiously prepared to entangle others, or whereby he has sought to violate with impunity the best interests and morals of social life. And if acts of this sort have been deliberately done under circumstances in which innocence has been betrayed, or confidence seduced, or falsehood or concealment systematically practised, a fortiori, courts of equity could not, without straining the administration of justice, interfere to save the party from the just results of his own gross misconduct, when the failure of success in the scheme would manifestly be the sole cause of his praying relief.' Again, it is difficult to suggest that there is no element of deterrence underlying the often-cited statement of James LJ in Parker v McKenna ((1874) LR 10 Ch.App. 96, at 124) that the rule that a fiduciary cannot make any profit without the knowledge of his principal is 'an inflexible rule, and must be applied inexorably by this Court, which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that.' That statement recognises that an honest fiduciary who has, by unwitting breach of duty, made a profit that the principal would never have obtained by his or her own efforts must, nevertheless, account to the principal in order that the standards of integrity required of fiduciaries may be kept up and fiduciaries may not succumb to the temptation to stray. In proposing that exemplary damages be available for breach of fiduciary duty, breach of confidence and procuring or assisting in a breach of fiduciary duty, the United Kingdom Law Commission, in its Report No.247 'Aggravated, Exemplary and Restitutionary Damages' said at para.5.55: ' But despite the absence of English authorities for awarding exemplary damages for an equitable wrong, we can ultimately see no reason of principle or practicality for excluding equitable wrongs from any rational statutory expansion of the law of exemplary damages. We consider it unsatisfactory to perpetuate the historical divide between common law and equity, unless there is a very good reason to do so. Professor Waddams argues, ... the availability of exemplary damages should not be determined by classification of the wrong as a common law tort or as a breach of an equitable obligation ... Indeed, we can see good reason for allowing punitive damages to be recovered against, for example, the dishonest trustee who acts in breach of his fiduciary duty or the person who dishonestly abuses another's confidence. Thus if, as we propose, punitive damages are awardable in respect of the (common law) tort of deceit, it would be anomalous if analogously wrongful conduct could not also give rise to an award, just because the cause of action originated in equity. Moreover, 'deterrence' is an aim that is not alien to courts of equity. For example it is a clear aim of the commonplace equitable remedy of an account of profits awarded for breach of fiduciary duty or breach of confidence.' In my opinion, the present position in Australia can be summarised thus. There is no authority which decides that exemplary damages cannot, as a matter of principle, be given by a court of equity for breach of fiduciary duty. Accordingly, to hold that wrongful conduct which would attract an award of exemplary damages in an action in tort cannot attract exemplary damages if the cause of action is equitable creates an anomaly which, in this country, is not justifiable either by precedent or by principle. Consistency in the law requires that the availability of exemplary damages should be coextensive with its rationale. Where wrongful and reprehensible conduct calls for the manifest disapprobation of the community, where a punishment is called for to deter the wrongdoer and others of like mind from similar conduct and where something more than compensation is felt necessary to ameliorate the plaintiff's sense of outrage, then it should make no difference in the availability of exemplary damages that the court to which the plaintiff comes is a court of equity rather than a court of common law. There is no need to appeal to any perceived fusion between the principles of equity and those of the common law in order to invest the equity court with jurisdiction to award exemplary damages. Such jurisdiction is already inherent in the court. It is, and always has been, a court of conscience; at least until the early seventeenth century, it frequently inflicted punishments in aid of its ordinary and traditional jurisdiction. Since then the exercise of the jurisdiction to punish has been muted, manifesting itself in the manner in which dishonest fiduciaries, as distinct from honest fiduciaries, will be called to account for profits and in the higher rate of interest imposed upon dishonest defaulting trustees, as distinct from honest defaulting trustees. The jurisdiction of the equity court to punish and deter may have been muted for many years but it is by no means dead. Finally, as has been pointed out by the High Court, it is no longer appropriate to think in terms of a 'sharp cleavage' between the criminal law and the civil law. The equity court, which at least in NSW administers the Corporations Act , is empowered to inflict punishment under the civil penalty provisions on those who breach duties under the Corporations Act which in former times were cognisable only in equity: Pt.9.4B Corporations Act . Likewise, criminal courts are increasingly invested with jurisdiction to award compensation to victims of crime, a jurisdiction formerly exercised only by civil courts: see Gray at 7-8. Whatever the views of Chancery lawyers in former times might have been as to the place of punishment and deterrence in the jurisdiction of equity, the rationale for depriving the equity court of such a jurisdiction has now disappeared. As the New Zealand Court of Appeal said in Aquaculture at 301: ' The practicality of the matter is that in the circumstances of the dealings between the parties the law imposes a duty of confidence. For its breach a full range of remedies should be available as appropriate, no matter whether they originated in common law, equity or statute '." 261 It was for those reasons that he concluded that Australian law permits the award of exemplary damages for breach of fiduciary duty.

The arguments of the parties 262 The arguments of the parties on exemplary damages at least in this Court - for in the court below they were virtually non-existent - were careful, elaborate and valuable, as indeed were the trial judge's eloquent reasons for judgment.

Defendants' arguments 263 The position of the defendants was simple. They argued that there was no jurisdiction in equity to award exemplary damages; that there had been many statements by judges and statements by an overwhelming majority of jurists denying that jurisdiction; that the absence of the jurisdiction was confirmed by equity's repugnance for penalties; that the old cases relied on by the trial judge did not reveal any instance of the court ordering a wrongdoer to make a financial payment to the other party to the proceedings, but showed only equity controlling legal proceedings in relation to what was in effect contempt of court; that the principles of law relied on by the trial judge to illustrate the punitive role of equity against dishonest fiduciaries, such as the imposition of high interest rates or the denial of allowances, did not do so; that cases using the language of deterrence were speaking only of the deterrent effect of the high standards imposed by courts of equity and favourable remedies granted by courts of equity, and did not imply any power to punish; and that any change in the law would create difficulties and fly in the face of statutory disapprobation of exemplary damages. 264 One important aspect of the defendants' arguments was put orally in the following lucid way: "Equity is quite capable of imposing remedies that provide a general deterrence effect, without introducing the notion of punishment. The notion of deterrence and the notion of punishment are quite distinct, in this sense. Every award of compensation against a defaulting fiduciary will deter other fiduciaries from doing such things that caused the award to come about. There can be nothing more of a deterrent, for example, than the prospect of being faced with an account of profits. If I as a fiduciary steal my employer's business and I am caught, at the end of the day, notwithstanding I have taken all the risks, he gets all the profit. That is a very strong deterrent that flows from the ordinary equitable remedies that are available. It is not necessary to impose any more stringent punishment upon the defaulting fiduciary so as to have the necessary deterrent effect for the community, if that is needed. The very nature of the way in which equity deals with its normal remedies on account of profits and the like constitutes some element of deterrence. There is no account taken of whether the breach is innocent or not. There is no account taken of whether the beneficiary could have pursued the opportunity himself. These are all quite stringent requirements that equity already imposes to constitute a deterrent on the one hand, and when one looks at the defences available to the defaulting fiduciary one again sees that equity imposes quite enough by way of deterrence in the way it conducts the running of such cases. Say, for example, the ordinary defences available in common law of remoteness of damage that arise in the general question of causation are not in some cases available at all to the defaulting fiduciary, for all of those reasons there is quite enough deterrence available in equity as it presently stands on principle, and there is no need and no basis in principle to impart the notion of penalty. Penalty and deterrence are entirely separate concepts. They are related but separate. In his Honour's reasons there is reference to what is said to be the element of deterrence in an account of profits. His Honour deals with that in paragraph 167 in his reasons. I adopt the idea that there is deterrence there, but that is not the principal function. That arises simply because of the way equity administers its causes of action."

Plaintiff's arguments 265 Counsel for the plaintiff declined to disavow any part of the trial judge's reasoning, though he saw some parts as having greater utility than others. It is plain that the part seen as having greatest utility was the part which called for concentration not on the particular cause of action sued on, but on the conduct underlying the available causes of action. He, like the trial judge, disavowed explicit reliance on any idea of the fusion of law and equity. His arguments can be organised under four heads. 266 First, he referred to Gray v Motor Accident Commission (1998) 196 CLR 1 at [13]-[15]: "In Butler v Fairclough [(1917) 23 CLR 78 at 89], Griffith CJ observed: 'The motive or state of mind of a person who is guilty of a breach of contract is not relevant to the question of damages for the breach, although if the contract itself were fraudulent the question of fraud might be material [ Bain v Fothergill (1874) LR 7 HL 158 at 206-207 per Lord Chelmsford]. A breach of contract may be innocent, even accidental or unconscious. Or it may arise from a wrong view of the obligations created by the contract. Or it may be wilful, and even malicious and committed with the express intention of injuring the other party. But the measure of damages is not affected by any such considerations.' The position is put somewhat differently in Restatement (Second) of Contracts [(1979) s355; cf Denison v Fawcett (1958) 12 DLR (2d) 537 at 543; Vorvis v Insurance Corporation of British Columbia [1989] 1 SCR 1085 at 1106, 1107]: 'Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.' The reasons underlying the apparent rule excluding an award of exemplary damages, even in cases of intentional or malicious breach of contract, were discussed by Judge Friendly in Thyssen Inc v SS Fortune Star [(1985) 777 F 2d 57 at 63; cf Hawkins v Clayton (1988) 164 CLR 539 at 584, per Deane J]. That case also is authority that an admiralty court does not award exemplary damages for a deviation or other breach of contract [ Thyssen Inc (1985) 777 F 2d 57 at 63-66]. Because the kinds of case in which exemplary damages might be awarded are so varied, it may be doubted whether a single formula adequately describes the boundaries of the field in which they may properly be awarded. Nevertheless, the phrase adopted by Knox CJ in Whitfield v De Lauret & Co Ltd [(1920) 29 CLR 71 at 77] of 'conscious wrongdoing in contumelious disregard of another's rights' describes at least the greater part of the relevant field [See also XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448 at 471, per Brennan J]. In considering whether to award exemplary damages, the first, if not the principal, focus of the inquiry is upon the wrongdoer, not upon the party who was wronged. (The reaction of the party who is wronged to high-handed or deliberate conduct may well be a reason for awarding aggravated damages in further compensation for the wrong done. But it is not ordinarily relevant to whether exemplary damages should be allowed.) The party wronged is entitled to whatever compensatory damages the law allows (including, if appropriate, aggravated damages). By hypothesis then, the party wronged will receive just compensation for the wrong that is suffered. If exemplary damages are awarded, they will be paid in addition to compensatory damages and, in that sense, will be a windfall in the hands of the party who was wronged. Nevertheless, they are awarded at the suit of that party and, although awarded to punish the wrongdoer and deter others from like conduct, they are not exacted by the State or paid to it." 267 Counsel said this supported the following points. One was that the High Court's description of the general circumstances in which equitable damages could be awarded corresponded with traditional areas in which Chancery had exercised a punitive power. Another was that the fact that the conduct complained of arose out of a contract did not debar exemplary damages: for example, the conduct might also be tortious. Another was that the rule excluding exemplary damages for breach of contract was "apparent" only, and reference was made to the abandonment of the rule by the Supreme Court of Canada in Whiten v Pilot Insurance Co (2002) 209 DLR (4th) 257. Yet another was that the concluding sentence revealed "an interesting parallel" with the role of an account of profits requiring a wrongdoer to disgorge the profits wrongly made, since that was not compensatory. "If one considers a compensatory order as equivalent as restoring to the plaintiff that which the plaintiff has lost, there is no bar or impediment to an award of exemplary damages by equity arising from the fact that it gives to the plaintiff more than is necessary to compensate the plaintiff for its loss." 268 Secondly, the plaintiff submitted that there were authorities in which orders reflecting a penal function of equity had been made. This was so in relation to the restriction of just allowances to fiduciaries who were dishonest or deliberate in their breaches and the award of higher interest rates in relation to orders for the payment of money by such persons. 269 Counsel for the plaintiff read the following passage from Sir Thomas Plumer V-C's judgment in Tebbs v Carpenter (1826) 1 Madd 290 at 306-307; 56 ER 107 at 113: "It appears, therefore, from this view of the authorities, that a distinction has been taken, as in every moral point of view there ought to be, between negligence and corruption in executors. A special case is necessary to induce the Court to charge executors with more than 4 per cent upon the balances in their hands. The obligation on executors to lay out balances not wanted for the exigency of the testator's affairs is now better understood, since it has been settled that they are indemnified against any loss in laying them out in the fund, which the Court sanctions, the 3 per cents. If the executor has balances which he ought to have laid out, either in compliance with the express directions of the will, or from his general duty, even where the will is silent on the subject, yet if there be nothing more proved in either case, the omission to lay out amounts only to a case of negligence and not of misfeasance ."

The plaintiff submitted that to charge a corrupt executor a higher rate was "very [redolent] of concepts of punishment …. [It] is almost impossible to understand the reasoning in such a case other than in punitive terms." 270 Counsel for the plaintiff then read the following passages from Sir John Romilly MR's judgment in Jones v Foxall (1852) 15 Beav 388 at 392-393; 51 ER 588 at 589-590: "The rules which apply to the cases in which executors are charged with interest on the balances retained by them are subject to a good deal of difficulty, arising, not so much from any doubt as to the principles themselves, as from the practical application of them to particular cases. Generally, it may be stated that if an executor has retained balances in his hands which he ought to have invested, the Court will charge him with simple interest at four per cent on these balances; if, in addition to such retention, he has committed a direct breach of trust, or if the fund had been taken by him from a proper state of investment in which it was producing five per cent, he will be charged with interest after the rate of five per cent per annum; if, in addition to this, he has employed the money so obtained by him in trade or speculation, for his own benefit and advantage, he will be charged either with the profits actually so obtained by him from the use of the money, or with interest at five per cent per annum, and also with yearly rests, that is, with compound interest. The principle on which the Court charges the executor with the profits, which have actually arisen from the property of his cestuis que trust employed by him, is obvious, and of general application where such profits are proved to have been made. It was the money of the cestuis que trust , and they are entitled to receive the profits it has earned. The principle upon which executors charged with interest on balances are made to account with yearly or half-yearly rests, is not so clearly defined, nor are the decided cases by any means free from obscurity or contradiction. In some cases, the Court has charged the trustee with annual rests, because the trust under which he acted in distinct terms required him to accumulate the fund at compound interest; in other cases, the principle seems to have been, that the Court visits the executor or trustee with an account, in the nature of a penalty for his misconduct, where he has not merely committed a breach of trust, but where he has himself endeavoured to derive, or has actually obtained, some pecuniary advantage from the use of the money, of which he has thus obtained possession."

Counsel naturally stressed the word "penalty". 271 Counsel for the plaintiff next read the following parts of Sir James Stuart V-C's judgment in Wroe v Seed (1863) 4 Giff 425 at 429-431; 66 ER 773 at 775, a case in which the defendant executors complained of the Chief Clerk's failure to grant them allowances: "Here were executors with a very large estate; £11,000 of it is said to have been in advance, ready to be distributed at the death of the testator. What conduct can be more grossly improper than that of executors, who were to pay legacies and to distribute the residue, with a direction to pay the income of the residue immediately, but who did not pay the income; who can suggest no difficulty as to knowing who the legatees were; who for five years after the testator's death left legacies unpaid, the residue almost wholly undealt with, no account ready that can be produced, and no account taken until this bill is filed; and who, when this bill is filed, bring forward demands against the estate on their own behalf, which the Court has found it to be its duty wholly to disallow. The questions to be disposed of with regard to them now are the question of the costs of this litigation, and that of the interest on their balances. One part of the conduct of these executors, which their counsel has endeavoured to shew was laudable and discreet, was that each of them took £1000 to his own house. One of them says he kept this sum in gold, and applied it for no purpose. They say that they kept these sums for the purpose of paying legatees if they should expectedly or unexpectedly come to demand any money. That is gross misconduct. It is highly culpable and gross misconduct for any executor who has a legacy immediately payable to take into his own house money for the purpose of paying it, and to keep it five years, there being no difficulty in ascertaining who the legatee is, and producing it only in consequence of a decree made against him by this Court. On these sums of £1000 each so improperly kept in their own hands, these executors must be charged with interest at £5 per cent. … Those are defaulting executors, and executors who have misconducted themselves, and they must pay the costs of all the litigation except so much as has been occasioned by the entering into the pedigree. I have some doubt even about that, because it is quite consistent with anything that appears on the pleading that these executors may have known this pedigree all along." 272 Counsel for the defendant noted that the case was treated by R P Meagher and W M C Gummow (eds) Jacobs' Law of Trusts in Australia (6th ed) [2209] note 57 as authoritative, and stressed the words "grossly improper", "highly culpable and gross misconduct" and "misconducted". He said: "Again, one finds a revisitation of this notion that gross misconduct warrants a punitive response." 273 Counsel for the plaintiff also submitted that the remedy of account of profits itself was punitive because it gave the plaintiffs greater recovery than compensation for what they had lost. "[The] result has the consequence of rewarding the plaintiff to an extent greater than his loss and perhaps a reasonable man on the bus might say 'punishing the wrongdoer for his misuse of funds'." 274 He drew attention to Paul A Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440. There Moffitt P said in a case where fiduciaries, bona fide but in breach of duty, used trust money and borrowed other money to acquire and run a hotel (at 443): "The case is a hard one, as were Regal (Hastings) [ Ltd v Gulliver [1967] 2 AC 134 n] and Phipps [ v Boardman [1967] 2 AC 46]. But for the breach of fiduciary duty, the entitlement of the creditors would have been limited to the company's contractual rights to recover the money owed to it by the respondents. The failure to obtain the consent of the trustees for their infant children has provided a windfall for the creditors. It has not served the interests of those (the children) whose consent was not obtained unless in the end there is a surplus in the company's account. It is ironic that this is so in respect of the purchase of the establishment which provided their home and to which they apparently made relevant contributions sufficient to warrant provision being made in the form of order mutually agreed to that in the accounts credit be given in respect of the efforts of these children."

He then continued, in a passage relied on by the plaintiff (at 444): "This windfall result to the benefit of creditors flows from the policy of the law in this field, which for the purpose of general discipline requires the fiduciary to account to the beneficiary for the gain rather than compensating it for damage caused by the breach. The authorities binding on this Court make it clear that the law in this field has a penal function as stated and that on a breach being proved inquiry is directed to a determination of the gain or profit flowing from the breach, the remedy then being to require the fiduciary to account to the beneficiary, in this case the company, for the gain. There is not conferred, as there is in the case of some other sanctions penal or criminal against wrongdoing, a discretion to quantify the penalty so as to match the circumstances mitigating or otherwise." 275 He also relied on Mahoney JA's statement (at 459) that the purpose of the relevant principle: "is, I think, not merely to secure for beneficiaries and those claiming through them the property which should be theirs, but also to provide a sanction against the conduct of a trustee when it falls below the standard required by the law." 276 The plaintiff concluded this part of the argument by submitting that: "the perceived novelty of his Honour's award in the court below is illusory rather than real. Its name is different, its tag is different, but its source, its function and purpose had a commonality with the traditional basis [for awarding] exemplary damages [at] common law." 277 Thirdly, he contended that the defendants' arguments were flawed by "resort to seductive epithets or suggested maxims", since these served "largely to obscure and over-simplify the issue". "[One] has to look at the substance, not the form". Counsel for the plaintiff said that the vice in repeating "epithets such as equity merely compensates, equity operates on conscience and the like" was that it masks the distinction between the cause of action and: "the appropriate moulding of the appropriate remedy in the appropriate case which may extend sometimes to an award of a significant amount to the plaintiff, not paid to the State but paid to the plaintiff …." 278 Fourthly, he said that even if the grant of exemplary damages was perceived as novel, that was no bar to the grant being made in future. "Equity is not static. It evolves and develops, mostly incrementally but sometimes dramatically …. We have the Anton Piller orders, Romalco [sic] orders, Hightrees estoppel, proprietary estoppel and so on. If novelty there be, novelty is no bar." 279 Counsel for the plaintiff submitted that given the wide range of remedies in equity and given that the indicia of equitable wrongs were well established, there was no difficulty in extending the range of remedies, particularly since in this instance all that was involved was the adoption of a common law remedy. He referred to passages in Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 185 ALR 335 at [87]-[100] in which Gummow J described how equitable notions were taken up by common law courts, particularly by Lord Mansfield. Counsel relied on a passage in the judgment of Deane and Dawson JJ in Baltic Shipping Co Ltd v Dillon (1993) 176 CLR 344 at 376 which was quoted by Gummow J: "[In] a modern context where common law and equity are fused with equity prevailing, the artificial constraints imposed by the old forms of action can, unless they reflect coherent principle, be disregarded where they impede the principled enunciation and development of the law. In particular, the notions of good conscience, which both the common law and equity recognise as the underlying rationale of the law of unjust enrichment, now dictate that, in applying the relevant doctrines of law and equity, regard be had to matters of substance rather than technical form."

Counsel conceded that the present context was different from those analysed by Gummow J, and by Deane and Dawson JJ, but said they revealed a move away from the rigidity of former days towards remedial flexibility. 280 Counsel for the plaintiff also relied on Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 205, where Lord Browne-Wilkinson said: "This derivation from fiduciary duties of care of the principle of liability in negligence where a defendant has by his action assumed responsibility is illuminating in a number of ways. First, it demonstrates that the alternative claim put forward by the Names based on breach of fiduciary duty, although understandable, was misconceived. The liability of a fiduciary for the negligent transaction of his duties is not a separate head of liability but the paradigm of the general duty to act with care imposed by law on those who take it upon themselves to act for or advise others. Although the historical development of the rules of law and equity have, in the past, caused different labels to be stuck on different manifestations of the duty, in truth the duty of care imposed on bailees, carriers, trustees, directors, agents and others is the same duty; it arises from the circumstances in which the defendants were acting, not from their status or description. It is the fact that they have all assumed responsibility for the property or affairs of others which renders them liable for the careless performance of what they have undertaken to do, not the description of the trade or position which they hold. In my judgment, the duties which the managing agents have assumed to undertake in managing the insurance business of the Names brings them clearly into the category of those who are liable, whether fiduciaries or not, for any lack of care in the conduct of that management."

Counsel said: "The point of the passage, the determining factor in the modern jurisprudence, is whether the remedy is appropriate to the circumstances of the case rather than whether the action is brought in one guise or another."

He also said: "Our purpose in going to the decision was simply to point out, once again, it is often said that the appropriate approach when dealing with the question of the suitability of remedy is to look at the facts and circumstances and substance of the issue rather than the question of whether one gives the remedy a tag, common law exemplary damages, or makes an award of exemplary damages in equity which has precisely the same corresponding effect that it would if it were made in common law." 281 Counsel then referred to Bristol and West Building Society v Mothew [1998] Ch 1 at 16-17, where Millett LJ quoted and agreed with Lord Browne-Wilkinson's observations. Counsel read the following passages in addition: "I ... endorse the comment of Ipp J in Permanent Building Society v Wheeler (1994) 14 ACSR 109, 157: 'It is essential to bear in mind that the existence of a fiduciary relationship does not mean that every duty owed by a fiduciary to the beneficiary is a fiduciary duty. In particular, a trustee's duty to exercise reasonable care, though equitable, is not specifically a fiduciary duty …' Ipp J explained, at p 158: 'The director's duty to exercise care and skill has nothing to do with any position of disadvantage or vulnerability on the part of the company. It is not a duty that stems from the requirements of trust and confidence imposed on a fiduciary. In my opinion, that duty is not a fiduciary duty, although it is a duty actionable in the equitable jurisdiction of this court …. I consider that Hamilton owed PBS a duty, both in law and in equity, to exercise reasonable care and skill, and PBS was able to mount a claim against him for breach of the legal duty, and, in the alternative, breach of the equitable duty. For the reasons I have expressed, in my view the equitable duty is not to be equated with or termed a 'fiduciary' duty.' I agree. Historical support for this analysis may be found in Viscount Haldane LC's speech in Nocton v Lord Ashburton [1914] AC 932, 956. Discussing the old bill in Chancery for equitable compensation for breach of fiduciary duty, he said that he thought it probable that a demurrer for want of equity would always have laid to a bill which did no more than seek to enforce a claim for damages for negligence against a solicitor. In my judgment this is not just a question of semantics. It goes to the very heart of the concept of breach of fiduciary duty and the availability of equitable remedies. Although the remedy which equity makes available for breach of the equitable duty of skill and care is equitable compensation rather than damages, this is merely the product of history and in this context is in my opinion a distinction without a difference. Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case. It should not be confused with equitable compensation for breach of fiduciary duty, which may be awarded in lieu of rescission or specific restitution."

On the strength of those passages counsel submitted: "It is unsafe to determine the outcome of this issue, once again, simply by resort to the verbal formula without understanding whether one is talking about exemplary damages within an historical context normally of common law. One should not disregard [that] there may in fact be a distinction without [a] difference." 282 Counsel for the plaintiff then supported the trial judge's view that exemplary damages should be awarded if the defendant's conduct called for that remedy, independently of the nature of the particular cause of action sued on, in reliance on Kuddus v Chief Constable of Leicestershire Constabulary [2002] 2 AC 122. 283 Counsel for the plaintiff submitted that the issue of whether exemplary damages should be awarded in equity was simply an issue of moulding equitable relief. He cited passages from Hill v Rose [1990] VR 129 at 123-144 in which Tadgell J spoke of how equitable remedies are "fashioned" to meet the needs of the particular case. He cited a rather wider passage from Norberg v Wynrib [1992] 2 SCR 226 at 293-294. He also cited a wider passage still from White v Ruditys 343 NW 2d 421 (1983), culminating in the statement: "We determine that the power to award punitive damages is derived from the flexibility a court of equity has in fashioning its relief." 284 In support of his contention that equity could award exemplary damages, counsel for the plaintiff relied on the New Zealand, Canadian and United States authorities favouring that course. 285 The plaintiff contended that so far as it was necessary to change the law, incrementally or otherwise, a strong policy justification for doing so was that in former times it was easier for employers to protect themselves against faithless employees competing during the employment by using physical materials like customer lists; whereas now the increased relative value of intangible property and the increased capacity of wrongdoers to misuse or damage it without ready detection justified a broadening of remedies to include explicitly punitive means like exemplary damages. 286 It was submitted that the narrowness of the step which the plaintiff asked should be taken, if any step had to be taken, was illustrated by the fact that even if there was no authority in England or Australia in which exemplary damages for equitable wrongs had been granted, there was no case in which it had been asked for and refused. In that sense no change in the law was called for. Reliance was placed on the recommendations of the English Law Commission that exemplary damages be available for breach of fiduciary duty, breach of confidence and procuring or assisting in a breach of fiduciary duty: Aggravated, Exemplary and Restitutionary Damages, para 1.49 n 379. Counsel for the plaintiff also relied on Columbia Picture Industries Inc v Robinson [1987] Ch 38 at 87, where Scott J contemplated the grant of exemplary damages against solicitors executing an Anton Piller order oppressively under their undertaking as to damages. 287 Counsel for the plaintiff referred the court to various articles favourable to this argument and submitted that in "Compensation for Breach of Fiduciary Duty" in T G Youdan (ed) Equity, Fiduciaries and Trusts, p 79, Gummow J suggested "that the deterrent effect of exemplary damages has its place in equity as in the common law." 288 In conclusion, the plaintiff referred to Meagher Gummow and Lehane: Equity, Doctrines and Remedies (3rd ed) para 102 for the proposition that equity has progressed in a "haphazard ad hoc manner". He referred to Jill E Martin (ed) Hanbury and Maudsley Modern Equity (13th ed, 1989) p 44: "the principles of equity have constantly developed and found new fields of application". He drew attention to the fact that one of the examples given was Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. He quoted the well known words of Sir George Jessel MR in In re Hallett's Estate: Knatchbull v Hallett (1879) 13 Ch D 696 at 710: "it must not be forgotten that the rules of Courts of Equity are not, like the rules of the Common Law, supposed to have been established from time immemorial. It is perfectly well known that they have been established from time to time - altered, improved, and refined from time to time. In many cases we know the names of the Chancellors who invented them. No doubt they were invented for the purpose of securing the better administration of justice, but still they were invented. Take such things as these: the separate use of a married woman, the restraint on alienation, the modern rule against perpetuities, and the rules of equitable waste. We can name the Chancellors who first invented them, and state the date when they were first introduced into Equity jurisprudence; and, therefore, in cases of this kind, the older precedents in Equity are of very little value. The doctrines are progressive, refined, and improved; and if we want to know what the rules of Equity are, we must look, of course, rather to the more modern than the more ancient cases."

He referred to Cadorange Pty Ltd (In Liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26 at 38 as an illustration of the capacity of modern equity courts to do equity in particular cases by refining and developing existing principle. 289 He concluded that the trial judge's reliance on the availability of criminal and quasi-criminal sanctions under the Corporations Act, and the related observations in Gray v Motor Accident Commission (1998) 196 CLR 1 at [16] supported the grant of equitable damages in equity. 290 It can be seen that to some degree the plaintiff wavered between contending that the existing law supported the trial judge's grant of exemplary damages and contending that the grant could be supported if a small change in the law were to be made.

Australian law on exemplary damages: general 291 Just before the trial judge published his reasons for judgment on 8 February 2002, what would a reasonably well informed lawyer have thought of the plaintiff's application for exemplary damages? 292 Neither the trial judge nor the defendant in its arguments to this Court pointed to any Australian, English or Irish case awarding damages for an equitable wrong. The English Law Commission, which was exceptionally strongly placed to be well informed on the subject, asserted that there was no English case: Report on Aggravated, Exemplary and Restitutionary Damages (Report No 2541, 1997) para 1.54. The Irish Law Reform Commission, which was in an equivalent position for Irish authority, pointed to no Irish case: Report on Aggravated, Exemplary and Restitutionary Damages (LRC 60-2000) para 4.01. Further, the English Law Commission in Aggravated, Exemplary and Restitutionary Damages (Consultation Paper No 132), para 3.78, said "it would seem that exemplary damages cannot be awarded in respect of an equitable wrong" - an opinion of some weight in view of the fact that Beatson J, as he now is, was one of the Commissioners. 293 The trial judge noted the fairly firm dicta of the Full Federal Court denying the availability of exemplary damages for breach of fiduciary duty in Bailey v Namol Pty Ltd (1994) 53 FCR 102 at 112. In addition, contrary to the trial judge's statement that "there is no decided case" on the point, in Yamabuta v Tay (No 1) (1995) 16 WAR 25 at 261 Commissioner Pringle QC, sitting in the Supreme Court of Western Australia, refused to allow an amendment to a Statement of Claim at the end of the trial so as to claim an award of punitive damages against an agent who had failed to account for profits made from transactions in which the agent had failed to disclose his personal interest. In relation to Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299, Commissioner Pringle QC quoted a statement in Meagher, Gummow & Lehane: Equity: Doctrines and Remedies (Butterworths, Sydney, 3rd ed, 1992) [4127] describing the Court of Appeal's decision as "astonishing". Commissioner Pringle QC said: "I respectfully express surprise at the conclusion of the Court of Appeal. In any event, I do not think that [the] proposition can be accepted at first instance. Moreover, the Statement of Claim does not seem to contain sufficient to justify the making of such an award even if jurisdiction existed."

That is a decision on the point. Three reasons were given (that the proposition was wrong; that it was beyond the power of a first instance judge to accept; and that insufficient facts were pleaded). Each reason was independent and free standing. Each thus constituted a separate ratio decidendi: Jacobs v London County Council [1950] AC 361 at 369. In addition, Commissioner Pringle QC declined to follow an American case favouring the grant of exemplary damages, Tideway Oils Programs Inc v Serio 431 So 2d 454 (1983), and also declined to follow a dictum in Smith v Day (1882) 21 Ch D 421 at 428, more fully discussed below. However, Yamabuta v Tay (No 1) is not a decision which was fully reasoned. The matter was argued but not decided in Tweedvale Investments Pty Ltd v Thiran Pty Ltd (1996) 14 WAR 109. In LED Builders Pty Ltd v Eagle Homes Pty Ltd (1999) 44 IPR 24 at [210] Lindgren J, in a case on s 115 of the Copyright Act 1968 (Cth) quoted from Bailey v Namol Pty Ltd at 113 the following words: "there is much to be said for the … view … that 'equity and penalty are strangers'." 294 As the trial judge accepted, and as the plaintiff appeared to accept, in Australian law exemplary damages are not generally available for breach of contract: Gray v Motor Accident Commission (1998) 196 CLR 1 at [13]. The position is largely the same in England. Thus in Addis v Gramophone Co Ltd [1909] AC 488 at 494-495 Lord Atkinson said: "I have always understood that damages for breach of contract were in the nature of compensation, not punishment … There are three well-known exceptions to the general rule applicable to the measure of damages for breach of contract, namely, actions against a banker for refusing to pay a customer's cheque when he has in his hands funds of the customer's to meet it, actions for breach of promise of marriage, and actions like that in Flureau v Thornhill [(1776) 2 W Bl 1078], where the vendor of real estate, without any fault on his part, fails to make title. I know of none other. The peculiar nature of the first two of these exceptions justified their existence. Ancient practice upholds the last, though it has often been adversely criticized, as in Bain v Fothergill [(1874) LR 7 HL 158]. If there be a tendency to create a fourth exception it ought, in my view, to be checked rather than stimulated; inasmuch as to apply in their entirety the principles on which damages are measured in tort to cases of damages for breaches of contract would lead to confusion and uncertainty in commercial affairs, while to apply them only in part and in particular cases would create anomalies, lead occasionally to injustice, and make the law a still more 'lawless science' than it is said to be."

See also at 491, 492, 501 and 502-505. In Mahmud v Bank of Credit and Commerce International SA [1998] AC 20 at 39, Lord Nicholls of Birkenhead said that Addis' case did not preclude recovery by an employee of financial loss caused by an employer's breach of an implied obligation to its employees not to conduct a dishonest or corrupt business. This does not affect Addis' case as a bar to exemplary damages, which do not compensate for actual financial loss. Lord Steyn at 51 said that so far as Addis' case held that an employee could not recover exemplary damages for wrongful dismissal it remained sound law. 295 The fact that exemplary damages are not recoverable for breach of contract is significant, because it tends against the trial judge's argument from anomaly. He reasoned that if conduct amounts both to deceit at common law and to a breach of fiduciary duty in equity, it is anomalous that exemplary damages can be recovered in deceit but not for breach of fiduciary duty. Yet in the very case under consideration the conduct of Messrs Harris and Eden was both a breach of fiduciary duty and a breach of contract. If the trial judge's reasoning is correct, and the plaintiff could recover equitable damages for a breach of fiduciary duty, it will have created an anomaly, because the plaintiff could not have recovered equitable damages for the identical conduct if the only cause of action alleged had been breach of contract. At least that is so unless an extreme version of the plaintiff's preference for a concentration on categories of conduct rather than causes of action is adopted: but in our procedure it remains important to rely on particular causes of action and reliance on particular causes of action does not entitle a plaintiff to take advantage of other causes of action which were not relied on. 296 So far as legislation is relevant to this case, it exhibits two characteristics. First, Parliament has tended to cut down exemplary damages at common law. Secondly, in the fields where Parliament has created new rights or developed existing rights, it has generally not conferred a right to exemplary damages. The first characteristic can be illustrated as follows. Though at common law exemplary damages for defamation were not uncommonly awarded, the Defamation Act 1974, s 46, has abolished the remedy. And though at common law exemplary damages may be awarded in claims for negligently inflicted personal injury, the Civil Liability Act 2002, s 21, has abolished them in all instances: see also Workers Compensation Act 1987 s 151R. The Motor Accidents Compensation Act 1999 s 144 abolished them in relation to personal injuries caused by motor accidents: see also Transport Accident Act 1986 (Vic) s 93. The second characteristic is seen in the fact that though the Trade Practices Act 1974 (Cth) is a piece of legislation generous in the remedies it affords, the sections relating to monetary relief, namely ss 82 and 87, do not permit the award of exemplary damages: Musca v Astle Corporation Pty Ltd (1988) 80 ALR 251 at 262 per French J; Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at [9] per Gaudron J; Nixon v Philip Morris (Australia) Ltd (1999) 95 FCR 453 at [103] per Wilcox J. This stands in contrast to the availability of treble damages under a predecessor of the Trade Practices Act, namely the Australian Industries Preservation Act 1906 (Cth), s 11. 297 The Corporations Act 2001 (Cth) also gives a wide range of remedies, including monetary remedies, but not exemplary damages: s 1317H. The Copyright Act 1968 s 115(4) in substance provides for exemplary damages, but it is the only major piece of legislation which does. 298 The reception given by Australian lawyers to the proposition advanced by New Zealand and Canadian judges in cases to be discussed below that exemplary damages are available for breaches of equitable duty has been hostile in some quarters. See Ford & Lee: Principles of the Law of Trusts (LBC Information Services, Sydney, 3rd ed) [17120]; Meagher, Gummow & Lehane: Equity: Doctrines and Remedies (Butterworths, Sydney, 3rd ed, 1992) [259], [2304] and [4127]; Mason and Carter: Restitution Law in Australia (Butterworths, Sydney, 1995) [1723]; LJW Aitken: "Developments in Equitable Compensation: Opportunity or Danger?" (1993) 67 ALJ 596 at 599-600. On the other hand, as the plaintiff pointed out, among those favouring exemplary damages for breach of equitable duty are I C F Spry, Equitable Remedies (6th ed) p 636; J Glover: Commercial Equity: Fiduciary Relationships paras [6.129]-[6.130]; P M McDermott: Equitable Damages p 104; P W Michalik: "The Availability of Compensatory and Exemplary Damages in Equity: A Note on the Aquaculture Decision" (1991) 21 VUWLR 391; and D Jensen: "Punitive Damages for Breach of Fiduciary Obligation" (1996) 19 UQLJ 126. Though critical of several aspects of Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299, Jack Beatson in "Damages for Breach of Confidence" (1991) 107 LQR 209 did not criticise the assumption of the court in that case that it had power to award exemplary damages. S M Waddams, The Law of Damages (2nd ed, 1991) para 11.240 also favoured awarding exemplary damages in equity. 299 There are also statements in the authorities pointing distinctly against the availability of exemplary damages in equity. In Spence v Crawford [1939] 3 All ER 271 at 289 Lord Wright said that the purpose of restitution carried out as part of recession in equity on grounds of fraudulent misrepresentation is "not punishment, but compensation". In Palmer v Monk (1963) 80 WN (NSW) 107 at 110 Jacobs J said: "The court of equity does not penalise a person dealing with a trustee in breach of trust, nor does it penalise a constructive trustee. It merely requires that such trustee or such person do equity, and equity … involves a restitution so that the beneficiary is in the same position as he or she would have been if the transaction had not been effected or sought to be effected." In Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 56, Handley JA (Mason P and Beazley JA concurring) pointed out that while equitable compensation "should compensate the plaintiff … it is no part of its function to strip profits from the defendants, or to punish them for wrongdoing". In Cole v Manning [2002] NSWCA 150 at [20] this Court observed that equitable compensation has no punitive function. In Maguire v Makaronis (1997) 188 CLR 449 at 496 Kirby said: "The purpose of equity's relief is not punishment". In Pilmer v Duke Group Ltd (2001) 207 CLR 165 at [151] he repeated that observation. Maddock's Treatise on the Principles and Practice of the High Court of Chancery (2nd ed, 1820), vol 1, p 255 said: "Courts of Equity do not affect to consider Fraud in the light of a crime; it is not their province to punish …." But the most famous enunciation of this theme appeared in Vyse v Foster (1872) LR 8 Ch App 309 at 333. There James LJ said, speaking on behalf of himself and Mellish LJ: "It was pointed out by Lord Cranworth, in Attorney-General v Alford [(1855) 4 De G M & G 843 at 851; 43 ER 737 at 741], that this Court has no jurisdiction in this class of case to punish an executor for misconduct by making him account for more than that which he actually received, or which it presumes he did receive, or ought to have received. This Court is not a Court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through failure of some equitable duty; but it has no power of punishing any one. In fact, it is not by way of punishment that the Court ever charges a trustee with more than he actually received, or ought to have received, and the appropriate interest thereon. It is simply on the ground that the Court finds that he actually made more, constituting moneys in his hands 'had and received to the use' of the cestui que trust."

Mason J cited the last four sentences with approval in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 109. He said the case was "authority for the proposition that equity does not assume jurisdiction to punish a fiduciary for misconduct by making him account for more than he actually received as a result of his breach of fiduciary duty". There may be instances where the operation of equitable remedies causes the giving up by the defendant of more than was gained. Mason J gave two examples at 109-110. One was where "the fiduciary has so mixed an indeterminate profit with his own property as to render the identification of the gain impossible. There ' … the whole will be treated as trust property, except so far as he may be able to distinguish what is his own': Brady v Stapleton [(1952) 88 CLR 322 at 336], quoting Page Wood V-C in Frith v Cartland [(1856) 2 H & M 417 at 420; 71 ER 525 at 526]." The other was put more tentatively: "The proposition may also need to be modified to take account of a profit acquired by a fraudulent fiduciary through a combination of trust property and his own property or efforts. It may well be that equity in such circumstances will not seek to apportion the gain". But in these instances the reason why the defendant gives up more than what was gained has nothing to do with punishment. In the first instance the fiduciary has failed to distinguish between the two kinds of property. In the second instance what the defendant loses on the account of profits is likely to be gained in an allowance for skill." The passage quoted by Mason J from Vyse v Foster continued at 333-334: "A trustee, for instance, directly lending money to his firm is answerable for such money with full interest to the uttermost farthing; but to make him answerable for all the profits made of such money by all the firm would be simply a punishment - a punishment arbitrary and most unreasonable in this, that its severity would be in the inverse ratio of the gravity of the offence. A man squandering trust money with deliberate dishonesty in profligate extravagance would be answerable for it with 4 per cent interest; a man lending it (at good interest) to a large, solvent, and prudent, well-established firm, of which he was a partner, would be punished by a fine equal to all the profits made thereby by all his partners. Accordingly, the Master of the Rolls, in Jones v Foxall [15 Beav 388], held that the partner could only be liable for his own one-third of the profits of the business in which the trust moneys were; and in another more recent case, Stroud v Gwyer [28 Beav 130], he held, that where the money was lent to a firm having notice of the breach of trust there was no ground for asking for the profits made."

High rate of interest on defaulting fiduciary 300 These passages are significant, because the trial judge relied on the higher rate of interest imposed on defaulting trustees as evidence pointing to the existence of a jurisdiction, continuing though long "muted", to award exemplary damages. This stands in contrast to conventional thinking on the point, as recorded, for example, in Meagher, Gummow & Lehane: Equity: Doctrines and Remedies (3rd ed) at [2304]. They said: "The third feature of equitable compensation is that no element of penalty is involved. This emerges most clearly from the cases dealing with awards of interest against defaulting trustees. Interest was usually awarded at 3%, but in cases involving a trustee's misappropriation of trust funds for his own benefit, higher rates (up to 5%) were allowed. More recently, Kearney J allowed a 'mercantile' rate as a means of recovering profit received or presumed to have been received by trustees as a result of gross misapplication of trust funds: Hagan v Waterhouse [(1991) 34 NSWLR 308 at 391-393]. But the higher rate is not awarded in poenam , by way of penalty. The defendant is charged 'with the interest which he has received, or which the Court is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive, that he is estopped from saying that he did not receive it.' This was made clear by Lord Cottenham LC in A-G v Alford (1855) 4 De G M & G 843 at 851; 43 ER 737; by James LJ in Vyse v Foster (1872) 8 Ch App 309 at 333, and by Ashburner In Principles of Equity 2nd ed pp 147-8; see also Jones 'Breach of Confidence - After Spycatcher ' [1989] Current Legal Problems 49 at 62-3. This is as far as equity extended itself in odium spoliatoris ." 301 It will be remembered that one of the cases relied on by the plaintiff to support the view that equitable relief can be penal was Tibbs v Carpenter (1816) 1 Madd 290 at 306-307; 56 ER 107 at 113; and that another was Jones v Foxall (1852) 15 Beav 388 at 393; 51 ER 588 at 590, where Sir John Romilly MR spoke of charging a defaulting executor or trustee with compound interest as a "penalty for his misconduct". The former case was cited in argument in Attorney-General v Alford (1855) 4 De G M & G 839; 43 ER 736, and Lord Cranworth LC appears to have had both in mind when he said (at 851-852; 741): "In many of the cases it is stated, that the Court proceeds in poenam to punish the executor, but what is the meaning of this? Why not punish him by making him account for more principal than he has received, if he is to be punished by having to account for more interest than he has received? What the Court ought to do, I think, is to charge him only with the interest which he has received, or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he is estopped from saying that he did not receive it. I do not think there is any other intelligible ground for charging an executor with more interest than he has made, than one of those I have mentioned. Misconduct does not seem to me to warrant the conclusion, that the executor did in point of fact receive, or is estopped from saying that he did not receive, the interest, or that he is to be charged with anything he did not receive, if it is not misconduct contributing to that particular result. In the present instance, I observe that one of the grounds of misconduct relied upon by the Vice-Chancellor is, that the Defendant did not communicate the matter to the rector and churchwardens of the parish. This was extremely improper conduct no doubt, but not in itself such conduct as enables me to make any alteration in the mode in which he is to be dealt with in point of interest. It is not misconduct that has benefited him, unless indeed it can be taken as evidence that he kept the money fraudulently in his hands, meaning to appropriate it to himself. In such a case I think the Court would be justified in dealing in point of interest very hardly with an executor, because it might fairly infer that he used the money in speculation, by which he either did make five per cent, or ought to be estopped from saying that he did not: the Court would not there inquire what had been the actual proceeds, but in application of the principle, 'In odium spoliatoris omnia praesumuntur,' would assume that he did make the higher rate, that is, if that were a reasonable conclusion. I must, however, say in fairness to the Defendant here, that looking to the circumstances I cannot believe that this would be a fair interpretation of his conduct: he acted extremely improperly in not communicating the bequest, but the circumstances of the case shew me that it is impossible to impute to him, that he meant to appropriate the money to his own use." 302 That case soon came to be regarded as a leading case; in particular, its rejection of punishment as the principle underlying the grant of compound interest was accepted as wholly correct. This was clear in Vyse v Foster, but a slightly earlier illustration is Burdick v Garrick (1870) LR 5 Ch App 233. A solicitor authorised to sell his principal's property and invest the proceeds in the principal's name paid moneys instead to his own bankers in his firm's name. Sir John Stuart V-C directed that an account should be taken and interest charged at the rate of 5 per cent with half yearly rests - ie compound interest. On appeal Lord Hatherley LC said at 241-242: "I cannot, however, think the decree correct in directing half-yearly rests, because the principle laid down in the case of the Attorney-General v Alford appears to be the sound principle, namely, that the Court does not proceed against an accounting party by way of punishing him for making use of the Plaintiff's money by directing rests, or payment of compound interest, but proceeds upon this principle, either that he has made, or has put himself into such a position as that he is to be presumed to have made, 5 per cent, or compound interest, as the case may be. If the Court finds it is stated in the bill, and proved, or, possibly (and I guard myself upon this part of the case), if it is not stated, but admitted on the face of the answer, without any statement on the bill, that the money received has been invested in an ordinary trade, the whole course of decision has tended to this, that the Court presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in those cases the Court directs rests to be made. But how does the case stand here? There is no charge made in the bill of any employment of this money which would produce compound interest; there is an admission in the answer that one of the trustees, being engaged with his co-partner in a solicitor's business, has paid into the common account of the firm portions of this fund. But then it must not be forgotten that a solicitor's business is not such a business as I have described; it is not one in which they could make compound interest on the money embarked, or in which half-yearly rests, or yearly rests, as the case may be, would be made in making up the account. A solicitor's profit arises from the time and the labour which he bestows upon cases in which he is engaged. There is nothing like compound interest obtained upon the money employed by a solicitor. On the contrary, he is out of pocket for a considerable period by those moneys which he expends, and upon which he receives no interest for, possibly, three or four years. It appears to me, therefore, that no case arises here in which you could say that a profit has been made, or necessarily is to be inferred, and consequently that there was an error committed in directing compound interest."

Giffard LJ said at 243-244: "Then as regards the question of compound interest, no doubt the principle applicable to that point was very clearly laid down by Lord Cranworth in Attorney-General v Alford . All that this Court can do as against a Defendant in such a case as this by way of penalty is to make him pay the costs of the suit. The question of interest clearly depends upon the amount which the person who has improperly applied the money may be fairly presumed to have made. If he has applied it to his own use, I think it is quite right to say that he ought never to be heard to say that he has made less than 5 per cent, and that that is a fair presumption to make; but if you seek to go further than that, and to charge him with more than 5 per cent, you must make out a case for that purpose. In this case there is no statement made in the bill having that object. There is an admission in the answer that the solicitor having an account at his bankers, this money went into his account. Consequently, there being neither proof nor presumption that compound interest was made, in my opinion compound interest ought not to be charged."

The plaintiff in this appeal did not suggest that an order for costs was in any relevant sense evidence of a punitive power in equity. 303 The award of the higher rate of interest in cases of gross misapplication of trust funds thus rests not on ideas of punishment or penalty, but on two other bases. The first was articulated by the Full Federal Court (Burchett, Gummow and O'Loughlin JJ) in Bailey v Namol Pty Ltd (1994) 53 FCR 102 at 112: the award of the higher rate of interest in cases of gross misapplication of trust funds rests "on the footing not that a penalty is imposed but that the defendant is estopped from denying that he received interest at such a rate which he ought to have received". The second is that the award ensures that the fiduciary retains no profit. Thus in Southern Cross Commodities Pty Ltd (in liq) v Ewing (1987) 11 ACLR 818 at 848, Acting Master Boehm, sitting in the Supreme Court of South Australia, in awarding compound interest at the higher rate, said: "It is not a punishment. It is not compensation. It is equity's way of ensuring, as far as possible, that no profit should remain in the hands of the trustee from so gross a breach of trust." An appeal was dismissed by the South Australian Full Court: Southern Cross Commodities Pty Ltd (in liq) v Ewing (1988) 91 FLR 271. That approach was approved by Kearney J in Hagen v Waterhouse (1991) 34 NSWLR 308 at 393, a case which was itself approved by this Court (Gleeson CJ, Handley and Sheller JJA) in Alemite Lubrequip Pty Ltd v Adams (1996) 41 NSWLR 45 at 47. In Wallersteiner v Moir (No 2) [1975] QB 373 at 388 Lord Denning MR combined the two bases when he said, after citing Jones v Foxall, Attorney-General v Alford, Burdick v Garrick and Vyse v Foster: "Those judgments show that in equity, interest is never awarded by way of punishment. Equity awards it whenever money is misused by an executor or a trustee or anyone else in a fiduciary position - who has misapplied the money and made use of it himself for his own benefit. The Court: 'presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in these cases the court directs rests to be made,' ie, compound interest: see Burdick v Garrick , 5 Ch App 233, 242, per Lord Hatherley LC." The reason is because a person in a fiduciary position is not allowed to make a profit out of his trust: and, if he does, he is liable to account for that profit or interest in lieu thereof. In addition, in equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business. It is plain that the company should be compensated for the loss thereby occasioned to it. Mere replacement of the money - years later - is by no means adequate compensation, especially in days of inflation. The company should be compensated by the award of interest. That was done by Sir William Page Wood V-C (afterwards Lord Hatherley) in one of the leading cases on the subject, Atwool v Merryweather (1867) LR 5 Eq 464n, 468-469. But the question arises: should it be simple interest or compound interest? On general principles I think it should be presumed that the company (had it not been deprived of the money) would have made the most beneficial use open to it: cf Armory v Delamirie (1723) 1 Stra 505. It may be that the company would have used it in its own trading operations; or that it would have used it to help its subsidiaries. Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. But, whichever it is, in order to give adequate compensation, the money should be replaced at interest with yearly rests, ie compound interest."

At 397 Buckley LJ followed the line of cases under discussion and said: "The justification for charging compound interest normally lies in the fact that profits earned in trade would be likely to be used as working capital for earning further profits. Precisely similar equitable principles apply to an agent who has retained moneys of his principal in his hands and used them for his own purposes …."

At 398 Buckley LJ said: "In cases of this kind interest is not … given to compensate for loss of profit but in order to ensure as far as possible that the defendant retains no profit for which he ought to account."

At 406 Scarman LJ said, after referring to Burdick v Garrick : "Dr Wallersteiner was at all material times engaged in the business of finance. Through a complex structure of companies he conducted financial operations with a view to profit. The quarter million pounds assistance which he obtained from the two companies in order to finance the acquisition of the shares meant that he was in a position to employ the money or its capital equivalent in those operations. Though the truth is unlikely ever to be fully known, shrouded as it is by the elaborate corporate structure within which Dr Wallersteiner chose to operate, one may safely presume that the use of the money (or the capital it enabled him to acquire) was worth to him the equivalent of compound interest at commercial rates with yearly rests, if not more. I, therefore, agree that he should be ordered to pay compound interest at the rates, and with the rests, proposed by Lord Denning MR and Buckley LJ."

The citation by Lord Denning MR of Jones v Foxall followed by his statement that it was among the judgments which show that in equity "interest is never awarded by way of punishment" negates the reliance by the plaintiff on that case. 304 All these cases were approved and applied by this Court (Meagher, Sheller and Beazley JJA) in Cureton v Blackshaw Services Pty Ltd [2002] NSWCA 187. In particular, the Court said that compound interest awarded against fiduciaries "is not awarded as a punishment": at [104]. 305 Accordingly the contentions of the plaintiff to the effect that the award of compound interest against fiduciaries reflects a punitive approach which is consistent with the availability of exemplary damages must be rejected. Those contentions rest on a highly selective citation of authority, and cannot survive a reading of all the leading cases.

Account of profits 306 Another manifestation of the continued but muted jurisdiction of equity to punish which the plaintiff relied on was, in the words of the trial judge, "the manner in which dishonest fiduciaries, as distinct from honest fiduciaries, will be called to account for profits". Yet while it is true that these rules have a deterrent and prophylactic function, like the whole regime applying to fiduciaries in a position of conflict of duty and interest or duty and duty, they are not penal in character. 307 Thus in Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 at 111, Mason CJ, Deane, Dawson and Toohey JJ said: "An account of profits is confined to profits actually made, its purpose being not to punish the defendant but to prevent its unjust enrichment."

The proposition was repeated by the majority at 114 and 115, and at 123 McHugh J said, citing the same authorities as the majority: "The object of an account of profits is to make the infringer give up its gains in order to prevent its unjust enrichment. No element of punishment is involved."

These statements were made in relation to accounting for profits of patent infringement, but they are also correct in relation to the duty of fiduciaries to account for profits made. Thus in one of the cases which the High Court cited, Sheldon v Metro-Goldwyn Pictures Corp 309 US 390 at 399 (1940), eight justices of the United States Supreme Court said that prior to statutory provision for the recovery of profits in copyright and patent cases: "recovery had been allowed in equity both in copyright and patent cases as appropriate equitable relief incident to a decree for an injunction … . That relief had been given in accordance with the principles governing equity jurisdiction, not to inflict punishment but to prevent an unjust enrichment by allowing injured complainants to complain 'that which, ex aequo et bono , is theirs, and nothing beyond this'."

The quoted words are from the United States Supreme Court's judgment in Livingstone v Woodworth 15 How 546 at 560 (1853). At 559 the Court also said: "We are aware of no rule which converts a rule of equity into an instrument for the punishment of simple torts … ."

At 560 the court said that "the infliction of damages, by way of penalty" was not "consistent with the practice of courts of equity". 308 In another of the cases cited by the High Court, My Kinda Town Ltd v Soll [1983] RPC 15 at 55 Slade J said: "The purpose of ordering an account of profits in favour of a successful plaintiff in a passing off case is not to inflict punishment on the defendant. It is to prevent an unjust enrichment of the defendant by compelling him to surrender those profits, or those parts of the profits, actually made by him which were improperly made and nothing beyond this."

Thus the fiduciary who is obliged to account is not obliged to account "on the basis of wilful default of the profits that could or should have been made": Potton Ltd v Yorkclose Ltd (1990) 17 FSR 11 at 14 per Millett J. 309 Further, though in Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557 Mason CJ, Brennan, Deane, Dawson, and Gaudron JJ said, after noting that the purpose of an account of profits being ordered against a patent infringer is not to punish the defendant but to prevent the unjust enrichment of the defendant, that "the liability of a fiduciary to account differs from that of an infringer in an intellectual property case", they did not suggest that one of the differences lay in punishment. Indeed they suggested the contrary at 561 in saying: "the stringent rule requiring a fiduciary to account for profits can be carried to extremes and … in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff." 310 The extent of the remedy of account of profits depends on the extent to which the fiduciary is unjustly enriched: Hospital Products Ltd v United States Surgical Corporation (1983) 156 CLR 41 at 107. It does not depend on the honesty of the fiduciary (though that commonly arises where defendants are obliged to pay exemplary damages): Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557. The mode by which an account of profits is taken can vary. Thus in Hospital Products Ltd v United States Surgical Corporation (1983) 156 CLR 41 at 110 Mason J said: "One approach, more favourable to the fiduciary, is that he should be held liable to account as constructive trustee not of the entire business but of the particular benefits which flowed to him in breach of his duty. Another approach, less favourable to the fiduciary, is that he should be held accountable for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that he has expended or made."

But Mason J also stressed that: "In each case the form of inquiry to be directed is that which will reflect as accurately as possible a true measure of the profit or benefit obtained by the fiduciary in breach of his duty."

The remedy removes profits, but it does not go further.

Allowances 311 The plaintiff located another supposed instance of the continued but muted jurisdiction of equity to punish defendants in the principles relating to the grant of allowances to fiduciaries who obtain profits in breach of duty and are compelled by equity to disgorge those profits. Thus the plaintiff supported the trial judge's statement at [165] that for honest fiduciaries the allowances are liberal; the extent of the allowance falls as dishonesty rises; and a grossly dishonest fiduciary may receive no allowances at all. That way of putting the matter suggests that a fiduciary has a right to allowances, or alternatively a just claim to allowances almost as of course, and loses that right or just claim in part or in whole because of dishonesty. That is not, however, the way the bulk of authority, such as it is, puts the matter. 312 There is an ancient jurisdiction under which, while a person who takes on the office of a trustee, acts conformably with the intent of the trust and makes profits must account for them, the court may order in favour of that person that he receive "a proper salary for the pains and trouble he had been at in the management thereof": Brown v Litton (1711) 1 P Wms 140 at 142; 24 ER 329. It was a jurisdiction commonly exercised when a partnership was carried on after the death of a partner: Brown v De Tastet (1819) Jac 284; 37 ER 858. 313 Lord Provost, Magistrates and Town Council of Edinburgh v Lord Advocate (1879) 4 App Cas 823 was a Scottish appeal, but in it Lord Hatherley gave the following account of English law at 838-839: "It was a recognised rule at all times that a cestui que trust , whose property has been improperly dealt with, has the choice of accepting the dealing with his property or repudiating it; that is, either of taking all the profit (he would not choose it, of course, if there had been loss) resulting from the dealing with his property, or requiring the payment back of his money with such interest as the Court thought right under the circumstances. There was found to be a difficulty about applying that to partnerships for some little time, but the principles of partnerships were discussed in the cases of Brown v De Tastet [Jac 284], and in the case of Wedderburn v Wedderburn [2 Keen's Rep 722, affd 4 Mylne & Craig 41]. When the principles were discussed in those cases it was said that the difficulty having arisen in this way, inasmuch as something must be allowed for labour and attention and activity in the business, such remuneration, for instance, as the managing partner or a person somewhat in that position might be entitled to - the Court did not see its way to direct a simple account of the profits without more. However, in those cases it came to be settled at last that the proper course is to allow an account of all profit made since the death of the partner, and to give his estate a share of that profit according to the capital on the one side, and to debit his estate on the other side with 'just allowances', which of course includes everything which the Court might think just and proper. The principle was that the trust money having been used in the partnership concern, and profits having resulted from that use of trust money, no attempt should be made to separate all the different funds out of which money might have been paid but the share of profits upon the trust money so used was to be ascertained according to the capital employed."

It is implicit in what Lord Hatherley said that it was for the person claiming allowances to establish both what they were and that they were just. 314 The modern authorities commence with Re Macadam; Dallow v Codd [1946] Ch 73. Cohen J held that trustees of a will, who appointed themselves directors of a company pursuant to a discretion vested in them by the will, were obliged to account to the trust for the directors' fees they had earned. He concluded by saying (at 82-83): "I leave over the matter of the exact wording of the order, because I do not want to do anything to prejudice the question whether, in the circumstances, I ought not to allow the plaintiffs to retain the whole or a part of the remuneration. If I can be satisfied (and that is the point I have not considered) that they were the best persons to be directors, I do not think it would be right for me to expect them to do the extra work for nothing."

There is no record of any argument having been advanced on the matter. 315 In Re Jarvis (Deceased); Edge v Jarvis [1958] 2 All ER 336 at 340 Upjohn J recorded a submission by the plaintiff that the defendant, a trustee who had profited from the trust, "should be made accountable for the whole business and its profits, making allowances for the time, energy and skill that she has expended, the assets that she has brought in, the testator's debts that she has paid and, of course, her mother's annuity." Upjohn J accepted that submission. But since the grant of allowances rested on a concession, the case has little force as an authority. 316 In Phipps v Boardman [1964] 2 All ER 187 at 208, after concluding that the fiduciary defendants were obliged to account for profits made on shares in consequence of exploitation of an opportunity derived from their fiduciary position, Wilberforce J said: "Moreover, account must naturally be taken of the expenditure which was necessary to enable the profit to be realised. But, in addition to expenditure, should not the defendants be given an allowance or credit for their work and skill? This is a subject on which authority is scanty; but Cohen J in Re Macadam, Dallow and Moscrop v Codd … gave his support to an allowance of this kind to trustees for their services in acting as directors of a company. It seems to me that this transaction, ie, the acquisition of a controlling interest in the company, was one of a special character calling for the exercise of a particular kind of professional skill. If Mr Boardman had not assumed the role of seeing it through, the beneficiaries would have had to employ (and would, had they been well advised, have employed) an expert to do it for them. If the trustees had come to the court asking for liberty to employ such a person, they would in all probability have been authorised to do so, and to remunerate the person in question. It seems to me that it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it. I cannot now form any opinion what sum would be appropriate, but I shall direct an inquiry what sum is proper to be allowed to Mr Boardman and Mr Tom Phipps in respect of their work and skill in obtaining the shares in the company mentioned in the statement of claim and the profit in respect thereof."

That appears to indicate that the fiduciary has a prima facie right to an allowance. Wilberforce J expressed the opinion that the payment should be on a liberal scale. 317 In the Court of Appeal Lord Denning MR, after expressing agreement with Wilberforce J's views on the substance of the case, said (Phipps v Boardman [1965] Ch 992 at 1020-1): "Ought Boardman and Tom Phipps to be allowed remuneration for their work and skill in these negotiations? The plaintiff is ready to concede it, but in case the other beneficiaries are interested in the account, I think we should determine it on principle. This species of action is an action for restitution such as Lord Wright described in the Fibrosa case [[1943] AC 32 at 61]. The gist of it is that the defendant has unjustly enriched himself, and it is against conscience that he should be allowed to keep the money. The claim for repayment cannot, however, be allowed to extend further than the justice of the case demands. If the defendant has done valuable work in making the profit, then the court in its discretion may allow him a recompense. It depends on the circumstances. If the agent has been guilty of any dishonesty or bad faith, or surreptitious dealing, he might not be allowed any remuneration or reward. But when, as in this case, the agents acted openly and above board, but mistakenly, then it would be only just that they should be allowed remuneration. As the judge said: 'it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.' I think there should be a generous remuneration allowed to the agents."

The first half of this passage suggests that the onus is on the fiduciary to justify a claim to recompense; the latter puts it the other way. 318 Pearson LJ said at 1030-1031: "It is to my mind a regrettable feature of this case that the plaintiff seems likely to recover an unreasonably large amount from the defendants even when under the judgment the defendants have been credited with an allowance on a liberal scale for their work and skill. The rule of equity is rigid. The agent who has made a profit from his agency, without having obtained informed consent from his principal, has to account for the whole of the profit. In an ordinary case, where an agent has simply made a secret profit, the rule is so to speak, good for discipline: there is a penal element calculated to deter agents from behaving in that way. The present case is exceptional, inasmuch as the defendants were acting in a manner which was likely to be and in fact was highly beneficial to the trust, and they did disclose the facts that they were going to buy the shares on their own behalf and hoped to make a profit. Their mistake was in not fully disclosing all the material facts, especially those bearing upon the probable size of the anticipated profit, and their mistake was made at one particular stage of the history, which was a late stage. The defendants did the work and exercised the skill and took the risk of failure and loss. The plaintiff's claim is based solely on property rights, and not on any expenditure of time, skill, effort or money or taking any risk. However, there is no basis that I can find for making an apportionment of the profit in this case in the events that have happened. The plaintiff gains a great deal from the defendants' mistake, if he is minded to exercise his full right."

This reveals at least a reluctance to make orders for allowances; and it treats the case in hand as "exceptional", not "ordinary". 319 Russell LJ said at 1032: "I would like to say that the defendants, Boardman and Tom Phipps, have my sympathy, in that having laboured and taken risks they are disappointed of their profit by principles of equity whose rigidity is necessary if cases deserving of no sympathy are not to escape. The plaintiff accepts that they should receive reward on a liberal scale for what they have done. Without intending to throw doubt on their right to this, I would prefer not to express any view on the law under that head, since the question of their right to such reward has not been the subject of argument before us."

In short, the status of Phipps v Boardman as an authority on this point is heavily undercut in view of the fact that the allowance issue was not controversial as between the parties. 320 In the House of Lords, Lord Cohen, who agreed with the opinions of Wilberforce J, Lord Denning MR and Pearson LJ, said (Boardman v Phipps [1967] 2 AC 46 at 104): "[The trial judge] directed an inquiry as to what sum is proper to be allowed to the appellants or either of them in respect of his work and skill in obtaining the said shares and the profits in respect thereof. The trial judge concluded by expressing the opinion that payment should be on a liberal scale. With that observation I respectfully agree."

Lord Hodson said at 112: "I am in agreement with the learned judge that payment should be allowed on a liberal scale in respect of the work and skill employed in obtaining the shares and the profits therefrom."

The other member of the majority, Lord Guest, did not discuss the question of allowances. The fairly detailed report of the argument in the House of Lords records no submission about allowances. 321 In Green and Clara Pty Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32 Brinsden J gave detailed consideration to particular allowances which were just in relation to profits made by an employed manager in breach of duty in terms suggesting that it was the fiduciary who bore the burden of establishing an entitlement to just allowances. 322 In Paul A Davies (Australia) Pty Ltd (In Liq) v Davies [1983] 1 NSWLR 440 the Court of Appeal ordered that a constructive trust should be imposed on property acquired in breach of fiduciary duty, but also ordered just allowances in favour of the defendants. Moffitt P said at 448: "the contributions of the respondents by way of effort and expertise in procuring the original purchase, in running and improving the property after they entered possession and in securing the completion of it by the provision of mortgage finance on their personal covenant are matters proper to be brought to account as just allowances … . [The] respondents were not guilty of conscious wrongdoing. It is on this basis and for this reason it is proper that there be provision made in any final accounting for just allowances. In a like case Lord Cohen considered that allowances in such circumstances should be assessed on a 'liberal scale' ( Phipps v Boardman [1967] 2 AC 46] at 104)."

Hutley JA agreed, and said (at 451): "The respondents are entitled to be treated as the managers of a profit-making enterprise of which they are also trustees; the matter has to be considered on the basis that they were applicants to the court for proper remuneration out of the trust property and income. The burden of establishing what is proper lies upon them."

Mahoney JA also agreed, and said (at 460): "A person who, contrary to his fiduciary duty makes, and therefore must account for, an unauthorized profit may be entitled to remuneration upon the taking of accounts upon a scale appropriate to his work skill and entrepreneurial efforts …. ."

This suggests that the fiduciary has no entitlement to anything, and points against the theory that refusal of allowances to a dishonest fiduciary amounts to the removal of what would otherwise be an entitlement as a punishment. 323 The next decision was specifically relied on by the plaintiff in support of the following proposition: "equity exercises its punitive powers … when denying to a dishonest or roguish fiduciary any allowance for skill and judgment in making profits". The decision was that of the Court of Appeal (Moffitt P, Hope and Samuels JJA) in United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 242-243. The principles stated did not have to be considered by the High Court, since the High Court disagreed with the Court of Appeal's conclusion that there had been a breach of fiduciary duty. The context of the passage relied on was a consideration of whether, on the assumption that "part of the property constituting the gain derived by HPI as a result of the breaches of its fiduciary duty was acquired or produced by the use of HPI's own moneys, or of moneys generated by it, HPI is entitled to a proportionate part of the assets constituting that gain" (at 239). 324 The court then discussed cases indicating that the burden of identifying which assets were attributable to the fiduciary's moneys lay on the fiduciary. They refused to apportion the assets for various reasons, one of which was put thus (at 241): "we do not consider this case to be one where a fiduciary has made an honest mistake and has to account accordingly; it is a case where the fiduciary set out to steal, and stole, the interests of the beneficiary he was required to protect. Cases including fraud and dishonesty seem always to have been treated as exceptions in the relevant statements of principle as being cases where the courts will not interfere to preserve for the fraudulent and dishonest party the contribution which he made and used to carry out his fraudulent and dishonest purpose. Thus in Scott v Scott [1964] VR 300, at 313, Hudson J said in referring to Lord Provost of Edinburgh v The Lord Advocate (1879) 4 App Cas 823: 'In that case the apportionment of the accretion in value which had taken place was, of course, between the funds of two charitable trusts, but it appears to me that in a case where, as here, there is no suggestion of fraud nor of an intention on the part of the trustee by his conduct to enrich himself, the rule is not only in accordance with authority but an obviously just one and should be applied.' Presumably Hudson J considered that the remedy against a fraudulent trustee would be a stricter one than that applied in the case of an honest trustee. Statements are to be found in many other cases that the trustee's misconduct did not involve fraud." 325 At 242-243, in the passage relied on by the plaintiff, they said: "In a general sense the expression 'just allowances' describes appropriately the nature of the amounts with which a defaulting fiduciary should be credited. It also supports the vagueness of the principle. As Lord Hatherley said in Lord Provost of Edinburgh v Lord Advocate (1879) 4 App Cas 823, at 839, it 'includes everything which the Court might think just and proper'. … We have concluded that no allowance should be made to HPI in respect of these matters, assuming for this purpose that the amount and value of any contribution could be established. In Story on Equity , 3rd ed (1920), par 697, at 296, there is set out a principle applied in relation to the cancellation of deeds which we regard as being of general application. It is in these terms: 'On the other hand, where the party seeking relief is the sole guilty party, or where he has participated equally and deliberately in the fraud; or where the agreement, which he seeks to set aside, is founded in illegality, immorality, or base and unconscionable conduct on his own part; in such cases courts of equity will leave him to the consequences of his own iniquity; and will decline to assist him to escape from the toils which he has studiously prepared to entangle others, or whereby he has sought to violate with impunity the best interests and morals of social life. And if acts of this sort have been deliberately done under circumstances in which innocence has been betrayed, or confidence seduced, or falsehood or concealment systematically practised, a fortiori , courts of equity could not, without straining the administration of justice, interfere to save the party from the just results of his own gross misconduct, when the failure of success in the scheme would manifestly be the sole cause of his praying relief.'

The equivalent paragraph in the second edition of the work was quoted with approval by Edwards J in Berridge v Public Trustee (1914) 33 NZLR 865, at 872. We consider that this principle is equally applicable to the determination by the court of what allowances should be made to a defaulting fiduciary. It is one thing if a fiduciary has made an honest mistake, but it is an entirely different thing to reward him for his fraudulent conduct. Any reward allowed to HPI for what it did in building up the manufacturing and competitive selling business would not be just, but unjust. Again, if it should be the fact that HPI invested some money derived from running its USSC distributorship in the manufacturing and competitive selling business or its assets, it did so at its own risk, trusting that its gross abuse of its fiduciary position would not be discovered by USSC, and taking every step to ensure that what it did was cloaked by the distributorship which it had obtained for this very purpose. We do not think that it would have been just and proper to have made any allowance to HPI if a constructive trust had been declared in respect of its assets as at 10th January, 1980, in favour of USSC." 326 In O'Sullivan v Management Agency and Music Ltd [1985] QB 428 the Court of Appeal held that contracts between a young composer and singer of popular music and certain fiduciaries should be set aside as having been procured, inter alia, by undue influence on their part. An account of profits was ordered. Debate took place on the extent of any allowance to be made in favour of the fiduciaries. Fox LJ, after referring to the passages set out above from Phipps v Boardman said (at 467-469) that they: "accept the existence of a power in the court to make an allowance to the fiduciary. And I think it is clearly necessary that such a power should exist. Substantial injustice may result without it. A hard and fast rule that the beneficiary can demand the whole profit without an allowance for the work without which it could not have been created is unduly severe. Nor do I think that the principle is only applicable in cases where the personal conduct of the fiduciary cannot be criticised. I think that the justice of the individual case must be considered on the facts of that case. Accordingly, where there has been dishonesty or surreptitious dealing or other improper conduct then, as indicated by Lord Denning MR, it might be appropriate to refuse relief; but that will depend upon the circumstances. What the first five defendants in substance are seeking is that the parties should be put in a position in which they would have been if the agreements had been on the basis which Mr Levison, an expert witness, thought might reasonably have been negotiated if Mr O'Sullivan had received independent advice from experienced persons. I do not feel able to accept that. In the first place, Mr Levison's evidence was really only directed to the question of what might reasonably have been negotiated. The question which recompense in the circumstances of this case it would be reasonable to allow was not investigated. If, for example, there was any failure by the MAM companies or Mr Mills to promote Mr O'Sullivan's interests as vigorously or competently as they might have been expected to do, with the result that Mr O'Sullivan suffered loss that might affect the position. Secondly, an order which, in effect, would involve substantial division of the profits between the beneficiary on the one hand and the fiduciary (and persons for whom he procured benefits) on the other, goes far beyond anything hitherto permitted. Once it is accepted that the court can make an appropriate allowance to a fiduciary for his skill and labour I do not see why, in principle, it should not be able to give him some part of the profit of the venture if it was thought that justice as between the parties demanded that. To give the fiduciary any allowance for his skill and labour involves some reduction of the profits otherwise payable to the beneficiary. And the business reality may be that the profits could never have been earned at all, as between fully independent persons, except on a profit sharing basis. But be that as it may, it would be one thing to permit a substantial sharing of profits in a case such as Phipps v Boardman [1967] 2 AC 46 where the conduct of the fiduciaries could not be criticised and quite another to permit it in a case such as the present where, though fraud was not alleged, there was an abuse of personal trust and confidence. I am not satisfied that it would be proper to exclude Mr Mills and the MAM companies from all reward for their efforts. I find it impossible to believe that they did not make a significant contribution to Mr O'Sullivan's success. It would be unjust to deny them a recompense for that. I would, therefore, be prepared as was done in Phipps v Boardman to authorise the payment (over and above out of pocket expenses) of an allowance for the skill and labour of the first five defendants in promoting the compositions and performances and managing the business affairs of Mr O'Sullivan, and that an inquiry (the terms of which would need to be considered with counsel) should be ordered for that purpose. Such an allowance could include a profit element in the way that solicitors' costs do. In my view this would achieve substantial justice between the parties because it would take account of the contribution made by the defendants to Mr O'Sullivan's success. It would not take full account of it in that the allowance would not be at all as much as the defendants might have obtained if the contracts had been properly negotiated between fully advised parties. But the defendants must suffer that because of the circumstances in which the contracts were procured."

Dunn LJ agreed at 459. Waller LJ reasoned as follows. First, he quoted the following words of Lord Blackburn in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1278: "It is, I think, clear on principles of general justice, that as a condition to a rescission there must be a restitutio in integrum. The parties must be put in statu quo. See per Lord Cranworth in Western Bank of Scotland v Addie (1867) LR 1 Sc & Div 145, 165. It is a doctrine which has often been acted upon both at law and in equity. But there is a considerable difference in the mode in which it is applied in courts of law and equity, owing, as I think, to the difference of the machinery which the courts have at command. I speak of these courts as they were at the time this suit commenced, without inquiring whether the Judicature Acts make any, or if any, what difference. It would be obviously unjust that a person who has been in possession of property under the contract which he seeks to repudiate should be allowed to throw that back on the other party's hands without accounting for any benefit he may have derived from the use of the property, or if the property, though not destroyed, has been in the interval deteriorated, without making compensation for that deterioration. But as a court of law has no machinery at its command for taking an account of such matters, the defrauded party, if he sought his remedy at law, must in such cases keep the property and sue in an action for deceit, in which the jury, if properly directed, can do complete justice by giving as damages a full indemnity for all that the party has lost: see Clarke v Dickson (1858) E B & E 148, and the cases there cited. But a court of equity could not give damages, and, unless it can rescind the contract, can give no relief. And, on the other hand, it can take account of profits, and make allowance for deterioration. And I think the practice has always been for a court of equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract." 327 He noted that in Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 at 456 at Rigby LJ approved that passage. He also noted that in Spence v Crawford [1939] 3 All ER 271 at 279 Lord Thankerton approved the passage. Waller LJ then said at 471-473: "It is next necessary to consider on what basis those accounts should be taken. There are many reported cases of bargains being set aside because they were made under undue influence, eg moneylending transactions with improvident heirs: Earl of Aylesford v Morris (1873) LR 8 Ch App 484; Beynon v Cook (1875) LR 10 Ch App 389; a doctor abusing the confidence of his patient: Billage v Southee (1852) 9 Hare 534; a solicitor making a champertous agreement: James v Kerr (1888) 40 Ch D 449. In each case the order of the court included the payment of a reasonable sum, eg five per cent interest instead of 60 per cent, reasonable charges in the case of the doctor and patient and in the case of the solicitor and client. There are on the other hand cases where trustees and directors have used their position and knowledge to make a secret profit and in those cases the whole profit except for expenses was ordered to be paid over. In Tate v Williamson LR 2 Ch App 55, Lord Chelmsford LC said, at p 61: 'Wherever two persons stand in such a relation that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be permitted to retain the advantage, although the transaction could not have been impeached if no such confidential relation had existed.' In Regal (Hastings) Ltd v Gulliver (Note) [1967] 2 AC 134, Lord Wright said, at p 154: 'That question can be briefly stated to be whether an agent, a director, a trustee or other person in an analogous fiduciary position, when a demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position, and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of the other person. The most usual and typical case of this nature is that of principal and agent. The rule in such case is compendiously expressed to be that an agent must account for net profit secretly (that is, without the knowledge of his principal) acquired by him in the course of his agency. The authorities show how manifold and various are the application of the rule.' There is also Phipps v Boardman [1965] Ch 992; [1967] 2 AC 46 and Lloyds Bank Ltd v Bundy [1975] QB 326. In the present case the first plaintiff had no idea of what would have been the proper price to pay or to be paid. Indeed it is not clear whether he knew what price he was being paid. This is not a case where one party is doing something while the other party is passive as in the trustees' cases, eg Phipps v Boardman , where the former party is making a profit which the passive party knows nothing about. Nor is it a case where one party is providing a service for another and because of the confidential relationship, overcharging that other, as for example in the doctor case. This is a case where both parties are contributing effort towards a joint objective. The plaintiff until he had come in contact with Mills and the defendant companies was an unknown and unsuccessful singer earning his living as a postal worker. As a result of his association with Mills he became a pop star of worldwide renown. This was the result of joint enterprise in which both parties played an important part. The agreement between the two parties was unfair in that the defendants were taking a bigger share of the profits than the plaintiff appreciated, but each party contributed to the joint success. No reported case has been shown to us where the effect of undue influence on any similar agreement, or indeed any agreement where both parties have been contributing, has to be considered. In the case of trustees making use of information for their own benefit they were not working for the interests of the beneficiary. In the case of doctors, moneylenders, etc, the other party was not doing work. In my judgment the approach which the court should make is that indicated in the passage from Lord Blackburn quoted by Rigby LJ and approved by Lord Thankerton. The important words of Lord Blackburn are that equity should give relief 'whenever, by the exercise of its powers, it can do what is practically just.' In my judgment this court is not concerned with punishing the defendants for their behaviour. We are concerned to see that the plaintiff gets the profit to which he is entitled and at the same time see that the defendants receive fair remuneration, but no more, for all the work that they have done in pursuance of this joint project. Although the trustee authorities indicate that trustees should retain no profit secretly made and only reasonable remuneration for their work as trustees, and although the present case is a fiduciary situation it is a case where the defendants, as the plaintiff knew, were doing a considerable amount of work. They are entitled to reasonable remuneration for that work. To apply the words of Lord Wright in Regal (Hastings) Ltd v Gulliver (Note) [1967] 2 AC 134, 154, the defendants here did make some profit with the knowledge and assent of the plaintiff. This the defendants are entitled to keep and would be reasonable remuneration. On the other hand it is clear that the profit which the defendants kept was excessive. The excess profit was retained without the knowledge of the plaintiff. The defendants must account for this profit. It will be for the official referee to decide what would be reasonable remuneration. It must include all expenses and a fair profit." 328 This reasoning rests on two propositions. One, which is fatal to the trial judge's contention that in this field equity penalises wrongdoers, is that the court "is not concerned with punishing". The second is that the profits which must be accounted for are those to which the plaintiff is entitled: the gross receipts in the fiduciary's hands are not profits, and that which constitutes profit is what has been received less "fair remuneration". 329 In In re Berkeley Applegate (Investment Consultants) Ltd (In Liq); Harris v Conway [1989] Ch 32, a liquidator administering a trust company which had taken money on trust from investors applied for an order for payment of remuneration out of the trust funds, as distinct from the company's own funds. The circumstances were thus rather different from those considered in the cases hitherto discussed. Edward Nugee QC, sitting as a deputy High Court judge, referred to Phipps v Boardman and also to cases where trustees and other fund holders had applied to the court. He said at 50-51: "the investors … need the assistance of a court of equity to secure the rights … . As a condition of giving effect to their equitable rights, the court has in my judgment a discretion to ensure that a proper allowance is made to the liquidator. His skill and labour may not have added directly to the value of the underlying assets in which the investors have equitable interests; but he has added to the estate in the sense of carrying out work which was necessary before the estate could be realised for the benefit of the investors. As was the case in Scott v Nesbitt , 14 Ves Jun 438, if the liquidator had not done this work, it is inevitable that the work, or at all events a great deal of it, would have had to be done by someone else, and on an application to the court a receiver would have been appointed whose expenses and fees would necessarily have had to be borne by the trust assets. On the evidence before me, the beneficial interests of the investors could not have been established without some investigation as has been carried out by the liquidator. The allowance of fair compensation to the liquidator is in my judgment a proper application of the rule that he who seeks equity must do equity. 'That … is a rule of unquestionable justice, but which decided nothing in itself: for you must first inquire what are the equities which the defendant must do, and what the plaintiff ought to have:' Neesom v Clarkson (1845) 4 Hare 97, 101 per Wigram V-C. 'The rule means that a man who comes to seek the aid of a court of equity to enforce a claim must be prepared to submit in such proceedings to any directions which the known principles of a court of equity may make it proper to give; he must do justice as to the matters in respect of which the assistance of equity is asked:' Halsbury's Laws of England , 4th ed, vol 16, (1976) p 874, para 1303, which in my judgment correctly states the law. The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest (as in In re Marine Mansions Co , LR 4 Eq 601 and similar cases) or by a receiver appointed by the court whose fees would have been borne by the trust property (as in Scott v Nesbitt , 14 Ves Jun 438); and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity (as in Phipps v Boardman [1964] 1 WLR 993). In my judgment this is a case in which the jurisdiction can properly be exercised." 330 This is a very broad statement, but so far as it applies to the present context it suggests that the rules do not rest on any penal basis, but only the basis that plaintiffs who seek equity must be prepared to do it by submitting to a condition that there be an allowance. The discretion is only to be "sparingly exercised". 331 In Guinness Plc v Saunders [1990] 2 AC 663 at 693-694 Lord Templeman said:

"In support of a claim for an equitable allowance, reference was made to the decision of Wilberforce J in Phipps v Boardman [1964] 1 WLR 993. His decision was upheld by the Court of Appeal [1965] Ch 992 and ultimately by this House under the name of Boardman v Phipps [1967] 2 AC 46. In that case a trust estate included a minority holding in a private company which fell on lean times. The trustees declined to attempt to acquire a controlling interest in the company in order to improve its performance. The solicitor to the trust and one of the beneficiaries, with the knowledge and approval of the trustees, purchased the controlling interest from outside shareholders for themselves with the help of information about the shareholders acquired by the solicitor in the course of acting for the trust. The company's position was improved and the shares bought by the solicitor and the purchasing beneficiary were ultimately sold at a profit. A complaining beneficiary was held to be entitled to a share of the profits on the resale on the grounds that the solicitor and the purchasing beneficiary were assisted in the original purchase by the information derived from the trust. The purchase of a controlling interest might have turned out badly and in that case the solicitor and the purchasing beneficiary would have made irrecoverable personal losses. In these circumstances it is not surprising that Wilberforce J decided that in calculating the undeserved profit which accrued to the trust estate there should be deducted a generous allowance for the work and trouble of the solicitor and purchasing beneficiary in acquiring the controlling shares and restoring the company to prosperity. Phipps v Boardman decides that in exceptional circumstances a court of equity may award remuneration to the trustee. Therefore, it is argued, a court of equity may award remuneration to a director. As at present advised, I am unable to envisage circumstances in which a court of equity would exercise a power to award remuneration to a director when the relevant articles of association confided that power to the board of directors. Certainly, the circumstances do not exist in the present case." 332 At 701-702 Lord Goff of Chieveley said of Boardman v Phipps: "It will be observed that the decision to make the allowance was founded upon the simple proposition that 'it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.' Ex hypothesi, such an allowance was not in the circumstances authorised by the terms of the trust deed; furthermore it was held that there had not been full and proper disclosure by the two defendants to the successful plaintiff beneficiary. The inequity was found in the simple proposition that the beneficiaries were taking the profit although, if Mr Boardman (the solicitor) had not done the work, they would have had to employ an expert to do the work for them in order to earn that profit. The decision has to be reconciled with the fundamental principle that a trustee is not entitled to remuneration for services rendered by him to the trust except as expressly provided in the trust deed. Strictly speaking, it is irreconcilable with the rule as so stated. It seems to me therefore that it can only be reconciled with it to the extent that the exercise of the equitable jurisdiction does not conflict with the policy underlying the rule. And, as I see it, such a conflict will only be avoided if the exercise of the jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees in any way to put themselves in a position where their interests conflict with their duties as trustees. Not only was the equity underlying Mr Boardman's claim in Phipps v Boardman clear and, indeed, overwhelming; but the exercise of the jurisdiction to award an allowance in the unusual circumstances of that case could not provide any encouragement to trustees to put themselves in a position where their duties as trustees conflicted with their interests. The present case is, however, very different. Whether any such an allowance might ever be granted by a court of equity in the case of a director of a company, as opposed to a trustee, is a point which has yet to be decided; and I must reserve the question whether the jurisdiction could be exercised in such a case, which may be said to involve interference by the court in the administration of a company's affairs when the company is not being wound up. In any event, however, like my noble and learned friend, Lord Templeman, I cannot see any possibility of such jurisdiction being exercised in the present case. I proceed, of course, on the basis that Mr Ward acted throughout in complete good faith. But the simple fact remains that, by agreeing to provide his services in return for a substantial fee the size of which was dependent upon the amount of a successful bid by Guinness, Mr Ward was most plainly putting himself in a position in which his interests were in stark conflict with his duty as a director. Furthermore, for such services as he rendered, it is still open to the board of Guinness (if it thinks fit, having had a full opportunity to investigate the circumstances of the case) to award Mr Ward appropriate remuneration. In all the circumstances of the case, I cannot think that this is a case in which a court of equity (assuming that it has jurisdiction to do so in the case of a director of a company) would order the repayment of the £5.2m by Mr Ward to Guinness subject to a condition that an equitable allowance be made to Mr Ward for his services."

Lords Keith of Kinkel and Brandon of Oakbrook agreed with Lord Templeman, and Lord Griffiths agreed with both Lord Templeman and Lord Goff. 333 It is to be noted that the jurisdiction exercised in Phipps v Boardman was seen by Lord Templeman as arising only in "exceptional circumstances". Lord Goff saw Phipps v Boardman as having "unusual circumstances". 334 In Warman International Ltd v Dwyer (1995) 182 CLR 544 at 561-562, Mason CJ, Brennan, Deane, Dawson and Gaudron JJ, said: "In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources. This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff. It is for the defendant to establish that it is inequitable to order an account of the entire profits. If the defendant does not establish that that would be so, then the defendant must bear the consequences of mingling the profits attributable to the defendant's breach of fiduciary duty and the profits attributable to those earned by the defendant's efforts and investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own. Whether it is appropriate to allow an errant fiduciary a proportion of profits or to make an allowance in respect of skill, expertise and other expenses is a matter of judgment which will depend on the facts of the given case. However, as a general rule, in conformity with the principle that a fiduciary must not profit from a breach of fiduciary duty, a court will not apportion profits in the absence of an antecedent arrangement for profit-sharing but will make allowance for skill, expertise and other expenses." 335 If it is for the defendant to establish that it is inequitable to order an account of the entire profits, it follows that the onus on the defendant is to negate dishonesty or other grave forms of misconduct, and hence the position is not so much that an account of the entire profits is a punishment, but rather that an absence of grave misconduct is a passport to an indulgence in favour of the defendant. And the closing sentence of the quotation suggests that, since the onus of establishing an entitlement to apportionment of profits is on the defendant, but that the grant of an allowance is normally the substitute for that remedy, the onus of establishing that an allowance is called for is on the defendant. 336 Hence the denial to a dishonest fiduciary of a share of the profits or of an allowance is not an instance of punishment. It is for the fiduciary to establish that the ordinary rule in relation to an account of profits should not be applied. In England the onus seems to require the establishment of "exceptional" or "unusual" circumstances. In Australia the High Court seems to suggest that the onus is lighter, but that it remains on the fiduciary. Since ordinarily a person subject to criminal punishment bears no burden, this suggests that the refusal of an order for profits sharing or for an allowance is not punitive.

Related equitable rules 337 The proposition that equitable damages are not available in equity is supported by related equitable rules - the equitable rules relating to penalties and forfeitures and equity's refusal to grant injunctions against crimes.

Penalties 338 Equity's abhorrence of exacting greater monetary relief from wrongdoers than compensation and profits is matched by its abhorrence of penalties. Where equity identifies a penalty arising under a contract, it relieves against it, but on condition that the party relieved from the penalty pay the damage which the party seeking to enforce the contract has suffered: Campbell Discount Co Ltd v Bridge [1962] AC 600 at 632. Thus equity ensures that contract breakers are not punished by penalties, though it also ensures that even though the penalty clause is rendered unenforceable, actual losses are recovered.

Injunctions against crime 339 "The Court has no jurisdiction to prevent the commission of crime": Daniell, The Practice of the Chancery Division (7th ed) vol II p1131. To this there are exceptions. One relates to infants. Another relates to "the commission of any threatened wrongful act which is a menace to the general rights of the public which are of a proprietary nature, such as the user of a highway, or which is likely to cause injury to the members of the public in general capable of being assessed in individual cases in terms of money, such as nuisances from noise, smell or filth, ie, injuries to the health or comfort of the general public": Attorney-General v Mercantile Investments Ltd (1920) 21 SR (NSW) 183 at 187 per Harvey J. But despite occasional aberrations such as Attorney-General, ex rel Daniels v Huber (1971) 2 SASR 142, courts of equity are reluctant to grant injunctions to prevent the commission of crimes. If it were not so, the "processes of a criminal trial with all its safeguards for the rights of accused persons could be short-circuited": at 165. And equitable intervention may cut across carefully devised statutory schemes and sanctions. This topic is not identical with the exemplary damages question: but if equity is cautious about enforcing the existing criminal law it would not be surprising if it were also reluctant to impose criminal sanctions against conduct some of which contravenes the substantive criminal law and some of which does not.

Smith v Day 340 Though the plaintiff did not rely on it, it is necessary to deal with certain dicta of Brett LJ in Smith v Day (1882) 21 Ch D 421 at 427-428. Those dicta have been cited as authority for the proposition that exemplary damages may be awarded in equity: eg M Tilbury, Civil Remedies, vol 1, para [3266]. In that case the Court of Appeal delivered ex tempore judgments after not calling on counsel for the respondents. Brett LJ made the following statement about the court's approach to the assessment of damages pursuant to an undertaking given by a plaintiff to pay the defendant damages caused by the grant of an interlocutory injunction which was dissolved at the trial: "I am strongly of opinion that the question whether an inquiry as to damages should be granted is within the discretion of the Judge who originally tries the case, and that his discretion ought not lightly to be interfered with. In exercising this discretion the Court should act as nearly as may be on fixed rules, or by analogy to fixed rules. Now in the present case there is no undertaking with the opposite party, but only with the Court. There is no contract on which the opposite party could sue, and let us examine the case by analogy to cases where there is a contract with, or an obligation to the other party. If damages are granted at all, I think the Court would never go beyond what would be given if there were an analogous contract with or duty to the opposite party. The rules as to damages are shewn in Hadley v Baxendale [9 Ex 341]. If the injunction had been obtained fraudulently or maliciously, the Court, I think, would act by analogy to the rule in the case of fraudulent or malicious breach of contract, and not confine itself to proximate damages, but give exemplary damages. In the present case there is no ground for alleging fraud or malice." 341 Brett LJ's acceptance of the possibility of exemplary damages was not referred to by Sir George Jessel MR either in the judgment he delivered first or in a short judgment he delivered at the end dealing with a point raised by Cotton LJ. Cotton LJ appeared to contradict Brett LJ in the second last sentence of his judgment. Though Aicken J quoted Brett LJ's observation without dissent in his lengthy analysis of the authorities in Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249 at 263, and though the Full High Court upheld Aicken J's orders, what Brett LJ said about exemplary damages is not part of New South Wales law. That is because it rests on an analogy with what Brett LJ took to be the availability of exemplary damages for fraudulent or malicious breach of contract. In Gray v Motor Accident Commission (1998) 196 CLR 1 the High Court made it plain that exemplary damages are not available for breach of contract. 342 Though Brett LJ's observation was referred to by Falconer J in Digital Equipment Corporation v Darkrest Ltd [1984] Ch 512 at 516, he did not comment on its correctness. According to the Law Commission, Aggravated, Exemplary and Restitutionary Damages (Report No 247), para 1.75 note 640, Hobhouse LJ doubted its correctness in an unreported case (Berkeley Administration Inc v McClelland (Court of Appeal, 18 February 1994)), and the Commission thought the view that exemplary damages could be awarded under an undertaking as to damages was "very surprising" (paras 1.75 and 1.77). The reasoning which it advanced for that view, which is sound, is as follows (para 1.75): "The purpose of an undertaking … is to ensure that if a court wrongly grants interlocutory relief, the financial or other detriment that is suffered by the defendant as a result of the issuing of the relief can be adequately compensated. If such compensation were unavailable, the awarding of interim relief would be severely impeded by concerns that unrepaired and unjustified harm might be caused to the defendant. On this view, the undertaking enforced is typically one to indemnify the defendant, in the event of an interlocutory injunction subsequently being discharged, for the loss he or she has suffered as a result of being restrained from doing what he or she could otherwise have done. The claim to 'damages' is really a claim to payment of an agreed sum, the measure of which is the defendant's loss; the 'damages' are not available for the breach of any duty in the undertaking, contractual or otherwise. By definition an 'indemnity' will only extend to losses suffered by the indemnified; the use of an undertaking for the purposes of punishment is, on this reasoning, contrary to principle."

The judicial creation of criminal sanctions 343 The trial judge was both frank and correct in acknowledging that he was making new law. He said at the outset that the question whether exemplary damages could be awarded for breach of equitable duty was "undecided by authority in Australia" and "must be decided in this case" (at [2]). He said that there "is no decided case" on the point (at [159]). In discussing Kuddus v Chief Constable of Leicestershire, his approach was to seek to avoid anomaly and irrationality, and to remove artificial confinements: that approach assumes that the present state of the law, unless judicially altered, is anomalous, irrational and artificially confined. It is true that near the end of the long passage quoted in [260] above the trial judge said that the relevant jurisdiction was "already inherent" in the court, though since the mid 17th century it had been "muted". It is, however, a fiction to treat the award of exemplary damages for breach of fiduciary duty as merely reviving a muted jurisdiction: to recognise for the first time so muted a jurisdiction is in reality to create it. Even if there is no precedent directly denying the jurisdiction, it does not follow that to recognise the jurisdiction is not to create a new precedent. 344 The trial judge was also frank and correct in acknowledging that the new law he made resulted in the imposition of criminal sanctions never imposed before. He said, several times, that the aims of exemplary damages were to punish, to deter, and to vindicate the victim's feelings and thereby abate the urge for self help or violent retribution. He thought that exemplary damages were appropriate because the conduct of Messrs Harris and Eden was "deserving of special condemnation and punishment". He said that their conduct, if they were officers of the plaintiff, was a serious crime, and even if they were not, was a type of conduct visited with criminal sanctions. He drew attention to the interaction between the possible award of exemplary damages and the possible infliction of punishment by the criminal courts. If there had been at least substantial criminal punishment, that bars the award of exemplary damages: Gray v Motor Accident Commission (1998) 196 CLR 1 at [40]. On the other hand, the High Court in the same case doubted whether the mere possibility of later criminal prosecution was sufficient reason not to award exemplary damages: at [48]. The trial judge thus said that an important question was "whether wrongdoing deserving of punishment would go unpunished for an award of exemplary damages." He pointed out that exemplary damages should not operate as "a double punishment". He said that if Messrs Harris and Eden were later prosecuted, any penalties imposed by the criminal court "will doubtless take account of punishment already suffered by the defendants as a result of these proceedings". And many other expressions used by the trial judge were in the same vein. 345 These usages correspond with the traditional language of the courts in discussing exemplary damages: for example, Uren v John Fairfax & Sons Pty Ltd (1966) 117 CLR 118 at 149 per Windeyer J ("exemplary damages … are intended to punish the defendant, and presumably to serve one or more of the objects of punishment - moral retribution or deterrence"); Gray v Motor Accident Commission (1998) 196 CLR 1 at [15] (exemplary damages are "awarded to punish the wrongdoer and deter others from like conduct" per Gleeson CJ, McHugh, Gummow and Hayne JJ). In Rookes v Barnard [1964] AC 1129 at 1266 Lord Devlin said the award of exemplary damages admitted "into the civil law a principle which ought logically to belong to the criminal". In Broome v Cassell & Co Ltd [1972] AC 1027 at 1086 Lord Reid said: "courts, perhaps without fully realising what they were doing, appear to have permitted damages to be measured not by what the plaintiff was fairly entitled to receive but by what the defendant ought to be made to pay as punishment for his outrageous conduct. That meant that the plaintiff, by being given more than on any view could be justified as compensation, was being given a pure and undeserved windfall at the expense of the defendant, and that in so far as the defendant was being required to pay more than could possibly be regarded as compensation he was being subjected to pure punishment. I thought and still think that that is highly anomalous. It is confusing the function of the civil law which is to compensate with the function of the criminal law which is to inflict deterrent and punitive penalties. Some objection has been taken to the use of the word 'fine' to denote the amount by which punitive or exemplary damages exceed anything justly due to the plaintiff. In my view the word 'fine' is an entirely accurate description of that part of any award which goes beyond anything justly due to the plaintiff and is purely punitive."

At 1114 Lord Wilberforce said that the recognition of exemplary damages included "a punitive element in civil damages", and in logic "brings a criminal element into the civil law", without, as Lord Diplock pointed out at 1128, giving the defendant the protection which defendants in criminal cases have. Lord Morris of Borth-y-Gest at 1099-1100 said juries gave: "a sum which marked displeasure or indignation or which was to serve as a deterrent or as an example or which vindicated the law or which was a way of punishing the defendant. But juries were not invited to isolate such element as was purely punitive. … In some cases their displeasure or indignation would operate as a type of topping-up process. But if the process by which they had arrived at a figure could have been analysed (which normally it could not have been), while it would probably have been found that there had been nothing in the nature of a mathematical addition of separate sums, yet it would have been recognised that some (wholly unascertainable) part of the whole must have been purely punitive. Stated otherwise such (unascertained) part was a fine. Logical analysis forces the conclusion therefore that in the result there would be in a civil action have been punishment for conduct not particularised in any criminal code and that such punishment had taken the form of a fine not receivable by the state but as a sort of bonus by a private individual who would, apart from it, be solaced for the wrong done to him. There may be much to be said for making it permissible in a criminal court to order in certain cases that a convicted person should pay compensation. There is much to be said against a system under which a fine becomes payable in a civil court without any of the safeguards which protect those charged with crimes."

It is not surprising that a defendant ordered to pay exemplary damages suffers the same stigma as an accused person found guilty and punished. 346 Though there are occasional statements the other way, in context they do not invalidate the trial judge's characterisation of exemplary damages as punitive. 347 The question accordingly arises: is it open to the courts in the 21st century to create new criminal sanctions? 348 In R v Newland [1954] 1 QB 158 the English Court of Criminal Appeal (Lord Goddard CJ, Sellers and Havers JJ) said that the declaring of new offences was not the business of judges but of the legislature (at 165). They said (at 167) that it was wrong for: "the judges to declare new crimes and … hold anything which they considered prejudicial to the community to be a misdemeanour. However beneficial that might have been in days when Parliament met seldom or at least only at long intervals it surely is now the province of the legislature and not of the judiciary to create new criminal offences." 349 The House of Lords took a different view in Shaw v Director of Public Prosecutions [1962] AC 220. But that decision has few friends. It was coolly treated in Knuller (Publishing, Printing and Promotions) Ltd v Director of Public Prosecutions [1973] AC 435. P J Fitzgerald Criminal Law and Punishment (Oxford, Clarendon Press, 1962) pp 9-10 summarised the objections to it as follows: "Few cases in recent years have been quite so disturbing as this. The resuscitation of the judicial power to create crimes runs counter to two cardinal principles of free and democratic government. In the first place, the idea of the rule of law, on which English lawyers have lavished so many panegyrics, is based on the demand that the citizen should be ruled by laws and not by the whims of men. In the sphere of criminal law this idea has become crystallized as the principle of legality, a principle according to which only breaches of existing criminal law should be punishable. The justification of this principle, which has been adopted as an actual rule in some legal systems, though not in the English legal system, is that the citizen should be able to know beforehand what conduct is permitted and what forbidden; for only in this way can he order his affairs with certainty and avoid coming into conflict with the law. It is this demand for certainty with regard to the provisions of the criminal law that militates against retrospective criminal legislation. When Parliament creates a new crime, it almost invariably legislates for the future only. This, however, is just what the courts cannot do. Our legal system is such that a court can only decide a point of law which arises in some actual case before the court, and consequently the court's decision always relates back to the facts of this case, facts which of course precede the decision. If, therefore, a court manufactures a new crime, it thereby determines after the event that the defendant's conduct, which at the time of commission was not prohibited by law, is a criminal offence. To countenance this type of retrospective criminal legislation means that certainty and consequently freedom are at an end. Bentham long ago pointed out that when the judges make law like this, they are treating the citizen as a man treats his dog, hitting him every time he does something to which the master takes exception. Animals and young children can only be trained in this way. Sane and adult members of a free society, however, are entitled to demand first to be told what conduct is forbidden so that they may choose whether or not to keep within the law. There is a further objection to the creation of new offences by the courts. Even suppose that a court could decide that the kind of act which the defendant had done would in future, though not in the instant case, constitute a crime, there is still the objection that this type of proceeding is not consonant with democratic government. If Parliament creates a new crime, the citizens whose liberty is thereby restricted have the consolation that this was done by their elected representatives whom they chose to perform this sort of activity, and whom in due course they may re-elect or reject. The judges, on the other hand, are appointed by the Crown, virtually irremovable and in practice accountable to no one. That such a body should have the power to decree that certain acts shall constitute crimes is totally incompatible with the notion of democracy." 350 Another classical statement of the arguments against judicial creation of criminal sanctions is that of Sir James Fitzjames Stephen: A History of The Criminal Law of England, vol 3, (1883) pp 359-360: "Though the existence of this power [of declaring new offences] as inherent in the judges has been asserted by several high authorities for a great length of time, it is hardly probable that any attempt would be made to exercise it at the present day; and any such attempt would be received with great opposition, and would place the bench in an invidious position …. In times when legislation was scanty, the powers referred to were necessary. That the law in its earlier stages should be developed by judicial decisions from a few vague generalities was natural and inevitable. But a new state of things has come into existence. On the one hand, the courts have done their work; they have developed the law. On the other hand, parliament is regular in its sittings and active in its labours; and if the protection of society requires the enactment of additional penal laws, parliament will soon supply them. If parliament is not disposed to provide punishments for acts which are upon any ground objectionable or dangerous, the presumption is that they belong to that class of misconduct which it is not desirable to punish. Besides, there is every reason to believe that the criminal law is, and for a considerable time has been, sufficiently developed to provide all the protection for the public peace and for the property and persons of individuals which they are likely to require under almost any circumstances which can be imagined; and this is an additional reason why its further development ought to be left in the hands of parliament."

It will be necessary to return to some of these arguments below. 351 While the award of exemplary damages for breach of fiduciary duty is not in terms the creation of a new criminal offence, it attaches criminal sanctions to conduct which is not necessarily otherwise criminal. All the objections to the creation of new crimes by the courts apply equally to the extension of exemplary damages beyond the limits marked by High Court authority in analysing the received law. 352 The difficulties in making equity the handmaid, and indeed a primary agency, of punishment, may be illustrated as follows. If exemplary damages can be awarded for breach of equitable duty, either the breach of equitable duty is not criminal, or it is. If it is not criminal, to award exemplary damages is to apply a criminal sanction retroactively to conduct which was not attended by that sanction when it was carried out. If it is criminal, it is almost certain, in modern conditions, that it will have been made criminal by statute, and the relevant statute will have stipulated particular criminal sanctions. Several problems will arise. What if there is a criminal prosecution? Does it matter if that criminal prosecution happens before or after the civil proceedings in which the exemplary damages are sought are decided? These are not abstract issues. For example, a breach of a director's duty of honesty is not only a breach of fiduciary duty, but a criminal offence in contravention of the Corporations Act 2001 (Cth) s 184, punishable by five years imprisonment or 200 penalty units or both. A solicitor who steals the assets of a client is not only in breach of fiduciary duty, but contravenes the Crimes Act 1900 (NSW) s 178A, which creates a criminal offence punishable by seven years imprisonment. A doctor who interferes sexually with a patient below the age of consent and is found in breach of fiduciary duty (if the Canadian cases are right - cf 370] below) will also have committed a criminal offence in contravention of the Crimes Act 1900 s 61N, which carries a sentence of two years imprisonment. Reading, the sergeant in Reading v Attorney-General [1951] AC 507 who assisted illicit dealers in spirits by accompanying them in uniform, was not only in breach of fiduciary duty, but committed a statutory offence of carrying out conduct to the prejudice of good order and military discipline for which he was sentenced to undergo two years' imprisonment and to be reduced to the ranks, which would have carried significant adverse financial consequences. If exemplary damages were available for breach of fiduciary duty and in each case the civil case took place before the criminal prosecution and the sum award exceeded any sum payable by way of fine or (as in Reading v Attorney-General) the greatest possible financial loss caused by reduction to the ranks, what should the sentencing judge do? And if the criminal trial took place before the civil proceedings, how far should the sentencing judge take into account the possibility of exemplary damages being awarded in a civil case? It is appreciated that these difficulties can also arise where exemplary damages for breach of common law duties which are also crimes, but there Parliament has had in contemplation the long existence of exemplary damages, and the statutes have been brought into being or permitted to exist with knowledge of the difficulties. The course of adding to the difficulties is a course better taken by Parliament than by an intermediate appellate court. Similar problems can arise in relation to the numerous criminal offences created by the Trade Practices Act 1974 (Cth) Pt VC, which are capable of being committed by a party owing fiduciary duties to another.

Fusion of law and equity? 353 To some extent the language of the trial judge suggested that he viewed the principles of law and of equity as having been fused, or as principles which ought to be fused. For example, he relied on Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299, which rests on the former view, and on the United Kingdom Law Commission Report, which expounds the latter. However, the trial judge rejected reliance on that view in saying that there was "no need to appeal to any perceived fusion" to find equitable jurisdiction to award exemplary damages, and counsel for the plaintiff in this Court declined to defend the award of exemplary damages on the ground of any such fusion. It is not the law of New South Wales that law and equity were fused when the judicature system was created by the Supreme Court Act 1970 ss 57-63 and the Law Reform (Law and Equity) Act 1972 ss 5-7. There was no "fusion of two systems of principle but of the courts which administer the two systems": O'Rourke v Hoeven [1974] 1 NSWLR 622 at 626 per Glass JA. This corresponds with Windeyer J's approval in Felton v Mulligan (1971) 124 CLR 367 at 392 of the celebrated dictum in Ashburner in Equity (2nd ed) p 18 that "the two streams of jurisdiction, though they run in the same channel, run side by side and do not mingle their waters." These views correspond with those of Sir George Jessel in Salt v Cooper (1880) 16 Ch D 544 at 549 about the object of the Judicature Act. "It is stated very plainly that the main object of the Act was to assimilate the transaction of Equity business and Common Law business by different Courts of Judicature. It has been sometimes inaccurately called 'the fusion of Law and Equity'; but it was not any fusion, or anything of the kind; it was the vesting in one tribunal the administration of Law and Equity in every cause, action, or dispute which should come before that tribunal. That was the meaning of the Act. Then, as to that very small number of cases in which there is an actual conflict, it was decided that in all cases where the rules of Equity and Law were in conflict the rules of Equity would prevail. That was to be the mode of administering the combined jurisdiction, and that was the meaning of the Act. To carry that out, the Legislature did not create a new jurisdiction, but simply transferred the old jurisdictions of the Courts of Law and Equity to the new tribunal as to the mode in which it should administer the combined jurisdictions." 354 The view from Scotland was similar. In Ind Coope & Co v Emmerson (1887) 12 App Cas 300 at 309, Lord Watson said that the legislation: "was not intended to affect, and does not affect, the quality of the rights and claims which [litigants] bring into Court, and submit to the judgment of the Court, whether as plaintiffs or defendants."

And in Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] AC 1056 at 1109 Lord Brandon of Oakbrook, with whom the other Law Lords agreed, said: "the Judicature Acts, while making important changes in procedure, did not alter and were not intended to alter the rights of parties … ." 355 The question of fusion may arise, however, in view of some of the plaintiff's arguments.

The law in New Zealand 356 It is convenient to look at the state of the authorities in New Zealand and in Canadian jurisdictions - sources which, at least until recently, Australian courts have found helpful in assessing the state of Australian law. It is also desirable to note some aspects of the American position. 357 The first relevant case in New Zealand is McKaskell v Benseman [1989] 3 NZLR 75 at 90. Jeffries J refused an application for exemplary damages for breach of fiduciary duty because the facts did not justify the award. He did not discuss, but appeared to assume, the proposition that jurisdiction to make the award existed. 358 The next case is Green v Matheson [1989] 3 NZLR 564 at 571. Cooke P, Somers, Casey, Hardie Boys and Wylie JJ assumed that punitive damages were available in relation to an alleged breach of fiduciary duty by a doctor who allegedly failed to treat a patient skilfully. The doctor was also sued for the torts of trespass to the person and negligence, and the court held that the Accident Compensation Act 1982 did not debar the patient's claim for exemplary damages. But the court did not discuss whether there were any other objections to the claim for exemplary damages in relation to the alleged breach of fiduciary duty. 359 In Aquaculture Corporation v NZ Green Mussel Co Ltd [1990] 3 NZLR 299 the trial judge held that he had no power to award compensatory damages for the wrongful use of confidential information, but provisionally assessed them at $1.5 million. He also awarded exemplary damages of $100,000. The plaintiff appealed against the refusal to award the $1.5 million compensatory damages. The six respondents (defendants below) withdrew from the appeal and presented no argument to the court. Cooke P, Richardson, Bisson and Hardie Boys JJ said at 301-302: "There is now a line of judgments in this Court accepting that monetary compensation (which can be labelled damages) may be awarded for breach of a duty of confidence or other duty deriving historically from equity … . In some of these cases the relevant observations were arguably obiter, but we think that the point should now be taken as settled in New Zealand. Whether the obligation of confidence in a case of the present kind should be classified as purely an equitable one is debatable, but we do not think that the question matters for any purpose material to this appeal. For all purposes now material, equity and common law are mingled or merged. The practicality of the matter is that in the circumstances of the dealings between the parties the law imposes a duty of confidence. For its breach a full range of remedies should be available as appropriate, no matter whether they originated in common law, equity or statute. … But, applying the foregoing approach as to the available range of remedies, we see no reason in principle why exemplary damages should not be awarded for actionable breach of confidence in a case where a compensatory award would not adequately reflect the gravity of the defendant's conduct. Without denying jurisdiction, however, we are not satisfied on the facts that this is a case for both heads of damages."

Somers J said at 302: "It may be that the heads, and other features, of monetary awards for breach of equitable obligation are fully equated with those applicable to awards of damages at common law. We have heard no argument about this and so far as I am aware awards for such infractions have, to date, been compensatory only. The exclusion of exemplary damages in this case can be justified either on the ground that equity and penalty are strangers or, if the equation exists, on the ground that the sum of $1.5 million sufficiently penalises." 360 The majority observations recognising the jurisdiction to award exemplary damages were thus:

(b) based on a theory that "equity and common law are mingled or merged" which was evidently not argued by the appellant, which in any event is not a theory known to Australian law, and which was specifically disavowed by the defendants in this Court;

(d) pronounced in a case where there was no competing argument advanced because the defendants were unrepresented.

It is difficult to imagine an "authority" offered for adoption in New South Wales which could be less satisfactory. In particular, it is not correct to say, though in Bottrill v A [2001] 3 NZLR 622 at [37] Richardson P, Gault and Blanchard JJ said it, that the Aquaculture Corporation case is one in which the "principles and policy considerations relevant to … exemplary damages issues have been extensively discussed …." 361 Apart from the unreported decision of Roper J in Collier v Creighton, the next significant New Zealand case was Cook v Evatt (No 2) [1992] 1 NZLR 676. Fisher J awarded $5,000 exemplary damages in addition to an account of profits against a financial adviser who had sold units to her without disclosing his interest in the transaction. He assumed that the equitable jurisdiction to award exemplary damages existed, but did not explain why. All he said was (at 705-706): "Exemplary damages may be awarded whether the cause of action is founded in law or in equity. In particular, they may be awarded for breach of fiduciary duty: Collier v Creighton (Christchurch, CP 13/89, 7 May 1991, Roper J) or its close neighbour, breach of confidence: Aquaculture Corporation v New Zealand Green Mussel Co Ltd at p 301. Unlike compensatory damages, exemplary damages may be cumulative upon the fiduciary's profits. Three elements must be satisfied before exemplary damages will be awarded. First, the defendant's conduct must have been so outrageous that punishment is called for as an end in itself. There must have been 'conscious wrongdoing in contumelious disregard of another's rights': Whitfield v De Lauret & Co Ltd (1920) 29 CLR 71, 77 per Knox CJ, cited with approval by Somers J in Taylor v Beere [1982] 1 NZLR 81 at p 93. Secondly, such other remedies as the defendant will have to bear in any event must fall short of an adequate punishment: Auckland City Council v Blundell [1986] 1 NZLR 732, 738; Aquaculture Corporation at p 299. Thirdly exemplary damages should be awarded only in 'serious and exceptional' cases: Donselaar v Donselaar [1982] 1 NZLR 97. On the other hand, where the successful cause of action is breach of fiduciary duty the additional step of demonstrating punishable conduct may be a relatively short one compared with most other classes of action. A beneficiary who places his or her trust in a fiduciary is peculiarly vulnerable. To take advantage of that trust will from its very nature be easy to do and difficult to detect. When a case is discovered deterrence may be warranted. Thus in Collier v Creighton at p 28 Roper J said 'A breach by a solicitor of his fiduciary obligations is a serious matter and the award I propose to make has a punitive element'. Speaking of fiduciary duties, although in a different context, Cooke P said in Day v Mead [[1987] 2 NZLR 443] at p 452: 'Of course, before reducing an award on the ground that the claimant has been partly the author of his or her own loss, the Court will have to give much weight to the well-established principle that, largely for exemplary purposes, high standards are expected of fiduciaries'." 362 The reference to Day v Mead raises two difficulties. The first, discussed at [175]-[191], is that it does not follow from the fact that "high standards are expected of fiduciaries" for "exemplary purposes" that the standards are penal or punitive. A standard can be high and it can be strict without the consequence being that the remedy for breach of it moves beyond compensation for loss and disgorgement of profit to punishment. (A similar fallacy appears to underlie what Roper J is quoted as having said in Collier v Creighton.) The second difficulty is that anything said in Day v Mead is very substantially discredited by the fact that in Pilmer v Duke Group Ltd (In Liq) (2001) 180 ALR 249 at [86] and [173] there are strong High Court dicta negating the possibility of equitable compensation awards being reduced for contributory negligence. 363 There is a dictum by Cooke P in Watson v Dolmark Industries Ltd [1992] 3 NZLR 311 at 316 supporting the availability of exemplary damages for breach of fiduciary duty, but he did not in fact award them and he did not explain why there was a jurisdiction to award them. 364 There are dicta by Tipping J approving Fisher J's approach in McLaren Transport Ltd v Somerville [1996] 3 NZLR 424 at 430, but Tipping J did not further explain why exemplary damages could be awarded in equity.

Canada 365 In Canada, there are authorities supporting the traditional approach. Thus in Fern Brand Waxes Ltd v Pearl (1972) 29 DLR (3d) 662 at 670, McGillivray JA (with whom Brook JA agreed) said that there was no precedent supporting the award of punitive damages for breach of fiduciary duty, and they allowed an appeal against the trial judge's award of punitive damages on that ground. In Herring v Worobel (1988) 67 OR (2d) 151 at 155 Yates J said: "there is no indication whatsoever that any breach of fiduciary duty will give rise to a claim for punitive damages." 366 However, a change which had begun in earlier cases was highlighted and developed in Norberg v Wynrib [1992] 2 SCR 226. A physician repeatedly prescribed a drug to a patient who was addicted to it. In return the physician received sexual favours. The plaintiff sued him for battery in relation to the sexual favours, negligence in relation to the prescribing of drugs to a known addict, and breach of fiduciary duty. She sought both general and punitive damages. At the trial the action failed. It was held that there was no battery because the plaintiff had consented. There was a duty not to prescribe drugs to a known addict, but that caused no physical injury. There was a breach of fiduciary duty, but it was not actionable because any injury resulted from the plaintiff's voluntary participation in illegal and immoral acts. The British Columbia Court of Appeal agreed in relation to battery. Though they found that the defendant had breached a duty of care, and that the feeding of the plaintiff's addiction caused her physical harm, the plaintiff failed for various reasons, including the defence of voluntary participation in illegal and immoral acts. The majority disagreed with the trial judge on fiduciary duty: they denied that it existed. On that point the dissenting judge agreed. 367 In the Supreme Court of Canada a majority (La Forest, Gonthier and Cory JJ) found that the defendant was liable in battery; they said nothing about negligence or fiduciary duty; and they awarded compensatory damages of $20,000 and punitive damages of $10,000. Sopinka J agreed as to the quantum of compensatory damages, declined to award punitive damages, and based his conclusions not on battery or fiduciary duty but on a breach of the common law duty which the physician owed the patient. McLachlin J (L'Heureux-Dubé J concurring) favoured the following damages awards: $20,000 for prolongation of addiction; $25,000 for sexual exploitation; and $25,000 for punitive damages. She based these awards not on tort but on breach of fiduciary duty. At the end of her lengthy judgment, she justified the award of punitive damages thus (at 298-300): "Quite apart from analogies with tort, punitive (or exemplary) damages are available with respect to breaches of fiduciary duty, and in particular for breaches of the sort exemplified by this case. In W (B)) v Mellor [1989] BCJ No 1393 (SC) (QL Systems) to which La Forest J refers in this judgment (at pp 252-53) a doctor was held to be in breach of his fiduciary duty when he engaged in an exploitive sexual relationship with his patient. McKenzie J awarded the plaintiff $15,000 in punitive damages. If further authority is needed for the proposition reference can be made to the decision of Callaghan ACJHC in Szarfer v Chodos (1986) 54 OR (2d) 663 (Ont HC), a case in which a lawyer was found to be in breach of his fiduciary duty to his client when he embarked upon a sexual relationship with his client's wife. Although Callaghan ACJHC did not find the defendant's conduct sufficiently high handed and arrogant to warrant awarding punitive damages in the circumstances of that case, it is clear from his analysis of the issue (found at pp 680-81) that he saw no bar to an award of punitive damages for a breach of fiduciary duty. I find Ellis' statement, found in his text Fiduciary Duties in Canada , at p 20-24, as to the circumstances which will constitute the conditions precedent for awarding punitive damages for a breach of fiduciary duty both helpful and applicable to the facts of this case: Where the actions of the fiduciary are purposefully repugnant to the beneficiary's best interests, punitive damages are a logical award to be made by the Court. This award will be particularly applicable where the impugned activity is motivated by the fiduciary's self-interest. I do not think it can be seriously questioned that Dr Wynrib's activities were both purposefully repugnant to Ms Norberg's best interests, and motivated entirely by his own self-interest. Punitive damages are awarded, not for the purpose of compensating the victim for her loss, but with a view to punishing the wrongdoer and deterring both him and others from engaging in similar conduct in the future. Dr Wynrib's conduct is sufficiently reprehensible and offensive to common standards of decency to render him liable to such a punitive award. While, given his age, it is unlikely that such damages will have much utility in terms of specific deterrent effect, concerns for general deterrence militate in favour of their being granted. The report of the Task Force of the Ontario College of Physicians and Surgeons makes it clear that the sexual exploitation of patients by physicians is more widespread than it is comfortable to contemplate. Its damaging effects extend not only to those persons who are directly harmed, but also to the image of the profession as a whole and the community's trust in physicians to act in our best interests. In this context punitive damages may serve to reinforce the high standard of conduct which the fiduciary relationship between physicians and patients demands be honoured. This is completely in keeping with the law's role in protecting beneficiaries and promoting fiduciary relationships through the strict regulation of the conduct of fiduciaries: on this point see Frankel, ["Fiduciary Law" 71 Calif L Rev 795 (1983)] at p 816. An award of punitive damages in the present case would signal the community's disapprobation of the sexual exploitation of vulnerable patients, and for that reason ought to be made."

She then turned to the question of quantum. 368 It follows that only two of the six judges favoured the grant of punitive damages for breach of fiduciary duty. Those two judges were in dissent not only on the issue of quantum, but also on the issue of whether there was a fiduciary duty. 369 It is to be noted that McLachlin J gave only one reason for recognising a jurisdiction to grant equitable damages for breach of fiduciary duty, namely that it was "logical" because the reprehensible conduct of Dr Wynrib and others like him called for punishment and deterrence and the award signalled community disapprobation of the conduct. In a nutshell, the "reasoning" takes the form: "It would be good if this remedy existed, therefore it exists." That is an argument of policy, naked and unashamed, for changing the law. Perhaps it is none the worse for that, but it is not an argument that the remedy exists, secreted within the interstices of existing legal principle. 370 Recognition of the doctor-patient relationship as a source of general fiduciary duty in any but exceptional circumstances has been opposed by the High Court, and though the justices differed to some degree in their approaches, the terms of all judgments make it unlikely that the minority view in Norberg v Wynrib would be followed here: Breen v Williams (1996) 186 CLR 71. That case refused to follow McInerney v MacDonald [1992] 2 SCR 138, in which the Supreme Court of Canada held that there was a fiduciary duty on a doctor to permit access to the patient's medical records. And Gaudron and McHugh JJ at 110 referred favourably to an observation of Sopinka J which sharply contrasts with McLachlin J's approach: "Fiduciary duties should not be superimposed on … common law duties simply to improve the nature or extent of the remedy" (at 312). 371 What light do the two cases referred to by McLachlin J throw on the question whether, and if so why, equity has jurisdiction to award exemplary damages? 372 The first was W (B) v Mellor, a decision of McKenzie J in the Supreme Court of British Columbia. He found that in inducing a patient to conduct an affair with him, the defendant doctor "was in breach of his fiduciary duty of care to his patient and is liable in damages. He also breached his contract of professional services". He awarded $10,000 damages for emotional stress. All he said about punitive damages was: "It is an appropriate case for punitive or exemplary damages which I assess at $15,000". 373 The second case, Szarfer v Chodos (1986) 27 DLR (4th) 388, was a case in which a lawyer had an affair with a client's wife. Callaghan ACJHC found that the lawyer was in a fiduciary relationship with the client, that the affair vitiated the trust which was the essential element of that relationship, and that the lawyer had failed to discharge an onus of proving that he had behaved reasonably: this was sufficient to make him liable to pay compensatory damages. In addition, the lawyer was held liable for having used confidential information learned during the fiduciary relationship against the client's interests, namely that the client and his wife were having matrimonial difficulties. On the subject of exemplary damages, the court said at 405: "The defendant stood in a fiduciary relationship to the plaintiff. He failed to discharge his duty to the plaintiff in that he used the confidential information obtained as to the marital relationship between the plaintiff and his wife for the benefit of himself. His conduct was dishonourable. Integrity is the fundamental quality of a lawyer. Trustworthiness is the essential element in the true lawyer-client relationship. While the affair was in one sense a private activity, it destroyed the essential trust between the plaintiff and the defendant which is the hallmark of the solicitor-client relationship. However, I am not satisfied in these circumstances that this is an appropriate case for exemplary damages. The defendant's conduct while deserving of condemnation cannot be characterized as sufficiently high-handed and arrogant in relation to the plaintiff's rights to warrant imposition of such damages." 374 Two matters must be noted. First, the reasoning on breach of duty, which sidesteps the statutory abolition of common law actions in the nature of enticement, uneasily moves between various possible causes of action, and is captured in the statement that the defendant's conduct "constituted professional negligence and demonstrated an unreasonable lack of skill and fidelity in his professional and fiduciary duties as a lawyer" (at 403). It must be questioned whether the conduct would be held actionable in New South Wales. Secondly, the court's reasoning on exemplary damages assumes but does not explain how equity has a jurisdiction to award exemplary damages. 375 The plaintiff submitted to this Court that the approach of McLachlin J "had been foreshadowed … in provincial Courts of Appeal in Canada". The only case cited was Guertin v Royal Bank of Canada (1983) 43 OR (2d) 363. That case concerned a breach of fiduciary duty owed by a bank to its customers. Cromarty J referred to cases discussing exemplary damages (one opposing the possibility of their grant in equity, another asserting the possibility but refusing them, the third apparently silent on the question) and said that punitive damages "do not appear appropriate in the circumstances here". The Ontario Court of Appeal dismissed an appeal without discussing punitive damages: Guertin v Royal Bank of Canada (1984) 47 OR (2d) 799. This is not a meaningful foreshadowing of Norberg v Wynrib. There are also cases where exemplary damages were awarded without consideration of whether there was power to do so: Schauenburg Industries Ltd v Borowski (1979) 101 DLR (3d) 701 at 712; Flame Bar-B-Q Ltd v Hoar (1979) 106 DLR (3d) 438 at 449; G E Cox Ltd v Adams (1979) 26 NBR (2d) 4 at 52; 57134 Manitoba Ltd v Palmer, Smith Paper Ltd (1985) 65 BCLR 355 at 376. 376 What has happened since Norberg v Wynrib? 377 KM v HM [1992] 3 SCR 6 was a case in which proceedings were brought by a daughter against her father, who had committed incest with her, in battery and for breach of fiduciary duty. The jury awarded $10,000 general damages and $40,000 punitive damages, evidently for battery. The trial judge dismissed the proceedings as statute barred. The Ontario Court of Appeal dismissed an appeal, but the Supreme Court of Canada allowed an appeal on that issue. La Forest J said (at 80, 81-2): "The jury in this case found that the respondent had sexually assaulted the appellant, and assessed general damages of $10,000 and punitive damages of $40,000. Though the punitive damages are within the general range of such awards, the general damages seem rather low. The jury, however, had the whole matter before it, and its award should not lightly be disturbed. At all events, the quantum was not disputed on this appeal. However, as I have found that a breach of fiduciary duty has also occurred, it raises the issue whether some additional remedy in equity is necessary to compensate the appellant fully and properly. … The question in this appeal is whether there are different policy objectives animating the breach of a parent's fiduciary duty as compared with incestuous sexual assault. In my view, the underlying objectives are the same. Both seek to compensate the victim for her injuries and to punish the wrongdoer. The jury award of general damages was made with full knowledge of the injuries suffered by the appellant and her rehabilitative needs. The same concerns would apply in assessing equitable compensation, and as such I would decline to provide any additional compensation for the breach of fiduciary obligation. The punitive damages award should also not be varied in equity. Of course, equitable compensation to punish the gravity of a defendant's conduct is available on the same basis as the common law remedy of punitive damages: see Aquaculture Corp v New Zealand Green Mussel Co [1990] 3 NZLR 299 at p 301. In the result, I am of the view that the jury award of $50,000 is an appropriate remedy for both the equitable and the common law claim."

L'Heureux-Dubé J, Sopinka, Gonthier, Cory, and Iacobucci JJ concurred. McLachlin J said at 85-86: "I would not wish to be taken as sharing the view that the award which the jury made was adequate. The jury was asked only to assess damages for the tort of battery and assault. It did so, and the appellant has not appealed from that award, asking only that the jury's award be reinstated. In these circumstances the question of whether the award was appropriate or not does not arise on this appeal. I would dispose of the appeal as proposed by La Forest J, but on the ground that the question of the quantum of the award was not before us. Having said that, I add that were I to enter on the matter of the quantum of damages, I would find myself unable to agree that the measure of damages for battery and assault would necessarily be the same as compensation for breach of fiduciary duty. As I see it, the question is whether the wrong encompassed by the cause of action is the same. The wrong encompassed by the torts of battery and assault may be different from the wrong encompassed by the action for a breach of fiduciary duty. The latter encompasses damage to the trust relationship, for example, which the former does not. The action for breach of fiduciary duty may also be more concerned with imposing a measure which will deter future breaches; as I noted in Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 at pp 587-88, trustees have always been held to highest account in a manner stricter than that applicable to tortfeasors. In short, while agreeing with my colleague that where the same policy objectives underlie two different causes of action similar measures of compensation may be appropriate (pp 80-81), I would not conclude that the policy objectives or the wrong involved in breach of fiduciary duty of this nature are necessarily the same as those which underlie the torts of battery and assault." 378 It follows from McLachlin J's observations that what La Forest J said about exemplary damages was very much a dictum. Nothing in the case explains why exemplary damages are available in equity. 379 In Ontex Resources Ltd v Metalore Resources Ltd (1993) 103 DLR (4th) 158 at 195 the Ontario Court of Appeal assumed that exemplary damages could be awarded for breach of fiduciary duty, but set aside an award of exemplary damages because there was no fiduciary relationship. 380 The plaintiff submitted that Norberg v Wynrib was applied in McDonald Estate v Martin (1994) 95 Man R (2d) 123. The trial judge awarded punitive damages of $500,000 against a fiduciary. The Manitoba Court of Appeal said at [131]: "The plaintiff's claim for strict disgorgement, rejected by the trial judge and not an issue on the appeal, may well have raised a nice question: Is the extraordinary common law remedy of an award of punitive damages compatible with the extraordinary equitable relief of disgorgement? We need not consider that question. There is ample authority for the proposition that punitive damages are available with respect to breaches of fiduciary duty …."

It cited Norberg v Wynrib (and quoted the passage quoted by McLachlin J from Ellis, Fiduciary Duties in Canada ), KM v HM and Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534. The purpose of the last citation is obscure, since the case had nothing to say about exemplary damages in equity. The Manitoba Court of Appeal then said that while the trial judge had not erred in deciding to grant punitive damages, the quantum was too high, and they substituted the figure of $250,000. The court gave no independent explanation of how or why there was a jurisdiction in equity to award exemplary damages: perhaps, in view of what had been said in the Supreme Court of Canada in Norberg v Wynrib and KM v HM , it had no need or occasion to, but was rather, in a practical sense, compelled to apply what the justices had said independently of any underlying merit in what they said. 381 The plaintiff submitted that Norberg v Wynrib was applied in Gerula v Flores (1995) 126 DLR (4th) 506. In that case a surgeon operated on the wrong disc in the plaintiff's back. The plaintiff sued in negligence, in battery and for breach of contract. The trial judge awarded substantial compensatory damages but no punitive damages. One of the grounds of appeal complained of that failure. The Ontario Court of Appeal referred to the dicta of McLachlin J in Norberg v Wynrib, and of La Forest J in KM v HM, although misdescribing them as what the judges "held". The Ontario Court of Appeal proceeded to award $40,000 exemplary damages. Though they used language appropriate to fiduciary duty (at 527), the fact is that fiduciary duty was never pleaded, proved or found, and the case does no more than repeat earlier dicta. 382 Ellis, Fiduciary Duties in Canada, paragraph 20.4(2), records no other significant Canadian authority.

United States law 383 Convenient collections of cases permitting or refusing the award of exemplary damages in equity up to 1956 may be found in "Power of Equity Court to Award Exemplary or Punitive Damages" 48 ALR (2d) 947. Later cases may be found in White v Ruditys 343 NW 2d 421 at 425 n 1 (1983); Tideway Oil Programs Inc v Serio 431 So 2d 454 (1983); Zitter "Punitive Damages: Power of Equity Court to Award" 58 ALR (4th) 844; Mertens v Hewitt Associates 508 US 248 at 257-258 and 270-273 (1993); Dobbs: Law of Remedies (1st ed, 1973) pp 211-212; (2nd ed, 1993) vol I p 460; Leavell, Love, Nelson and Kovacic-Fleischer: Cases and Materials on Equitable Remedies, Restitution and Damages (2000) p 1218. 384 The traditional view was that "a court of equity is not an instrument for the punishment of an individual or for the exacting of vengeance": Orkin Exterminating Co of South Florida Inc v Truly Nolan Inc 117 So 2d 419 at 422 (1960). That view apparently commended itself to all nine justices of the Supreme Court in Tull v United States 481 US 412 at 422 (1987): "Remedies intended to punish culpable individuals, as opposed to those intended simply to extract compensation or restore the status quo, were issued by courts of law, not courts of equity." 385 However, neither the traditional reluctance of United States courts to award exemplary damages for equitable wrongs, nor the more recent trend in favour of this course, are intrinsically significant for present purposes. What may be significant is the principle on which the various cases rest. 386 One argument against the grant of exemplary damages is that "the plaintiff by applying to [a court of equity] waives all claim for vindictive damages": Bird v Wilmington & Manchester Railroad Co 8 Rich Eq 46; 64 American Decisions 739 (1865). The point was put thus in Karns v Allen 115 NW 357 at 361 (1908): "[The plaintiffs] elected to sue in equity, but having done so they brought themselves within the rules of equitable actions and waived the right to recover exemplary damages."

This begs the question of what the "rules of equitable actions" are: IHP Corp v 210 Central Park South Corp 228 NYS (2d) 883 at 888 (1962). It assumes an answer to the problem it sets out to solve. 387 The conventional approach by courts opposing the grant of exemplary damages in equity is to reason as the Delaware Court of Chancery did in Beals v Washington International 386 A 2d 1156 (1978). It held that in 1776, when the Delaware Court of Chancery was established, the Chancery courts in England lacked a jurisdiction to award punitive damages, and hence the Delaware Court of Chancery lacked one also. The position had not changed and could not change without express statutory provisions. At 1158-1160 Hartnett V-C said: "Plaintiffs in fact candidly concede that the rule of law that Chancery Court does not have jurisdiction to award punitive damages is the majority rule in this country …. For this Court to ignore … the rule announced by the clear majority of cases decided in this country … would be for this Court to take it upon itself to assume new jurisdiction. While this Court may sometimes find it necessary to broaden its jurisdiction in order to fulfill its historical role of granting relief where no adequate relief is available at law, especially if constitutional rights are involved or an injustice would otherwise result, it should not on its own volition assume new jurisdiction to impose penalties it could not formerly impose. The purpose of awarding punitive or exemplary damages is to impose a penalty or deterrent to prevent conduct which is deemed to be bad or harmful …. This is clearly a policy decision …. There are three separate but equal branches of government. One branch of government should not encroach on the other …. It is the Legislative Branch which should make the policy decision that a certain course of conduct, not previously cause for the imposition of punitive damages, should now be penalised beyond the awarding of compensatory damages. This Court, in the absence of such Legislative finding an action should not take it upon itself to change a century-old limitation on its jurisdiction and undertake to assess damages in excess of what is necessary to make an injured party whole."

The merits of that approach are considered below. 388 One argument advanced against awarding exemplary damages in equity was put thus in a note in (1963) 63 Columbia Law Rev 175 at 177: "an award of punitive damages lies within the exclusive province of a jury and usurpation of that function by the chancer would deprive defendant of his state-guaranteed constitutional right to a jury trial before punishment".

This was apparently adopted by the Supreme Court of Oregon in holding: "the allowance of punitive damages by a court sitting in equity, without a jury, is inconsistent with a court in equity doing justice between the litigants": Pedah Co v Hunt 509 P 2d 1197 at 1199 (1973). See also Orkin Exterminating Co of South Florida Inc v Truly Nolan Inc 117 So 2d 419 at 422 (1960). This argument, whatever its soundness in United States jurisdictions, has no relevance in New South Wales. There is no relevant constitutional right to jury trial before punishment. 389 One argument employed by United States courts which do not recognise a jurisdiction to award exemplary damages in equity rests on an analogy with equity's repugnance to penalties and forfeitures. Thus in Beals v Washington International Inc 386 A 2d 1156 at 1158 (1978) Hartnett V-C sitting in the Court of Chancery of Delaware, said: "The question of whether this Court has jurisdiction to assess punitive damages has apparently never been considered by this Court in any reported decision."

After referring to some United States cases, he continued at 1159: "The rationale of these cases denying Chancery's power to award punitive damages is clear. Traditionally and historically the Court of Chancery as the Equity Court is a court of conscience and will permit only what is just and right with no element of vengeance and therefore will not enforce penalties or forfeitures. … I therefore hold that Chancery historically and traditionally did not enforce forfeitures or penalties and that this was the rule of law in the high court of chancery in England in 1776 and is therefore the rule in this Court today."

This argument was referred to above. 390 An argument said to favour exemplary damages is that courts do not "still sit exclusively either as equity or law courts". They can "act in both sides at the same time in the same case. By statute, … legal and equitable causes of action may be joined in the same complaint": IHP Corp v 210 Central Park South Corp 228 NYS 2d 883 at 886 (1962). In discussing an appeal, the New York Court of Appeals said (189 NE 2d 812 at 813): "No amount of authority in other States should persuade us that Judge Cardozo was wrong when he said in Susquehanna SS Co v Andersen & Co (239 NY 285, 294, 146 NE 381, 384): 'The whole body of principles, whether of law or of equity, bearing on the case, becomes the reservoir to be drawn upon by the court in enlightening its judgment'. Maitland expressed the same view when he predicted that 'The day will come when lawyers will cease to inquiry whether a given rule be a rule of equity or a rule of common law; suffice it that it is a well-established rule administered by the High Court of Justice.' (Maitland, Equity [1909], p 20). Needless to say, we have accepted Maitland's and Judge Cardozo's understanding of the consequences of the merger." 391 But to reason that while in the past, while the common law was administered in common law courts and equity in its own courts, common law courts awarded exemplary damages and equity courts did not, the fact that the two systems are now administered in the one court entails the conclusion that the common law remedy of exemplary damages is available for equitable wrongs is to fall into a crude fusion fallacy. The conclusion arrived at could only be justified if there was some particular provision in the legislation effecting the administration of the two systems in a single court compelling it. There is none in the New South Wales legislation. Maitland did not suggest anything to the contrary. Precisely what Cardozo J's colourful metaphor meant is unclear; if it meant that any common law remedy can be granted for an equitable wrong in consequence of the introduction of a judicature system, it is contrary to Australian law. 392 There are some American courts, moreover, which, while they favour the grant of exemplary damages in equity, do not base it on fusion. Thus in White v Ruditys 343 NW 2d 421 at 426 (1983) the Court of Appeals of Wisconsin said: "We do not … conclude that the power to award punitive damages is the result of the merger of courts of law and courts of equity." 393 Another argument said to favour the grant of exemplary damages for equitable wrongs was put thus in IHP Corp v 210 Central Park South Corp 228 NYS 2d 883 at 887 (1962): "… equity will mold its decrees to suit the needs of the particular case. Thus, while tradition and precedent might forbid the Chancellor, as such, from awarding punitive damages, an equally strong tradition would bar any unqualified rule that customary forms of equitable relief will invariably be adequate and will always preclude accepted forms of legal relief. Such inflexibility has never been characteristic of equity jurisprudence."

Similarly, in White v Ruditys at 426 the Court of Appeals of Wisconsin said: "We determine that the power to award punitive damages is derived from the flexibility a court of equity has in fashioning its relief". They then quoted J Pomeroy, A Treatise in Equity Jurisprudence (5th ed, 1941) para 109: "Equitable remedies … are distinguished by their flexibility, their unlimited variety, their adaptability to circumstances, and the natural rules which govern their use. There is in fact no limit to their variety and application; the court of equity has the power of devising its remedy and shaping it so as to fit the changing circumstances of every case and the complex relations of all the parties."

This argument is similar to that which appeared to underlie Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299, and will be considered shortly.

Analogy with employer's duties 394 The plaintiff contended that exemplary damages may be awarded in cases where an employer who was sued in negligence had displayed a conscious and contumelious disregard for an employee's health, and referred to Trend Management Ltd v Borg (1996) 40 NSWLR 500 at 504 and Gray v Motor Accident Commission (1998) 196 CLR 1 at [21]-[24]. The plaintiff contended that the "award of exemplary damages for breach of the employee's duty inherent in the employer/employee relationship is, as a matter of principle, and ought to be, equally available to the employer in equity for breach of fiduciary duty as to the employee in negligence". 395 This submission lacks logic. The duty that rests on an employer does not necessarily indicate anything about the duty that rests on an employee. A common law duty of care that rests on an employer does not necessarily indicate anything about the fiduciary duty that rests on an employee. And the remedies available for breach of the employer's duties need not necessarily be the same as the remedies for breach of the employee's duties.

Principle and policy 396 It has been seen that the plaintiff's arguments wavered between suggesting that the law already accommodated the possibility of exemplary damages in equity, and suggesting that while the law needed to be changed, the change called for involved only a slight extension. There are several matters which point against the possibility that the law presently accommodates the possibility of exemplary damages, and which also point against the desirability of this Court extending it.

Anomalies 397 The trial judge was concerned with the importance of avoiding anomalies. He saw it as anomalous that where identical conduct can constitute deceit and a breach of fiduciary duty, exemplary damages could be ordered in relation to the former cause of action but not the latter. It has already been pointed out that to grant exemplary damages on the present facts would create a new anomaly, since on the present facts there was a breach of contract, yet the High Court in Gray v Motor Accident Commission (1998) 196 CLR 1 appear to have denied that exemplary damages can be awarded for a breach of contract.

The trial judge's deceit example 398 The example given by the trial judge of a solicitor who deceives the client and steals the client's life savings, and who thereby stimulates a sense of outrage which is equally great whether the client sues in deceit or for breach of fiduciary duty, raises the following issues. A client who sues in deceit certainly has an opportunity of obtaining exemplary damages, but also:

(a) carries a burden of proof which is pitched, in a practical sense, higher than if the action were only for breach of fiduciary duty;

(b) may face more onerous tests for breach, causation and remoteness than if the action were only for breach of fiduciary duty;

(c) stimulates more bitter opposition from the defendant, since defeat will carry for the solicitor a real risk of being struck off the roll, and since solicitors may be more willing to face whatever odium attaches to settling a claim for breach of fiduciary duty than they are to face the certain odium attaching to settling, and thereby making some admissions about the possible merits of, a deceit claim;

(d) ensures, if the action succeeds, that the solicitor will lose whatever insurance cover exists.

It is not irrational to maintain the existence of different remedies for different causes of action having different threshold requirements and different purposes. The resulting differences are not necessarily "anomalous".

Interaction with other fields of law 399 That exemplary damages should be recoverable in tort is not surprising, for as Windeyer J pointed out in Uren v John Fairfax & Sons Pty Ltd (1966) 117 CLR 118 at 149 in a passage referred to with approval by the High Court in Gray v Motor Accident Commission (1998) 196 CLR 1 at [16], "the roots of tort and crime" are "greatly intermingled". Common law crimes are usually crimes involving mens rea, and in a practical sense issues of motivation, intention to injure, and malign purposes such as dishonesty commonly arise. These mental states overlap with those relevant to the grant of exemplary damages. But equitable duties do not, in standard forms of their operation, turn on those mental states. There is no strong reason to import exemplary damages from one field into so different a field. 400 In Gray's case at [16] the High Court went on to give examples of intermingling by which statutes conferring civil remedies also contain civil penalty provisions, statutes permit orders of compensation to the victims of crime, and statutes permit orders of restitution of property during a criminal trial in favour of the victims of crime. The latter two examples exemplify a process of adding civil remedies to criminal sanctions, not criminal sanctions to civil remedies. The first example is not an example of a criminal sanction at all: the distinction between civil penalties and criminal sanctions is a deliberate and important one from a number of points of view. 401 Equitable duties, unlike certain duties enforced by the law of tort, are not historically intermingled with crime. And contractual duties, which can give rise to as well as qualify fiduciary duties, and which often have analogies with fiduciary duties even if particular fiduciary duties do not arise out of and are not qualified by any particular contract, are not historically intermingled with crime. There are areas where fiduciary duties have been overlaid with statutory remedies, such as the duties of company directors, but where Parliament has created specific distinctions between those breaches of duty which do attract criminal sanctions and those breaches of duty which do not, it is dangerous for courts to cut across them by creating criminal sanctions of their own. 402 In W v W [1999] 2 NZLR 1 the Privy Council (Lords Browne-Wilkinson, Steyn, Hoffmann, Hobhouse of Woodborough and Millett) had to consider issues relating to the interaction of criminal proceedings with the award of exemplary damages in civil cases. On behalf of the Board, Lord Hoffmann advised as follows (at 3-4): "There are plainly important differences … between a criminal prosecution and an action for exemplary damages. The procedure is of course radically different and so is the standard of proof. A prosecution is generally speaking initiated and controlled by the state. A civil action is initiated and controlled by the victim. Thus the prosecution of an action for exemplary damages enables the victim publicly to vindicate his or her version of events and inflict punishment, even revenge, in ways which a criminal prosecution may not satisfy. Punishment takes the form of damages which go to the victim rather than imprisonment or a fine which can afford her only a more indirect satisfaction. Allowing the victim to pursue such a claim may have a therapeutic value which mitigates the effects of the offence. On the other hand, there can be no doubt that allowing an action for exemplary damages to follow or precede a criminal punishment carries the risk that a person may be punished twice for the same offence. The minority view acknowledges that this would be unfair and proposes that any criminal punishment should be taken into account by way of reduction in the damages awarded. But this remedy carries its own difficulties because prima facie it must be assumed that the criminal punishment was considered by the Court to be appropriate to the offence and the offender. To award exemplary damages at all would imply that the civil Court thought that the criminal punishment had been inadequate. There is an additional problem when a criminal prosecution follows a civil action. Logically, the criminal punishment should take into account the exemplary damages which have been awarded but there is an argument for regarding criminal proceedings in the name of the state as having primacy over a private action. In addition, there are arguments which go to the wider question of whether claims for exemplary damages should be awarded at all, such as the absence of the ordinary safeguards afforded to an accused person in criminal proceedings, on which Lord Devlin laid stress in Rookes v Barnard [[1964] AC 1129 at 1230]. In New Zealand, this consideration has not been treated as sufficient to justify a restriction in the scope of exemplary damages but that does not mean that it carries no weight. It remains something to be taken into account in the calculation of where the public interest lies in deciding the narrower question." 403 Lord Hoffmann then turned to aspects of the problem peculiar to New Zealand. He said the answer to the relevant questions "depends upon a perception of the balance of public advantage and disadvantage" (at 4). Perceptions of that kind are hardly relevant to ascertaining the scope of a rule of law, if it exists, and, if they are to be used as materials for decisions by courts at all, are best left to ultimate appellate courts.

The use of the words "penal", "punitive", "punishment" and "prophylactic" 404 The theory that the strict rules of equity, particularly those compelling disgorgement of profits, are deterrent and punitive in character rests in part on certain verbal usages by judge and jurist. Thus in Phipps v Boardman [1965] Ch 922 at 1030-1031 Pearson LJ said: "The rule of equity is rigid. The agent who has made a profit from his agency, without having obtained informed consent from his principal, has to account for the whole of the profit. In an ordinary case, where an agent has simply made a secret profit, the rule is so to speak, good for discipline: there is a penal element calculated to deter agents from behaving in that way."

The plaintiff cited cases using the language of punishment, of which the high watermark was Paul A Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440 at 444 and 459. There are various other cases using the language of punishment which the plaintiff did not cite. The much-cited article by Gareth Jones, "Unjust Enrichment and the Fiduciary's Duty of Loyalty" (1968) 84 LQR 472, says of fiduciary liability "these principles may be penal" (at 474); describes the liability as "penal" (at 478, 486 and 497); speaks of "a strictly penal rule" (at 490); advocates the need for "mitigating the liability of the honest and conscientious fiduciary … who is punished as an example to others" (at 497) and whose "largest punishment" should be a liability to account (at 497); and points to the "dishonest fiduciary who is punished as a warning to others" (at 501). Jones also says that the authorities "appear to suggest that a prophylactic rather than a restitutionary principle" underlies the law relating to fiduciaries (at 474). 405 These usages must not be misunderstood. 406 The substantive rules of equity in relation to fiduciaries - the standards which equity requires them to meet - are often high and strict. Honesty is rarely a defence; nor, statute apart, is reasonableness. The height and strictness of the standards protect the principals of fiduciaries by nullifying temptation. In that sense they deter fiduciaries from drifting into a position of conflict, or worse. 407 In like fashion, the existence of the remedy of equitable compensation for unlawfully caused loss and of the remedy of account of profits to capture unlawful gains - the "unlawfulness" in each case being measured by the high standards referred to - can have a deterrent effect, because it tends to make the unlawful conduct in question futile. This is particularly so in that the remedy which lies against a defaulting trustee of effecting restitution to the trust estate is not limited by common law principles of causation and remoteness of damage: Re Dawson (dec'd); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 84 WN (Pt 1) (NSW) 399 at 404-406. It is not clear what other equitable wrongs this wide form of equitable monetary relief applies to. It has been held not to apply beyond "traditional trusts" to "bare trusts" arising in "commercial situations": Target Holdings Ltd v Redferns (A Firm) [1996] AC 421 at 435-436. It has been said to apply to the director of a company who deals with its assets for an improper purpose: O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 277, 280 and 281. It may well apply to breaches by a fiduciary who is in a position of conflict between duty and duty or duty and self-interest (as distinct from mere breaches of duties of skill and care): Bristol and West Building Society v Mothew [1998] Ch 1 at 16-20. It may apply even more widely. The remedies of equitable compensation and account of profits certainly have a deterrent effect. In the very loose sense of the words as employed by Jones, those remedies may be seen as "penal" or "punitive". But they are not penal or punitive in the sense of exacting any money sanction greater than that which is needed either to give full compensation for loss or full disgorgement of gain. 408 Similarly, attempts to justify exemplary damages on the ground that fiduciary duties rest on "prophylactic" rather than "restitutionary" principles misunderstand the meaning of those words. "Prophylaxis" is the "preventative treatment of disease". Employed as a noun, a "prophylactic" is a "medium or measure used to prevent, or as a precaution against, disease", according to the Oxford English Dictionary (2nd ed). That dictionary gives various examples, including: "Vaccination, which has now stood the test of practice for a century, remains today one of the greatest medical prophylactics the world has ever known."

Employed as an adjective, "prophylactic" refers to that which "defends from or tends to prevent disease"; it is "preservative" or "precautionary". The Macquarie Dictionary gives similar meanings. 409 The meanings of "restitution" in the Oxford English Dictionary include: "1.a. The action of restoring or giving back something to its proper owner, or of making reparation to one for loss or injury previously inflicted … 2. … A restoration of something taken from another. 3. Reparation of … hurt or loss …. 4.a. The action of restoring a person or persons to a previous status or position; the fact of being thus restored or reinstated; a document authorising such restoration. …" 410 In the Macquarie Dictionary the meanings include: "1. reparation made by giving an equivalent or compensation for loss, damage or injury caused; indemnification. 2. the restoration of property or rights previously taken away, conveyed, or surrendered. 3. restoration to the former or original state or position." 411 In Green and Clara Pty Ltd v Bestobell Industries Ltd [1982] WAR 1 at 20, a case concerning the liability of a manager to his employer for profits made by competing with the employer, Kennedy J said: "It is not necessary, in a case such as the present, for the respondent to show that it has suffered damage: see Parker v McKenna (1874) 10 Ch App 96 at 124; Furs Ltd v Tomkies (1936) 54 CLR 583 at 592; Reading v Attorney-General [1951] AC 507; [1951] 1 All ER 617. It is also immaterial that the respondent could not have made a profit, as in this case, if it be accepted, for this purpose, that the contact, in the absence of the tender of the second appellant, must have gone to the second lowest tenderer; see Keech v Sandford (1726) Sel Cas temp King 61; Regal (Hastings) Ltd v Gulliver and Industrial Development Consultants Ltd v Cooley, supra . The reason for this is simply that the rule is, as it has sometimes been expressed, a prophylactic rule and not a restitutionary rule." 412 By the words "prophylactic rule" Kennedy J meant only what James LJ meant in Parker v McKenna (1874) LR 10 Ch App 96 at 124-125 in speaking of an agent making a profit from the agency: "it appears to me very important, that we should concur in laying down again and again the general principle that in this Court no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge and consent of his principal; that that rule is an inflexible rule, and must be applied inexorably by this Court, which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that."

And Kennedy J meant what Rich, Dixon and Evatt JJ meant in Furs Ltd v Tomkies (1936) 54 CLR 583 at 592-593 in speaking of an errant company director: "If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation. With reference to a transaction arising out of another relation of confidence, Lord Eldon said: 'The general interests of justice' require 'it to be destroyed in every instance; as no Court is equal to the examination and ascertainment of the truth in much the greater number of cases' ( Ex parte James [(1803) 8 Ves 337 at 345; 32 ER 385 at 388])." 413 The rules that a plaintiff need not show damage and need not show that the fiduciary has taken a profit which the plaintiff could have gained are prophylactic in the sense that they tend to prevent the disease of temptation in the fiduciary - they preserve or protect the fiduciary from that disease. The temptation might be assisted if the fiduciary had in contemplation the possibility of escaping liability by arguing that the principal was caused no loss, or that the profit made was never available to the principal. 414 The prevention of or protection from the relevant disease is assisted by the strictness of the standard imposed and the absence of defences justifying departures from it. The rules relating to an account of profits are not restitutionary in the sense that they do not rest on giving back something which the plaintiff once had, or restoring the plaintiff to a state of affairs which the plaintiff once occupied but has lost because of the fiduciary's behaviour, or requiring some damage to the pre-existing position of the principal, or compensating the principal for some loss suffered. They strip the fiduciary of gains whether or not the plaintiff could ever had made the gains in question. No doubt the strictness of the rules, in tending to prevent fiduciary temptation arising and thus tending to protect the principal from fiduciary misconduct, tends to deter fiduciaries from misconduct themselves. But it does not follow that the rules are punitive. At a later stage of the case in which Kennedy J uttered his aphorism, Green and Clara Pty Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32 at 38, Brinsden J said: "as Kennedy J pointed out, … this branch of the law is prophylactic, not restitutionary. There is a penal element in it calculated to deter others from behaving in the same way." But Brinsden J did not mean that the law was penal or punitive in a sense consistent with the award of exemplary damages. 415 So far as the plaintiff relied on the language used by Moffitt P in Paul A Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440 at 444, Hutley JA did not agree with that language or use similar language. The "authorities binding on this Court" which are said to have "stated" that the law has a penal function are not identified. The three cases mentioned by Moffitt P before the passage just quoted are Regal (Hastings) Ltd v Gulliver, Phipps v Boardman and Scott v Scott [1964] VR 300; (1963) 109 CLR 649. As counsel for the plaintiff fairly conceded, none of these cases contain language to the effect of that employed by Moffitt P. He submitted, however, that Moffitt P was correct to use that language in relation to the underlying principle. That is not so. What is more, reliance on this case contradicts the plaintiff's arguments based on the language used in 19th century cases on interest and allowances in relation to the plaintiff's argument that equity punished corrupt fiduciaries: the defendants of whom Moffitt P was speaking were not corrupt, and the court held that for that reason they should be permitted liberal allowances. As to Mahoney J's words at 459, the mere fact that the civil law provides a sanction against misconduct does not mean it is a criminal sanction. 416 Similarly, descriptions before Attorney-General v Alford of compound interest as "punitive" or "penal", whatever was intended at the time, cannot, since Lord Cranworth LC's analysis in that case, be read as meaning that equity in truth has a punitive function. 417 Sometimes the word "penal" is used, but it is not intended to mean "punitive" in the sense of criminal punishment, but rather "harsh". In Townend v Townend (1859) 1 Giff 201 at 212; 65 ER 885 at 890, Sir John Stuart V-C, after declaring that the plaintiff was entitled to an account of profits, said: "It is said that is a severe and penal decree. I can see that to be a decree which the law of this Court makes it imperative upon me to pronounce." The submission summarised by him did not mean that it was a criminal or punitive decree; merely that it was harsh. It was "penal" in the sense that high taxation is called "penal". 418 Gareth Jones said in "The Recovery of Benefits Gained from a Breach of Contract" (1983) 99 LQR 443 at 456: "to be deprived of what you have gained can never be a penal liability". That correct observation dilutes the significance of his linguistic usages in the article referred to above. 419 Nor should significance be attached to the language of Lord Brougham in Docker v Somes (1834) 2 My & K 655 at 665; 39 ER 1095 at 1098 in which he called the rule by which a trustee must account for profits as "the rule by which breach of trust is discouraged and punished - discouraged by intercepting its gains, and thus frustrating the intentions that caused it; punished by charging all losses on the wrongdoer, while no profit can ever accrue to him …." That is not punishment in the sense of criminal punishment. The non-punitive character of an account of profits is well established in modern High Court authority: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 109; Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 at 111, 114, 115 and 123; Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557-562. 420 It is ironical that the plaintiff, whose argument contended that its opponents concentrated only on labels or tags or forms, relied so heavily on casual phrases in particular cases without analysis either of the total apposite line of authorities or the particular context in which the phrases were employed.

Exemplary costs 421 There are traces of the jurisdiction to award "exemplary costs" in cases of gross breach of trust. Thus in Waltham v Broughton (1740) 2 Atk 44, 26 ER 423, proceedings before Lord Hardwicke LC are reported as follows: "The defendant having been guilty of the grossest fraud that ever appeared before a court, Lord Chancellor decreed, that he should refund the principal money he cheated the plaintiff of, with legal interest till the payment, and to pay costs both of the original and cross bill. If, said his Lordship , I could make the defendant pay exemplary costs, I would do it; but though it was the ancient course of the court, in notorious frauds, yet it has been disused for some time, from the difficulty of carrying it into execution; but if the practice had been continued down to the present time, I would certainly have inserted in the decree, Let the defendant pay exemplary costs ." 422 It is quite unclear what was meant by "exemplary costs" and quite unclear whether they were punitive or merely in the nature of a complete indemnity. Maddock's Treatise on the Principles and Practice of the High Court of Chancery (2nd ed, 1820), vol 1, p 256 said that the practice "has long since been superseded".

The 16th and 17th century cases 423 The 16th and 17th century cases referred to by the trial judge, taken in the order he set them out, are reported as follows. 424 The report of Barker v Ireland & Morris (1610-11) Tot 103; 21 ER 136 is: "a person sentenced in this Court for forgery, in 8 Jac li A fo 1172 …." 425 The report of Baskervile and Guilliams (1545-1546) Tot 156; 21 ER 153 is: "In the judgment roll, 37 H 8 …, between Baskervile and Guilliams, set on the pillory for procuring perjury in the Spiritual Court." 426 The report of Philips v Benson (1578-1579) Tot 11; 21 ER 108 is: "the defendant ordered to answer a bill of perjury, 19 Eliz li B fo 165 …." 427 The report of Sacheverell v Sacheverell (1621) Tot 38; 21 ER 116 is: "one of the commissioners letting the defendant escape, being taken upon a commission of rebellion, was to stand committed to prison, till he brings in the defendant, in Hil 18 Jac …." 428 The report of Barker v Shepheard (1633) Tot 102; 21 ER 136 is: "a fine imposed, and parties pilloried and imprisoned, and laid in irons for abusing a man for serving a subpoena in the King's Bench." 429 The report of Woodcock v Woodcock (1576-1577) Cary 63; 21 ER 34 is: "A bill of perjury proceeded in this Court. - Whereas the plaintant exhibited his bill against the defendant for wilful perjury, the defendant hath demurred, which this Court alloweth not of: It is ordered a subpoena be awarded to the defendant to answer …." 430 In contrast, the report of Griffith v Jenkin (1579) Cary 75; 21 ER 40 exhibits a voluble garrulity: " An English bill for perjury . - Upon an oath made for impotency of Jenkin, the defendant in a former suit by the said Goose, by the name of William ap William, they procured a dedimus potestatem to take the answer of Jenkin to John Floyd, and William Goose himself, whereas the party was under fifty years of age and not impotent; hereupon the plaintant exhibits an English bill of perjury into this court, against the said Goose for perjury, and Jenkin for the procuring of it; whereupon they being served with a subpoena to answer the perjury, they get a stay of the proceedings from the counsel of the marches; where, upon motion, Sir Thomas Bromley, Lord Chancellor, marvelled at such their stay, and writ his letters to the said counsel, and granted a new subpoena against the defendants to answer the perjury …." 431 The plaintiff did not develop any reasoning which might underlie those cases. So far as the cases contain any reasoning at all, it is reported with extreme brevity. Without a close examination of the late Tudor and Stuart background, it will be difficult to assess their significance. Indeed there is a passage in Spence, The Equitable Jurisdiction of the Court of Chancery (1846) which suggests that they were anomalous even in their own day. The passage says: "The jurisdiction as to Perjury of itself, and not as an ingredient in fraud, rather belongs to the obsolete jurisdiction of the court."

To that a footnote is appended, which reads: "In Tothill there is this passage, 'A person sentenced in this court for forgery', p 168; 8 Ja 1 fo 1172. But until the abolition of the Court of Star Chamber, that court appears to have been considered the proper tribunal for cases of forgery and subornation of witnesses and the like, when not connected with a question as to property, and not the Court of Chancery."

The footnote concludes with a reference to a later part of the work with the words "Obsolete Jurisdiction of the Court of Chancery." The cross reference is to "Book the Fourth", entitled "The Obsolete Jurisdiction of the Court of Chancery - General Summary as to the Rise and Establishment of the Extraordinary Jurisdiction of the Court". Chapter 1 of that book is entitled "The Criminal Jurisdiction of the Court of Chancery". It is divided into two sections. The first section deals with the jurisdiction exercised as late as the reign of Charles I in relation to the repression of disorder. It concludes: "When, however, an improved state of society diminished the frequency of crime, and the state of the country permitted that the powers of the magistracy and of the ordinary tribunals should be efficiently exerted for the repression of outrage and violence, and an effectual supervision was exercised over the magistrates themselves; and when the jurisdiction of the ordinary courts to afford Compensation for injuries, as well as to inflict punishment, was completely established, the necessity for the interference of the Court of Chancery in such matters ceased, and the Court of Chancery renounced its jurisdiction. In modern times the Court of Chancery has refused to exercise any jurisdiction for the repression of crimes, or even to afford its aid to the criminal jurisdiction of the courts of common law …." 432 The second section deals with the "Ancient Jurisdiction of the Court of Chancery as to Perjury". It states: "Before the statute 5 Eliz c 9, s 15, gave authority to the judges of the different courts to hold jurisdiction as to perjury committed in their respective courts, the Court of Chancery used to take cognisance of perjury committed there, under its extraordinary jurisdiction, by examining the defendant on oath; after that statute, it was resolved by the judges of the Common Law Courts, that the Star Chamber only could proceed by English bill; and that in the Court of Chancery perjury could only be examined into by Latin bill, and common law pleading. In proceedings of the latter kind, on issue joined, it was tried in the Court of King's Bench, according to the ordinary course on the common law side of the court. There are, however, some English bills for perjury in the reign of Elizabeth. Lord Keeper Bacon, 12 Eliz declared, that it did not belong to this court to examine into perjury. This jurisdiction, with the rest of the criminal jurisdiction of the Court of Chancery, was abandoned, when it was found that it might be properly left to the ordinary tribunals."

In short, not only was the jurisdiction in desuetude by the time of the Civil War, but it appears to have faded away after the Court of Star Chamber was abolished in 1641. This is supported by cases such as Adams v Bridges (1598), which is reported in W H Bryson (ed), Cases Concerning Equity and the Courts of Equity 1550-1660 (Selden Society, 2001 - vol 117), vol 1, p 268 [289] as follows: "There was a bill exhibited by Adams against Bridges to reverse a decree made upon an untrue oath in this court. And when it came to [the] hearing, my lord keeper [Sir Thomas Egerton] said [that] though he doubted not but perjury might be examined here, yet the [Court of] Star Chamber was the fitter place. Therefore, he referred it thither." 433 In any event, the 16th and 17th century cases do not demonstrate a process of punishment merely for breach of equitable duty occurring before any litigation about that breach of duty, but for something additional in the nature of an assault on the integrity of the process of the equity court or of other courts by forgery or perjury. It is particularly notable that in none of the cases cited was there an award of exemplary damages. The plaintiff only relied on the cases in a limited way. Counsel for the plaintiff said they showed that equity had a penal function, even if it was only a power to punish for interference with court processes. That penal function is so different from a function of awarding exemplary damages for breach of equitable duty as not to support the existence of it.

Cases about the "moulding of relief" 434 The reliance by the plaintiff on Lord Browne-Wilkinson's statement in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 is not favourable to its argument. That statement was a quintessential illustration of the unsatisfactory nature of much modern discussion of legal principle: it makes assertions of historical fact without demonstrating their soundness, or, apparently, without any historical investigation which might back them. It makes statements about directors duties, for example, which could not be made without engaging in the research conducted by Powell JA in Daniels v Anderson (1995) 37 NSWLR 438 and forming a view about whether the proposition which Lord Browne-Wilkinson asserts ever represented the law. There are numerous other criticisms which could be made of it, and of the passages quoted from Millett LJ's judgment in Bristol and West Building Society v Mothew. But in view of the importance of the questions discussed in those cases, in view of the fact that they do not arise for decision in this appeal, and in view of the limited use which the plaintiff seeks to make of the cases, it is not necessary to pursue these criticisms. 435 All the plaintiff sought to get from the passages in question was that labels should be avoided and that to grant exemplary damages in equity was only a small change in the law if it was a change at all. On the contrary, it is a radical change having no justification in traditional thinking, properly understood. Whether it is a desirable change is a question outside the proper province of an intermediate appellate court. 436 The plaintiff's reliance on the extension of exemplary damages in Kuddus v Chief Constable of Leicestershire Constabulary [2002] 2 AC 122, which formed a significant part of the trial judge's reasoning, is misplaced. It is one thing for the House of Lords, an ultimate appellate court, to take that step in a jurisdiction where recovery of exemplary damages at common law is restrictive compared to Australia. It is another thing for this Court, which is not an ultimate appellate court, to take the different step of recognising recovery of exemplary damages in equity even though the rules relating to recovery of exemplary damages at common law are less restrictive than in England. 437 Turning to the plaintiff's citation of Hill v Rose [1990] VR 129 at 143, Tadgell J did not mean that it is an appropriate judicial method to look at a case, decide what justice calls for, and invent an appropriate remedy. All he meant was that where an existing category of equitable remedy can be granted, its precise form should be fashioned to meet the needs of the case. To some extent the words of McLachlin J in Norberg v Wynrib at 502 bear a similar meaning; if they, like the passages in White v Ruditys 343 NW 2d 421 (1983) go further, they do not form part of Australian law. It is incorrect to say, as D Jensen "Punitive Damages for Breach of Fiduciary Obligation" (1996) 19 UQLJ 126 at 131 said, that Tadgell J's "reasoning is similar to that used in White v Ruditys to justify an award of punitive damages". 438 Columbia Picture Industries Inc v Robinson [1987] Ch 38 at 87 is not an authority supportive of the grant of exemplary damages for equitable wrongs. A solicitor who executes an Anton Piller order oppressively is acting outside the order; without the order the solicitor is committing the tort of trespass to land or trespass to goods; the exemplary damages are awarded for that tort. 439 It is not necessary to say more about the plaintiff's submission in relation to Cadorange Pty Ltd (In Liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26 than that any change in the law in that case was much less significant than that which the plaintiff is seeking in this. 440 The heart of the plaintiff's argument was that equity already possessed the power to award exemplary damages, or that if it did not it ought to, by fashioning or moulding its relief so as to conform to the common law power to award exemplary damages where the factual circumstances were similar to those in which, had the plaintiff sued in tort, exemplary damages would be available. This appears to have been the basis of Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299. The sole justification advanced by the New Zealand Court of Appeal for the existence of a jurisdiction to award exemplary damages was (at 301): "a full range of remedies should be available as appropriate, no matter whether they originate in common law, equity or statute."

Finn regarded this "basket of remedies approach" as "eminently commendable": "Equitable Doctrine and Discretion and Remedies" in W R Cornish, Richard Nolan, Janet O'Sullivan and Ggraham Virgo (eds), Restitution, Past Present and Future pp 255 and 271. Sir Anthony Mason in "The Place of Equity and Equitable Remedies in the Contemporary Common Law World" (1994) 110 LQR 238 at 244 quoted the justification set out above without disapproval. Just before he did so, he also drew attention to the fact that in New Zealand the Court of Appeal imported the notion of contributory negligence into the remedy of equitable compensation in Day v Mead [1987] 2 NZLR 443 at 451 on the ground that: "There appears to be no valid reason for denying jurisdiction to follow that obviously just course, especially now that law and equity have been mingled or are interacting." 441 Sir Anthony Mason then said (at 243-244): "that does not necessarily depend upon the Judicature Acts. It may simply rest on the willingness of the New Zealand Court of Appeal to develop the concept of equitable compensation by reference to the doctrine of contributory negligence as refined by statute. Putting to one side any reliance on the Judicature Acts, I suspect that, at bottom, criticism of Day v Mead rests on two unarticulated grounds. One is that the Court of Appeal was guilty of impiety in daring to pollute a traditional equitable concept with a new-fangled common law notion. The other is that it is not for the courts, under the guise of judicial development, to alter the substantive principles of law and equity on policy grounds. Neither objection can be supported. The traditional principles of equity are not so invincibly superior to the concepts of the common law that equity cannot occasionally profit from common law ideas. And, though the courts should look at policy arguments with due circumspection, it would be absurd to suggest that the courts cannot adjust or modify equitable principle on policy grounds where to do so is appropriate." 442 Despite their acceptance of the approach in the Aquaculture Corporation case, neither Finn nor Sir Anthony Mason specifically isolated the grant of exemplary damages and approved that. Their position on that particular point appears to remain open. 443 A second notable feature of the Aquaculture Corporation case as analysed by Finn and Sir Anthony Mason is that it seems to be recognised as one which depends on a change in the law on policy grounds, the change being the adoption by equity of a common law technique. If that is a correct reading of their approach, it must be applauded as at least having the benefit of realism. The Aquaculture Corporation case approach cannot be regarded as being part of the existing law. Whether the law should be changed so as to adopt it as another question. When should the courts make a change in the law? There is no doubt that ultimate appellate courts, less often intermediate appellate courts, and perhaps less often still trial courts, may "change" the law, so long as this is not debarred by the binding authority of a higher court. It is not necessary on this occasion to seek to determine how far this Court can change the law. It is sufficient to say that to change the law in favour of the plaintiff here is not a step which should be taken. It would be a radical step. It may affect the operation of legal regimes established by statute. In State Government Insurance Commission v Trigwell (1979) 142 CLR 617 at 633-634 Sir Anthony Mason said: "I do not doubt that there are some cases in which an ultimate court of appeal can and should vary or modify what has been thought to be a settled rule or principle of the common law on the ground that it is ill-adapted to modern circumstances. If it should emerge that a specific common law rule was based on the existence of particular conditions or circumstances, whether social or economic, and that they have undergone a radical change, then in a simple or clear case the court may be justified in moulding the rule to meet the new conditions and circumstances. But there are very powerful reasons why the court should be reluctant to engage in such an exercise. The court is neither a legislature nor a law reform agency. Its responsibility is to decide cases by applying the law to the facts as found. The court's facilities, techniques and procedures are adapted to that responsibility; they are not adapted to legislative functions or to law reform activities. The court does not, and cannot, carry out investigations or enquiries with a view to ascertaining whether particular common law rules are working well, whether they are adjusted to the needs of the community and whether they command popular assent. Nor can the court call for, and examine, submissions from groups and individuals who may be vitally interested in the making of changes to the law. In short, the court cannot, and does not, engage in the wide-ranging inquiries and assessments which are made by governments and law reform agencies as a desirable, if not essential, preliminary to the enactment of legislation by an elected legislature. These considerations must deter a court from departing too readily from a settled rule of the common law and from replacing it with a new rule."

The reasoning in that passage and the language in which it is expressed are both very powerful. It is to be noted that not only was Mason J unexpansive in his exposition of exceptions to the ban on remoulding rules, but he contemplated those exceptions as giving liberty only to "an ultimate court of appeal". The commendation of Finn for the reasoning, such as it is, in the Aquaculture Corporation case is not so limited. However, with respect, the approach of Mason J is impeccably sound, and his limitation of the opportunity to mould the law within narrow boundaries is also sound. The plaintiff did not successfully point to any conditions or circumstances in which equity's abstention from granting exemplary damages was based, nor to any relevant "radical change" in them. 444 What the New Zealand Court of Appeal contemplated in the Aquaculture Corporation case was a form - perhaps a mild form, but a form nonetheless - of fusion. It was fusion in the sense of selecting a remedy from the common law range of remedies which a court of equity administering the law relating to equitable wrongs before the introduction of a judicature system would not have administered. What is contemplated is that the unified court administering the two systems may select a remedy historically granted by the courts of common law in relation to a wrong recognised only in the courts of equity. But whatever one calls the process, it must be recognised as a process involving a deliberate judicially-engineered change in the law. 445 Proponents of fusion often appear to be unclear whether the legal regime which they describe is one of actuality or velleity. Thus Andrew Burrows, a signatory to the Law Commission's Report on Aggravated, Exemplary and Restitutionary Damages (Report No 247), which succeeded Consultation Paper No 132 on that subject in which it was said that "it would seem that exemplary damages cannot be awarded in respect of an equitable wrong" (para 3.78), and which recommended that exemplary damages be recoverable for equitable wrongs, said in "We Do This At Common Law But That In Equity" (2002) 22 OJLS 1 at 13: "it remains unclear whether punitive damages can be awarded for equitable wrongs. This uncertainty, and the needlessly restrictive categories, renders the present law on punitive damages unsatisfactory. It is unprincipled and has no sound basis in policy. Moreover, it contrasts with the position in, for example, Canada and New Zealand where punitive damages can be awarded for equitable wrongs. Not surprisingly, the Law Commission has recommended legislation which would effect a principled reform. According to this, the courts would have the power to award punitive damages for torts and equitable wrongs according to the same principled basic test of whether there was an outrageous and deliberate disregard of the claimant's rights. Again, if we are to take fusion seriously, this recommendation of the Law Commission should be supported."

But if we take fusion seriously, surely the desired state of the law has already been achieved? If a desired state of the law has already been achieved, why recommend that it be changed? If on the other hand it is necessary that the law be changed, consideration must be given whether an intermediate appellate court is the correct agent of that change. 446 If an entitlement in trial or intermediate appellate courts to grant exemplary damages for equitable wrongs arises because it is permissible to fashion and mould equitable remedies to meet the justice of the particular case, what other remedies are possible? Presumably it is not possible for those courts to grant remedies which High Court cases have ruled out. Thus it is not possible to grant both equitable compensation and an account of profits without compelling the plaintiff to elect between them, because there is High Court authority compelling election: Warman International Ltd v Dwyer (1995) 182 CLR 544. (See also Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514 at 521.) But can other remedies not opposed by distinct High Court authority be granted? For example, can a money remedy be charged on a particular unencumbered asset even if there is no basis in the existing law for granting proprietary relief instead of personal relief? If not, even assuming the behaviour of the defendant to have been within the worst category justifying exemplary damages, why not?

The articles relied on 447 The arguments advanced in the various articles favourable to the plaintiff's contention on which it relied have been dealt with above, and need not be examined further, save in one respect. 448 So far as the plaintiff contended that Gummow J favoured the grant of exemplary damages in equity, the submission rested on the following passage ("Compensation for Breach of Fiduciary Duty" in T G Youdan (ed) Equity, Fiduciaries and Trusts pp 79-80). "Undoubtedly, there is a strong deterrent element in the formulation of the duties imposed upon fiduciaries. As I have stated earlier, this is reflected in the decisions rendering fiduciaries accountable for profits in circumstances where the gaining of the profit has not occasioned a loss. It also appears in the wide form of accounting ordered and the limited allowances permitted in cases of cheating by roguish fiduciaries [See, for example, Re Tebbs [1976] 1 WLR 924 (Ch D); Bartlett v Barclay's Bank Trust Co Ltd [1980] Ch 515 at 546-7; US Surgical Corp v Hospital Products Ltd [1983] 2 NSWLR 157 at 237-43 (CA), reversed on other grounds (1984) 156 CLR 41]. In principle, there would seem to be no reason why this concept of deterrence should not also play a part in compensation cases. In the United States, the decisions are divided as to whether exemplary damages may be awarded against defaulting trustees, Pedah Co v Hunt [(1973) 509 P 2d 1197 at 1199 (S C Or)] being against the existence of such jurisdiction and Gould v Starr [(1977) 558 S W 2d 755 (CA Mo). Other decisions are collected in the Annotation at (1956) 48 ALR (2d) 947] being for it. Discussion of the subject in the United States does not always distinguish between cases in which (under legislation of the same character as Lord Cairns' Act) [ Chancery Amendment Act 1858 (UK) 21 & 22 Vict c 27] an equity court award damages in aid of a legal right, consequent upon commission of a tort or breach of contract, and cases where equity acts purely in its exclusive jurisdiction in respect of breaches of fiduciary duty. The discussion also is complicated by the existence of federal and state constitutional guarantees of jury trials of common law claims and by the identification of any exemplary element in an award of damages for breach of equitable duty as the intrusion into an equity case of a common law claim [See generally Note 'Punitive Damages Held Recoverable in Action for Equitable Relief' (1963), 63 Col L Rev 175; C A Bane, 'Uses of English Legal History in America' (1982) 2 Ox J Legal Stud 297]. In Fern Brand Waxes Ltd v Pearl [[1972] 3 O R 829 (CA)] the defendant was obliged to return, with interest, funds he had transferred, in breach of fiduciary duty, from the plaintiff to companies he controlled. The Ontario Court of Appeal held that because the claim was for accounting and not in tort, the trial judge had been in error in awarding punitive damages. However, subsequent decision in that province have treated the issue rather differently. In Szarfer v Chodos [(1986) 54 OR (2d) 663 at 680-1 (HC)], the court was prepared to entertain a claim for exemplary damages for breach of fiduciary duty but in the end decided that it was not appropriate to make an award. The same approach had been taken in Guertin v Royal Bank [(1983) 43 O R (2d) 363 at 377-8 (HC), affirmed (1984) 47 O R (2d) 799n (CA).]" 449 It cannot be concluded that Gummow J was advocating the availability of exemplary damages in equity. This is so for several reasons. 450 First, there are of course ways that deterrence can play a role in "compensation cases" short of granting exemplary damages - favourable rules as to causation and remoteness, for example. 451 Secondly, the observations in Meagher Gummow and Lehane: Equity: Doctrines and Remedies (3rd ed, 1992) on the subject of exemplary damages are strongly critical of Aquaculture and like New Zealand cases: see [259], [2304], [4117] and [4127]. The language used in that last paragraph, in particular, points against Gummow J as being supportive of the plaintiff's position, since the proposition that the remedy of exemplary damages is available for a breach of equitable duty is described as "astonishing". And more recently, Gummow J in "Equity: Too Successful"? (2003) 77 ALJ 30 at 32, 40 and 42, has given plain indications that he is not of opinion that exemplary damages are recoverable in equity. 452 Thirdly, Gummow J's account of the United States cases does not evidence favour to the grant of exemplary damages in equity, and while he does not in terms criticise the Canadian cases apparently favouring the remedy, allowance must be made for the constraints of courtesy enveloping an Australian equity lawyer addressing a Canadian audience on Canadian law. 453 Finally, even if Gummow J can be read as not opposing the recognition of exemplary damages being awarded for equitable wrongs, he is not to be read as suggesting that that step can be taken in any court in this country below the High Court.

Incremental change and equitable development 454 So far as the concluding parts of the plaintiff's argument relied on the opinions of Meagher Gummow and Lehane about the general fact that equity has progressed, and has done so haphazardly, the hostile opinions of that work on the specific question of the availability of exemplary damages in equity must be borne in mind. 455 So far as the plaintiff's argument relied on what Hanbury and Maudsley said, it must be remembered that most of the various examples which that work provides of equity's "creativity" and "dynamism" fall into the following classes: they are decisions of the House of Lords, not lower courts (eg Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567); they have since been overruled or damagingly criticised by the House of Lords (eg the reasoning in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105 was not accepted in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 714-715); they have since been overruled by other courts in England (eg Solle v Butcher [1950] 1 KB 671 was overruled in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] 4 All ER 689); they have been held by this Court and the High Court not to be law in Australia (eg Lord Denning MR's "new model constructive trust"); they are said by Hanbury and Maudsley itself to be problematical or wrong; or they are not really novel. 456 As to Sir George Jessel MR's account of the development of equity in Re Hallett's Estate, it is true that the rules of equity have changed from time to time, and true that individual Chancellors - and Masters of the Rolls, Lord Keepers and Vice Chancellors - have effected these changes. It is also true that the rules can be changed in future. But those deeds of single judges were done when there was no appellate jurisdiction in the House of Lords, or very limited access to it, at a time before modern parliamentary democracy had developed, and members of parliaments consisted largely of wealthy men who in turn supported Cabinets composed largely of aristocratic oligarchs whom it was difficult to interest in the details of private law. What individual judges did in those constitutional and forensic conditions is not a sound guide to what modern Australian courts, at least at levels below the High Court, can do. A single equity judge in the time of Sir George Jessel MR had the power, the competence, the authority and the capacity to compel acceptance from other judges which only the High Court has now, at least where the change goes beyond the application of existing principles in a new way or marginal extensions of the law. 457 In In re Diplock. Diplock v Wintle [1948] Ch 465 at 481-2 Lord Greene MR, Wrottesley and Evershed LJJ said of the equitable claim made in that case by next-of-kin against persons who had wrongly received the testator's assets under an invalid bequest: "if the claim in equity exists it must be shown to have an ancestry founded in history and in the practice and precedents of the courts administering equity jurisdiction. It is not sufficient that because we may think that the 'justice' of the present case requires it, we should invent such a jurisdiction for the first time."

The defendants relied on those words. That is a sound modern approach, at least for courts below the High Court, and at least where anything more than non-radical change is involved. 458 Sir George Jessel MR's judicial life coincided with the time when democracy in a modern form was beginning and the responsiveness of Parliament to social or legal ills was starting to develop. It was a time when the judiciary was small, highly skilled and united. It is now large, less skilled, and far from entirely united. For courts below the High Court to act in the manner of the single judges sitting in Chancery who made modern equity is to invite the spread of a wilderness of single instances, a proliferation of discordant and idiosyncratic opinions, and ultimately an anarchic "system" operating according to the forms, but not the realities, of law.

Purging the conscience 459 One argument advanced for the recovery of exemplary damages in equity is that: "the punitive order has the effect of purging the defendant's conscience in respect of the wrongful conduct which is the subject of the proceedings …. … Restoring good conscience between fiduciary and principle, in some cases, [requires] that a court do more than simply compensate the victim and deprive the perpetrator of his or her gains. Punitive orders may sometimes be required in order to fulfil this purpose".

See D Jensen: "Punitive Damages for Breach of Fiduciary Obligation" (1996) 19 UQL 125 at 130, citing various passages in P W Michalik "The Availability of Compensatory and Exemplary Damages in Equity: A Note on the Aquaculture Decision" (1991) 21 VUWLR 391 at 412-413. 460 No equity judge has ever considered exemplary damages as a means of purging the defendant's conscience for breach of duty. If there is force in the argument, it is an argument for changing the law, not for identifying within the existing law the power to award exemplary damages.

Analogy with deliberate and malicious torts 461 Another argument is put thus by Jensen at 126: "A situation in which a fiduciary consciously breaches his or her duties would appear to be sufficiently analogous to a situation involving a deliberate or malicious tort to justify an award of punitive damages."

That too is an argument for changing the law not for detecting within the law an existing principle supporting the grant of exemplary damages.

Deterrent role of exemplary damages 462 Glover: Commercial Equity: Fiduciary Relationships, paragraph [6.129] has advanced the following argument in support of the award of exemplary damages in equity. "Fiduciary obligations and their sanctions are expressed with prophylactic vigour - in large part to deter the disloyal fiduciaries at large. This is for the encouragement of others. It is not to do justice between the parties. Accordingly, gains that fiduciaries make may sometimes have to be accounted for to beneficiaries, even though they are made honestly and not at anyone's expense. Where fiduciaries cause losses , the prophylactic counterpart is exemplary damages. It is not compensation. A thief cannot be deterred simply by being required to return stolen goods whenever he or she is caught. Thieving may then on the balance of probabilities be a profitable business. For a corresponding reason, a fiduciary cannot be deterred from cynically causing losses by the prospect, in some cases, of being required to put the losses right. More is needed. Fiduciaries who cause loss to a beneficiary in a cynical, malicious or particularly reprehensible manner need to be deterred in an exemplary way. If this is accepted, then the ultimate rationale of a fiduciary's duty of loyalty is not restitution, or not only restitution. It is prophylaxis as well. 'A prophylactic rather than a restitutionary principle underlies fiduciary duties, as Gareth Jones says, and as much has been acknowledged by several other restitutionary scholars."

This too is an argument for changing the law. It is not reasoning which identifies the desired conclusion within the law as it stands.

Modern statutes 463 The lack of favour shown to exemplary damages by Parliament in modern statutes is important in three ways. First, it suggests that any anomalies created by the present law in relation to exemplary damages are not seen by Parliament as grounds in themselves for widening exemplary damages. Secondly, if exemplary damages were henceforth to be granted in equity, fresh anomalies might be created by reason of the difference between a widened equitable position and a narrow statutory position. Thirdly, the frequency with which Parliament has restricted or failed to extend the power to award exemplary damages is a sign that the question of whether exemplary damages should be awarded in equity is one better dealt with by the legislature than by this Court.

Law Reform Commissions 464 The fact that in England (Aggravated, Exemplary and Restitutionary Damages (Law Commission Report No 247) para 1.3 (10(a)) and in Ontario (Report on Exemplary Damages (1991) p 74) Law Reform Commissions have recommended that punitive damages for equitable wrongs be introduced by legislation - recommendations which are entirely, of course, within their rights and acceptance of which by the appropriate legislatures is entirely within their rights - does not point against the conclusion either that equitable damages are not available as a matter of the current law or that they ought not to be introduced into the law by this Court. Indeed, the fact that so far as English law is concerned the Law Commission has seen it as necessary to recommend their legislative introduction supports the view that they are not part of the current law. And the fact that in Ontario the Law Reform Commission saw it as necessary to clarify the current law, as it then stood, supports the view that it was not as clear as the plaintiff in this case would have it. Similarly, the fact that both Commissions thought it necessary to recommend particular legislation is a sign that in a field of this kind, parliamentary legislation is the appropriate kind of legislation to adopt if the High Court is disinclined to intervene.

Legal regulation of commerce 465 It is often said that equitable doctrines apply to commercial affairs more than they did in the past. If so, to grant exemplary damages for breach of equitable duty would tend to conflict with other key bodies of law regulating commercial affairs - the law of contract, the Trade Practices Act and the Corporations Act. Exemplary damages are not available for breach of contract, for contraventions of the Trade Practices Act or for contraventions of the Corporations Act.

Consequences of election rules 466 A plaintiff able to establish an equitable wrong such as a breach of fiduciary duty who can establish both that the breach has caused loss and that the wrongdoer has made a gain is not entitled both to equitable compensation and to an account of profits. It is necessary that an election be made between them. At common law exemplary damages are not recoverable unless actual damages are also recovered. If exemplary damages are recoverable in equity, does it follow that a plaintiff who elects against equitable compensation and in favour of an account of profits is debarred from receiving exemplary damages? Or is it possible to claim both an account of profits and exemplary damages? This was not an issue with which the trial judge had to deal, because in relation to some wrongs the plaintiff elected for, and obtained, equitable compensation, while in relation to others, it elected for, and obtained, an account of profits. This problem need not be resolved, but it illustrates how the change in the law which the plaintiff calls for is not merely incremental and does not involve merely selecting from an available range of existing remedies.

Double punishment 467 If there is in truth a deterrent or punitive element in existing equitable remedies and the court adopts the practice of awarding exemplary damages as well, there will be difficulties in ensuring that the defendant is not punished twice.

Change in the nature of property 468 Whether the nature and scale of intangible property and the possibilities of its being damaged have changed so much as to justify the grant of exemplary damages as a remedy is a policy question. Subject to any role which the High Court considers is open to it, policy questions are primarily for resolution by democratically elected politicians. Accordingly, policy questions of that kind have no materiality at least on the particular issue before this Court.

Balance of defendants' arguments 469 In view of the undesirability of this Court embarking on a course of seeking to change the law, the arguments advanced by the defendants against that course need not be considered. Nor is it necessary to consider the intense controversies which have taken place about whether even at common law exemplary damages should be narrowed or widened, though the existence of these controversies highlights the inappropriateness of this Court attempting to change the law.

Conclusion on exemplary damages in equity 470 There is no power in the law of New South Wales to award exemplary damages for equitable wrongs. But a narrower proposition suffices for the purposes of deciding this case. There is no power in the law of New South Wales to award exemplary damages for equitable wrongs of the type involved in the circumstances of this case. No English or Australian authority supports it. There is no convincing reasoning in New Zealand, Canadian or United States authorities. This Court ought not to change the law of New South Wales so as to create power to do so. Nothing in the authorities or the commentaries suggests why it should or why this Court has power to. In short, equity does not bear the same relationship to the instinct for revenge as the institution of marriage does the sexual appetite.

If the jurisdiction exists, should it have been exercised? 471 In view of the conclusion just stated that the jurisdiction does not exist, it is not necessary to deal with the defendants' arguments on this point beyond saying that the defendants' primary argument, that exemplary damages should be reserved to the most unusual cases, and the present case was not at all unusual, is unattractive. If the conduct engaged in by the defendants is common, there is much to be said for the most vigorous exercise of whatever judicial powers there are to deal with it, and nothing to be said in criticism of what the trial judge did in this case.

Costs 472 Part 52A rule 33(2) provides: "Where - … (f) in proceedings commenced after 1 October 1997, where a plaintiff recovers: … (ii) … a sum not more than $225,000, the plaintiff shall not be entitled to payment of his or her costs of the proceedings unless, it appearing to the Court that the plaintiff had sufficient reason for commencing or continuing proceedings in the Court, the Court makes an order for payment."

The trial judge found a "sufficient reason" in the view that it was appropriate for the proceedings to be started in the Supreme Court rather than any other court because of "the difficulty and novelty of the question whether exemplary damages for breach of fiduciary duty can be awarded by a court in Australia". 473 The defendants advanced two arguments in relation to the costs of the trial. The first was that the plaintiff had no sufficient reason to initiate proceedings in the Supreme Court. The second was that the costs order was erroneous, whether or not the trial judge was correct about exemplary damages, because the trial judge had failed to give weight to the extreme lack of success of the plaintiff. It had claimed hundreds of thousands of dollars and recovered but a small fraction of what was sought. 474 The trial judge recorded a concession by counsel appearing for the defendants before him "that the novelty and difficulty of the question as to whether exemplary damages can be awarded for breach of an equitable duty warranted the proceedings being commenced in the Supreme Court rather than in the District Court or the Local Court". In the light of that concession, it is not open to attack the trial judge's conclusion. In any event, while there may be some difficult and novel questions the answer to which is so plain that the existence of the question would not amount to a "sufficient reason" within the meaning of the rule, that cannot be said of the present question. While the answer to the question is plainly in the negative, the length and difficulty of the arguments advanced to this Court indicate that it was a question deserving examination. 475 The trial judge's costs order was justifiable, and should not be altered even though the exemplary damages awards are to be set aside. The claim was for about $500,000. The plaintiff had reason to distrust the first and second defendants, each of whom had lied to him. Persons of that character, to the perception of the plaintiff, might well have concealed matters which could be exposed to light in litigation. The plaintiff alleged a diversion of ten specific business opportunities. The plaintiff only established that six were wrongfully diverted. In relation to one of these there was no loss to the plaintiff or profit to the defendants. But it was not unreasonable for the plaintiff to hope for a better outcome. The plaintiff did have expert accounting evidence quantifying the damages in the range $391,554-$587,953. Even if, as the trial judge found, that quantification was wildly optimistic, it cannot be inappropriate for a plaintiff in these circumstances to commence proceedings in the Supreme Court where the issues involve difficult legal questions such as breach of fiduciary duty, the contractual duty of loyalty, the quantum of actual compensation and the amounts recoverable on accounts of profits. The Equity Division is far better equipped than the District Court to consider these questions. All the judges of the Equity Division are extremely experienced in relation to issues of that kind, and few District Court judges are. Further, much of the trial was devoted to a fight on liability, and though the defendants gave in on that question, they only did so at the end of the trial. 476 In all the circumstances the costs orders of the trial judge should not be disturbed. 477 The next question that arises relates to the costs of the appeal. The sum in dispute in relation to costs was said to be of the order of $200,000. The appellant has failed to achieve any success on that question. On the other hand, the appellants have achieved success to the extent of $20,000 in relation to exemplary damages. Very much the bulk of time in argument was taken up in relation to the question of exemplary damages. Balancing the large amount of time spent on exemplary damages against the very small extent to which the appellants enjoyed success, and taking into account the deplorable behaviour of the defendants which made the proceedings necessary, it seems just that there be no order as to the costs of the appeal, that is, each side will bear his or its own costs. That position, which is highly favourable to the plaintiff, results from the highly special circumstances of the present case.

3. Orders 6 and 7 of the trial judge are set aside.

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