Leave to bring strike out application out of time granted

Second Defendant : Mr D H Solomon & Mr C S Williams

1 LE MIERE J: The defendants have applied for orders dismissing the action against the first defendant (Mr Palassis) and striking out [6], [7], [10], [11], [15], [18.1] and [18.3] of the statement of claim. The application is made under O 20 r 19 of the Rules of the Supreme Court 1971 (WA). The application is brought outside of the time within which it is required to be made by O 20 r 19(3). The defendants seek an extension of time for making the application. The plaintiffs oppose the application and oppose an extension of time for making the application.

2 Order 20 r 19(3) requires that an application to strike out the whole or part of a pleading must be made within 21 days of its service. The purpose of the rule is to ensure that strike out applications are brought promptly so that they may be disposed of quickly and the action continue without further delays dealing with pleading disputes.

3 Where an application to strike out a pleading is not made within 21 days of its service the court has an inherent power to extend the time. Power is also conferred on the court to extend time by O 3 r 5(1). The court should exercise that power to ensure the prompt and efficient disposal of litigation consistent with the attainment of justice. The power may be exercised so as to promote the efficient utilisation of the resources of the parties and of the court.

4 In this case, the defendants say that the case against Mr Palassis and the disputed paragraphs of the statement of claim have no reasonable prospect of success. If they are right then an irreparable prejudice would be done to Mr Palassis by requiring him to prepare for and defend at trial a case that has no reasonable prospect of success. So far as Chattock is concerned, permitting the case to go to trial on the disputed pleading would require Chattock to prepare for and defend a Barnes v Addy (1874) LR 9 Ch App 244 (Barnes v Addy) claim that has no reasonable prospect of success and furthermore to prepare for and answer a damages claim that Chattock has received rent from the plaintiffs in excess of market rent. That would involve expert evidence.

5 In this case it is appropriate to consider the merits of the defendants' strike out application before determining whether or not the court should exercise its power to extend the time for the defendants to bring the strike out application.

6 According to the statement of claim, the first plaintiffs and Mr Palassis are accountants who used to practice together as Stanton Partners. Mr Palassis was the managing partner of Stanton Partners. The second defendant, Chattock, is an entity related to Mr Palassis. Chattock owned a building at 5 Ord Street, West Perth. In or about 1992 Mr Palassis proposed to the first plaintiffs that Stanton Partners should take a lease of premises at 5 Ord Street (the Premises). Thereafter the first plaintiffs and Mr Palassis (together the Partners) and Chattock negotiated for the terms of a lease.

7 The plaintiffs allege that throughout the negotiations Mr Palassis acted for and on behalf of, and as agent of, Chattock. The plaintiffs say that Mr Palassis, for and on behalf of, and as agent of Chattock, made oral proposals to the plaintiffs in respect of the rent and outgoings payable under the proposed lease, for the payment to the Partners of management fees in respect of the management of the building and in respect of rights of pre-emption which the Partners would have over the shares in Chattock and the building (the Proposals).

8 Between November 1992 and January 1993 Mr Palassis delivered to the first plaintiffs a written statement of certain Proposals (the Written Proposals). The Written Proposals did not include certain Proposals namely the 'Right of Pre-emption Proposal', the 'Rent Proposal' and the 'Shares Proposal'. The Right of Pre-emption Proposal was that the Partners would have a right of pre-emption over the shares in Chattock in that each of the shareholders in Chattock would grant the Partners the first right to purchase their shares in Chattock if they wished to sell them. The Rent Proposal was that if the total rent received 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 Shares Proposal was that 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 and the Partners were to receive 37.14% of the allotted shares. The first plaintiffs say that they and Mr Palassis orally agreed to the Proposals and on 7 February 1993 entered into occupation of the Premises and commenced to pay rent and, by reason of those matters, the Partners and Chattock entered an agreement for lease (the Agreement for Lease). The plaintiffs say that the terms of the Agreement for Lease included the Right of Pre-emption Proposal, the Rent Proposal and the Shares Proposal.

9 The plaintiffs say that Mr Palassis, in breach of the fiduciary duties he owed to the plaintiffs, and to the knowledge of Chattock, did not ensure that a lease was prepared and executed containing the terms of the Agreement for Lease. The plaintiffs say that in or about 1997 Marjoe Nominees Pty Ltd (who at the time owned one half of the issued shares in Chattock) sold its shares in Chattock without offering to the Partners the first right of refusal. The plaintiffs say that at some time the total rentals received or receivable in respect of the building exceeded $450,000 but Chattock has not paid the 74.27% of the Excess or any sum to the Partners. The plaintiffs further say that in the financial years ending 30 June 1997 and 1999 Chattock received gross income in respect of the building in a sum exceeding $450,000 but Chattock has not issued any shares to the Partners. The plaintiffs allege accordingly that Mr Palassis breached fiduciary duties he owed to the plaintiffs and Chattock breached the terms of the Agreement for Lease. The plaintiffs claim damages for breach of the Agreement for Lease.

10 The plaintiffs originally made further claims against the defendants. However, those claims were compromised by a deed of settlement and release between Mr Palassis and the first plaintiffs dated 10 November 2000 (the Deed).

11 A copy of the Deed was provided to the court during the hearing of this application. It was the subject of my judgment in Joyce v Palassis [No 3] [2007] WASC 214. In that judgment I summarised the Deed, other litigation referred to in the Deed and subsequent pleading amendments in this action. I will repeat those matters in these reasons.

12 The Deed makes reference to other litigation between the plaintiffs and Mr Palassis. The Deed refers to Supreme Court CIV 2025 of 1998 and Supreme Court CIV 1616 of 1999, as well as the present proceedings.

13 The Deed included the following settlements. First, the plaintiffs agreed to discontinue CIV 2025 of 1998. Second, Mr Palassis agreed to discontinue the counterclaim in CIV 2025 of 1998, and to discontinue CIV 1616 of 1999.

14 The first plaintiffs and Mr Palassis gave mutual releases and discharges in favour of each other. By cl 4.1 of the Deed the first plaintiffs released Mr Palassis from all claims against him arising out of all 'claims, issues and matters alleged or raised' at anytime in this action excluding the 'Surviving Claims'. Clause 6.1 defines the Surviving Claims and provides that no other cause of action or material facts will be pleaded in this action. Clause 6.2 provides that the plaintiffs will amend the statement of claim in the form of the sch 3 minute. Clause 6.3 provides that Mr Palassis and Chattock will sign a minute of consent orders in the form annexed as sch 4 of the Deed. That minute provides that the plaintiffs have leave to amend their statement of claim in terms of the sch 3 minute. Clause 6.4 provides that once the court has given leave for the plaintiffs to amend their statement of claim in the form of the sch 3 minute, the plaintiffs will not make any amendments to their statement of claim to plead any other cause of action or material facts, but may amend their particulars or give further particulars as they see fit, provided those particulars are limited to loss or damage. Clause 6.5 provides that if Mr Palassis or Chattock makes any amendment to his or its defence, the plaintiffs may amend their statement of claim, provided that the need to make the amendment fairly arises from and is consequential to the amendment to Mr Palassis' defence or Chattock's defence as the case may be and provided that the plaintiffs shall not in any circumstances plead any cause of action or plead any material fact raised in the claim, as defined.

15 On 14 November 2000 the parties filed a memorandum of consent orders that the plaintiffs have leave to amend their statement of claim in terms of the sch 3 minute. On 7 December 2000 a registrar made orders that the plaintiffs have leave to amend their statement of claim in terms of the sch 3 minute. The amended statement of claim gives effect to the settlement effected by the Deed.

2008 application to amend statement of claim

16 The plaintiffs applied to amend their statement of claim in the form of a minute of substituted statement of claim dated 11 December 2007. The defendants opposed the amendment to insert a new particular 6 of the particulars of loss and damage in [18] and also to insert a new [18A]. The defendants also objected to the amendments to the prayer for relief which were consequential upon the amendments objected to. The defendants opposed those amendments on the ground that they disclosed no reasonable cause of action. Further, the defendants applied for an injunction restraining the plaintiffs from making those amendments on the basis that to do so would breach the terms of the Deed. On 7 April 2008 I delivered reasons for judgment by which I refused to grant the plaintiffs leave to amend the statement of claim to insert particular 6 to [18], [18A] and the consequential amendments to the prayer for relief: Joyce v Palassis [No 4] [2008] WASC 45.

17 The plaintiffs applied to the Court of Appeal for leave to appeal. On 21 July 2008 the Court of Appeal dismissed the application for leave to appeal: Joyce v Palassis [2008] WASCA 151.

18 The plaintiffs' claim against Mr Palassis is that he breached fiduciary duties that he owed to them. The defendants submit that the statement of claim does not plead material facts that give rise to a fiduciary obligation owed by Mr Palassis to the plaintiffs in relation to the transaction in question - that is, the negotiation and execution of a lease of the Premises by Chattock to Stanton Partners. The defendants further submit that the statement of claim does not plead an arguable case against Mr Palassis because the fiduciary duty or duties alleged to have been breached by Mr Palassis are prescriptive duties. The defendants submit that Australian law recognises only proscriptive, not prescriptive, fiduciary duties. The defendants submit that for those reasons the statement of claim fails to disclose a reasonable cause of action against Mr Palassis.

19 The defendants submit that [6], [7], [10], [11], [15], [18.1] and [18.3] of the statement of claim should be struck out on two distinct grounds. First, the paragraphs either plead allegations that go only to the claim made against Mr Palassis or, in the case of [18.3], are predicated on the claim against Mr Palassis being successful. Second, [18.3], which pleads an allegation that Chattock profited, seeks to set up a recipient liability claim against Chattock under the rule in Barnes v Addy. The defendants submit that insufficient material facts are pleaded in the statement of claim to found a claim by the plaintiffs for Barnes v Addy liability on the part of Chattock. Alternatively, the defendants submit that, even if such material facts were pleaded, no material facts are pleaded that establish a causal connection between Mr Palassis' alleged breach of fiduciary duty and the profit alleged to have been made by Chattock.

20 The defendants submit that the Court of Appeal has held that the statement of claim does not plead material facts that reveal that Mr Palassis acted, in relation to the transaction, in a fiduciary capacity and hence that the statement of claim fails to disclose a reasonable cause of action against Mr Palassis.

21 In Joyce v Palassis [2008] WASCA 151 the Court of Appeal held that the plaintiffs do not have the right under the existing pleadings to contend that Mr Palassis must account for his profit derived from the transaction. Counsel for the appellant (plaintiffs) submitted that the appellants are entitled to an account of profits as a remedy because of breach of fiduciary duties pleaded in [1] - [13] of the statement of claim. Counsel's submission was that [15] should be ignored for the purposes of the appeal.

22 Pullin JA, with whom Buss JA agreed, said at [29] that it was therefore necessary to look at the pleadings, to ignore [15], and to see whether sufficient material facts have been pleaded in [1] - [13] to establish a breach of fiduciary duty by Mr Palassis. Pullin JA said:

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.

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 [31] - [32].

23 On the hearing of this application counsel for the plaintiffs accepts that [1] - [13] of the statement of claim do not reveal that Mr Palassis acted, in relation to the transaction, in a fiduciary capacity and hence that [1] - [13] of the statement of claim do not disclose that Mr Palassis owed to the plaintiffs any fiduciary duty. Counsel for the plaintiffs submits that [15], in the context of the statement of claim as a whole, sufficiently pleads that Mr Palassis owed a fiduciary duty (or duties) to the plaintiffs and breached that duty (or duties).

24 Fiduciary obligations arise because a person has come under an obligation to act in the interests of another. The existence of a fiduciary obligation is not itself a material fact. A fiduciary obligation is the obligation that arises from the relationship of the parties and all the circumstances. It is the relationship and circumstances that constitute the material facts: Cubillo v Commonwealth [2001] FCA 1213; (2001) 112 FCR 455; Revinder Rohini Pty Ltd v Krizaic [1991] FCA 318; (1991) 30 FCR 300.

25 As I have said, the Court of Appeal held that [1] - [13] of the statement of claim do not reveal that Mr Palassis acted, in relation to the transaction, in a fiduciary capacity. The critical point identified by Pullin JA is that 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. Counsel for the plaintiffs submits that [15] of the statement of claim includes a plea that Mr Palassis acted on behalf of the Partnership in ensuring that a lease was prepared and executed containing the terms of the Agreement for Lease.

26 Paragraph 15 is a plea that Mr Palassis breached the fiduciary duties pleaded in [7.1], [7.2], [7.3] and [7.4] by failing to ensure that a lease was prepared and executed containing the terms of the Agreement for Lease. The only material facts pleaded in [15] are:

(a) Mr Palassis was the managing director of the Partnership;

(b) Mr Palassis did not ensure that a lease was prepared and executed containing the terms of the Agreement for Lease;

(c) Chattock knew that Mr Palassis did not do so; and

(d) Chattock did not submit a lease to the Partners which contained the Proposals, nor request that they execute such a lease.

27 Paragraph 6 of the statement of claim pleads that Mr Palassis was the managing partner of the partnership and as managing partner he was responsible for the administration of the Partnership, including arranging the preparation of all legal documents for and on behalf of the Partnership. Paragraph 7.4 pleaded that it was Mr Palassis' 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. In the Court of Appeal Pullin JA, with whom Buss JA agreed, held that the facts and circumstances pleaded in [1] - [13] did not give rise to any fiduciary obligation owed by Mr Palassis to the plaintiffs in relation to the transaction in question. There are no further material facts or circumstances pleaded in [15] that arguably give rise to any fiduciary obligation owed by Mr Palassis to the plaintiffs in relation to the transaction. The plea that Mr Palassis owed a duty to ensure that a lease was prepared and executed containing the terms of the Agreement for Lease is nothing more than a statement by way of conclusion. The pleading of an alleged fiduciary obligation and its content is not the pleading of material facts.

28 The statement of claim does not disclose a reasonable cause of action against Mr Palassis. Paragraphs 6, 7, 10, 11, 15 and 18.1 plead allegations that go only to the claim made against Mr Palassis and, if time to bring the application is extended, must be struck out.

29 Counsel for the plaintiffs submitted that the plea in [18.3] is based upon the second limb of the rule in Barnes v Addy. Such a claim can only succeed if it is established that Mr Palassis acted in breach of a fiduciary duty. The statement of claim does not disclose a reasonable cause of action that Mr Palassis breached a fiduciary duty. Accordingly, if time to bring the application is extended, [18.3] must also be struck out.

30 The plaintiffs submit that the court should not exercise its power to extend the time for the defendants to bring this application.

31 The plaintiffs say that [15] of the statement of claim has, materially, been in the same form since the proceedings first commenced in October 1998. Paragraph 18.3 was introduced to the statement of claim on 20 February 1999 by leave granted after a contested application. The statement of claim was further amended with the consent of the defendants in about February 2000. The statement of claim was further amended with the consent of the defendants in November 2000. It was these amendments that gave effect to the Deed which restricts the ability of the plaintiffs to amend the statement of claim. Subsequently there was a contested application to amend the statement of claim which was heard on 23 January 2008. No strike out application in relation to [15] or [18.3] of the statement of claim was brought at that time. Leave to amend the statement of claim was granted on 7 April 2008.

32 The defendants accept that the application has been brought some years after the relevant allegations were pleaded by the plaintiffs. However, the defendants submit that the application follows two recent events. First, on 21 July 2008 the Court of Appeal determined that the facts pleaded in the statement of claim do not reveal that Mr Palassis acted in a fiduciary capacity in relation to the relevant transaction: [2008] WASCA 151 [31], [32]. Second, it was only on 19 September 2008 that the plaintiffs provided particulars of [18.3] which confined the allegations made in that paragraph to an allegation that Chattock profited by reason of Mr Palassis' alleged breach of fiduciary duties.

33 In response to those matters the plaintiffs submit that notwithstanding that the Court of Appeal decision was delivered on 21 July 2008 and the particulars of [18.3] on 19 September 2008, the defendants did not bring their application until 17 November 2008.

34 That contention is responded to by Mr Williams, a solicitor for the defendants, in his affidavit sworn 8 December 2008. In essence, Mr Williams says that on 1 August 2008 he conferred with the plaintiffs' solicitors regarding the defendants' foreshadowed application for orders dismissing the action against Mr Palassis and striking out the relevant paragraphs of the statement of claim. On 4 August 2008 the defendants' solicitors sent an email to my associate enclosing a minute of consent orders programming the hearing of the strike out application. The court was not able to hear the application until 8 December 2008. In effect, the application proceeded so that it could be heard on 8 December 2008 and there was no complaint from the plaintiffs that the application was not filed before 17 November and no prejudice has been caused to the plaintiffs by that occurrence. In all the circumstances, I do not consider that the defendants unduly or unreasonably delayed bringing the application after the delivery by the Court of Appeal of its reasons for judgment on 21 July 2008.

35 In all the circumstances, the court should extend the period within which the defendants are required to bring this application. If the time is not extended Mr Palassis would suffer irreparable prejudice in that he would be required to prepare for and defend at trial a case that has no reasonable prospect of success. Chattock would be prejudiced in that it would be required to prepare for and defend at trial a part of the case against it that has no reasonable prospect of success and would incur the cost and inconvenience of dealing with a damages claim that involves expert evidence. It is not in the public interest that the resources of the court and the parties should be expended in the trial of issues that have no reasonable prospect of success.

36 The defendants should have leave to bring the application out of time. Paragraphs 6, 7, 10, 11, 15, 18.1 and 18.3 of the statement of claim should be struck out.

37 The defendants submit that the action against Mr Palassis should be dismissed. The plaintiffs submit that they should be given leave to amend the statement of claim so as to re-plead their case against Mr Palassis and their case against Chattock based on the rule in Barnes v Addy.

38 Leave to amend is commonly given when an application to strike out is successful but it will be refused when it can be seen that no amendment will improve the case.

39 Counsel for the defendants submits that the Deed precludes the plaintiffs from amending their statement of claim to plead any other cause of action or material facts and hence that it is not open to the plaintiffs to amend their statement of claim to plead a reasonable cause of action against Mr Palassis and a claim against Chattock based on breach of fiduciary duty by Mr Palassis.

40 In response the plaintiffs submit that the doctrine of estoppel by convention may preclude the defendants from relying upon the Deed to resist leave being granted to the plaintiffs to amend their statement of claim. The plaintiffs further submit that they have not fully considered, and have not had an opportunity to fully consider, amendments to the statement of claim to overcome the objections of the defendants.

41 I will give the plaintiffs an opportunity to bring in a minute of proposed amended statement of claim and to seek leave to amend their statement of claim in terms of that minute.

42 I will order that [6], [7], [10], [11], [15], [18.1] and [18.3] of the statement of claim be struck out and the summons otherwise be adjourned.