Kendell v Sweeney & Ors

EQUITY - TRUSTS AND TRUSTEES - TRUSTEES- THEIR APPOINTMENT, DISMISSAL, ESTATE ETC - LIABILITY FOR ACTS OF CO-TRUSTEES - whether trustees were validly appointed in accordance with the trust deed - where power of trustees to release and discharge shareholders' loan accounts challenged - where applicant contends loan accounts are "shams"

INTERPRETATION - DEEDS - where construction of settlement deed in dispute -whether "good faith" can be implied into the settlement deed requiring the parties to it to act reasonably

Trustee Act 1925 (NSW) 6

Trusts Act 1973 (Qld) s 12

Alcatel Australia v Scarcella [1998] NSWSC 483; [1998] 44 NSWLR 349

Asia Television Ltd v Yau's Entertainment Pty Ltd [2000] FCA 254; [2000] 48 IPR 283

B P Refinery (Westernport) Pty Ltd v Hastings Shire (1977) 52 ALJR 20

Burger King Corp v Hungry Jacks Pty Ltd [2001] NSWCA 187

Carpenter v Carpenter Grazing Co Pty Ltd (1987) 5 ACLC 506

Central Exchange Ltd v Anaconda Nickel Ltd [2002] 26 WAR 33

Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337

Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209

Edwards v The Hunter Co-op Dairy Co Ltd (1992) 7 ANZ Insurance Cases 61-113

Ferguson v O'Neill [1943] VicLawRp 3; [1943] VLR 30

Hickman & Co v Roberts [1913] AC 229

Hospital Products Limited v United States Surgical Corporation (1984-1985) 156 CLR 40

Hughes Aircraft Systems International v Air Services Australia [1997] FCA 558; (1997) 76 FCR 151

Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church [1993] 31 NSWLR 91

Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd [1958] HCA 33; (1958) 100 CLR 342

Mackay v Dick (1881) 6 App Cas 251

McArthur v Mercantile Mutual Life Assurance Co Ltd [2001] QCA 317

Panamena Europea Navigacion (Compania Limitada) v Frederick Leyland & Co Ltd (1947) AC 428

Popovic v Tanasijevic (No 5) [2000] SASC 87; [2000] 34 ACSR 1

Renard Constructions (ME) Pty Ltd v Minister for Public Works (1982) 26 NSWLR 234 (CA)

Retravision (NSW) Ltd v Copeland (8 October 1997, NSWSC unreported)

Richard Walter Pty Limited v Federal Commissioner of Taxation 95 ATC 4402

Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; [2002] 76 ALJR 436

Saxby Bridge Mortgages Pty Ltd v Saxby Bridge Pty Ltd [2000] NSWSC 433

Scandinavian Trading Tanker Co A B v Flota Petrolera Ecuatoriana [1983] AC 694

Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596

Service Station Association Ltd v Berg Bennett & Associates Pty Ltd [1993] FCA 638; (1993) 45 FCR 84

Sharrment Pty Ltd & Ors v Official Trustee in Bankruptcy (1988) 18 FCR 449

Spira v Commonwealth Bank of Australia [2003] NSWCA 180

Wyllie v National Mutual Life Association of Australasia Ltd SC NSW 50094 of 96, 18 April 1997

McGillvrays as town agents for Maxwell & Co for the respondent

[1] William George Kendell died in February 1994, leaving a will under which he bequeathed all his shares in Kendells (NSW) Pty Limited ("the company") and in Joymar Pty Limited to his daughters Susan Done, Penelope Nelson and Jeni Kendell.

[2] Joymar was described in the will as the trustee of the WGK Trust. The testator made some specific bequests in favour of his wife who was also the residuary beneficiary. The will made no provision for Mr David Kendell, the applicant in these proceedings, declaring that the testator had "made provision for him during (his) life time".

[3] As a result of the will's dispositions, the trustee of the Trust held 9,785 (19.7%) ordinary shares in the capital of the company and the balance was held equally by the second, third and fourth respondents.

[4] By a deed dated 9 September 1995, entered into between the executors appointed by the will, G Bryant and T Rogers as "The Retiring Trustees" and Australian Vineyard Estates Pty Ltd, a company controlled by the applicant, the executors purported to remove the retiring trustees as trustees of the Trust and to appoint Australian Vineyard Estates as trustee in their stead. The deed recited:

"A. The Retiring Trustees are presently trustees of a trust fund known as the WGK Trust.

B. The Executors of the Estate of the Late William George Kendell are the Principal under the Deed of Trust creating the WGK Trust.

C. Pursuant to the said Deed of Trust the Principal may by notice in writing to a trustee remove the trustee from office and may by deed appoint a new trustee of the Trust Fund."

(emphasis added)

[5] By an instrument in writing described as a "memorandum" dated 23 December 1997, the executors purported to remove Australian Vineyard Estates as trustee of the Trust and to appoint Pamela Kendell, then the wife of the applicant, as trustee in its place.

[6] By another memorandum dated 5 August 2002, the executors, again purporting to act as "the principal", removed Pamela Kendell as trustee and appointed the applicant in her stead.

[7] On the advice of the company's accountants, the second to fourth respondents resolved, on 23 December 1999, that the company be placed in voluntary liquidation.

[8] By an originating application filed on 10 September 2002, the applicant sought the following relief:

"1. A declaration that on its proper construction the Settlement Deed dated 14 October 1998 between the Company and Australian Vineyard Estates Pty Ltd did not have the effect of writing off or otherwise disposing of the loan accounts of the Company's shareholders.

2. An order that the First Respondents conduct the liquidation on the basis that the loan accounts of the Company's shareholders were not written off or disposed of.

3. A declaration that the First Respondents conduct the liquidation on the basis that the debt of $278,733 allegedly owed by the Applicant is not due and owing.

4. Costs."

[9] The settlement deed's significance in these proceedings results from the arrangements made in it for disposition of the shareholders' loan accounts.

[10] In May 1996, the company declared dividends in favour of its shareholders, including a dividend of $19,700 in favour of Australian Vineyard Estates. It was resolved by the directors in the meeting in which dividends were declared that the dividend in favour of Australian Vineyard Estates be applied towards reduction of its indebtedness to the company. The applicant did not accept the company's right to appropriate the dividend in this way.

[11] Australian Vineyard Estates, at the applicant's behest, commenced proceedings in the Local Court in Sydney claiming payment of the amount of the dividend. A defence filed by the company alleged that at the date of the dividend Australian Vineyard Estates was indebted to the company in the sum of $288,443 and that the debt had been acknowledged by Mr G Bryant, in his capacity as former trustee of the Trust, on 16 June 1995.

[12] The parties to the dispute agreed to settle it and, to that end, executed a deed dated 14 October 1998 ("the settlement deed"). The deed relevantly provided:

"1.2 On the receipt by the Plaintiff of the Settlement Sum, the Parties release and discharge each other party from all sums of money, actions, suits, causes of action, proceedings, claims, accounts, demands, costs and expenses (including legal costs and expenses) which may be or may have become due and owing to which each party has now or has at any time before the execution of this Deed or but for the execution of this Deed, may have or may have been able to bring or make claims against or from any other party or any servant or agent of any other party in respect of or in any way connected with the Proceedings.

1.3 The Parties agree that the loan accounts of all the Defendant's shareholders including the loan account with WGK Trust will be either written off or otherwise disposed of in a manner recommended by the Defendant's accountant but in any event in a manner agreeable to all the Defendant's shareholders.

1.4 The Parties agree (without any admission) that the Defendant's affairs will be conducted for the benefit of all its shareholders.

3. BAR TO ACTIONS

Save by way of enforcement of the terms of this Deed, upon payment of the Settlement Sum, this Deed shall operate as an absolute bar to all actions, suits, causes of action, proceedings, claims, accounts, demands, costs and expenses (including legal costs and expenses) threatened or brought or attempted to be brought by or in the name of any of the Parties to this Deed or against any of the Parties to this Deed arising out of or in connection with or in respect of the proceedings."

The shareholders' loan accounts and proposals for their extinguishment

[13] At the heart of the applicant's case is the contention that irrespective of what the books of the company might record, he as trustee of the Trust owes no money to the company. On the other hand he asserts that his sisters' loan accounts, recorded in the company's books, evidence their indebtedness to the company. He wants the liquidators to call up these loans.

[14] The accounts of the company for the year ended 30 June 1988 contain a number of loan accounts, including one in the name of the Trust in the sum of $298,433. Also in evidence is a document under the hand of the testator as chairman of a meeting of trustees of the Trust held on 30 June 1988. It asserts the presence of the testator and the applicant "representing Joymar Pty Limited" and records an authorisation by "the Trustees" of a vesting of capital of $200,000 to the testator and the crediting of such moneys "to the beneficiary's loan account and thence to be on-lent by the beneficiary to (the company) as loan at call". That loan is not referred to in the company's balance sheets.

[15] The company's trial balance for the year ended 30 June 1989 showed $298,433 owing by the Trust to the company and recorded other loan accounts. The Trust's tax return for the year ended 30 June 1988 shows a loan by the company in the sum of $298,433 as a current liability. Furthermore, the existence of the subject loan account is acknowledged in clause 1.3 of the settlement deed which provides for the disposition of all shareholder loan accounts.

[16] In a letter of 16 June 1995, Mr G H Bryant "as trustee for WGK Trust", wrote to the company's accountants stating, inter alia:

"To my knowledge, the assets of the WGK Trust are 9785 shares in Kendells (NSW) Pty Limited and the liability is the amount of $298,433 owing to Kendells (NSW) Pty Limited."

[17] Mr Bryant also said in the letter that in view of his understanding that the testator intended his daughters to "benefit" from the Trust, it was his intention to resign as trustee and that it was appropriate for the executors to appoint the Public Trustee to administer the Trust. The accountants wrote back in August 1995 stating that the Trust:

"... now serves no purpose ... The only assets of the trust are (the shares) ... and the only liability is $298,433 owing to Kendells (NSW) Pty Limited. We believe the most practical action to take that will benefit all those involved, including yourself is for Kendells (NSW) Pty Limited to agree to forgive the debt in exchange for the shares. If this scenario was adopted it is our understanding that the trust will then cease to exist and along with it, your obligation as trustee."

[18] The applicant argues that any admission made by one of two co-trustees does not bind the trust estate. Presumably, he relies on the general principle that, where there is more than one trustee of a private trust, all trustees must act jointly in the execution of the trust.[1]

[19] The evidence, however, fails to disclose what provisions, if any, are made by the trust deed for one of two co-trustees to act independently of the other or for the validation of acts done by one of two trustees on behalf of the Trust.

[20] Moreover, the submission assumes that Mr Bryant, who expressly states in his letter of 16 July 1995 that he is acting as a trustee, should be taken as having acted without the authority or acquiescence of his co-trustee. I doubt that the evidence supports the making of that assumption, but the question of Mr Bryant's authority in relation to the letter or of the accountants in relation to their letter is of little significance having regard to the admissions in the Trust's income tax returns.

[21] Hall Chadwick Accountants wrote to the applicant on 28 May 2001 in his capacity as representative of "WGK Trust". The letter stated the understanding of its author that Swan & Baker Pty Ltd "never gave a recommendation [in relation to the writing off of the loans] because in its view the size of your loan account meant that there were material income tax implications for you". It recommended that the applicant obtain his own accounting advice and stated that unless he objected in writing within 14 days of the date of the letter, they would treat all loan accounts "as zero from ...15 October 1998".

[22] The applicant responded to the letter on 7 June 2001, denying the existence of any "enforceable obligation" on the part of the Trust to pay money to the company and asserting that, as the other shareholders were not parties to the deed, the liquidator had "no power or obligation to write off (their) loan accounts". He stated that "... the preferable course is for you to acknowledge that the company has no enforceable claim against my client and recover the loans outstanding from the other shareholders".

[23] The applicant argues that there is no evidence of the existence of a debt owing by the trustee of the Trust and that, insofar as there are book entries which evidence the existence of a debt, the transactions recorded by them are shams. He relies on the following matters:

(a) The absence of written evidence of any agreement supporting the book entries;

(b) An inference from "the nature of the transaction that there was no real expectation that WGK Trust would repay the alleged debt";

(c) The fact that no interest was ever charged, payable or paid;

(d) The assertion that the testator, as governing director of the company moved money around amongst entities controlled by him "as he determined to be appropriate";

(e) The impossibility of the Trust repaying the amounts allegedly lent to it as its only asset was shares in the company and it had no income earning activity;

(f) The applicant's evidence that he was not present when the purported resolution of the trustee was allegedly made on 30 June 1988;

(g) Apart from the present proceedings and the resolution of 27 May 1996, the absence of any attempt by the company to have the debt repaid.

[24] Particular reliance is placed on the following passage in the reasons for judgment in Richard Walter Pty Limited v Federal Commissioner of Taxation:[2]

"The central feature of the loan transaction is that the parties must intend that the whole of moneys lent should be repaid. In the present proceedings, I do not consider there was ever intended to be, nor was there, any such obligation created."[3]

[25] The matters listed above are, for the most part, matters referred to in Richard Walter Pty Ltd as reasons supporting the conclusion that the loans under discussion were shams.

[26] The expression "sham" was described as follows by Lockhart J in Sharrment Pty Ltd & Ors v Official Trustee in Bankruptcy,[4] in the following language quoted with approval in Richard Walter Pty Ltd:

"A 'sham' is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive."

[27] Whilst acknowledging that the matters to which the applicant points provide some support for his contentions, I am not satisfied that the subject entries and transactions were not intended to create legally enforceable rights and obligations. At relevant times the company and the trustee of the Trust were under the control of the testator whilst the applicant was the only other director of the company and of the then corporate trustee. He left the conduct of the affairs of both entities entirely in the hands of his father who was the governing director of the company. The evidence does not disclose whether he was also governing director of Joymar but he fulfilled that role in practice.

[28] The books of the Trust and the company were written up to record the subject transactions by the entities' accountants on the instructions of the person who had the capacity to give them. The income tax returns were similarly prepared. They are formal documents prepared pursuant to obligations under the corporations legislation existing at the time and for the purposes of the Income Tax Assessment Act. Their content stood unchallenged for some years and I see no reason why the presumption of regularity should not apply.[5]

[29] Additionally, the evidence does not suggest to me that the testator intended that the subject entries not record legally effective transactions. Nothing has been placed before me to show that the testator was incapable of lawfully implementing the transactions under consideration. And it is difficult for the applicant, having acceded to his father's sole conduct of the affairs of the company and Joymar in his lifetime, to now assert irregularities on the grounds of his lack of knowledge or participation.

Has the applicant established that he is the trustee of the Trust?

[30] The respondents raise a number of arguments in support of their contention that the applicant has not established that he is the trustee of the Trust. The first argument is that although the will records that Joymar was the trustee of the Trust at the time of the will, the deed of 9 September treats Messrs G Bryant and T Rogers as the trustees on that date and there is no documentary evidence of the removal or resignation of Joymar or of the appointment of Messrs G Bryant and T Rogers. The conclusion to be drawn, it is argued, is that Joymar was never removed as trustee. The next contention is that in appointing Australian Vineyard Estates as trustee the executors purported to act by deed, but in removing it and appointing Pamela Kendell in its place they acted by means of a memorandum which does not purport to be a deed. When Pamela Kendell was in turn removed and the applicant appointed trustee in her place, the executors again acted by means of a memorandum in writing. It is argued that because the executors acted by deed on 9 September 1995, it may be inferred that the trust deed provided that the power of removing and appointing trustees was required to be exercised by deed.

[31] No copies of the trust deed are now able to be found and the applicant has given secondary evidence of its contents. He swears to having drafted the trust deed and to recalling a provision in it that "the trustee could be removed and a new trustee appointed by memorandum in writing from the Principal and in the event of his death from (sic) his executors". He swears that the Principal was his father.

[32] The mere fact that the first of the subject instruments is in the form of a deed and others are not, does not lead inescapably to the conclusion that the subject powers must be exercised by deed. A possible explanation is that the author of the 9 September 1995 deed opted for a formal instrument even though the trust deed did not require it. There are, however, matters which cast doubt on that explanation.

[33] In cross-examination the applicant admitted that he probably prepared the 9 September deed and that his recollection of the trust deed would have been better in 1995 than in 2004 and 2005. Plainly, the applicant's concession about his memory was warranted.

[34] Copies of the trust deed were held in 1995 by Mr Bryant and by the Trust's accountants. It may be inferred from this fact that the applicant also had a copy of the trust deed available to him when drafting the 9 September deed. The language of the 9 September deed also suggests that its author had a copy of the trust deed before him at the time of its drafting. Recital C to the deed records that the Principal "may by notice in writing to a trustee remove the trustee from office and may by deed appoint a new trustee of the Trust Fund". To my mind, it would be odd to draw this distinction between the mode of removal and the mode of appointment if the author was not recording the requirements of the trust deed gleaned from perusing it. I consider it probable also that recital B would not have been worded as it was without recourse to the trust deed.

[35] The memorandum of 23 December 1997 which purported to remove Australian Vineyard Estates as trustee and to appoint Pamela Kendell in its place and the memorandum of 5 August 2002 effecting the removal of Pamela Kendell as trustee and appointing the applicant in her place, both recited that the Principal may "by memorandum in writing to the trustee remove the trustee from office and appoint a new trustee of the Trust Fund". The applicant did not explain in affidavit or oral evidence how the description of the method of appointing trustees changed from that recited in the 9 September deed or how recital C to the 9 September deed came to be worded as it was. A possible explanation is that by the time the applicant came to prepare the December 1997 memorandum he no longer had access to a copy of the trust deed and failed to refer to a copy of the 9 September 1995 deed.

[36] It may be the case also that, by the time he came to prepare the memoranda, the applicant was immersed in dispute with his sisters and suffering from the deep mental stress, to which he referred in his evidence. His evidence is that the trust deed is in a format similar to a great many prepared by him when a partner in a large firm of solicitors. Yet, although aware that the respondents intended challenging the validity of his appointment as trustee, he seems to have only made a limited search for copies of similar trust deeds.

[37] The respondents also relied on a letter written by the applicant to their solicitors on 26 March 2004, in which he advised "...I have been removed as trustee of the WGK Trust and DWK Holdings Pty Limited has been appointed in my stead". He added "I shall forward a copy of the Memorandum of Appointment on Monday". No such memorandum was sent. It was unclear from the applicant's oral evidence whether he was saying that the appointment and removal had never actually taken place or whether there had been a purported removal/resignation and appointment but that the appointee had refused to accept the appointment. He also explained that at the time he wrote the letter he was suffering from "a serious mental depression". This evidence, of itself, does not establish that the applicant is not the trustee of the Trust, but it does support the conclusion I have reached that the applicant's evidence about the terms of the trust deed needs to be approached with caution. Whilst I do not doubt the applicant's honesty, I have the impression that his mental and physical condition makes it impossible for him to consider matters objectively and casts doubt on the accuracy of his recollection.

[38] For these reasons I consider it probable that the applicant is not the trustee of the Trust.

Were appointments of trustees invalid as a result of failure to register deeds of appointment?

[39] Section 6 of the Trustee Act 1925 (NSW) relevantly provides:

"(1) A new trustee may by registered deed be appointed in place of a trustee, either original or substituted, and whether appointed by the Court or otherwise.

(2) A new trustee may be so appointed in any of the following cases, namely:

(a) where a trustee is dead,

(f) where a trustee is removed under a power contained in the instrument creating the trust,

(4) The appointment may be made by the following persons, namely:

(a) by the person or persons nominated for the purpose of appointing new trustees by the instrument, if any, creating the trust, or

[40] Mr Priestley submits that it is necessarily implicit in the section that an appointment of a new trustee, whether by a person nominated for the purpose of appointing new trustees in the trust instrument or otherwise, must be by registered deed. This conclusion, he argues, is supported by dicta of Young J in Retravision (NSW) Ltd v Copeland.[6] It does not appear to me, however, that Young J, in the passage to which I was referred, gave consideration to the question of whether a power to appoint a new trustee expressly conferred in the trust instrument was negated or overridden by the statutory power.

[41] In my view, it is improbable that the legislation intended such an obvious and commonplace power to be overridden by an inference to be drawn from a provision which establishes an express statutory power. Such a conclusion is unlikely. Section 6 is similar in terms to section 41 of the Trustee Act 1925 (UK) and has analogues in other Australian States and in New Zealand.[7] My research, admittedly brief, does not reveal the existence of any suggestion, let alone determination, that the provisions under consideration should not be regarded as facilitative rather than qualifying or overriding powers expressly conferred in instruments creating trusts.[8] Also subsections (6), (13) and (15) of section 6 suggest that the section is not intended to restrict or qualify any power of appointment of new trustees conferred by the instrument constituting the trust.

Did the deed effect the writing off or otherwise disbursement of the loan accounts of the company's shareholders?

[42] I now turn to addressing the matters in respect of which relief is sought.

[43] It is common ground that the deed did not operate to extinguish any of the subject loan accounts.

[44] The respondents argue that to make the third of the orders sought in the application would be to sanction the non adherence by the parties to the deed of settlement to its terms. It is submitted that the purpose of the winding up was to give effect to the deed of settlement, that the liquidators intend to act in accordance with its terms, as does the company, and that the Court should not interfere with the liquidators' desire to follow this legally justifiable and commercially appropriate course.

[45] It is further submitted that the application is concerned, in substance, not with a dispute of law arising in the course of winding up, but with a commercial decision by the liquidators made in the conduct of the winding up. Mr Priestley, in support of these submissions, referred to the following passage from the reasons of Young J in Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd:[9]

"Under s 511, the court does not give directions to the liquidator as to what he should do. It cannot advise the liquidator to do something which would be, for instance, a wise and commercial breach of trust. Although it is said that the section must be construed liberally (see per Gibbs, J in Re Evers Motor Co Ltd (at 13) and Re Union Bank of Kingston-Upon-Hull (1880) 13 Ch D 808), the court's role is to decide disputes according to law. Thus the court decides a question of fact or law in a summary way, but the decision is the same as would have been reached by a court sitting with a jury or after full-blown pleadings. The jurisdiction is not to decide matters according to the opinion of the presiding judge as to what would be commercially appropriate."

[46] I have no difficulty, with respect, in accepting the propositions advanced in the above passage. It seems to me, however, that the submission under consideration does less than justice to the applicant's case. The liquidators are purporting to act in accordance with the terms of the deed of settlement, but there is a real question as to whether they are in fact in fact doing so. Under the settlement deed it is agreed that the subject loan accounts be written off or otherwise disposed of but there is the qualification that the writing off or disposition be, not only "recommended by the defendant's accountant", but take place "in a manner agreeable to all the defendant's shareholders."

[47] I was initially disposed to the view that the words "but in any event in a manner agreeable to all the defendant's shareholders" did not qualify "written off" but, on reflection, I accept that the words "but in any event" indicate that the qualification was intended to apply whether the loan accounts were "written off" or "otherwise disposed off". As the trustee of the trust has not agreed to the manner of writing off proposed, the respondents' contentions, that in writing off the loans the liquidators will be acting in accordance with the deed and that the applicant is frustrating the implementation of the deed's provisions, are, on the face of things, erroneous.

Should a term be implied in the settlement deed that the parties to it act reasonably?

[48] In response to this difficulty, Mr Priestley sought to rely on Renard Constructions (ME) Pty Ltd v Minister for Public Works[10] in which the Court, by a majority, implied in a construction contract an obligation on the part of "the principal" to act reasonably. The implication was made by implication of law and not by application of the test in B P Refinery (Westernport) Pty Ltd v Hastings Shire[11] adopted by Mason J in Codelfa Constructions Pty Ltd v State Rail Authority of NSW, namely: [12]

"(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

[49] The remaining member of the Court, Meagher JA, rejected the implication of such a term, holding that it could not satisfy the Codelfa tests. Moreover, he considered it to be "difficult, if not impossible, to ascribe any sensible meaning to such a concept in this connection".[13]

[50] In Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church,[14] Kirby P and Priestley JA applied Renard Constructions. Kirby P stated that he was bound by the decision.

[51] The issue of the implication of such a term arose again for the consideration of the New South Wales Court of Appeal in Alcatel Australia v Scarcella,[15] which concerned the lease of commercial premises. After reviewing the Australian authorities, Sheller JA, with whose reasons the other members of the Court agreed, concluded that:

"The decisions in Renard Constructions and Hughes Bros means that in New South Wales a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract."

[52] These decisions have been followed subsequently in New South Wales, [16] but the correctness of the approach embodied in them is yet to be pronounced on by the High Court of Australia.[17]

[53] Finn J in Hughes Aircraft Systems International v Air Services Australia,[18] considered[19] that "more open recognition [of an implied term of good faith] in our own contract law is now warranted". The implication of a "term of good faith and fair dealing" in a franchise agreement was accepted by Byrne J in the Victorian case of Far Horizons Pty Ltd v McDonalds Australia Ltd[20] and a term to act in good faith was implied in a dealership agreement by Finkelstein J in the Federal Court in Garry Rogers Motors Aust Pty Ltd v Subaru (Aus) Pty Ltd.[21] Finkelstein J observed:

"If such a term is implied it will require a contracting party to act in good faith and fairly, not only in relation to the performance of a contractual obligation, but also in the exercise of a power conferred by the contract. There is no reason to think, prima facie at least, that the obligation of good faith and fair dealing would not act as a restriction on a power to terminate a contract, especially if that power is in general terms."

The acceptance of the implication of a duty to act reasonably or in good faith as a matter of law though has not been universal.[22]

[54] In 1993, when a judge of the Federal Court, Gummow J was of the view that the implication by law in contracts generally of a term that one contracting party be obliged to act in good faith towards the other required "a leap of faith" which translated "well-established doctrines and remedies into a new term as to the quality of contractual performance, implied by law".[23]

[55] After reviewing the American authorities, he commented:

"Anglo-Australian contract law as to the implication of terms as heretofore developed differently, with greater emphasis upon specifics, rather than the identification of a genus expressed in wide terms. Equity has intervened in matters of contractual formation by the remedy of rescission, upon the grounds mentioned earlier. It has restrained freedom of contract by inventing and protecting the equity of redemption, and by relieving against forfeitures and penalties. To some extent equity has regulated the quality of contractual performance by the various defences available to suits for specific performance and for injunctive relief. In some but not all, of this, notions of good conscience play a part."

[56] In Central Exchange Ltd v Anaconda Nickel Ltd[24] the Full Court of the Supreme Court of Western Australia considered the question of whether there should be implied into a deed of settlement entered into, to compromise proceedings between the parties, a term that the respondent would deal with the appellant in good faith. Steytler J, with whose reasons Wallwork J agreed, reviewed the authorities but found it unnecessary to decide the question as, assuming in favour of the appellant that such a term existed, the respondent was not entitled to the relief sought.

[57] In the course of his reasons, his Honour[25] remarked:

"While the content of the phrase "good faith", in this context, remains still to be worked out, it seems, from the aforegoing review of the case law, that it is, as yet, questionable just how much an implied term of that kind would add to the well-established doctrines referred to by Gummow J in Berg Bennett, above, taken together with the implied term that each party will do what is necessary on its part to enable the other to have the benefit of the contract, accepted in such cases as Butt v M'Donald (1896) 7 QLJ 68 at 70 - 71 and St Martins Investments, above, at 607. That said, an implied term of that kind would undoubtedly bring with it a degree of flexibility, because of its general nature, that is not present in what Sir Anthony Mason, above, at 94, has described, perhaps a little unfairly, as 'rigid rules'. That degree of flexibility may well result in further development and growth of the concept, if it should gain general acceptance."

[58] Whether it is desirable to introduce "a degree of flexibility" of this kind into commercial dealings is open to question. Courts have tended to resist inducements to import fiduciary relationships into arms length commercial dealings, particularly where the parties are on an equal footing.[26]. In Hospital Products Limited v United States Surgical Corporation, Wilson J observed:[27]

"In a commercial transaction of the kind here under consideration, where the parties are dealing at arm's length and there is no credible suggestion of undue influence, I am reluctant to import a fiduciary obligation. The Courts have often expressed a cautionary note against the extension of equitable principles into the domain of commercial relationships, so as 'not to strain (them) beyond (their) due and proper limits', to use the words of Lord Selborne L.C. in Barnes v. Addy (1874) 9 Ch App 244, at p 251."

[59] There are differences, of course, between implying obligations of good faith and reasonableness on the one hand and determining the existence of a fiduciary relationship on the other but some of the reasons for traditional caution are applicable to both areas. The implication, as a matter of law, of a term of reasonableness in a commercial contract will tend to superimpose an often unwarranted layer of complexity and uncertainty onto commercial bargains.

[60] In the view I take of this matter, however, it is not necessary for me to express a concluded view on whether this line of authority should be followed.

Was there a breach of the implied term that the parties do all that is reasonably necessary to give the other of them the benefit of the contract?

[61] The parties' bargain was that the loan accounts be got rid off, either by being written off or disposed of in some other way. But because the manner in which such writing off or disposition could be effected had the potential to involve some or all of the debtors in a potential income tax liability which might be able to be avoided, the qualification was introduced that the manner of writing off or disposition be agreeable to all shareholders. As is mentioned later, it may be possible to imply a term which would avoid an impasse in the event of a failure to agree.

[62] It is unnecessary, however, to explore that matter further as there is no difficulty in implying a term that each party "do all that was reasonably necessary to secure performance of the contract".[28] In Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd, Mason J noted that the "rule of construction is not to be thought to be confined to the imposition of an obligation on one contracting party to cooperate in doing all that is necessary to be done for the performance by the other party of his obligations under the contract." He referred, with approval, to the following passage from the judgment of Griffith CJ in Butt v M'Donald:[29]

"It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract."

[63] The applicant has taken the stance, consistently, that "all loan accounts are not to be written off or otherwise disposed of". He has asserted, and continues to assert, that the Trust owes no money to the company and that his sisters' loans should be called up by the company. He has set his face against agreeing a mode of writing off or disposition for the loan accounts and is thus in breach of the implied obligation just discussed.

The consequences of the applicant's breach of an implied term of the settlement deed

[64] Returning to the applicant's breach of his implied obligations, because of his default the applicant cannot rely on any absence of his own agreement to a proposal under clause 1.3. The applicable principles are that a party cannot insist on a condition if non-fulfilment of it is due to his own fault and that a party to a contract is absolved from performance where performance is prevented by the wrongful act of another contracting party.[30]

[65] Hickman & Co v Roberts[31] provides an illustration of these principles. It concerned a building contract under which payments to the builder were to be made on the certificate of the architect. The architect, having taken an erroneous view of his role, failed to issue a certificate. It was held that the proprietor was precluded from setting up as a defence to the action either that the issue of the certificate was a condition precedent to the bringing of the action or that the certificate was conclusive as to the amount of the claim. In the Court of Appeal it was ordered that the question of the amount due to the builder should be settled by an official referee. That course of action was approved on appeal to the House of Lords.

[66] In Panamena Europea Navigacion (Compania Limitada) v Frederick Leyland & Co Ltd,[32] a contract for the repair of a vessel provided that the ship owners would pay for the repairs upon "the ordinary commercial basis" after the issue of a certificate by the owner's surveyor that the work had been satisfactorily carried out. In breach of the shipowner's duty no certificate was issued. The contractor sued for a sum on account of work done to the vessel. It was held that, as the certificate was not issued through the default of the owner's surveyor, the contractor was absolved from the necessity of obtaining it and the contractor was entitled to recover the amount claimed in the action. This conclusion was arrived at by application of the principle which prevents a person from taking advantage of the non-fulfilment of a condition, the performance of which has been hindered by himself and the related principle which "exonerates one of two contracting parties from the performance of a contract when the performance of it is prevented and rendered impossible by the wrongful act of the other contracting party".[33]

[67] The principle discussed in those cases was applied by the New Zealand Court of Appeal in Butcher v Port,[34] a case involving the wrongly formed opinion of an insurer's representative where the holding by the insurer of a particular opinion was a precondition to the insurer's liability to make payment under a policy of insurance.

[68] In that case, Cooke J expressed the principle under consideration as follows:[35]

"For present purposes a clause such as this is not materially distinguishable from one making the certificate of a party's engineer or other appointee a condition precedent to action. The principle that a party cannot insist on a condition if non-fulfilment is his own fault is basic in contract law: see for instance New Zealand Shipping Co. Ltd. v. Société des Ateliers (1919) A.C. 1, 6, per Lord Finlay L.C.

In relation to certificate clauses and the like the principle has the effect of, first, disabling the party from setting up the absence of the stipulated approval and, secondly, leaving the issue to the determination of the Court. In England there is the highest authority for this in the decisions of the House of Lords in Hickman & Co. v. Roberts (1913) A.C. 229 and Panamena Europea Navigacion (Compania Limitada) v. Frederick Leyland & Co. Ltd. (1947) A.C. 428.

[69] Butcher v Port and the decisions just referred to were considered and applied in McArthur v Mercantile Mutual Life Assurance Co Ltd. [36]

Were the applicant's obligations in respect of the loan account extinguished by clauses 1.2 and 1.3 of the settlement deed?

[70] It is now necessary to deal with the applicant's contention that, if he owed moneys to the company in his capacity as trustee, as alleged, any obligation in that regard was extinguished by clauses 1.2 and 1.3 of the deed. Those provisions, construed in isolation, are wide enough to catch the subject loan account. Under clause 1.2, the company releases and discharges Australian Vineyard Estates from all sums of money which may be or may have become due and owing at any time before the execution of the deed. The release also covers all claims and demands which the company may have or may be able to bring before the execution of the deed. The releases must be "in respect of (matters) ... in any way connected with the proceedings referred to in the recital. The connection or relationship required is thus loose, and in my view, is established on the facts.

[71] The difficulty with the applicant's argument is that clause 1.3 specifically includes the Trust loan account in the accounts the subject of the clause and legislates for its disposition. It is thus a necessary inference that the loan account is not released or otherwise legislated for by the more general provisions of clauses 1.2 and 1.3.

[72] Alternatively, to give commercial efficacy to the deed it would be necessary to imply a term along the lines that in default of agreement by the shareholders the loan accounts be written off by the company in such a manner as it reasonably deems appropriate.

[73] It was not contended by the applicant that the company has no power to enter into an agreement under which it agreed, in effect, to give away some of its property by writing off debts. In this regard however I note that the consent of all the company's shareholders to the deed may be inferred and it would appear that it had no creditors at relevant times. It may also be the case that the debtors would have had limitation period defences.

[74] There is no controversy between the parties about the subject matter of the first declaration sought in this application and it is thus inappropriate to make it. For similar reasons, the order sought in paragraph 2 of the application is inappropriate.

[75] I do not propose to make the declaration sought in paragraph 3 of the application. The basis for it is the applicant's contention, which I have found against, that there was no loan by the company to the Trustee of the Trust and the alternative contention that any relevant loan agreement was a sham. Nor is it appropriate that I give any other directions or make any declarations. There is no cross application before me and matters which may need to be considered by the liquidators may not have been addressed in these proceedings.

[76] For the above reasons, it will be ordered that the application be dismissed. I will now hear argument on costs, including the costs of the first respondents.

[1] 48 Halsbury's Laws of England, 4th ed para 865; Underhill's Law of Trusts and Trustees, 11th ed 379-80.

[3] See Ferguson v O'Neill [1943] VicLawRp 3; [1943] VLR 30 at 32.

[5] Carpenter v Carpenter Grazing Co Pty Ltd (1987) 5 ACLC 506 at 514 and Popovic v Tanasijevic (No 5) [2000] SASC 87; [2000] 34 ACSR 1.

[7] For example, Trusts Act 1973 (Qld) s 12.

[8] See eg., the discussion in Jacobs' Law of Trusts in Australia, 6th ed, paras 1504-1507; 48 Halsbury's Laws of England, 4th ed paras 699 et seq.

[9] (1997) 42 NSWLR 209 at 213

[10] (1982) 26 NSWLR 234 (CA).

[12] (1982) 149 CLR 337.

[14] [1993] 31 NSWLR 91.

[15] [1998] NSWSC 483; [1998] 44 NSWLR 349.

[16] See eg. Spira v Commonwealth Bank of Australia [2003] NSWCA 180; Burger King Corp v Hungry Jacks Pty Ltd [2001] NSWCA 187.

[17] Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; [2002] 76 ALJR 436.

[18] [1997] FCA 558; (1997) 76 FCR 151.

[20] [2000] VSC 310.

[22] Saxby Bridge Mortgages Pty Ltd v Saxby Bridge Pty Ltd [2000] NSWSC 433; Asia Television Ltd v Yau's Entertainment Pty Ltd [2000] FCA 254; [2000] 48 IPR 283 and Central Exchange Ltd v Anaconda Nickel Ltd [2002] 26 WAR 33.

[23] Service Station Association Ltd v Berg Bennett & Associates Pty Ltd [1993] FCA 638; (1993) 45 FCR 84.

[26] Hospital Products Limited v United States Surgical Corporation (1984-1985) 156 CLR 40 at 70 per Gibbs CJ, 118-119 per Wilson J and at 149-150 per Dawson J; Scandinavian Trading Tanker Co A B v Flota Petrolera Ecuatoriana [1983] AC 694 at 703, 4 and Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd [1958] HCA 33; (1958) 100 CLR 342.

[28] Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 607 per Mason J, referring to Mackay v Dick (1881) 6 App Cas 251 at 263.

[30] Butcher v Port (1985) 3 ANZ Ins Cases 60-638 and Panamena Europea Navigacion (Compania Limitada) v Frederick Leyland & Co Ltd (1947) AC 428.

[31] [1913] AC 229.

[32] [1947] AC 428.

[34] (1985) 3 ANZ Insurance Cases 60-638.

[36] [2001] QCA 317.