Partnership - Rights and duties of parties inter se - Fiduciary relationship - Joint venture for purpose of securing a Commonwealth grant - Exclusion by one party of another's entitlements arising out of agreement - Breach of contract and fiduciary duty.

United Dominion Corporation v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1, applied.

Equity - Trusts and trustees - Constitution and classification of trusts generally - Classification of trusts in general - Constructive Trusts - Independent of intention - General principles - Breach of fiduciary duty - Knowing participation by an agent.

Consul Developments v DPC Estates [1975] HCA 8; (1975) 132 CLR 373, applied.

First Defendant: H Targett 26 and 29 March 2004

First Defendant: Ritchie & Parker Alfred Green & Co

Judgment ID Number: [2004] TASSC 43

iWAVE PTY LTD (ACN 081 093 2810) v BREAK O'DAY BUSINESS

ENTERPRISE BOARD INCORPORATED and NEIL BUTTERWORTH

1 The plaintiff is a company, the directors of which are Philip and Lyn Barnard. The first defendant is an association, the Break O'Day Business Enterprise Board ("BODBEB") incorporated pursuant to the Associations Interpretation Act 1964, which had at all times, as a member and office bearer, Neil Butterworth, the second defendant. At all relevant times the respective individuals acted as the agents of and were authorised by the corporate entities to conduct the contractual and commercial arrangements which are the subject of these proceedings.

2 In 1999/2000 the Commonwealth of Australia through its Department of Industry Science and Resources established a program designed to enhance the tourism potential of regional Australia. It stated the purpose as:

"The broad objective of the Program is to develop geographically-based regional tourism websites which cover a range of tourism products and services in regional areas. These regions may, for example, be based on State/Territory Government defined Regional Tourism Organisation (RTO) boundaries or may combine several RTO areas in one large site. The development of other innovative online initiatives with community benefits will also be considered"

"... given to proposals that incorporate, or demonstrate a firm commitment to, e-commerce for tourism products and services. Funding can be provided for existing regional tourism websites to upgrade to e-commerce. Innovative online initiatives that do not necessarily involve websites may also be considered in Round 1."

3 The Department invited proposals for funding under Round 1 and indicated that, subject to circumstances, grants of between $1,500 and $70,000 would be provided for each successful project.

4 The plaintiff joined with a community organisation, the North-Eastern Tasmania Tourism Association ("NETTA") in preparing and submitting a Phase 1 proposal:

"To establish a financially self sustaining interactive web site exploiting the opportunities for tourism in North East Tasmania, bringing together the North East's diverse tourist stakeholders to form a cohesive regional tourist portal providing global internet access."

5 The proposal was directed towards the provision of a service in the North Eastern area of Tasmania naming townships of Bridport, Derby, Winnaleah and Ringarooma as centres of operation. However, it named the Dorset municipality as the core of its project and stated as one of its aims the development of:

"... closer relationships with the tourist groups at Georgetown, St Helens and Flinders Island".

6 BODBEB was an organisation designed to further the interests of the community, in particular its commercial viability, of the area encompassed by the Break O'Day Council. It also responded to the Commonwealth initiative and likewise submitted a Phase 1 proposal.

7 Officers of the Commonwealth contacted representatives of both proposers and suggested that whilst their respective proposals were meritorious, their chances of success would be enhanced if:

(i) the proposals included a wider geographical area, namely the Midlands and the Tasman Peninsula;

(ii) the respective organisations combined in presenting a Phase 2 proposal.

The suggestion was agreed and representatives of the respective participating organisations arranged a meeting which was held at the Council Chambers in Scottsdale on 25 February 2000. The meeting was attended by Mr and Mrs Barnard (representing iWave), Wendy McLennan (NETTA), Mr Butterworth (representing BODBEB), Mark Lowndes (representing a company, Computer Productions Australia Pty Ltd, ("PA") associated with BODBEB) and Geoffrey Butler who represented the first defendant and another organisation, the Break O'Day Regional Tourism Association. The meeting "agreed" that in the Phase 2 proposal, the "Midlands" or "Port Arthur" geographical areas not be included, and that the "North East submission was to 'stand alone'." Following that meeting, a Phase 2 proposal was developed and submitted to the Commonwealth. The acceptance by the Commonwealth and its provision of the sum of $60,000 to the first defendant is the subject of these proceedings.

8 The plaintiff's claim is that the meeting of 25 February established a joint venture, commercial in nature, which on acceptance by the Commonwealth, established a trust which required the parties to distribute the money obtained, in accordance with either the terms of the venture or the principles of equity.

9 The second defendant, as the agent, cannot here be liable in contract but can, in some circumstances, become liable for a breach of trust on the part of his principal.

10 The plaintiff's case as against the first defendant is for:

(3) Misrepresentation or misleading conduct actionable by statute.

Its cause of action as against the second defendant arises from a claimed complicity in the breach of fiduciary obligation by the first defendant.

11 The pleadings, reflecting modern complexity of legal principle and their extension by statute, permit easier resolution since the dependent facts mostly result in similar outcomes. Remedy arising from breach of contract and breach of fiduciary relationship differs in one respect, but not in terms of liability. Factual findings likewise determine the liability of the second defendant.

12 Consideration of the respective cases can be confined to four issues:

13 The purpose of the meeting of 25 February was stated as being:

"To work jointly on a submission for ROTP to benefit tourism in Dorset and BOD Municipalities."

It was decided that the submission would stand alone and not involve the "Port Arthur" proposal. Various tasks were allocated to participants which included:

- Mr Barnard and Mrs McLennan were to be responsible for the collation of information and the completion of the submission.

- Mr Barnard and Mr Lowndes were to liaise on technical information and site construction.

Significantly the minutes, prepared by Mr Butterworth, recorded:

"3.5 Submission to have BODC as finance controller (Project Management) with subcommittee membership.

3.12 Council (BODC) 'site' to be secondary but info re bylaws etc to be essential due to visitor info and itinerary."

14 The Phase 1 proposal of the plaintiff and NETTA was the only one placed before the meeting. The terms of the Phase 2 proposal, as submitted to the Department, show that it reflected much of that Phase 1 document.

15 The Phase 2 proposal was primarily prepared by Mr Barnard and Mr Butterworth. Central to the proposal was the development of a "web site" which permitted ready access to information, bookings for services and accommodation by intended users or purchasers, and the capacity of service providers to customise and vary details of their particular facility or service. That portion of the proposal, central to these proceedings, was prepared and formulated by Mr Barnard. The proposal relevantly stated:

iWave P/L ACN 081 893 281. Web and Internet development company.

North East Tasmanian Tourist Association Inc (NETTA)

The Break O'Day Business Enterprise Board is incorporated in Tasmania (the standard model rules of association), 19/8/98 Incorporation No 4024.

c) States/Territories in which the organisation operates

"The amalgamation of the Phase 1 proposals of NETTA and Break O'Day BEB Inc means that this Phase 2 proposal now represents the entire NE and E Tasmanian region, approximately one third of Tasmania; it is the joint proposal of NETTA, iWave Pty Ltd, the Break O'Day Regional Tourist Association Inc and has the direct support and involvement of the Dorset and Break O'Day municipal councils."

16 The detailed project plan provided for the administration and financial management to be the responsibility of the first defendant and the "Web Technology and Server Management" and training to be undertaken by the plaintiff and Mr Lowndes. Heading 2.3 stated:

"The Phase 1 proposal suggested that a joint proposal between a tourism body and an Internet business would be favourably [sic] looked upon. Accordingly this project is a joint venture involving the Internet company iWave P/L. As a result of the participation of iWave as a partner, the project will act as a lighthouse for several innovative technologies being developed by that company."

The structure of the managing or operating group was provided for under Heading 4.4 in the terms:

"The proponent, the Break O'Day Business Enterprise Board Inc, is the organisation primarily responsible for this project once complete. Formal stakeholders, iWave P/L, NETTA, and the Break O'Day Regional Tourism Association Inc will share that responsibility.

A sub-committee will be set up specifically to manage this project and it's [sic] outcomes. That sub-committee will have elected representatives from the shareholders mentioned above, together with stakeholders from the community business and tourism operators."

17 The initial budget proposal sought the allocation of $85,000 and stated as an "in kind" contribution by participating organisations some $56,000 of which some $10,000 was identified as coming from the plaintiff. The budget was not acceptable to officers of the Department and following consultations with Mr Barnard, Mr Butterworth submitted an amended budget seeking a grant of $60,000 from the Department. The variation included an increase of the "in kind" contribution by the plaintiff to $20,000. It provided for the allocation of $7,500 for project management, which all participants agreed would be paid to the first defendant. The technical site development allocation was itemised as:

A further amount of $10,000 was identified for contract work. Although the grant was not formally made until 26 June 2000, the respective parties were aware of their success beforehand. They arranged a meeting held in Derby on 16 June. Notes of that meeting were taken by Mrs Barnard and Mr Butterworth respectively. The notes of Mrs Barnard record that the project was to be controlled by Mr Barnard, Ms McLennan, Mr Butterworth and, if required, an officer of the Department, with expenditure to be authorised by any two of the three persons. The note recorded:

"2 Neil confirms he can look after accounts ($5,000 in kind from Neil) and do the monthly report to Canberra.

7 Grant money to go into Break O'Day Business Enterprise Board - NEET account. ANZ St Helens. Cheques signed by Neils [sic]Board."

Those notes are not contradicted by notes taken by Mr Butterworth at the same meeting, and are accepted as an accurate summation of the agreement relevant to this cause, reached at the meeting.

18 The deed of grant named "The Commonwealth of Australia represented by the Department of Industry Science and Resources" as the grantor and the "Break O'Day Business Enterprise Board Inc" as grantee. The deed of grant reflected the legal entity which would hold the money and did not create a new form of legal relationship. It was in accordance with the administrative arrangement stated in the Phase 2 proposal. The deed recognised Mr and Mrs Barnard, representing the plaintiff, as members of the steering committee. The conditions attached to the deed relevantly required:

"2.4 The Grantee must spend the Grant on the Project and for the Approved Purposes"

"3.1 The Grantee agrees to undertake the Project diligently and in accordance with:

(a) the Project Schedule and Budget and any other Schedules;

The deed included a budget and details of allocation in the following terms:

which replicated the amended budget earlier provided as part of the Phase 2 proposal.

19 Following formal notification, a meeting was convened for 19 July at St Helens. The meeting was attended by Mr and Mrs Barnard, Messrs Butterworth and Lowndes and for part of the time Mr Geoff Butler, who represented both the first defendant and the Break O'Day Regional Tourism Association. The meeting was unseemly and marked with conflict and recrimination. Three of the participants made notes of the meeting which represent the perspective of each of the makers. The print out of an electronic whiteboard, tendered in evidence, shows the course of some of the discussion. The minutes of the meeting prepared by Mr Butterworth after the meeting do not accurately reflect either the tenor or course of the meeting. The recollection of Mr Butler is scant and differs substantially from the other witnesses. The tenor of the meeting itself might explain some of the discrepancies in the differing accounts and it is not necessary to resolve each difference. The respective positions were clearly stated. The Barnards expected the meeting to give effect to the terms of the budget. They believed the purpose to be implementation of what had already been agreed and the development of the project. They assumed that the plaintiff would, with the allocated resources, complete the technical work necessary for the setting up of the "web site". Mr Butterworth believed that the first defendant was the designated manager of the project and ought determine future allocation of resources. The criticism and its tenor of the Barnards was seen as a challenge to his authority and responsibility. A clash of wills heightened the discord. Central to the dispute were whether a new "web site" was required or whether an existing site be modified and further developed, and the role of Mr Lowndes and his organisation, CPA, in future work and access to resources. What is clear is that the allocation of resources to the plaintiff was not agreed by a majority of those present at the meeting. The minutes prepared by Mr Butterworth are not accepted as being wholly accurate, but they do record:

Time did not allow the complete allocation of contract work to

Pending and to be consider [sic] after more urgent matters are established."

20 The whiteboard print out, although an incomplete record, shows entries which include, under headings, budget and consulting:

21 The notes of both Mr and Mrs Barnard show the issues to be control, financial allocation, nature of web site and involvement of CPA, and lack of agreement. On their case, acceptance was not necessary and the conduct of Mr Butterworth, who effectively controlled the meeting, was contrary to matters already agreed.

22 That Mr Butterworth believed that the Board of the first defendant controlled the project and was entitled to re-allocate resources is evident by his e-mail of 24 July to Mr Barnard, which stated:

Geoff Butler as a Break O'Day Business Enterprise Board member was not impressed by your lack of cooperation at the last meeting and will raise the matter at the Board meeting 1 August. At this point in time I would suggest that you delay any further work on this project until further notice. As explained at the last meeting, BODBEB are responsible for the project and the steering committee can only make recommendations in keeping with the project. I have requested both NETTA and BODRTA to forward information regarding icons and stakeholders to me asap. It may be necessary to re-schedule the 31st meeting and will advise accordingly. Attached also is a brief of the project in respect to protocol."

23 On the same say he sent an e-mail to Mrs McLennan who had been absent from the meeting of 19 July through illness and whose presence might have obviated irrevocable breach, advising:

have sent u copy of minutes plus brief on BODBEB and project.

Have not heard back from u re Phil. If Phil is to become a casuality [sic] as far as the project is concerned, do I understand from conversation last week u wld still be happy with the project as long as NETTA was well presented on the web. I see the most important issue is that of creating wot bth u & BOD require to promote tourism. In yr absence at any time will Adrian be the person to talk with. I may need to meet with u or Adrian to sure this up.

The last meeting adopted as a matter of urgency - an icon from each of the two regional areas. Cld u please send details of yr best 'lighthouse'. BOD have identifies and organuised [sic] all of their 10 stakeholders so mark and start on them immediately. Cld u tell me yr position and how long it may be b4 details cld be sent.(for scheduling purposes).

In view that BODBEB meet on Tuesday 1 Aug we may have to delay the 31st meeting to another date suitable. Geoff Butler was not happy with Phil and will raise the matter with the Board.

I am anxious to see the project run smooth and produce the result we all want.

24 At some stage the Board of the first defendant met on the issue, although the evidence, generally vague and unsatisfactory, of Mr Butler makes it difficult to determine when. Following that meeting, Mr Butterworth, on 2 August, further advised Mr Barnard that:

"The executive committee of the Board of Management resolved that both yourself and Mark Lowndes of CPA P/L cannot be members of the steering committee as you both have a conflict of interest. This conflict involves your capacity as consultants to the project and receiving payment for services. You may be invited to meetings as and when required."

25 On 3 August Mr Butterworth chaired a meeting of two persons which included himself and which purported to be a meeting of the ROTP "Steering" Committee. The minutes of that meeting, which run counter to the terms of the Deed, record the removal of Mr Barnard and Mr Lowndes from the steering committee by the first defendant and their replacement by two new persons.

26 The plaintiff ceased to have any further involvement in the project and was allocated no resources provided by the Commonwealth.

27 There was a contract concluded between the plaintiff and the first defendant at least as of the date of the forwarding of the Phase 2 proposal. It is not necessary to determine whether or not it was executory only as of February 2000, since the completion of the joint proposal constitutes a joint venture. It is likewise unnecessary to determine the status of NETTA or other parties named in the documentation. The nature of such a contract was stated by the High Court in United Dominion Corporation v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1 by Gibbs CJ at 10 - 11:

"The term 'joint venture' is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or, under Scots' law, 'adventure') will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a 'joint venture' and what should more properly be seen as no more than a simple contractual relationship may on occasion be blurred. Thus, where one party contributes only money or other property, it may sometimes be difficult to determine whether a relationship is a joint venture in which both parties are entitled to a share of profits or a simple contract of loan or a lease under which the interest or rent payable to the party providing the money or property is determined by reference to the profits made by the other. One would need a more confined and precise notion of what constitutes a 'joint venture' than that which the term bears as a matter of ordinary language before it could be said by way of general proposition that the relationship between joint venturers is necessarily a fiduciary one: but cf per Cardozo CJ, Meinhard v Salmon (1928) 249 NY 458 at 462; 164 NE 545 at 546. The most that can be said is that whether or not the relationship between joint venturers is fiduciary will depend upon the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken. If the joint venture takes the form of a partnership, the fact that it is confined to one joint undertaking as distinct from being a continuing relationship will not prevent the relationship between the joint venturers from being a fiduciary one. In such a case, the joint venturers will be under fiduciary duties to one another, including fiduciary duties in relation to property the subject of the joint venture, which are the ordinary incidents of the partnership relationship, though those fiduciary duties will be moulded to the character of the particular relationship: see, generally, Birtchnell v Equity Trustees, Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 at 407 - 409."

28 The venture was a proposal for the performance of work and the share in proceeds provided by the Commonwealth. The plaintiff had undertaken to perform identified work in return for payment from resources allocated by Government. The precise return might not be known until the outcome was defined by the terms of acceptance or allocation by the Commonwealth but, in any event, the variations required by officers of the Department were acceptable to the plaintiff and the terms of the deed reflected the amounts stated in the proposal. Unilateral exclusion by the first defendant through its agent, Mr Butterworth, was a breach of the term of the agreement and beyond its power. Its designation as "grantee" was an administrative arrangement simply reflecting the necessity to deposit the money to an incorporated body required to ensure that the money was allocated in accordance with the terms of the agreement and not misappropriated. The first defendant, which saw no conflict in its own reception of portion of the grant, was not empowered either by the terms of the deed or the agreement between the parties. The agreement was a proposal for the development of a project with a consequent share of the proceeds or profits (Consul Developments v DPC Estates [1975] HCA 8; (1975) 132 CLR 373). The obligations of the parties were dependent on and determined by the circumstances and terms of acceptance or the amount provided by the Commonwealth (Kelly v Bell Commodities Corporation Pty Ltd (1989) 18 NSWLR 248) but were sufficiently certain to permit enforcement and constitute both a trust and fiduciary relationship (Hospital Products v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41). The terms were defined by the areas of interest and responsibilities stated in the Phase 2 proposal (Noranda Australia v Lachlan Resources (1988) 14 NSWLR 1) which had been confirmed at the June meeting.

29 Paragraph 8 of the statement of claim, unamended, claimed:

"Upon a proper construction of the agreement and the relationship which existed between the plaintiff and the defendant as parties to the joint venture at all material times there has existed between the plaintiff and the first named defendant a fiduciary relationship of mutual trust and confidence in that each of the plaintiff and the first named defendant agreed to act for and on behalf of or in the interests of the other in order to obtain funding for and implement the web site project."

30 The joint defence admitted the particulars. Before trial, the plaintiff amended its pleading to read:

"... which existed between the plaintiff and the first defendant as parties ..."

to which the first defendant has pleaded a denial. Following the hearing, the first defendant served and filed an amended defence said to be in compliance with the leave granted at the time of the allowance of the amendment to the statement of claim. Counsel for the plaintiff objected to the terms of the amended defence on the ground that it withdrew an admission made in the original pleadings. During the course of the hearing in May 2004, the first defendant agreed to file a redrafted amended defence, which reads:

"The First Defendant repeats its Defence herein save and except that it denies each and all of the amendments as contained in the Amended Statement of Claim."

31 Nothing turns on the further amendment or argument. The pleading is one of law (see Supreme Court Rules, rr249 - 251) which is constrained (Independent Automatic Sales Ltd v Knowles and Foster [1962] 1 WLR 974; Pioneer Plastic Containers Ltd v Commissioner of Customs and Excise [1967] Ch 597). It remained for the Court, given the differences of factual matters originally pleaded, to determine the "proper construction of the agreement". However, notwithstanding the proposed amended general denial or the ultimate pleading, the original pleadings demonstrate that the case of both defendants depended on their version of events and the Court's interpretation of the documentation, rather than a denial of legal consequence if adverse findings were made or a particular meaning given to the relevant documents.

32 The Court accepts that Mr Butterworth had not intended to deceive the plaintiff, in the sense that he understands the term. But such is not necessary to constitute breach of a fiduciary obligation. The Court also accepts that following the 19 July meeting, the plaintiff was not precluded from submitting a tender for work to the re-structured committee and chose not to so do. But it was not required to take such a course since it had an existing entitlement. In any event, representatives of the plaintiff had been removed from the governing body and Mr Barnard advised that he should refrain from further work until the dispute had been settled. Permission to tender in the future was no remedy for the breach.

33 The plaintiff is entitled to its remedies against the first defendant in contract and equity.

"Each of the actions of the first or second named defendant ...

(d) In respect of the second named defendant, constituted a knowing participation by him in the breach of fiduciary duty of the first named defendant."

35 Liability might attach to a third party other than a trustee, even though there is no dishonest design in the transaction. The proposition as originally stated is that strangers are not to be made constructive trustees merely because they act as agents of trustees in transactions within their legal power, but responsibility might be extended in equity where such persons made themselves trustees de son tort, or actively participate to the injury of the cestui que trust (Barnes v Addy (1874) 9 LR Ch 244). The modern application of the extension was stated by Gibbs J in Consul Development v DPC Estates Pty Ltd (supra) when, in considering Lord Selborne's judgment in Barnes, said, at 396:

"Although in this passage Lord Selborne speaks of dishonesty and fraud it is clear that the principle extends to the case 'where a person received trust property and dealt with it in a manner inconsistent with trusts of which he was cognizant': Soar v Ashwell [1893] 2 QB 390, at pp 396-397; Lee v Sankey (1872) LR 15 Eq 204, at p 211; and in In re Blundell; Blundell v Blundell (1888) 40 Ch D 370, at p 381 . All these authorities, however, are dealing with trustees and trust property in the strict sense and the question is whether the principle applies to impose liability on strangers who knowingly participate in a breach of fiduciary duty committed by a person who is not a trustee or is at most a constructive trustee. In Selangor United Rubber Estates Ltd v Cradock [No 3] [1968] 1 WLR 1555 , Ungoed-Thomas J held that directors of a company should be regarded as holding on trust any moneys of the company under their control and that agents of the directors who received moneys of the company in circumstances that showed that they assisted 'with knowledge in a dishonest and fraudulent design' on the part of the directors were liable as constructive trustees. He held that what is 'dishonest and fraudulent' for this purpose has to be judged according to 'the plain principles of a court of equity' [1968] 1 WLR, at pp 1580-1582. After an exhaustive discussion of the question what knowledge is required to satisfy the test stated in Barnes v Addy [1874] 9 Ch App 244 , he expressed his conclusions on that matter as follows [1968] 1 WLR, at p 1590:

'The knowledge required to hold a stranger liable as constructive trustee in a dishonest and fraudulent design, is knowledge of circumstances which would indicate to an honest, reasonable man that such a design was being committed or would put him on inquiry, which the stranger failed to make, whether it was being committed. Acts in the circumstances normal in the honest conduct of affairs do not indicate such a misapplication, though compatible with it. And answers to inquiries are prima facie to be presumed to be honest ...'

This decision was followed by Brightman J in Karak Rubber Co Ltd v Burden [1972] 1 WLR 602 (at p396).

The decision in Selangor United Rubber Estates Ltd v Cradock [No 3] (1968) 1 WLR 1555 that the rule in Barnes v Addy (1874) 9 Ch App 244 applies to agents of company directors who have received money of the company does not go quite far enough to resolve the present case, since Consul did not receive any property of DPC. However, in my judgment, the principle under discussion extends to the case where a stranger has knowingly participated in a breach of fiduciary duty committed by a person who is not a trustee even though nothing that might properly be regarded as trust property - even property stamped with a constructive trust - has been received. The strict rule of equity that forbids a person in a fiduciary position to profit from his position appears to be designed to deter persons holding such a position from being swayed by interest rather than by duty (see Bray v Ford [1896] AC 44, at p 51 ); it is 'a rule to protect directors, trustees, and others against the fallibility of human nature': Costa Rica Railway Co Ltd v Forwood [1901] 1 Ch 746, at p 761 . If the maintenance of a very high standard of conduct on the part of fiduciaries is the purpose of the rule it would seem equally necessary to deter other persons from knowingly assisting those in a fiduciary position to violate their duty. If, on the other hand, the rule is to be explained simply because it would be contrary to equitable principles to allow a person to retain a benefit that he had gained from a breach of his fiduciary duty, it would appear equally inequitable that one who knowingly took part in the breach should retain a benefit that resulted therefrom. I therefore conclude, on principle, that a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation."

36 Here Mr Butterworth acted as the representative of an incorporated association. He was fully cognisant of the terms of the arrangements and their documentation and was the "decision-maker" for the first defendant during all of the negotiations and agreements. It was his opinion concerning the effect of the deed and his stated belief that the plaintiff was required to compete with others by submission or tender which led to the breach of the agreement. He was not the passive agent or conveyor of information from the incorporated body. He controlled the line of communication between the joint venturers and the Commonwealth. His conduct at the meeting of 19 July and his later communications with others shows that he was zealous in defence of his authority. His conduct constituted knowing participation in a breach of fiduciary duty.

37 The first defendant is in breach of both its contractual obligations and fiduciary duty to the plaintiff. The second defendant is liable to the plaintiff for breach of fiduciary duty. It is not necessary to determine the issues of representation, promissory estoppel or statute raised by the pleadings.

38 Remedy differs between contractual and fiduciary breach (Supreme Court Civil Procedure Act 1932, s34; Wallersteiner v Moir (No 2) [1975] 1 All ER 849; Smith v Croft [1986] 2 All ER 551).

39 The original joint venture proposal identified an amount of $33,000 as being at the disposition of the plaintiff, and remained as such in the revised proposal. The plaintiff concedes that the sum of $5,000 identified for "specialist artwork" required the employment of a specialist and loan of this sum would have been available for its own use. Mr Barnard gave evidence that since most of the intended work involved skill and labour which he and his wife could undertake, the plaintiff's profit margin would have been in the vicinity of 80 per cent. The plaintiff has in its pleadings confined its claim for damages to an amount of $20,000. However, counsel for the plaintiff in the course of his closing address, quantified the claim on the basis of the evidence given at trial as 80 per cent of $22,000, plus a GST component (Shaw v Director of Housing & State of Tasmania (No 2) [2001] TASSC 2; (2001) 10 Tas R 1). There ought be an assessment in favour of the plaintiff in an amount of $17,600. Such sum is recoverable for both the contractual and equitable remedies.

40 Interest is recoverable as an equitable remedy. In Wallersteiner (supra), Lord Denning stated the principle in the following terms at 855 - 856:

"The principles on which the courts of equity acted are expounded in a series of cases of which I would take the judgment of Romilly MR in Jones v Foxall [1852] EngR 407; (1852) 15 Beav 388; of Lord Cranworth LC in Attorney-General v Alford (1855) 4 De G M & G 843 at 851; of Lord Hatherley LC in Burdick v Garrick (1870) 5 Ch App 233 at 241, 242; of Sir W M James LJ in Vyse v Foster (1872) LR 8 Ch App 309 at 333. 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 those cases the Court directs rests to be made [ie compound interest]':

see Burdick v Garrick (1870) LR 5 Ch App at 242 by 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 at 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 (1722) 1 Stra 505[1722] EWHC KB J94; , [1558-1774] All ER Rep 121. 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.

Applying these principles to the present case, I think we should award interest at the rate of 1 per cent per annum above the official bank rate or minimum lending rate in operation from time to time and with yearly rests."

41 Detailed consideration of the Australian position, especially since deregulation of the financial markets, was given by Kearney J in Hagen v Waterhouse (1991) 34 NSWLR 308. It is appropriate to republish at length his statement at 391 - 393, since absent legislative confines, there remains difficulty in determining a rate of interest reflective of consistency and the nature of the specific commercial form and nature of the relationship and its breach, especially in cases involving joint venture. The statement reads:

As was said by Street J in Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 84 WN (Pt 1) (NSW) 399 at 408; [1966] 2 NSWR 211 at 218_:_

'... The general principle is that where a trustee has, through his breach of trust, occasioned loss to the trust estate then he is liable to make good that loss, together with interest.'

(See also Jacobs' Law of Trusts in Australia, 5th ed (1986) para 2208 and Ford and Lee, Principles of the Law of Trusts, 2nd ed (1990) paras 1713 et seq at 731ff.) The 'trustee' rate is fixed upon that obtainable from investment in government stock at the time (Palette Hughes Pty Ltd (In Liq) v Krohn [1937] VicLawRp 66; [1937] VLR 314. Until recent times the rate adopted was 4% as a matter of policy of the Court (Re Tennant; Mortlock v Hawker [1942] HCA 3; (1942) 65 CLR 473 at 507 per Dixon J). In 1966 Street J in Re Dawson accepted 4 per cent as the trustee rate. The effect of inflation has markedly increased government stock interest rates. The rate applied by the court in 1979 was 8 per cent: AE Goodwin Ltd v AG Healing Ltd (1979) 7 ACLR 481 at 493 per Powell J. This rate was applied in 1983 by the Supreme Court of Western Australia in Re Boyagarra Pty Ltd (In Liq) (1983) 7 ACLR 612. Although I would have thought that a rate such as 10 per cent may thereafter have been justified (Bartlett v Barclay's Bank Trust Co Ltd (No 2) [1980] Ch 515 at 547), the prescribed rate of interest on legacies remains 8 per cent (r 49(9) of the Supreme Court Rules 1970). I consider that the trustee rate to be applied should be 4 per cent up to 1975 and 8 per cent thereafter. The 'mercantile' rate is applied as a means of recovering profit received or presumed to have been received by the trustee as a result of misapplication of trust funds. The trustees suggest that the appropriate rate is that applicable for ten year Commonwealth Government Bonds. The plaintiffs contend that commercial rates should apply and that bank overdraft rates provide the appropriate scale. In England the Court of Appeal in Wallersteiner v Moir (No 2) [1975] QB 373 adopted a flexible rate by reference to the official bank rate or minimum lending rate in operation from time to time. This was applied in O'Sullivan v Management Agency Ltd [1985] QB 428. In Australia a flexible approach has generally applied. In Southern Cross (Commodities) Pty Ltd (In Liq) v Ewing (1987) 11 ACLR 818 the Supreme Court of South Australia adopted the Wallersteiner v Moir (No 2) formula.

No evidence was presented on the mercantile rate issue. It may be said in favour of the plaintiffs' contention that the bank overdraft rate represents a more realistic approach to changes in monetary conditions, particularly having regard to the volatility of interest charges in recent times. Wallersteiner v Moir (No 2) and the South Cross Commodities case can be seen as responses to this reality, as are the rates of interest allowable in respect of common law claims (Hungerfords v Walker [1989] HCA 8; (1989) 63 ALJR 210; Supreme Court Practice Notes). Against this stands the comment of Dixon J in Re Tennant (at 507-508):

'But changes in monetary conditions led to what may be described as judicial movements, first to reduce and afterwards to raise the rate. Experience of the marked fluctuations in interest rates has rather confirmed the policy of the court in fixing for its purposes a rate which over a long period represents a fair or mean rate of return for money.'

This statement referred to the 'trustee' rate, but Street J in Re Dawson (at 409-411; 219-220) regarded it as reflecting a judicial attitude, and adopted and applied 'the policy of the court' in fixing 5 per cent as the mercantile rate in accordance with the established practice of the Court in 1966.

In view of the dramatic increases in interest rates following the inflationary cycle since the 1970's, two points arise. First, the two above-mentioned cases adopting the bank overdraft rate were essentially commercial cases rather than trust cases. As pointed out by Needham J in Re Hatton Developments (Aust) Pty Ltd and The Companies Act (1978) 3 ACLR 484; (1978) ACLC 30,081 at 20,082, the practice of the Court was to order in commercial transactions a higher rate of interest than in 'trustee-type situations or situations analogous to trustee responsibility'. However this statement was made in reference to the 'trustee' rate, and it seems odd that delinquent directors should pay more than defaulting trustees of whom the highest standard of probity is expected.

The second point is whether the judicial attitude mentioned by Street J should continue to apply in today's context of high and fluctuating interest rates, particularly in view of the flexible response to them manifested by Wallersteiner v Moir (No 2). I think that the volatile range of fluctuations in interest rates in recent times ought to be taken into account in applying to these changed conditions the policy of the Court which was settled in times of greater monetary stability. Since then a fundamental change has resulted from financial deregulation and its consequential uncertainties. I consider that it is no longer appropriate to apply a policy fixing a settled mean rate of interest, but rather that the mercantile rate should reflect the reality of the market place as it exists under a regime not in contemplation at the time of the foregoing pronouncement of judicial attitudes. Indeed the policy of the Court evinced in the Practice Notes as to interest before judgment in proceedings for recovery of money is to adopt rates reflecting commercial rates of interest applicable from time to time since January 1974.

Accordingly, I conclude that the mercantile rate which is appropriate in this instance is 5 per cent up to 1970; 7 per cent thereafter up to 1974; and thereafter the rate from time to time as specified in the Practice Notes.

In instances where I consider that compound interest rather than simple interest should be applied I have so specified. I have done so on the basis of the proposition stated in Southern Cross Commodities Pty Ltd (In Liq) v Ewing (at 843; 1,133):

'... that a trustee may, and normally will, be charged with compound interest with yearly rests not only where he has used the money for his own commercial purposes but. also where he has been guilty of fraud or serious misconduct.'

As commented by Ford and Lee, Principles of the Law of Trusts, 2nd ed (1990) para 1713.2 at 733: '... Then an award of compound interest is a device of equity to minimise the possibility that any profit can remain in the trustee's hands.'

The compound interest as awarded is to be calculated at yearly rests."

42 Here the ambitions of the parties were modest. The first defendant was a small community-based organisation intended for the general enhancement of its community. The plaintiff intended a reasonable return for the skill and labour of its members. The second defendant stood to gain no personal benefit. The joint venture, although it might have grown larger, was a single proposal for the development of a program and not one with ongoing and increasing profits or capital appreciation.

43 The appropriate interest award ought be 1 per cent over the rates fixed by the Reserve Bank, calculated at yearly rests.

44 There remains the matter of GST calculation, which might depend on the formal order made. Counsel have agreed that this, and the interest calculation, be considered further once these reasons for judgment have been published.