Jurisdiction : DISTRICT COURT OF WESTERN AUSTRALIA

Citation : JOHNSON -v- SHEPPARD [2003] WADC 112

Administrative law - Appeal against decision of District Court on appeal from Real Estate and Business Agents Supervisory Board - Licensed real estate agent - Contract for sale of strata title units - Whether conduct of agent involved breach of code of conduct for agents and sales representatives - Duty to act fairly and honestly

Code of Conduct for Agents and Sales Representatives, s 5(1)

Real Estate and Business Agents Act 1978 (WA)

Grljusich v Andrews [2003] WASCA 206

Harle v Legal Practitioners Liability Committee [2003] VSCA 133

Macleod v The Queen [2003] HCA 24; (2003) 214 CLR 230

Peters v The Queen [1998] HCA 7; (1998) 192 CLR 493

Bradshaw v Medical Board (WA) [1990] 3 WAR 322

Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336

Chidiac v The Queen [1991] HCA 4; (1991) 171 CLR 432

Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission [2000] HCA 47; (2000) 203 CLR 194

Maxwell v Dixon [1965] WAR 167

Peters v The Queen [1998] HCA 7; (1998) 192 CLR 493

State Rail Authority of NSW v Earthline Constructions Pty Ltd (in liq) & Ors [1999] HCA 3; (1999) 160 ALR 588

Warwick Entertainment Centre Pty Ltd v McKenzie [2000] WASCA 280

Ziems v Prothonotary of The Supreme Court of NSW [1957] HCA 46; (1957) 97 CLR 279

1 MURRAY J: The appellant is a licensed real estate agent. She and her husband are the directors of a company called Property Headquarters Pty Ltd. For reasons which will shortly appear it is material to note that the appellant, her husband, her father and one other were directors of a company called Haskin Pty Ltd.

2 Under the Real Estate and Business Agents Act 1978 (WA) s 102(1)(a) the appellant was the subject of an inquiry into her conduct for the purpose of determining whether or not there was proper cause for disciplinary action to be taken against her. The inquiry was concerned to establish whether the appellant had acted in breach of the Act and the Code of Conduct for Agents and Sales Representatives made pursuant to s 101 of the Act.

3 The notice of inquiry made a number of allegations of which it gave particulars. The first was concerned with the question whether there had been a breach of s 68(4) of the Act in that having received money into her company's trust account she caused the money to be withdrawn without the authority of those lawfully entitled to it. A further allegation was that having caused the money to be withdrawn, she caused the money to be paid to persons other than those lawfully entitled or authorised to receive it, in breach of s 68(5) of the Act. There was a general allegation that she failed to act in the best interests of her principal as a sales representative in breach of s 2 of the Code of Conduct. It was alleged that, contrary to s 6(2) of the Code, as a person in bona fide control of the agency business she failed to properly supervise her husband and other employees of the company and a related allegation was that she failed to exercise skill, care and diligence in breach of s 7 of the Code.

4 I have left until last the allegation which is of importance for present purposes that the appellant failed to act honestly, contrary to s 5(1) of the Code of Conduct, which simply imposes upon an agent a duty to "act fairly and honestly".

5 Each of the allegations, the subject of the inquiry, was supported by the same set of particulars. It was alleged that a Mr Teo, and Mr Teo and a Dr Low, were respectively the lessors of strata title properties at an address in Perth to a company called ACCA Pty Ltd. It was alleged that Property Headquarters Pty Ltd was the managing agent in respect of these leases and so was required to collect rental and other payments due under the leases, to pay outgoings on behalf of the respective lessors and to remit the net balance to them. It was alleged that Mrs Johnson, as the person in bona fide control of Property Headquarters Pty Ltd, caused the company to withdraw money payable to the lessors respectively from the company's trust account and to have that money paid to Haskin Pty Ltd.

6 After an inquiry heard over two days in December 2001 the Real Estate and Business Agents Supervisory Board delivered its decision on 8 May 2002. For reasons which it then gave it found Mrs Johnson guilty of all of the allegations in the notice of inquiry.

7 A penalty hearing was held on 9 September 2002. The Board had found under s 103(2) of the Act that there was proper cause for disciplinary action against the appellant as an agent because she had acted in breach of the requirements of the Act and the agents' Code of Conduct. The Board determined under s 103(1) that the appellant's licence and triennial certificate, the certification of her authority as a licensee to carry on business as an agent, should be suspended for a period of 18 months from the expiry of 28 days from the decision as to penalty. On my calculation that period of suspension would become effective on 8 October 2002 and the period of suspension would expire on 8 April 2004. In addition Mrs Johnson was fined $3,000.

8 It should be noted that under the Act the Board's disciplinary powers are activated by its satisfaction "that proper cause exists for disciplinary action". In other words, a conclusion by the Board that any one or more of the alleged breaches of the Act or the Code of Conduct were established would provide proper cause for disciplinary action. The suspension of the licence was not therefore related to any particular alleged breach and nor was the fine related to any particular alleged breach. All that can be said is that the Board made particular reference to its "finding of dishonesty involving conflict of interest" before going on to impose the penalties, which were in terms related by the Board to all of its decisions concerning the appellant's breaches of the Act and the Code of Conduct.

9 The appellant appealed to the District Court against the adverse findings and the penalties imposed. Her appeal was dismissed. She appeals from that decision to this Court. The appeal to the District Court was made pursuant to s 23 of the Act. That appeal is by way of rehearing on the evidence before the Board. Its success would therefore depend on demonstration of error on the part of the Board: Grljusich v Andrews [2003] WASCA 206 at [76] - [81].

10 The further appeal to this Court under the District Court of Western Australia Act 1969 (WA) s 79 is of the same character, as is an appeal to the Full Court from the final decision of a Judge of the Supreme Court.

11 The appeal to this Court, as finally pressed before us, asserts that her Honour in the District Court erred in failing to conclude that the Board had erred in finding a breach of s 5(1) of the Code of Conduct in that there was no evidence to support that finding, or alternatively, it was against the weight of the evidence. The second ground of appeal asserts, in effect, that her Honour ought to have found that the penalties imposed on the appellant were manifestly excessive.

12 As to the first ground that it was not open to the Board to find that the appellant failed to act honestly, no attention appears to have been given to what that concept may mean in the context of the Code of Conduct, either before the Board or before the District Court. In my view, it is necessary to start from that point. I consider that there is nothing in the Code of Conduct which gives any support for the view that "honesty" in the context of the Code bears any special meaning related to the duties of an agent which would take it outside the ordinary English meaning of the word "honesty". The phrase used in s 5(1) of the Code is that the agent must act "fairly and honestly". The ordinary meaning of the word is, in my opinion, the appropriate meaning.

13 In Peters v The Queen [1998] HCA 7; (1998) 192 CLR 493 the High Court considered the concept of honesty as an element of the offence of conspiracy to defraud. The Court held that dishonesty in the context of that offence involved no special use of the word "honesty" but merely the need to find whether the conduct in question was dishonest according to the standards of ordinary, decent people. That, in my opinion, is the sense in which the word is used in this context. The question was whether the appellant's conduct breached the duty to act fairly and honestly in the sense in which that word is ordinarily used. The question therefore was whether the appellant's conduct was dishonest according to the standards of ordinary decent people. That made it necessary to identify the quality of the conduct and the knowledge, belief or intention said to render it dishonest: see Peters per Toohey and Gaudron JJ at 504 [18].

14 There is no reason to suppose that standards of fairness and honesty applicable to real estate agents differ in any way from those applicable in the community at large, in relation to the standards to be observed when a person is acting for another, with a duty to act in the best interests of the principal, but not in such a way as to advance those interests improperly, according to the ordinary standards of reasonable, honest people. In particular, it would be no answer to say that the person concerned, whose honesty was under consideration, did not appreciate that ordinary, decent people would view his or her conduct as dishonest: Harle v Legal Practitioners Liability Committee [2003] VSCA 133 per Chernov JA, with whom Callaway and Buchanan JJA agreed, at [29] - [30], relying substantially on Peters and the later decision of the High Court in Macleod v The Queen [2003] HCA 24; (2003) 214 CLR 230, in a case concerned with the liability of a professional indemnity insurer for the conduct of a solicitor subject to a clause excluding liability for the dishonest acts or omissions of the assured.

15 Against that background, the terms in which the ground of appeal concerning the Board's finding that the appellant failed to act honestly were couched, require some further examination of the facts as they were found by the Board and reviewed by the District Court Judge. I have mentioned the particulars upon which the allegations in the notice of inquiry were based and it may be said at once that in respect of each allegation those particulars were found to have been made out. The facts appear to have been as follows.

16 Haskin Pty Ltd owned the lots in a strata title office building in St George's Terrace, Perth. On 7 October 1994 lot 53 (formerly lot 28) was sold to a Mr Teo acting by his investment vehicle the Teo Investment Trust. On the same date lot 27 was sold to Mr Teo and a Dr Low jointly. Both contracts were settled on 17 February 1995. It was a term of each contract that Haskin would guarantee a minimum net rental of 8 per cent of the purchase price per annum after payment of expenses and outgoings. The 8 per cent rental guarantee was to cover the first three years after the contracts of sale were completed and to the extent necessary, the guarantee was to be paid by Haskin monthly in arrears.

17 I have mentioned the common directorships of the appellant and her husband in Haskin and the real estate agency Property Headquarters Pty Ltd. Importantly, the appellant was not only a director but the principal of Property Headquarters and the person in de facto control of its business and the conduct of its licence. The contract for the sale of the units referred to a unit management agreement whereby purchasers of units engaged Property Headquarters as managing agent. The contracts disclosed the appellant's conflict of interest arising out of her and her husband's common directorships and shareholding in Haskin.

18 At the time of settlement in February 1995 the units had not been let. They were let by Teo and Teo and Low respectively on and from 3 July 1995 to a lessee ACCA Pty Ltd, but the monthly rental net of outgoings was substantially less than the 8 per cent rental guarantee. The rent was paid monthly in advance.

19 Initially, until the premises were leased, Property Headquarters collected the 8 per cent rental guarantee on behalf of Teo and Low from Haskin as required by the standard management agreement which was accepted to be applicable to the function of Property Headquarters as the managing agent. The money was deposited in a trust account and, after disbursements and fees were deducted, these moneys were paid to Teo and Low.

20 From July, when the premises were leased, this procedure continued in respect of the payment of rent and other moneys under the leases by ACCA. In other words, those moneys collected by Property Headquarters were paid into the trust account in the names of Teo and Low. But instead of paying these moneys, net of disbursements and fees, to Teo and Low as the owners of the units, Property Headquarters paid the money to Haskin. The idea was that Haskin would top up the money received, as required under the contracts for the sale of the units, until it reached the 8 per cent guarantee amount and Haskin would then pay this amount to Teo and Low, rather than have Property Headquarters collect the additional sum required from Haskin to honour its obligation as managing agent to collect the moneys due to Teo and Low in respect of the investment constituted by these premises, either in the form of rental income or, to the extent required, in the form of the 8 per cent guarantee by Haskin as the vendor.

21 Property Headquarters' internal accounting process was in computerised form. The arrangement I have described was established on the instructions of Mr Johnson. The appellant, who was not computer literate, played no role in this process. The arrangement I have described was achieved by the simple process of Property Headquarters recording Haskin, rather than ACCA, as the tenant liable to pay rent as well as the 8 per cent rental guarantee to Teo and Low.

22 There was evidence from the trust account operator for Property Headquarters, a Ms Meloncelli, that this arrangement, for which Mr Johnson had given the instructions, was unusual. In other cases where there was a rental guarantee the ledger was set up in the ordinary way showing payments into trust by the tenant and payments out to the owner with the company, in its capacity as managing agent, charging to the guarantor, usually Haskin, any sums due under the guarantee.

23 In the event, it seems that almost immediately there were difficulties with Haskin, which appeared to be suffering liquidity problems. The appellant, who played no role in the day-to-day operations of Haskin, was aware of these financial difficulties. She knew, for example, that Haskin was not able to pay strata levies. By September 1995 Haskin had stopped making payments to Teo and Low, but as I understand it the rental payments, which continued to be received from ACCA, continued to be disbursed to Haskin.

24 Teo and Low were of course aware that their payments, equal to the 8 per cent guarantee, were continuing to be received from Haskin despite the rental of the premises to ACCA. When the payments stopped they complained to the appellant and ultimately sued Haskin, obtaining summary judgment, as I understand it, for the unpaid rent and the amount due under the rent guarantee.

25 Also, the appellant later caused Property Headquarters to pay a total of $18,640 to Teo and Low as rental received from ACCA for the period 1 November 1995 to 30 June 1996. She, at all times, took the position that Property Headquarters was under no obligation with respect to the rental guarantee which was the obligation of Haskin. It is perhaps noteworthy that, although the appellant took up with her husband Haskin's apparent incapacity to pay strata levies and rental guarantee moneys, she did not cause Property Headquarters to initiate any action to recover the moneys due in respect of these leases.

26 It seems abundantly clear that the arrangement described was not made with the authority of Teo and Low although, of course, as soon as the premises were rented they no doubt noted, as Mr Teo indicated in evidence, that the payments to them continued to be made by Haskin. Mr Teo said he thought that was because Haskin bore the responsibility to ensure that the rental guarantee was honoured although, of course, what should have been happening was that the net rent should have been paid to them by Property Headquarters monthly in advance. Haskin had the obligation to top those moneys up to the rental guarantee sum monthly in arrears.

27 It does not seem to me to matter what the understanding of Teo and Low might have been. The crucial question for present purposes is the knowledge of the appellant. She gave evidence before the Board which touched on this topic. It is difficult to follow some of the evidence but it is noteworthy that there are differences, it would seem, between her evidence to the Board and the view of the transactions she then expressed and what she said when interviewed by the respondent, an Inspector of the Board, on 23 June 1999. An audio record was made of that interview, which was conducted by the respondent and another inspector with the appellant and her husband together, a proceeding which would seem to me to be undesirable, given that an inquiry was proceeding into the activities of the appellant and of Mr Johnson who, I understand, was a licensed real estate sales representative.

28 However that may be, it is clear that the appellant was aware, at least broadly, because she dealt with the solicitors concerned, of the structure and terms of the relevant contractual arrangements, first with respect to the sale of the units by Haskin to Teo and Low and secondly, the terms of the leases by Teo and Low to ACCA. She knew that those leases involved the appointment of Property Headquarters as the managing agent under the standard form of contractual arrangement in that regard. She knew therefore what obligations Property Headquarters bore in relation to collection and payment.

29 As to the particular arrangements which were made in that regard by Ms Meloncelli within Property Headquarters, the appellant said that although she was not aware precisely how it was set up, "we discussed the broad idea of what was supposed to happen and then it was implemented by my staff" (record of interview p 21). She did say at that point that she was not aware that the rental money paid by ACCA was in fact being paid to Haskin until she checked the records when the Board's investigation was underway. She said that until then "it was not an issue", but the important point seems to me to be the appellant's acceptance that she knew broadly what the system was to be.

30 That is consistent with what she said earlier in the interview at a point where she was describing in some detail her understanding of the various contractual arrangements. Referring to the fact that the solicitors were engaged to prepare the documents, she said that her understanding was that the lease was to be dealt with in the context of Haskin's guarantee. She said at p 9 of the record of interview:

"...it was meant to be where they could have the ability - Haskin - to gain income from those properties to be able to meet the guarantees. It wasn't meant to be that we just sit and forget about it for three years."

A little later the appellant agreed that she was aware of the arrangement that the rent from the tenant ACCA was being paid to Haskin (p 11). She understood that Haskin was to be treated as if it was the lessor although that was not how the solicitors drew the agreements. Nonetheless, she thought that to be "in the spirit of the transaction" and therefore "that's how I instructed management" (p 12).

31 In my view, as in the view of her Honour, the Judge of the District Court hearing the original appeal, it was well open to the Board to find, as it did, that the rent moneys were wrongly paid to Haskin and both the appellant and her husband knew that the rent should have been paid to Teo and Low. However, when Haskin suffered liquidity problems it applied those moneys for its own benefit. The Boards' final conclusion was expressed in the following terms:

"Article 5(1) of the Code of Conduct provides that 'An agent must act fairly and honestly'. We have outlined above our findings that Mrs Johnson had a conflict of interest. There was a circumstance of dishonesty in the way in which this particular transaction was dealt with. We concur with the submission of Counsel for the appellant that Mrs Johnson knew that the units had been leased to Acca. This lead to the circumstance of dishonesty whereby Mrs Johnson, knowing that the rent was being paid in by Acca but not out to Mr Teo and Low, had the power to correct the situation but did not do so. The payment by Mrs Johnson of the two cheques totalling $18,640.00 in reimbursement of the rent received from Acca, was, in our view, a belated attempt to remedy the unauthorised application of trust monies. She must accept responsibility for the unauthorised payment of the trust monies.

We also find that Mrs Johnson has breached Article 5(1)."

32 In my opinion, although her Honour the District Court Judge said that she agreed with some of the appellant's criticisms of the Board's findings and reasoning with respect to dishonesty, in the end there is not much difference between the Board and the way in which her Honour expressed her reasons for holding that the Board's conclusion was well open to it. Her Honour said that the appellant's failure to act to ensure that the rent was paid to Teo and Low gave rise to the inference that she knowingly supported her own interest in preference to their interests. Her Honour thought that was the only reasonable inference open. Her Honour said that the dishonesty arose both from setting up the system to misdirect trust money away from Teo and Low and then, knowing Haskin was not paying the 8 per cent guarantee, in failing to correct that misdirection.

33 It seems to me also, with respect, that that conclusion is inescapable. The appellant was interested in the affairs of both Property Headquarters and Haskin in a material way. As a director and shareholder in Haskin and the guarantor of its operations she was a direct beneficiary of anything which benefited Haskin. To declare her interest to Teo and Low in the context of the making of the contract of sale was only a necessary first step designed to ensure that the appointment by Teo and Low of Property Headquarters as managing agent of the investment property they were acquiring was not improper. That was not the relevant conflict of interest for present purposes. The relevant conflict of interest was between the proper performance of the appellant's duties as the principal of the managing agent, Property Headquarters, to act so as to secure the best interests of Teo and Low, the principals in the agency agreement, and her interest in Haskin.

34 In my opinion, it was well open to the Board, on the appellant's own admissions, to find that she knew what was in fact the structure of the sale agreement, the lease agreements and the management agreement. It was open to find, as the Board did, that the appellant understood that the obligation of Property Headquarters, as those agreements were constructed, was to collect the rent from ACCA, allow for proper disbursements and fees and remit the net rent periodically to Teo and Low. It was open to find that she well understood that Haskin's obligation was to top up that payment to meet the 8 per cent guarantee obligation, so far as that was necessary, and she knew that it was necessary having regard to the rental achieved. And yet, it was open to find, and indeed the inference was compelling, that she thought that the letter of the agreements did not accord with the spirit of what was proposed in that the agreements as made left Haskin without any income from the leases which might assist Haskin's liquidity and assist it to meet its guarantee obligations.

35 Therefore, she instructed that the system be set up within Property Headquarters in such a way as to divert the rental income from Teo and Low to Haskin. That was her deliberate intention, although she did not know and did not interest herself in the precise manner, using the computerised accounting system of Property Headquarters, by which that would be achieved. That extraordinary arrangement was put in place without the authority of Teo and Low and it put in jeopardy their capacity at least to receive the rental agreed upon. Therein lay both the relevant conflict of interest and the dishonesty which constituted the breach of s 5(1) of the Code of Conduct.

36 To my mind it was relevant only to penalty that when the arrangement was put in place there is nothing to suggest that the appellant was aware that Haskin had, or was likely in the near future to have, liquidity problems of the kind which beset it. It was no doubt the case that she expected that by the arrangement made Haskin might benefit and Teo and Low would suffer no harm because they would continue to receive the return on their investment guaranteed at 8 per cent.

37 That requires me to turn to the question of penalty and the appeal against the penalties imposed. It must be recalled, as I have mentioned, that those penalties became available upon the finding of proper cause for disciplinary action. One or more of the available penalties could be imposed. The maximum fine was $10,000. The licence could be suspended, or it, and any triennial certificate held by the agent, might be cancelled and that person might be disqualified, temporarily, permanently, or until the fulfilment of any condition which might be imposed by the Board.

38 In this case the Board found proper cause for disciplinary action in that the conduct of the appellant involved a breach of s 68(4) of the Act. The misdirection of the rental moneys without the authority of Teo and Low involved a breach of s 68(5) of the Act in the failure to account which that conduct involved. That was clearly not in the best interest of the appellant's principals Teo and Low. Section 2 of the Code of Conduct was therefore breached. In so far as the appellant's husband and other employees of Property Headquarters were involved in setting up the systems by which the conduct was enabled to occur, there was held to be a failure to properly supervise them, contrary to s 6(2) of the Code of Conduct, and a failure to exercise skill, care and diligence, contrary to s 7 of the Code of Conduct. Finally, of course, and importantly, what the appellant did was properly held to be dishonest in breach of s 5(1) of the Code of Conduct.

39 In the circumstances of this case it seems to me to be impossible to argue that the penalties imposed by the Board for disciplinary purposes, the Board being recognised to be the expert tribunal having the responsibility of governance of the industry of real estate agents, were manifestly excessive. Her Honour the District Court Judge would not have been justified in interfering so as to set aside or modify those

penalties and, in my opinion, this Court may not hold that her Honour erred in declining to intervene.

41 TEMPLEMAN J: I have had the advantage of reading in draft the reasons published by Murray J. I agree with his Honour's reasons, and would add only the following observations.

42 The finding of the Real Estate and Business Agents Supervisory Board ("the Board") that the appellant knew that the strata-titled units had been let to ACCA Pty Ltd ("ACCA") was accepted by the appellant: submissions [35].

43 In her evidence to the Board, the appellant said she knew from the fact that she was signing the relevant cheques, that the rent paid by ACCA was being transferred from the trust account of Property Headquarters Pty Ltd to Haskin Pty Ltd ("Haskin") (AB 204). The appellant was a director of Haskin and a guarantor of its obligations. Later in her evidence, the appellant denied she had made that admission (AB 206). However, it was a matter for the Board whether to accept the admission: and the Board clearly did.

44 It was therefore open to the Board to find that during the period in which the appellant knew that Haskin was (at least) unable to make payments under its guarantee to her clients, the owners, the appellant knowingly preferred the interests of Haskin (and hence, her own interests) over those of her clients and was thereby in breach of her fiduciary duty.

45 The Board's finding was that the appellant "had the power to correct the situation but did not do so" (AB 42): hence "the circumstance of dishonesty" on which the Board's conclusion was based.

46 The learned District Court Judge expressed her conclusions rather differently. The conclusions contained a reference to the appellant's trust account ledger cards. This may have been irrelevant, in the sense that nothing turned on the applicant's knowledge of the detail of the ledger cards. However, her Honour's ultimate conclusion included the following:

"The dishonesty arises ... from ... knowing Haskin was not paying the 8 per cent, failing to correct the misdirection [ie, of rent paid by ACCA, to Haskin]"

47 That conclusion was essentially the same as the conclusion reached by the Board. It reflected the knowing breach of fiduciary duty to which I have referred above. In my view, it justified the finding of dishonesty, in the context of Article 5(1) of the Code of Conduct for Real Estate Agents and Sales Representatives.

48 I therefore concur in the order that the appeal be dismissed.

49 SIMMONDS J: I have had the advantage of reading in draft the judgment of Murray J. For the reasons he gives, I too would dismiss this appeal.