Citation : JOYCE -v- PALASSIS [No 4] [2008] WASC 45

Interlocutory appeal - Application to amend statement of claim - Turns on own facts

1 PULLIN JA: This is an interlocutory appeal against the judgment of Le Miere J who refused the appellants leave to amend a statement of claim.

2 The statement of claim reveals that the first respondent (Mr Palassis) was in partnership with the first appellants, operating an accountancy firm called Stanton Partners. Mr Palassis was also the managing partner of Stanton Partners and he had an interest in the second respondent (Chattock) which owned an office building in Ord Street, West Perth. Palassis on behalf of Chattock, put a proposal (made an offer) to his partners concerning occupancy of the Ord Street property. Details are set out below. The appellants say that they and Mr Palassis orally agreed (accepted) the proposal, that there was then an Agreement for Lease between Chattock and Stanton Partners, that on 7 February 1993 Stanton Partners entered into occupation of the premises and commenced paying rent. Mr Palassis and the appellants fell out in 1997 and they have been engaged in various pieces of litigation for most of the time since then.

3 On 10 November 2000 the first appellants and Mr Palassis executed a deed of settlement and release which resulted in the settlement of two other actions and the settlement of the action the subject of this appeal 'excluding the Surviving Claims as defined in clause 6.1'.

The Surviving Claims are the claims by LCJ [first appellants] in Supreme Court proceedings CIV 2134 of 1998, limited to the causes of action and material facts pleaded in:

(a) paragraphs 12.1, 12.2 and 12.3 of LCJ's Minute of Amended Further Re-Amended Statement of Claim in CIV 2134 of 1998 annexed as Schedule 3; and

(b) paragraph 18 of LCJ's Minute of Amended further Re-Amended Statement of Claim in CIV 2134 of 1998 annexed as Schedule 3;

and no other cause of action or material facts will be pleaded in CIV 2134 of 1998.

6.2 LCJ will, as soon as possible after the Settlement Date, take all necessary steps to obtain the leave of the Supreme Court to amend the Statement of Claim in CIV 2134 of 1998 in the form of the Minute of further Re-Amended Statement of Claim annexed as Schedule 3.

6.3 SMP [first respondent] and Chattock Holdings Pty Ltd will sign a Minute of Consent Orders in the form annexed as Schedule 4 at the Settlement Date.

6.4 Once the Supreme Court has given leave for LCJ to amend their Statement of Claim in CIV 2134 of 1998 in the form of Schedule 3, LCJ will not make any amendments to the Minute of Amended Further Re-Amended Statement of Claim annexed as Schedule 3 to plead any other cause of action or material facts, but may amend its particulars or give further particulars as they see fit, provided those particulars are limited to loss or damage.

6 There is a possible difference between what the appellants are permitted to claim under cl 6.1 (ie a claim for breach of contract against Chattock) and what the appellants are permitted to claim under cls 6.2 to 6.4 (ie a claim for breach of contract against Chattock and a claim for breach of fiduciary duties against Mr Palassis) but this court has not been asked to resolve that point. The respondents seem to have argued the matter before Le Miere J on the basis of the latter situation.

7 The minute of amended further re-amended statement of claim which was annexed as sch 3 to the deed contained the following paragraphs.

Mr Palassis owed the fiduciary duties of partner to the First [appellants]: those duties included:-

7.1 the duty to act in good faith and in the interest of his partners;

7.2 the duty not to place himself in a position where either:-

7.2.1 his duty to his partners and his self interest conflicted or where there was a real and sensible possibility of conflict;

7.2.2 his duty to his partners on the one hand, and Chattock (or any other person) on the other conflicted, or where there was a real and sensible possibility of conflict;

7.3 the duty to make full and frank disclosure to the First [appellants] of each and every fact material to any Partnership decision relating to a dealing or proposed dealing in which Chattock had a direct or indirect interest;

7.4 the duty to perform his functions as managing partner in the interests of the Partnership and to ensure that all tasks or functions entrusted to him were duly performed.

9 Paragraph 12 pleaded out some further proposals not included in the written proposals. The paragraph read:

The Written Proposals did not include further Proposals which Mr Palassis made to the First [appellants] namely that:-

12.1 the Partners would have, and Chattock would procure the Partners did have, a right of pre-emption over the shares in Chattock. Mr Palassis proposed that the terms of the right of pre-emption would be that each of the shareholders in Chattock, including Marjoe, would grant the Partners the first right to purchase their shares in Chattock if they wished to sell them, for the same consideration and for the same terms and conditions as then proposed for the sale to the purchaser (the Right of Pre-emption Proposal);

12.2 if the total rental received or receivable in respect of the Building should exceed the sum of $450,000 plus unrecoverable outgoings per annum (the Excess) then the Partners would receive 74.27% of the Excess (the Rent Proposal);

12.3 At the expiration of each calendar year, Chattock would allot 100 fully paid ordinary shares in itself for each $10,000 by which the gross income received or receivable in respect of the building exceeded $450,000. The second plaintiff was to receive 37.14% of the allotted shares ('the Shares Proposal').

The reference to 'The Written Proposals' can be ignored. That was part of the action which was settled. Paragraph 12 should be read as meaning that Mr Palassis on behalf of Chattock made an offer in terms of the 'Proposals' set out in pars 12.1 to 12.3. Paragraph 13 pleaded that the 'Proposals' were 'orally agreed to', ie accepted and that this constituted an 'Agreement for Lease'.

10 Paragraph 15 pleaded that it was Mr Palassis' duty as managing partner to ensure that a lease was prepared and executed in terms of these oral agreements but that in breach of the duties pleaded in pars 7.1, 7.2, 7.3 and 7.4, he did not do so and that Chattock did not submit a lease to the partners which contained the 'Proposals'.

11 The statement of claim then contained a plea that subsequently shareholders in Chattock sold shares without offering the partners the right of refusal. I note in passing that there is no plea that Chattock failed to 'procure that the partners did have a right of pre-emption' but the significance of that is not a matter for concern on this appeal. The appellants also plead that the total rental received or receivable in respect of the building exceeded $450,000 plus unrecoverable outgoings per annum in 1995 or 1996, but that Chattock had not paid 74.27% of the excess to the partners and that this occurred again in the year ended 30 June 1997. Finally, the appellants plead that Chattock received gross income in respect of the building in a sum exceeding $450,000 in the year ended 30 June 1999 and that Stanton Partners became entitled to the issue of shares in Chattock but Chattock had not issued any shares. These are all alleged to be breaches by Chattock of the Agreement for Lease.

In the premises:-

18.1 Mr Palassis breached the duties pleaded at paragraphs 7.1, 7.2, 7.3 and 7.4;

18.2 Chattock breached the terms of the Agreement for Lease, whereby

18.3 Chattock has profited; and

18.4 the Partners have suffered loss and damage;

18.5 the First Plaintiffs have suffered loss and damage.

PARTICULARS OF LOSS AND DAMAGE

(1) Loss of the opportunity to acquire one half of the issued shares in Chattock.

(2) Loss of 74.27% of the Excess.

(3) Loss of issued shares in Chattock.

Further particulars of loss and damage will be delivered after discovery and interrogatories.

AND THE PARTNERS CLAIM

(1) Damages for breach of the Agreement for Lease; interest on damages under Section 32 Supreme Court Act 1935 as amended at the rates following:

(a) 8% from 30.07.92 to 11.09.97

(b) 6% from 12.09.97 to date of judgment.

14 On 14 November 2000 the parties filed a memorandum of consent orders in the proceedings providing for the appellants to have leave to amend their statement of claim in terms of the sch 3 minute. An order was made on 7 December 2000 that leave be granted.

15 By summons dated 11 December 2007, the appellants applied for leave to amend the statement of claim by adding to par 18 particulars 4 and 5 (which are not the subject of this appeal) and the following particular 6:

PARTICULARS OF LOSS AND DAMAGE AGAINST MR PALASSIS

(6) The partners have paid rental to Chattock which they would not otherwise have paid. The Partners have also paid contributions to the maintenance, upkeep and the provisions of services to the Building which they would not otherwise have paid:

(a) the Partners paid rent at a rate of $97.50 per square metre (that is $56,783.88) per annum together with variable outgoings and rates and taxes for the period 1 February 1993 - 30 June 1995, which amounted to $84,362.53 for the period;

(b) thereafter, the Partners paid rent at the rate of $195.00 per square metre (that is $113,548.56) per annum together with variable outgoings and rates and taxes, from 1 July 1995 - 30 October 1998;

(c) on or about 20 January 1999, the Partners entered into a lease of 1 Havelock Street, West Perth, and:

(i) for the period 1 December 1998 - 30 November 1999, paid rent at the rate of $125.00 per square metre together with variable outgoings and rates and taxes;

(ii) for the period 1 December 1999 - 31 January 2000 paid rent at the rate of $150.00 per square metre together with variable outgoings and rates and taxes;

(d) had the Partners not entered into the Agreement for Lease, then they would have entered into a lease of alternative premises at a net effective rent of $70.00 to $80.00 per square metre per annum over a seven year term.

Further particulars of loss and damage will be delivered after discovery and interrogatories.

16 The appellants also sought leave to add a new par 18A reading:

Further or alternatively, by reason of the premises referred to at paragraph 18 Mr Palassis must account for his profit.

PARTICULARS OF LOSS AND DAMAGE

(1) The First Plaintiffs cannot provide further particulars at this time. The precise amount by which Mr Palassis has profited is a matter within his peculiar knowledge.

17 The appellants also sought to amend the prayer for relief to add:

AND THE FIRST PLAINTIFFS CLAIM AGAINST MR PALASSIS:-

(1) Equitable compensation;

(2) Alternatively, an account of profits;

(3) Further or other relief.

Le Miere J's order and reasons for his order

18 Le Miere J made an order refusing leave to amend.

19 In relation to particular 6 to par 18, his Honour concluded that the proposed particular was not a particular of any loss or damage arising from material facts pleaded [46].

20 In relation to par 18A, his Honour refused to grant leave to add this paragraph on the basis that the statement of claim did not plead that Mr Palassis made a profit 'from his actions which are said to constitute a breach of fiduciary duty; that is, it is not pleaded that Mr Palassis made a profit by failing to ensure that Chattock and the Partners entered into a lease containing the terms of the Agreement for Lease' [51].

21 His Honour noted that the parties accepted that if the amendments to the proposed particular 6 to par 18 were not allowed, and if leave was not granted to add par 18A, then the amendments to the prayer for relief should also be disallowed. As a result, the amendments to the prayer for relief were disallowed.

22 The appellants appeal against the order of his Honour refusing leave to insert particular 6 to par 18A, refusing leave to insert the new par 18A and refusing leave to amend the prayer for relief.

1. The learned Judge erred in law in holding that as the Statement of Claim does not allege that the First Respondent (First Defendant) (Mr Palassis) derived any profits from the breach of fiduciary duty alleged it is not open to the Applicants (Plaintiffs) to seek an order for an account of profits [50].
2. The learned Judge erred in law in holding that the Statement of Claim should not be amended in terms of proposed particular 6 to paragraph 18 of the Minute dated 11 December 2007 ('the Minute') because there was:-

2.1 no plea (in the Statement of Claim) that Mr Palassis' breach of duty caused the Applicants (Plaintiffs) to enter into a lease they would not otherwise have entered into;

2.2 no plea (in the Statement of Claim) that but for Mr Palassis' failure to ensure that Chattock Holdings Pty Ltd (Chattock) executed a lease containing the terms of the Agreement for Lease the Applicants (Plaintiffs) would not have paid the rent they paid to Chattock or that they would have entered into a different lease at market rent; [45];

2.3 no sufficient connection between the loss and damage in proposed paragraph 6 and the material facts pleaded. [40].

24 Paragraph 18A asserts that Mr Palassis 'must account for his profit'. During submissions made to Le Miere J, counsel for the appellants said:

Particular 18A pleads that alternatively Mr Mr Palassis must account for his profit. Strictly speaking its not actually necessary to plead it. Its conclusionary. It's not a material fact.

25 Having applied for what the appellants said was unnecessary and having had the application refused, the appellants now seek leave to appeal. Counsel for the appellants repeated the submission that the application to add par 18A was unnecessary but that the appellants now wish to complain about the judge's reasons for dismissing the application to add the unnecessary paragraph.

26 In the circumstances, leave to appeal should be refused. Before leave to appeal is granted on an interlocutory matter, it is usually necessary to demonstrate that the appellants have an arguable case and that the appellants will suffer substantial injustice if the decision below is not reversed: Wilson v Metaxas [1989] WAR 285. If the appellants' submission is correct, the appellants would suffer no injustice if the application for leave were refused, because it contends that par 18A does not introduce a new material fact, was unnecessary and contends (wrongly as will appear below) that it already has the right under the unamended pleadings to contend that Mr Palassis must account 'for his profit'.

27 Le Miere J did not err when he said in his reasons at [51] that 'the current statement of claim does not plead that Mr Palassis made a profit from his actions which are said to constitute a breach of fiduciary duty'. Le Miere J was told by counsel for the plaintiff that the breach of fiduciary duty relied upon was that contained in par 15 but the appellants through new counsel now say that this was 'not a concession [he] would have made'. Counsel now submits that the appellants are entitled to an account of profits as a remedy because of breach of fiduciary duties pleaded earlier in the statement of claim in pars 1 to 13. His submission was that the submission about par 15 made to Le Miere J should be ignored for present purposes.

28 The appellants submit that a fiduciary must not put himself in the position where interest and duty conflict. That is undoubtedly correct, stated as a general proposition of equitable principle. See Breen v Williams (1996) 186 CLR 71, 93 (Dawson & Toohey JJ); Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178, 198 (Deane J). But to sue a person for breach of fiduciary duties requires more than mere incantation of equitable principle. It is necessary to plead relevant material facts. It was not enough to merely assert that Mr Palassis was a Managing Partner and a fiduciary. As was said in Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 by McHugh, Gummow, Hayne and Callinan JJ at [77] quoting Frankfurter J in Securities and Exchange Commission v Chenery Corporation [1943] USSC 32; (1943) 318 US 80:

[The fact that a person is a fiduciary] only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? And what are the consequences of his deviation from duty?

29 It is therefore necessary to look at the unamended pleadings, to ignore par 15 as counsel for the appellants now wish the court to do, and to see whether sufficient material facts have been pleaded in pars 1 to 13 to establish a breach of fiduciary duty by Mr Palassis.

(a) the first appellants and Mr Palassis were partners in an accounting partnership (par 1);

(b) Mr Palassis was an officer of Chattock (par 3);

(c) Mr Palassis acted with the authority and at the request of and in the interests of Chattock (par 4);

(d) Mr Palassis 'for and on behalf of, and as agent of, Chattock' proposed to the 'first plaintiffs' (ie the first appellants) that the partnership should take a lease of premises at 5 Ord Street, West Perth which were owned by Chattock, that the partners and Chattock entered into negotiations and 'throughout the negotiations Mr Palassis acted (inter alia) for and on behalf of, and as agent of, Chattock' (par 8);

(e) during oral discussions, Mr Palassis 'for and on behalf of, and as agent for Chattock' made proposals to the 'first plaintiffs' (par 9);

(f) certain of the oral proposals made by Mr Palassis to the 'first plaintiffs' were not included in the 'written proposals' (par 12);

(g) the 'first plaintiffs' and Mr Palassis as partners, orally agreed to the proposals and by reason of the premises, the partners and Chattock entered into an agreement for lease (par 13).

31 In par 6 of the statement of claim it was pleaded that by virtue of the partnership agreement, Mr Palassis was the managing partner of the partnership and he was responsible for the administration of the partnership including the preparation of legal documents for and on behalf of the partnership. However, neither par 6 nor any other material fact alleged that Mr Palassis represented the partnership in relation to the transaction. The Partners received the proposals put by Mr Palassis acting on behalf of Chattock. The Partners accepted the proposals which Mr Palassis had put on behalf of Chattock. That does not give rise to any circumstances where there was, in effect, 'self-dealing', as to which see Clay v Clay [2001] HCA 9; (2001) 202 CLR 410 [51]. Mr Palassis was at all times, according to the allegations in the statement of claim, acting on behalf of Chattock and not on behalf of the partnership in relation to the transaction in question.

32 Thus, there was no circumstance in which Mr Palassis was undertaking to act for and on behalf of the partners or exercising any power or discretion which would affect the interests of his partners. There was nothing in the material facts which gave Mr Palassis a special opportunity to exercise any power or discretion to the detriment of his partners who were vulnerable to abuse by the exercise of those powers or

discretions. See Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, 96 - 97 (Mason J); Pilmer v Duke Group Ltd [70] (McHugh, Gummow, Hayne & Callinan JJ). In short, pars 1 to 13 of the statement of claim does not reveal that Mr Palassis acted, in relation to the transaction, in a fiduciary capacity, let alone in breach of any relevant fiduciary duty.

33 There being no arguable case, leave to appeal on ground 1 should be refused.

34 For the same reasons, ground 2 should be dismissed. The particulars that the appellant sought to add by way of particular 6 to par 18 depend upon the allegation in par 18.1 that Mr Palassis breached his fiduciary duties. The particulars are not particulars of loss suffered by the alleged breach pleaded in par 15. The appellants did not contend otherwise.

35 Instead, the appellants again invited the court to examine pars 1- 13. As already stated above, there are no material facts in pars 1 - 13 which show that Mr Palassis acted in a fiduciary capacity in the transaction or that he breached any relevant fiduciary duty. The appellant has not demonstrated an arguable case and as a result, leave to appeal on this ground should also be refused.

36 As a result, the proposed appeal against the refusal of leave to amend the prayer for relief falls away, and it is not necessary to deal with the respondents' notice of contention.

37 The application for leave to appeal should be dismissed.