Supreme Court of Queensland|1999-04-23|Before: Derrington J

Klement v Pencoal Limited & Ors [1999] QSC 90 (23 April 1999)

1 The plaintiff was the registered lessee with the fifth defendant as tenants in common in equal shares over the mining lease and an associated special lease and mining information which were the subject of an option agreement and a resulting sale to the first defendant who subsequently sold them to the second defendant, which is the current lessee. The plaintiff alleges that the signature on the respective documents of transfer to the first defendant which purported to be his are forgeries and that consequently the registration of the transfer of title and subsequent dealings are all invalid and ineffective to transfer his interest in such leases. Consequent upon this he claims that the second defendant holds one half of its interest in each of the leases on trust for him and seeks rectification of the registers. He also claims to have a similar half interest in the associated mining information.

3 The plaintiff seeks damages against the first and fifth defendants for conversion of his interest in such property or alternatively that the first and second defendant be declared trustees for him in respect of their respective holding of what had been his title in this property, with consequential relief. He also asks for an account against the first, second and fifth defendants or alternatively as against the fifth defendant that he pay to the plaintiff a one half share in the sum of $1,010,000.00 received by him in respect of the option and subsequent sale of the property. He also asks for interest.

4 In the alternative, he claims against the first defendant for specific performance of any contract binding on him or in the alternative the sum of $500,000.00 and interest representing his one half share of the purchase money payable under such contract.

5 The fifth defendant counterclaims for his share of the proceeds of the sale of certain items of plant and equipment sold by the plaintiff under a joint venture between them. He further seeks a declaration that the plaintiff agreed to compromise any claim in respect of the proceeds of the sale of the said leases and associated property. He also asks for equitable compensation for breach of fiduciary duty and an account of their joint venture dealings.

6 Prior to 1988 the plaintiff and the fifth defendant ("Lindner") conducted businesses in South Australia involving among other things dealing in used machinery and scrap metal. They had been friends for many years and had formed a partnership, described as a joint venture, to buy used plant and equipment from General Motors Holden in South Australia for resale. For the purpose, a bank account had been opened and was operated by Lindner. This arrangement had continued into other ventures and was remarkable for its informality and lack of definition.

7 Relevantly, it had extended to the purchase of coal mining machinery at the Sirius Creek coal mine in Central Queensland in 1985. In the course of this transaction, Lindner became aware that the mining lease itself and two associated leaseholds together with accumulated mining information about the mine were for sale at a nominal price, and after some discussion they bought them for resale as part of the joint venture. The titles to the lands were registered in the name of both parties as tenants in common in equal shares, and Lindner's address was endorsed on the titles as the only address of the title-holders. He was allowed to retain the title documents. From that time until these assets were sold, it was Lindner who paid all the rents and met all the obligations relating to the leases, including developmental costs. The money came partly from the joint venture bank account, but a substantial part came from Lindner's own resources. It was also he who alone engaged in all the efforts to sell the mine with the mining information and who finally arranged an option and their subsequent sale. Similarly, he too alone arranged the prior separate sale of one of the leases, which was not necessary to the mining operation. The plaintiff was content to allow him to conduct the entire transaction from the arrangements for the purchase through all subsequent negotiations to the eventual grant of an option and resale, without any intrusion or contribution on his part.

8 It is common ground that he gave to Lindner, who had moved to Darwin, an authority in some form to act on his behalf. What purports to be a photocopy of an authority dated 15 November 1987 was used by Lindner in his relevant dealings as proof of his agency, but the plaintiff denies its authenticity. The original was never produced in the trial and the photocopy that was produced may have been doctored, for the plaintiff's signature may have been taken from another source to produce the photocopy. It authorises Lindner to conduct all business on the plaintiff's behalf; and although it is neither sealed nor witnessed, it is even expressed to amount to a power of attorney. Conversely, as with many other things, the plaintiff is very vague about the content of the authority to which he admits. He claims that it is more limited in scope, but his version in this respect is unacceptable having regard to the scope of Lindner's permitted authority which he manifested by his later conduct. Indeed, he later took the step of formally revoking any power of attorney, though not his general authority. As it turns out, although it is probable that the copy which Lindner now produces is genuine, its validity is largely irrelevant because its only significance is that it holds out Lindner as authorised to conduct all the relevant business on behalf of the plaintiff and it is certain that such extensive authority was given one way or another. By his conduct, the plaintiff confirmed this in the dealings concerning the option and the sale which followed, so that those who were dealing with Lindner were justified in believing that the authority which he had produced was good.

9 It was in this way that in 1988 Lindner negotiated with a company called Pennant Pty Ltd ("Pennant") for the partners to grant an option over the mining lease and one of the other leaseholds and the associated mining information. The fee for the option was $10,000.00 and the purchase price on its exercise was to be $1,000,000.00. The option agreement, drawn up by Pennant and presented to Lindner, made provision for the signatures of both registered lessees. When Lindner attempted to execute it for the plaintiff under his purported power of attorney which he produced, Pennant referred the matter to its solicitors and on their advice required the plaintiff's personal signature to the document.

10 Just before this, Lindner had negotiated the sale of the remaining leasehold to other purchasers and the documentation was sent for signature to the plaintiff, who duly executed and returned it. That transaction was subsequently completed but not before the plaintiff required direct payment by the purchasers' solicitors of his half share of the proceeds. It is not fair to him to say, as the defendants do, that he knew at that time that Lindner claimed to be entitled to all the proceeds of the sale of these assets. The basic assumption is not true.

11 In the meantime in May 1988, he was provided with a photocopy of the option agreement with Pennant, purporting to bear his signature. His denial of its authenticity cannot be confirmed or denied by a handwriting expert. On its face it revealed that Lindner had claimed to represent the plaintiff under a power of attorney and had tried to use it to execute the agreement on his behalf. It also provided for all notices to be sent to Lindner and for the option fee to be paid at Lindner's discretion. The plaintiff also had a copy of Lindner's direction that the fee be paid to his private account in Darwin.

12 In early June, the plaintiff referred this to his solicitor for advice, but only as to the question of the power of attorney. There was no suggestion of forgery. As it has been remarked, the only action taken was that a notice was sent to Lindner terminating his power of attorney, but not his agency to conduct the relevant transaction. Despite the solicitor's advice to the contrary, the plaintiff deliberately chose not to notify Pennant of any of this, nor, importantly, to disavow Lindner's claim to extensive authority as his agent. His only excuse was that he felt secure in knowing that his signature on the transfer documents would be necessary for any valid completion of the sale, but he took no steps to ensure that this would be so such as by requesting Pennant to send documents direct to him for execution. He was more than content to have the sale consummated without interference that might harm its prospects since it represented a large profit to him. Further, there are many reasons why it is clear that his signature was not a forgery, not the least being that he did not complain of it to his solicitors; and that Lindner had supplied him with full copies of everything, including the indication that Lindner had produced to Pennant the plaintiff's authority that referred even to the power of attorney.

13 As the signature on the option was not a forgery then by arming Lindner with it for presentation to Pennant and, more particularly, to present a document bearing his signature as valid evidence of its authenticity, he confirmed to Pennant Lindner's continuing authority to conduct the entire transaction on his behalf: Breskvar v Wall (1971) 126 CLR 376. Further, as the agreement provided that all notices should go to Lindner and that the option fee of $10,000.00 be paid into a bank account to be nominated by Lindner, as the plaintiff must have known when he signed it, this further indicated Lindner's very wide authority, and must have confirmed to Pennant that same message that his wide written authority and general absence of involvement had already conveyed.

14 As it turns out, Pennant assigned its interest in the option to a related company, the first defendant ("Pencoal"), which was then called South Blackwater Mines Ltd, and which continued to use Pennant's agents and solicitors as its own. It inherited their belief as to Lindner's authorisation in relevant respects that the plaintiff had engendered. In the course of time Pencoal exercised the option and purchased the leases which it later sold and transferred to the second defendant. It is an independent entity with a right to indemnity from Pencoal in respect of any defect in its title or any liability to the plaintiff.

15 When, on 15 August 1988 the first defendant gave notice of the exercise of the option, it paid to Lindner at his direction a deposit of $100,000.00 as proved for in the option agreement. Then again on 21 October 1988 when the transaction was settled, the full balance of the purchase money was paid to him at his direction. He had forged the plaintiff's signatures on the transfer documents which he tendered in exchange. He applied all the purchase money as well as the option fee to his own business and, he says, has since dissipated it in unsuccessful private ventures. In about September 1989 the transfer of the special lease and mining lease to Pencoal were registered. Pencoal's sale of both leases to the second defendant took place in July 1990 and these transactions were registered in November 1990 and March 1991. The sale of the mining information was in each case co-ordinated with the sale of the leases.

16 It may be said of Lindner that his conduct did not necessarily reveal an intention to defraud anyone, at least as he saw it. From the plaintiff's admissions and judicial knowledge of the general obligations of a mining lease, and from a reasonable understanding of the cost in time and money in supervising the performance of those obligations and in finding a purchaser and negotiating a sale, it is reasonable to believe that he felt some entitlement to reimbursement from the proceeds of the sale before they were divided. He had properly informed the plaintiff of the option and was probably alarmed by his attitude as to the proceeds of the sale of the other lease and his revocation of his authority after such a long period of passivity. He was probably prepared to account to the plaintiff for a fair share, as he saw it, and he later moved in that direction. But he probably wished to avoid the disadvantage to himself of the plaintiff's insistence again on receiving his half share of the purchase money direct from the purchaser. By the forgery, he had the money in hand to relieve any financial pressure that his expenditure had generated, and he would be in a better bargaining position in the subsequent accounting. His conduct was unlawful and reprehensible but probably not the barefaced fraud it appears at first glance.

17 In the meantime, although he knew that the option was to expire in early September 1988 at the latest, the plaintiff did nothing to follow it up, even by way of suitable enquiry. He says that prior to that date he was told that it probably would not be exercised, but even if this evidence is true, such information was totally inconclusive and does not explain his reticence in such a lucrative deal. Nor in any case does it explain his failure to ask for his share of the option fee of $10,000.00 which he knew had been paid to Lindner's private bank account. He was a very experienced businessman and dealer, and his reticence would have been totally out of character. On this as on several other issues his demeanour in evidence was very poor and he should not be believed. Although he did not know of the forgery of his signature on the transfer documents and their being uttered on the settlement, he has not established that he was generally unaware of the progress of the transaction. This curious attitude is consistent with what followed.

18 It is likely that while he may not have authorised Lindner's forgery of his signature to the transfer, the plaintiff was content to condone it as part of Lindner's efficient conduct of the transaction with such splendid results and in the expectation that his friend would ultimately account to him fully. Such an approach would not have been inconsistent with his revocation of the power of attorney, for he may not have been prepared to allow Lindner free reign under a power of attorney that might have been used in other unauthorised deals which he may not have wished to enter.

19 In November 1988 at a chance meeting with Lindner at the Cavan hotel, there were heated words between them concerning this matter. Lindner boasted that he could use the plaintiff's signature at any time. This evidence is of little or direct significance since he had plainly forged the signature on the transaction documents. Its greatest importance is that he did not try to hide it, and it further warned the plaintiff of his attitude and should have put him on his guard; and yet he still did nothing to pursue the matter. Even in January 1989, knowing that his title was still registered on the leases, he deliberately refrained from lodging a caveat. Having regard to his extensive authority to Lindner to conduct the transaction, his continuing failure to do anything indicates factually his persistent holding out or ratification of Lindner's wide authority to deal with the purchaser on his behalf in all relevant features of the transaction.

20 At another meeting between them at the same hotel in December 1988, although it is denied by the plaintiff, he challenged Lindner to the effect that he had received nothing from the transaction. Lindner claims that the parties then struck a deal whereby the plaintiff would receive a sum of $200,000.00 in full settlement of his entitlement, and by way of corroboration points to three payments which he made in 1989 and 1991 amounting in all to $65,000.00 in total. These, he says, were part of his performance of the agreement, but he could not pay more because of the financial adversity that befell him.

21 He seeks to fortify this evidence by reference to an entry in his company's financial papers acknowledging an indebtedness to the plaintiff of $170,000.00 as at 30 June 1989. He says that this represents the agreed figure of $200,000.00 less $30,000.00 which had been paid by that time. Although this relatively contemporary entry appears in his records, it is of no value since it was unilateral and could well have represented no more than his offer to the plaintiff and his hope at the time of what he may achieve by further negotiation. He had to put something and he certainly did not want to acknowledge any greater sum.

22 His evidence of a concluded agreement is not supported by Mr Messenger, a witness called on his behalf. He says that there was some discussion involving a proposed figure of $200,00.00 to $250,000.00, but he recalls no conclusion of the transaction. It is unlikely that any conclusion was reached in his absence.

23 Lindner's case is that this settlement took into account the sums which he had personally expended on this part of the joint venture, and it also allowed him some reward for the considerable time which he alone had put into it. He also claims that it took into account an indeterminate amount owing to him for his interest in machinery and plant from the earlier joint venture which had been stored on land owned by the plaintiff and sold with it. All of these background facts are true, but there was no agreement that he was entitled to recompense for the time which he spent on the project, or the amount of it, and the value of the equipment sold by the plaintiff is also disputed. That would not matter if there were a concluded agreement in full settlement of their cross entitlements, and the general justification of Lindner's claims would explain why the plaintiff might be prepared to settle for much less than half of the net proceeds of the sale.

24 The truth as to this matter is difficult to ascertain because of the unreliability of both but even on Lindner's evidence there was no concluded agreement since he says that the plaintiff only agreed to his proposition in principle. It is also unlikely that the plaintiff would have agreed to a figure of $200,000.00 if, as Mr Messenger says, Lindner suggested a settlement of $200,000.00 to $250,000.00; nor would he have allowed the time for payment to be indeterminate. It cannot be said that there was probably a concluded agreement, but, consistently with their unusual dealings, there was probably no absolute rejection of the offer either, and it was probably left for further discussion depending on what was forthcoming.

25 Lindner may have read this in a self-serving way as an agreement, but his subsequent payments of irregular and variable instalments of money was probably his attempts to keep the plaintiff happy in the hope of reaching an ultimate settlement after he had provided a substantial sum in total, and it is this that may have generated his instructions to his accountant.

26 The plaintiff's acceptance of the payments, which he knew were in part satisfaction of his share of the sale, was probably part of a waiting strategy, founded on the same basic informal trust in a satisfactory outcome to be agreed that had marked this unusual business relationship. He was probably prepared to stay his claim in order to see how much he would receive for his share of the sale without further disputation. This would also have been consistent with his general acquiescence in Lindner's total control of the transaction, including his understanding of the likelihood that Lindner had applied his signature to the transfer. It also explains his otherwise inexplicable failure to take any immediate action against him or to disturb the transaction which he then certainly knew had been completed. He may also have been prepared to allow Lindner some suitable compensation for his efforts, once he himself had received a suitable sum. As this was for the future, it was appropriate for him to wait to see what would come to him. He may have been prepared to accept a sum of $200,000.00 to $250,000.00 in full settlement once it was paid; but it is unlikely that he accepted a concluded compromise at that stage and on such imprecise terms. Such fluid informality would have been consistent with the whole tenor of their arrangement.

27 Seeing such an argument as the least dangerous to his claim against the first and second defendants, learned counsel for the plaintiff postulated that he was mistaken in saying that he had not executed the option agreement. It is true that his memory was unreliable and that he rationalised considerably, always to his own advantage as he saw it. Nor was he always truthful. There is a similar difficulty as to Lindner, who was plainly dishonest in his evidence in a number of respects, but this is not to say that neither witness was ever right. The result is that it is impossible to rely totally on the direct evidence of either, and so it is necessary to have recourse to inferences from the circumstances. But even this is made more difficult because of their unusual financial and personal relationship which makes it dangerous to rely on what would be reasonably expected in ordinary circumstances.

28 For example, the plaintiff's signing the transfer in the other sale and his insistence on receiving his share of the proceeds from the purchaser might imply that he would insist on a similar arrangement in this larger transaction; but he took no steps to do so and did not even ask Lindner for his share of the consideration for the option. He may have wished to avoid seriously affronting Lindner who had outlaid a substantial amount of his own moneys and was totally responsible for such a satisfactory result; and he may have been expected to bring more benefits to the plaintiff in the future. Such was the strange nature of their business relationship that such speculation as to explanation is virtually endless. The one fact that can be grasped is that there were so many possible hidden motives that ordinary human responses must be used with caution as a bases for inferences in this case.

29 Their joint venture contract had been informal in the highest degree in its formation and in its performance. For the most part, Lindner appears to have had total management of their joint affairs and control of the finances of their enterprises, and there seems to have been little accounting or sensible division of profits. For example, some of the payments relating to the purchase of the mining lease in the present case were made from the bank account used in the joint venture, some from another account under Lindner's control and some from his own personal funds. There were also bizarre financial arrangements in respect of other matters. It may be that some of this disorder was caused by the variable availability or unavailability of suitable funds, but as between these two parties, all of these matters were in Lindner's hands and the plaintiff was content to permit this, probably subject to his ultimately receiving an appropriate share to be worked out between them in the course of time. He also seems to have been generally content to refrain from pressing for any rights that he may have had, probably because of his elevated belief, which he stressed in his evidence, in Lindner's capacity to make substantial money for him on a long term basis. It was only after the last payment in May 1991 was not followed by any further payment for some time, that he took any action at all. Since by then Lindner was obviously without much substance, he probably saw the first and second defendants as the only prospective source of an effective remedy, and he has tailored his evidence with this in mind.

30 It remains to refer to the subject of part of Lindner's counterclaim. From their original joint venture the parties had stored left-over plant and equipment on the plaintiff's land. It passed with the land to the new owner when the plaintiff sold the lot in 1986 together. Again typical of this business relationship, the plaintiff did not seek Lindner's approval, nor did he account for Lindner's share of their value. Nor, until this action, did Lindner seek it.

31 The acceptable evidence shows that the following items were sold, and their respective value is indicated.

32 Lindner later sold some of these on commission for the new owners and received commission of $5,000.00. There is nothing to suggest that he did this as part of the joint venture, for he also did private business of this nature, and that commission should not come into account.

The Plaintiff's Claim Against The First Defendant

33 In his submissions, learned counsel for the plaintiff says that his principal claim against the first defendant is for payment of his entitlement to $505,000.00 plus interest because its obligation was to pay the registered proprietors in accordance with their respective interests. Of the amount claimed, $5,000.00 represents half the option fee. As his argument that the plaintiff signed the option agreement is correct, since it provided for payment according to Lindner's direction, which was done, the fee passed according to the plaintiff's own express agreement and he cannot claim it again. This is now conceded.

34 His major argument is based on the proposition, nemo dat quod non habet, or as the simple English adherents would prefer, no-one may give something which he or she does not have. It is argued Lindner could not, by the use of a forged instrument which had no validity since he had no authority to forge it, transfer the plaintiff's interest to Pencoal. This is correct so far as it goes but it does not address the question whether Lindner could do so as his agent, in which case it is in law the principal who is giving his title through his agent. And if he does so by the delivery of an instrument bearing a signature by which he is bound, either through agency or by estoppel or ratification, then the instrument is good to pass the title in law since the defect in the signature is irrelevant. Consequently, it is not a question of nemo dat but one of agency or estoppel in respect of the delivery of the signed document to the purchaser as a valid transfer of title. It seems to be common ground and to be right that the claim against the second defendant depends on the success of the claim against Pencoal, and even if that is successful the success of the former does not automatically follow.

35 In any case, his claim for a debt by Pencoal as to his half of the purchase price and interest is in conflict with his claim that the forged signature to the transfer meant that his interest in the property did not pass, notwithstanding that Pencoal had an enforceable contractual right to purchase it. Ex hypothesi, as he did not perform his contractual obligation, he has no entitlement to his half the purchase price, nor to interest. Presumably this is the reason for his alternative claim for specific performance; but if he cannot regain his title or establish an enforceable trust, he could not perform his obligations that would entitle him to the payment of his half of the purchase money. If he were successful, this would be an alternative remedy to his prayer for a declaration that Pencoal received the titles to his interest in the property in trust and is liable to account to him and/or that the second defendant now holds them in trust for him. However, he could only hope for such equitable relief if he came to equity with clean hands and if he were prepared to do equity. In that respect his own conduct that led to this result would disentitle him from such relief. Whether his delay would defeat his equity would also be in issue, since he was guilty of serious delay in pursuing his interests when he knew that the transaction was settled. Had he taken prompt action, he or Pencoal would probably have recovered his share of the purchase money from Lindner and the sale could have proceeded properly. As it turned out, his laches saw Lindner dissipate all his assets so that that sum is now probably irrecoverable, and this, if he were to succeed, would prejudice Pencoal. These would be more than sufficient to deny him equitable relief against the first and the second defendants.

36 This alone may not be sufficient to defeat his claim against the third and fourth defendants to have the registers of title rectified; but the second defendant is unquestionably a purchaser for value without notice of any trust; and so would take its legal title free of it. It would therefore be necessary for the plaintiff to show that the title did not pass to Pencoal at all. If that be the case, then prima facie the registers should be corrected, but then other considerations may apply.

37 The result turns upon the validity of the first defendant's defences:

i) that the plaintiff authorised Lindner to apply his signature to the transfer;

ii) that he authorised Lindner or held him out as his agent duly authorised to conduct the entire transaction on behalf of both of them, including the presentation of a valid transfer in exchange for payment of the purchase price, and thereby to represent the document so presented as bearing his valid signature;

iii) that he is bound by the document which his agent used on his behalf in respect of a transaction within the bounds of his ostensible authority; or (and it may be the same thing) that he is estopped from denying the validity of the signature represented by his agent to be his;

iv) that because he knew or should have known that Lindner might forge or had forged his signature in the transaction, he was in breach of his duty by failing to warn Pencoal. In this case the damages would equal the loss that it would suffer by having to pay him his half share of the purchase money; and

v) that there was estoppel, election, acquiescence and ratification of the sale and Lindner's actions by the plaintiff's post-sale conduct.

Although the arrangements of the joint venture were remarkably loose and the plaintiff invested Lindner with very wide powers to act on his behalf, there is no evidence that he authorised him to apply his signature to the documents, nor is that a reasonable implication, particularly in the light of clear indications to the contrary.

38 However, he cannot deny that Lindner was generally his agent in the relevant transaction with a very wide scope of power. The only question is whether in the settlement of the sale he was his agent to present signed transfers and other documents on the implied representation that they were validly executed by the plaintiff. The facts in support of this are:

· Lindner was the agent in respect of all matters antecedent to the sale concerning these assets;

· His address was that shown on the titles as the address of the lessees;

· He was given the duly signed documents in the sale of the other leasehold to present to those purchasers in the settlement of that sale;

· He was his agent in every aspect of the negotiations for this transaction;

· He had a written authority from the plaintiff in very wide terms;

· He had possession of the titles to the leases and of the mining information;

· He was the party nominated in the option as the recipient of notices from the grantee;

· He had the power to direct the payment of the option fee of $10,000.00, and directed it to his private account;

· He was given the plaintiff's signature to the option agreement to present it to the grantee as a valid document in settlement of that transaction and a confirmation of all the powers he had exercised already;

· He was permitted by the plaintiff to continue to conduct the entire transaction without intrusion or serious enquiry by him;

· The plaintiff intended that he continue to act as agent for the entire transaction, including the presentation of the transfer documents in settlement of it;

· The plaintiff gave the purchaser's agents no indication that the wide authority which had been exercised to that time and ratified by his conduct was limited in any way (but this would not extend to forgery);

· The plaintiff's post-settlement conduct confirmed the agency in every respect (other than the act of forgery) including the settlement of the transaction;

39 There is no serious fact suggesting the contrary, which is not surprising in view of the plaintiff's assertion that he left "everything" to Lindner. The effect is that Lindner was his agent acting within the scope of his ostensible authority in settling the matter. The plaintiff intended that he should do so and Pencoal was justified in believing that he was so authorised. Of course the authority did not and could not be inferred to extend to uttering a forged document, but that does not detract from his ostensible authority to produce a document, represented as valid, as the performance of the plaintiff's obligation, and to that extent he was the plaintiff's agent. This feature of the wide scope of his written authority was confirmed by his giving the executed option agreement to Lindner to present to Pennant to further the transaction and to receive the option fee on behalf of both of them. It also meant that the purchaser was relieved of any enquiry in this respect and in respect of any doubts that may have been generated by Lindner's attempt to execute the document under the "power of attorney": cf Northside Developments Pty Ltd v Registrar General [1990] HCA 32; (1990) 170 CLR 146.

40 Further, if the "power of attorney" had been forged, his failure to enquire further, and to take appropriate steps to avoid imposition on the purchaser by his agent is inexcusable and does not leave him legally unscathed. While it may have been comfortable for him to be reticent for fear of disrupting the sale, it means that he deliberately neglected to warn Pennant of the danger of his agent's abuse of power in the rest of the transaction. He did not even take the precaution of asking Pennant to send any documents to him for execution. This of course is not a case where a party, simply knowing of a threat of harm by a second party to a third, owes no duty to the third party because of the absence of control over or responsibility for the second party: cf Banque Financiere de la Cite S.A. v Westgate Insurance Co Ltd [1991] 2 AC 249 (HL). He was using Lindner as his agent for his own benefit in respect of the relevant act wherein the danger lay. He plainly intended that the purchaser should regard Lindner as his agent to conduct the entire transaction on his behalf.

41 While the "power of attorney" was probably not a forgery, the existence of this attitude is confirmed by his later conduct. Although at their meeting in November 1988, he was in effect told by Lindner that the sale had been or would be completed by forgery of his signature, he still did not notify the purchaser, did not follow his solicitor's later advice to lodge a caveat which may have been effective to preserve his title and allow the purchaser to protect itself by recovery from Lindner. Nor did he make any formal demand on Lindner or complain of the forgeries. Instead he was content to do nothing other than to accept two payments amounting to $50,000.00 in 1989 and a further payment of $15,000.00 in 1991; and it was only after it was obvious that payments had dried up that he was moved to commence proceedings and challenge the authority of Lindner's actions.

42 Read in the whole history of their relationship, his reaction to all of these matters indicates that he was not particularly affronted by Lindner's forgery and was certainly content to accept it providing that in the course of time he was to receive the benefits flowing from it. In a way this is consistent with his own sale of partnership property stored on his land and with the evidence that Lindner seems to have had no inhibition in telling him that he had applied his signature to the transaction. The freedom of his admission seems to have been well placed having regard to the plaintiff's reaction and Lindner's acquiescence. With minor exceptions they disregarded formality and blindly accepted the conduct of each other in favour of practical utility with a mutual trust in a final accounting.

43 The plaintiff's overall conduct gives rise to a variety of possible defences. The first and most obvious is that he held Lindner out as his agent to conduct the transaction, including the production of the transfer documents as validly executed instruments for the purpose of settlement, and the receipt of his share of the purchase money. If that is so, then he is bound by that conduct. There may be an incidental question as to whether he is also bound by his agent's implied misrepresentation as to the validity of the signature, in which case he would be estopped from denying that validity, but that is subsumed in the larger principle. Further, if Lindner was authorised to receive the purchase money on his behalf, as that has paid, he would be deemed at law to have received it and to be obliged, if necessary, to perform the contract by affixing his signature to the transfers. The next serious question is whether by his conduct he is estopped from denying the validity of his signature independently of the question of agency. Thirdly, there is a question whether he ratified his agent's acts.

44 The broad doctrine is that the principal is liable for the act of an agent if it be done in the course of the latter's employment and within the scope of the agency: Lloyd v Grace Smith & Co [1912] UKHL 1; [1912] AC 716. This applies to acts within the ostensible authority of the agent, and while it may not be within the actual authority of the agent to commit a fraud by the use of forged documents, it may be within his ostensible authority to perform acts in which the fraud is practised: Uxbridge Permanent Benefit Building Society v Pickard [1939] 2 KB 248. The effect on the principal of a forged instrument falls within the question of ostensible authority: Ruben v Great Fingall Consolidated [1906] AC 439; Kredit Bank Cassel v Schenkers [1927] 1 KB 826; and Slingsby v District Bank [1932] 1 KB 544, discussed in Uxbridge at p.256-257.

45 The bases of this doctrine of ostensible authority is estoppel: Northside Developments Pty Ltd (supra) per Dawson J at 200. There is no basis here for suggesting that there should be an estoppel from denying authority, for example, to forge a signature since there is unlikely to be any holding out of such an authority; but there may be ostensible authority to utter a document as genuine that will estop denial of its authenticity even if it happens to be forged. Uxbridge, for example, was concerned with the uttering of forged documents by an employee in the course of his employment rather than his actual forging of the document. This was noted in Northside Developments Pty Ltd (supra) per Dawson J at 201, and the point is as important here as it was there. Learned counsel for the plaintiff naturally tried to divert attention to the act of forgery, which was not authorised and could not usually be implied as held out; but the forgery was outside the transaction. It is the uttering of the documents as genuine and the receipt of the purchase money to perform the act that are the proper subjects of scrutiny in respect of ostensible authority, for they were the actions of the agent that were relevant to the operative part of the transaction with the purchaser.

46 The cases mostly refer to the act of an agent who has a status where the ostensible authority to perform the act is held out by implication because it ordinarily applies to such a status. Identical in principle is the case such as this where the principal expressly or impliedly holds out an authority of the agent which is wide enough to include the presentation of his signed transfers in exchange for the purchase money. The authority covers the agent's act if the document produced is forged. If the fact and scope of the agent's authority is implied rather than express, then the only additional question is the principal's words and/or conduct support such an implication.

47 As it has been shown, by the list of factors catelogued above, Lindner was plainly held out by the plaintiff as his agent to conduct the entire transaction on his behalf.

48 By his own clear acknowledgement, his own part in any transaction was to be confined to putting his signature to the transfer. Presumably he intended to use this to protect his share of the proceeds; but even apart from the message he conveyed to the purchaser, he also intended that Lindner conduct all the necessary dealings with the purchaser. As with the option agreement which he had executed, this was to include production of relevant documents purporting to have been executed by the vendors in performance of their obligations, and Lindner's direction as to payment of the purchase moneys. This is a clear implication of his actual intention that was manifested to the purchaser both before and after the settlement by his written authority and his conduct, and any private reservations as to what he might do to preserve his interests are irrelevant insofar as they were not communicated to the purchaser, particularly where they departed from the confidence in Lindner which he had already granted and implied.

49 It follows from Lindner's authority to represent that the documents which he presented on the settlement were valid as to their signatures, that the plaintiff is bound despite the forgery, and is estopped from denying the authenticity of his signature in contradiction of that representation, which Pencoal acted upon to its detriment. Equally, Lindner's authority to receive the purchase money on his behalf means that Pencoal's payment to him amounted to payment to the plaintiff. In those circumstances, if the other aspect of this defence had failed, Pencoal would still have been entitled to require him to execute the document without further payment. This result is in no way affected by the argument that the first defendant is not entitled to rely on any set-off Lindner may have against the plaintiff, for in law the payment was made to the plaintiff through his agent and not to the agent in his own right.

50 As for Pencoal's conduct, from the matters known to its agent's through the plaintiff's written authority and subsequent corroborative conduct, it was entitled to believe and did believe that Lindner was his agent duly authorised for all relevant purposes. This is not surprising since he had that authority, and the plaintiff intended that he should.

51 Other than in respect of such estoppel as supports ostensible agency, which has been discussed above, there is little to support a plea of estoppel from the plaintiff's pre-settlement conduct. There would have been considerable grounds for it if there had been forgery of his signature on the option agreement to his knowledge; but since it has been determined that he did in fact execute it, there was no conduct on his part during that period, even by way of inactivity, that misrepresented any position to Pencoal. Even the termination of the suggested power of attorney did not alter the situation since Lindner was in fact left with the very full powers in respect of the completion of the transaction in all relevant respects.

52 Pencoal also argues for an estoppel based upon the plaintiff's failure to act to warn it when in November 1988 he learned of the forgery. The transaction had been settled and the purchase money paid over on and by 21 October 1988 before he learnt of it, and he could not have prevented this, but he could have warned Pencoal who, on the sparse evidence available, could and would have pursued Lindner successfully to obtain the plaintiff's valid signature to the transfer. There is no doubt that Lindner would have been obliged to disgorge sufficient of the purchase money to obtain the plaintiff's signature and that he would have and could have done so. This detriment to Pencoal certainly flowed from his election to remain silent: Moorgate Mercantile Co v Twitching [1977] AC 890 is distinguishable here because here the plaintiff's inactivity was not a mere absence of protection of his title, for he knew of his agent's misconduct which called for action on his part as part of his duty to speak out in such circumstances; but most of all because his inactivity is relevant here as going to evidence of the fact and scope of the agency. However, it is doubtful whether such conduct ex post facto can support an estoppel other than to the extent that it supports the doctrine of ratification, and it is better discussed under that head.

53 Because the plaintiff knew of the forgery and at a relatively early stage when Pencoal could have remedied the matter and did not disavow it for over three years, by which time the position was not remediable, the plaintiff's deliberate silence amounted to ratification: McLaughlin v City Bank of Sydney [1912] HCA 16; (1912) 14 CLR 684, 691; Scots Church Adelaide Inc v Feud [1951] SASR 41; 52-53. See also the suggestion by Waller J in Suncorp Insurance and Fiance v Milano Assicurazion SpA (1993) 2 Lloyd's Rep 225. It is also relevant that he intended that the transaction should stand fully performed so that he could share in its benefits, and that he accepted some of those benefits although they would not have been available to him if his obligations had not been discharged by the provision of a binding signature: McLaughlin v City Bank of Sydney (supra). There is every indication that he intended to ratify the transaction for his own advantage, and it is immaterial that he did not notify Pencoal of that fact: Harrisons & Crosfield Ltd v L & N W Ry Co Ltd [1917] 2 KB 755, 758; Pagan SpA v Feed Products Ltd (1987) 2 Lloyd's Rep 601, 613; Shell Co of Australia Ltd v Nat Shipping and Baggage Services Ltd ("The Kilmun") (1988) 2 Lloyd's rep 1, 11. His silence in the circumstances amounted to an implied communication of his attitude in that respect. It was only if he intended to reject the transaction on the basis of an absence of authority that he came under a duty to communicate the fact to Pencoal within a reasonable time: Scots Church of Adelaide Inc v Feud (supra); Prince v Clarke [1823] EngR 321; (1823) 107 ER 70, 71; Phillips v Homfray (1871) LR 6 Cr.App 770, 778. Moorgate Mercantile Co v Twitching (supra) is again distinguishable because this is not a mere matter of inactivity but of inactivity in the light of known misconduct of an agent and going to evidence of ratification. Accordingly, quite apart from any other defence, the plaintiff would have been bound by the settlement by his ratification of his agent's conduct so that a valid title in the property would have passed to the purchaser: McLaughlin v City Bank of Sydney (supra); Scots Church Adelaide v Feud (supra).

54 If ratification had not been made out, the plaintiff would still have been estopped from denying the authenticity of his signature and the effectiveness of the transfer since his inactivity, with knowledge of Lindner's wrong-doing at a time when it could have been remedied, prevented Pencoal from avoiding detriment. By analogy, if the customer of a bank does not inform the bank of a fraud until the bank has paid out, the customer is estopped from asserting that his signature has been forged: Mackenzie v British Linen Co [1881] 6 App.Cas. 82. See also Ogilvie v West Australia Mortgage and Agency Corporation Ltd [1896] AC 257; William Ewing v Dominion Bank (1904) 35 SCR 133. In Greenwood v Martins Bank Ltd [1932] 1 KB 371, a husband who failed to disclose that his signature had been forged by his wife was estopped for asserting the forgery. In Fung Kai Sun v Chan Fui Hing [1951] UKPC 17; [1951] AC 489, a mortgagee who had noticed that a mortgage was forged delayed in disclosing this fact and the forger escaped. The mortgagee was held to be estopped from asserting that the mortgage was forged. In contrast, in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1985] UKPC 22; [1986] AC 80, a customer's clerk forged his principal's signature and it was held that the customer was not liable to the bank in negligence for failing to maintain a proper system of detecting fraud or for failing to examine his bank accounts and he was not estopped from asserting the forgery. In other words, a simple failure to take care is not enough to lead to an estoppel. These cases are discussed in Banque Financiere de la Cite S.A.(supra) at 274.

55 It may further be observed that Leonard v Ielasi (1987) 46 SASR 495, where an owner's inaction after learning of a bailee's registration of a bailed vehicle in his own name led to an estoppel is strongly analogous in principle. The absence of agency confined the governing principle to estoppel rather than the agency or ratification. The plaintiff here placed Lindner in the position to utter the forged document and to receive the purchase money, and did nothing to remedy the situation when he found what had been done. If it came down to estoppel, the present case would be even stronger than that in the authority.

56 As the analysis by Lord Templeman in Banque Financiere de la Cite S.A. v Westgate Insurance Co Ltd [1991] 2 AC 249 (HL) at 274 indicates, there is no duty upon one party to notify another party of a fraud by a third party; but in certain circumstances where there is a relationship between the parties, there may be estoppel. This has already been discussed above under that topic. It might be noted that Smith v Leurs [1945] HCA 27; (1945) 70 CLR 256 is plainly distinguishable in the present case where the plaintiff had a duty to prevent Lindner's causing harm to strangers because Lindner was his agent who was causing harm in the course of his agency, as the plaintiff knew at a time when it could have been remedied. It might also be noted that in the subsequent case of W D & H O Wills (Aust) Ltd v State Rail Authority of NSW (1998) 43 SRNSW 338, Mason P. impliedly referred to the exception from the general rule in Smith v Leurs by limiting it to the case of a wrongdoer "for whom the defendant has no primary responsibility". Agency cases do not usually appear in this jurisprudence because the instances of this that refer to agency are decided on that basis. This is the distinction made by McHugh JA in Thomas Australia Wholesale Vehicle Trading Co Pty Ltd v Marac Finance Australia Ltd (1985) 3 NSWLR 452, 469-70.

The plaintiff was bound by the actions of his agent while he was acting within the scope of his actual and apparent authority. He therefore provided Pencoal with an effective transfer which passed the title to the relevant assets and the payment to his agent of his share of the purchase money amounted to a discharge of Pencoal's obligations under the contract. This means that he has no claim against it.

57 Even if the above defence had failed, he would have been found to have ratified Lindner's conduct, or he would have been estopped from denying the validity of his signature of the transfer, and he would still have failed against this party.

58 The plaintiff's claim against the second defendant depends on the success of his claim that title did not validly pass to Pencoal, and because it failed he must fail against the second defendant also. Pencoal had a good title which it duly transferred to the second defendant free of any residual equitable interest of the plaintiff. There is no other basis for any claim against the second defendant.

The Claim against the Third and Fourth Defendants

59 Since the plaintiff is bound by his agent's action in tendering the transfer as authentic and receiving the full purchase money in exchange, the title in the property passed to Pencoal in the first instance and subsequently to its transferee, the second defendant. In that case, the respective registers are correct and no order will be made against these defendants.

60 If for some technical reason it were otherwise, it would be appropriate to give the first and second defendants leave instanter to amend their pleadings to include a counterclaim for an order requiring the plaintiff to execute the transfer document in favour of Pencoal without further payment, and to make an order accordingly.

61 On his own admission Lindner has received the whole of the purchase money from the sale and has not fully paid the plaintiff what is due to him. From the above findings it will be apparent that there was no concluded compromise agreement between these parties in relation to the relevant transaction or their general financial position inter se. Nor is there any acceptable evidence of any breach of duty by the plaintiff in failing to contribute to the costs and expenses of the relevant enterprise. Nor is there satisfactory evidence that Lindner's provision of funds caused damage to his business which should be taken into account in any accounting between them. His failure to seek contribution from the plaintiff is inexplicable in this respect except to the extent that he may have regarded the enterprise as his own alone or expected to receive appropriate compensation in the subsequent division of profits. Equally clearly, and this is not seriously controverted, the plaintiff must account to Lindner for his share of the assets sold in conjunction with his land as determined above. Lindner's agreement to allow this property to go to the purchaser "to keep the old bastard happy" cannot be construed as more than his agreement that it be included in the sale. It is not sufficiently strong to justify a construction that he was abandoning his interest in the proceeds of the sale, nor is that implied by the contemporaneous or subsequent circumstances. There is no reason why this should be reduced because Lindner later received commission for selling some of the items for the parties who purchased them from the plaintiff. That was Lindner's private business and not part of the joint venture.

62 The only issues are whether Lindner is entitled to have brought into account the sums which he paid by way of outgoings and expenses associated with the purchase, preservation and sale of the assets under his control, and whether he is entitled to compensation for the time and effort spent by him.

63 In a partnership such as this, in the absence of agreement to or circumstances indicating the contrary, there is plainly a term implied from the circumstances that a partner should be reimbursed for personal expenses associated with the business of the partnership. The plaintiff is prepared to accept this and to allow the amounts claims by Lindner in that respect. It should not include the amount of the deposit which he was required to pay but which was refunded to him; but he should be allowed the cost of loss of use of his money from which the amount of any interest actually received should be deducted in order to determine the true actual cost. There is no basis for implying a term providing for interest on his other expenditure.

64 As for compensation for his personal time and effort, in the absence of any prior arrangement between them that might be interpreted as supporting this claim, it cannot be said that the circumstances support such an implication. It was certainly not a necessary implication, particularly in the context of such a complicated, unusual and informal arrangement. It was probably expected by both that there would subsequently be discussions in which some suitable compensation would be mutually and amicably arranged according to some idiosyncratic and ad hoc basis, and even on his own evidence there would appear to be a heavy moral obligation upon the plaintiff to recognise Lindner's effort. However, none of this amounts to a sufficient legal contractual term that can be enforced in this court. It cannot be said that there was a residual understanding that if all else failed, then Lindner would be entitled to at least reasonable compensation. The claim must therefore be disregarded.

65 In the result, on a mutual accounting relating to these matters, the sum due to the plaintiff is $353,881.00 made up as follows:

Option Fee and Purchase Price paid to Lindner alone

66 If there is to be a further accounting concerning other matters of the joint venture, they have not been sufficiently ventilated here. and they should not delay this judgment. However, out of caution it is desirable to adjourn any further issues as to accounts since it was asked that they remain open.

67 There is no reason why Lindner, having had the use of the money from the time of its receipt, should not pay interest on the amount due to the plaintiff which should have been paid to him at the time. This should be modified to a small extent to allow for the plaintiff's acquiescence in some delay while he waited to see what he would receive, and left the possibility of a compromise open. This is also subject to an adjustment to allow for the plaintiff's having had the use of Lindner's half share of the value of the assets sold by him with his land. The value of that half share was about $30,000.00 which he had used for about two years before this accounting should have been made. The resulting net figure for interest is $370,000.00 which, added to the principal sum of $353,881.00 makes a total of $723,881.00.

68 The plaintiff's claims against the first, second, third and fourth defendants are dismissed.

69 There is judgment for the plaintiff against the fifth defendant in the sum of Seven Hundred and Twenty-Three Thousand, Eight Hundred and Eighty One Dollars ($723,881.00).

70 At the request of the parties, the question of costs is reserved for further argument.

71 Any further issues of accounts as between the plaintiff and the fifth defendant are adjourned to a date to be fixed.

Klement v Pencoal Limited & Ors [1999] QSC 90

At a glance

Court

Decision date

Before

Source

Judgment (95 paragraphs)

Klement v Pencoal Limited & Ors [1999] QSC 90 (23 April 1999)

Parties

Cases Cited (6)