Maguire v Makaronis

Maguire v Makaronis - [1997] HCA 23 - HCA 1997 case summary — Zoe

[82]

The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries' rights can be protected is to restore to the trust fund what ought to be there. In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate. [40] His Lordship continued [41] , with reference to decisions of Lord Eldon (when Master of the Rolls) in Caffrey v Darby [42] , Lord Cottenham LC in Clough v Bond [43] , Street J in Re Dawson (deceased) [44] and Brightman LJ in Bartlett v Barclays Trust Co [Nos 1 and 2] [45] : If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred. Thus, there is no translation into this field of discourse of the doctrine of novus actus interveniens [46] . 1. [1914] AC 932 at 956-957. 2. [1996] 1 AC 421 at 434. 3. His Lordship referred to Nocton v Lord Ashburton [1914] AC 932 at 952, 958. As is implicit in the above remarks, the Court of Chancery awarded compensation in these cases in the exercise of its inherent jurisdiction and independently of the jurisdiction received by Lord Cairns' Act (Chancery Amendment Act 1858 UK) to award damages in lieu of or in addition to injunctions or decrees for specific performance, where what was at stake were legal not equitable rights: see Underhill and Hayton, Law Relating to Trusts and Trustees, 15th ed (1995), p 827 and Perell, The Fusion of Law and Equity (1990), pp 75-83. 4. Target Holdings Ltd v Redferns [1996] 1 AC 421 at 434 5. (1801) 6 Ves Jun 488 [31 ER 1159]. 6. (1838) 3 My & Cr 490 [40 ER 1016]. 7. [1966] 2 NSWR 211. 8. [1980] Ch 515. 9. See Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 426-427

[138]

On 5 June 1990 there was a further variation of the contracts between the parties. This extended the completion date for the purchase of the land to 1 June 1991. But by now, with multiple extensions, unconditional contracts and vendors subject to their own pressures, the need for Mr and Mrs Makaronis to raise funds to effect their purchases was extremely acute. An inquiry to the Commonwealth Development Bank, supported by each of the appellants as respective solicitors for the vendors and purchasers, came to nothing. As found by Ashley J, it was in mid-May 1990 that Mr Tansey mentioned to Mr Makaronis the connection which his firm had with the Leongatha branch of the Commonwealth Banking Corporation (the Bank) whereby the Bank would provide clients of the firm with short-term bridging finance. It was found to be likely that Mr Tansey told Mr Makaronis that such finance would be provided on terms similar to those which other banks required, including the giving of security, the payment of fees for the necessary documents, the levying of bank charges, stamp duty and a 1 per cent procurement fee charged by Mr Tansey's firm for access to the facility. Although an explanation of the high rate of interest then found to be normal for such bridging finance (22 per cent) and the other costly incidents of the transaction was vehemently denied by Mr and Mrs Makaronis, the trial judge found that these matters had been explained with sufficient simplicity to be understood, particularly by Mrs Makaronis whom the judge specifically found to have good understanding. He found that, shortly before the execution of the necessary documentation, Mr Tansey told Mr and Mrs Makaronis, and they understood, that the amount of bridging finance was to be $250,000 and that a fee quantified at $2,500 (1 per cent) was to be paid to his firm for procuring the finance. Ashley J was also satisfied that Mr Tansey told Mr and Mrs Makaronis that the "Commonwealth Bank" was providing the money and that his firm was obliged to guarantee payment to that Bank.

[174]

[I]t is one thing to strip a fiduciary of profit without much inquiry; it is another to hold him accountable for all loss without inquiry into relative causes. Nevertheless, the author acknowledges that, especially lately, the decision has been followed in Australia by federal [102] and State [103] courts. It has received approval from Australian judges speaking and writing extracurially [104] . Recent dicta in this Court also suggest that the Brickenden test should be accepted [105] . It has been applied by the Supreme Court of Canada in a recent decision [106] . In New Zealand it has been applied repeatedly in recent decisions [107] . Cooke P (as Lord Cooke then was) described it as a rule which is "one of strictness, and, indeed, severity" [108] . The rule has been ascribed to the policy decision that fiduciaries should be held to strict standards and not simply limited to the disgorgement of personal gain [109] . This view of fiduciary duties, and the strict consequences of their breach, also finds an echo in opinions expressed in this Court on connected matters [110] . 1. Law Quarterly Review, vol 110 (1994) 328. See also Parkinson, The Principles of Equity (1996), pp 795-797. 2. Law Quarterly Review, vol 110 (1994) 328, at p 332. 3. Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 393-394 Wan v McDonald (1992) 33 FCR 491 at 519-521 Stewart v Layton (1992) 111 ALR 687 at 713 4. Hill v Rose [1990] VR 129 at 142 Gemstone Corporation v Grasso (1994) 62 SASR 239 at 243, 245, 253. 5. Handley, Reduction of Damages Awards, in Finn (ed), Essays on Damages (1992) 113, at p 127; Meagher, Gummow and Lehane, Equity, Doctrines and Remedies, 3rd ed (1992), par 2304. 6. Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 426-427 7. Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534See also Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 8. Farrington v Rowe McBride & Partners [1985] 1 NZLR 83 at 93, 99; Mouat v Clark Boyce [1991] ANZConv R 578 at 583, 590-591; Estate Realties Ltd v Wignall [1991] 3 NZLR 482 9. cf Estate Realties Ltd v Wignall [1991] 3 NZLR 482 at 493 Gathergood v Blundell & Brown Ltd [1991] 1 NZLR 405 10. Mouat v Clark Boyce [1991] ANZConv R 578 at 590. 11. See, eg, Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 393, per Gibbs J; Chan v Zacharia (1984) 154 CLR 178 at 198-199, per Deane J.

[194]

Where, however, the fiduciary's breach comprises non-disclosure, equity can be seen at what has been described as its "flexible pragmatic best (or worst) in dealing with fiduciaries" [138] . The general rule is that non-disclosure will vitiate the transaction affected, however fair that transaction might have been in all other respects [139] . To achieve the multiple objectives of equity in respect of breaches of fiduciary duties, a rule of strictness is applied. Otherwise, the simple rule will be eroded that fiduciaries must make sure that the beneficiary is fully informed of the real state of things [140] and secure a "fully informed consent" for any conduct which involves (relevantly) a private profit or a possibility of conflict of interest and duty [141] . Ordinarily, once the breach is established, it is the duty of the defaulting fiduciary to effect, so far as possible, a restitution or restoration of the beneficiary to the position which would have obtained if the fiduciary's duties had been fulfilled. The elasticity of equitable remedies comes to the aid of a fiduciary whose default is judged to be technical rather than deliberate and fraudulent and whose failures cannot really be said to have produced all of the losses which follow, in point of time, the non-disclosure. The purpose of equity's relief is not punishment. So far as possible, it is to restore the status quo ante [142] . For this reason, the remedies will be fashioned according to the exigencies of the particular case so as to do what is "practically just" as between the parties [143] . The fiduciary must not be "robbed"; nor must the beneficiary be unjustly enriched [144] . Given the ample discretion afforded to primary judges and the advantages conventionally attributed to them in conducting a trial, appellate courts will exercise restraint in disturbing such orders unless it is shown that the judge has made an error of a kind that authorises appellate intervention to correct discretionary decisions.

[200]

So far as Smith J's suggestion that the Bank could, in any case, recover the fund paid via the solicitors on a claim for moneys had and received on the basis that the consideration for the payment had wholly failed or on the basis that there would be an unjust enrichment, I am likewise unconvinced. The Bank received a guarantee which (in the absence of contrary evidence) would lead to the inference that its position is wholly protected as against the solicitors. The solicitors obtained from Mr and Mrs Makaronis the security and promises they bargained for. In so far as they were the Bank's "nominees", as the primary judge thought, they certainly received consideration which did not, therefore, wholly fail. I would refrain from exploring the possible application of the "unifying legal concept" of unjust enrichment [149] because this, too, was simply not litigated. As a matter of practicalities, the Bank is hardly likely to pursue Mr and Mrs Makaronis. This is because it holds a valid guarantee from the solicitors for the entirety of the advance and the agreed interest. In order to recover their debt, the solicitors relied on the instrument of mortgage with its security provisions and personal covenants which the orders below wholly set aside. Such orders therefore effectively released Mr and Mrs Makaronis, who are insolvent. The prospect of the solicitors' recovering anything from them, absent access to the security, is chimerical. Everyone appreciated that the real subject matter of the litigation was the control of the sole remaining asset which survived the Makaronis' disastrous poultry farm venture. This was expressed most clearly by Nathan J [150] . Understandably, he and Smith J were concerned that a requirement that Mr and Mrs Makaronis, as a condition of relief, bring into court their last remaining asset, namely their home, would effectively confirm the mortgage. It would restore the security to the solicitors. This would be so despite the breach of fiduciary duty found. This result was unacceptable to the majority, hence Nathan J's conclusion [151] : "The burden of the breach must be carried by the solicitor in default not the hapless client."

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