CONTRACT - contract for sale of joint venture project - term that joint venture vehicle would fund certain capital works not exceeding $4.7 million - meaning of term - whether director of joint venture vehicle breached duties owed as director and/or fiduciary by incurring excess expenditure.

TRUSTS AND TRUSTEES - joint venture - monies provided by joint venture vehicle to be lodged as security with electricity supply company - whether monies were held on trust for joint venture vehicle or as debt owing to joint venture vehicle - whether director of joint venture vehicle liable for breach of trust.

LEGAL PRACTITIONERS - solicitors - monies held by solicitor for client company disbursed upon direction - whether solicitor in breach of trust - whether director of joint venture vehicle liable for solicitor's breach of trust.

1 This appeal and crossappeal arise out of trial division proceedings in which Australian Super Developments Pty Ltd ('ASD')[1] and its various subsidiaries claimed compensation from Mr David Marriner ('Marriner') and his associated companies, for amounts which Marriner had allegedly caused ASD to pay, in breach of trust and of the statutory duties he owed ASD as a director.[2] In those proceedings, Marriner and his associated companies also counterclaimed for damages arising out of alleged misrepresentations made by ASD and one of its associated companies, United Super Pty Ltd ('United Super'). In the reasons which follow, we refer to Marriner and ASD as the parties to the appeal and cross-appeal, except where it is necessary to refer to associated entities. The other parties to the proceedings are identified in the attached schedule.

2 In essence, ASD claimed that Marriner had induced or procured payments made in breach of trusts of which it was the beneficiary. We discuss the nature of those trusts below.[3] ASD also claimed that an expenditure limit of $4.7 million, which was imposed on Marriner as Chief Executive Officer and Director of ASD, was exceeded by $824,890 and that payments were made in excess of the limit without the approval of the ASD Board of Directors ('Board').

3 The payments were said to have benefited Marriner and/or his companies by increasing the value of the Laguna Quays resort ('the Resort'), which Marriner had agreed to acquire on the winding up of a joint venture between ASD, Marriner and various corporate entities.[4]

4 Marriner now appeals against the orders made by the trial division requiring him to pay $412,113 to ASD and dismissing his counterclaim for damages against ASD and the second to sixth respondents.[5] In its cross-appeal, ASD seeks an order that Marriner pay it the sum of $929, 800.

5 United Super, the secondnamed defendant to Marriner's counterclaim, was the trustee of the Construction and Building Unions Superannuation Fund ('CBUS'). Before entering into the Laguna Quays project, CBUS and Marriner had been involved in a number of joint ventures, in which Marriner had provided his expertise as a property developer and CBUS had provided the funds. ASD was the vehicle through which the joint ventures were conducted.

6 United Super (in its capacity as trustee of CBUS) and Goldworthy Pty Ltd ('Goldworthy'), a Marriner company, held equal interests in ASD. The other companies which played a role in the joint venture and their officers were helpfully described in the trial judge's reasons as follows:

[United Super Pty Ltd['s] directors included the third defendant by counterclaim Ralph Willis (after 13 April 2000) and the fourth defendant by counterclaim George Wason (after 5 September 1994). [CBUS], as a superannuation trust is subject to prudential regulation by APRA. It held the shares and units in ASD and the ASD trust from 1993 until 2000.

United Super Investments Pty Ltd ('USI'), a wholly owned subsidiary of United Super which held the shares and units in ASD and the ASD Unit Trust after 2000 when the shares and, perhaps, the units, passed to it from United Super.

[ASD] ... was, at all material times, the trustee of the Staged Developments Australia Unit Trust, established in 1993. It was the proprietor of part of the land upon which the Laguna Quays resort was conducted. Its shareholders and unit holders at all relevant times up to 2000 were Goldworthy and [CBUS], each holding six shares and sixty units. Thereafter all the shares were held by USI. The board of directors during the period 1999 to 2000 comprised appointees of each of the two venturers. The Marriner appointees were Gary Arthur Weaven, Ian Robert Court and Mr Marriner himself until they resigned on 3 November 2000. The [CBUS] appointees were Barry Frost, George Wason, Thomas John Supple Kane (to 28 January 2000) and Ralph Willis (from 27 November 2000). Mr Marriner was CEO of this company until 3 November 2000 when he resigned and the office was taken over by Ian Patience.

Matelda Oaks Pty Ltd, a wholly owned subsidiary of ASD was the proprietor of part of the land upon which the Laguna Quays resort was conducted. It was the trustee of the Victorian Property Trust.

ASD - Laguna Investments Pty Ltd, formerly called SDA Laguna Investments Pty Ltd ('Laguna Investments'), a wholly owned subsidiary of ASD is a company whose responsibility was the Laguna Quays project.

Laguna Management Pty Ltd ('Laguna Management'), a wholly owned subsidiary of Laguna Investments conducted the day-to-day operations of the Laguna Quays resort as agent for Laguna Investments.

Goldworthy Pty Ltd, the secondnamed defendant and secondnamed plaintiff by counterclaim, is a company controlled by Mr Marriner and of which he was director. Goldworthy held shares and units in ASD and the ASD Unit Trust respectively for the Marriner interests.

Fulham Holdings Ltd, the sixthnamed defendant, is a Marriner company which took an assignment of the debt owed by Laguna Investments to ASD under the 13 November 2001 agreements.

Laguna Australia Pty Ltd ('Laguna Australia'), the thirdnamed defendant is a Marriner company wholly owned by Fulham Holdings which was incorporated in April 2000. This is the company which purchased the real estate comprising the Laguna Quays project and the shares in Laguna Investments.

Laguna Australia Airport Pty Ltd ('Laguna Airport'), the fourthnamed defendant, is another Marriner company incorporated in October 2000 to own the airport which Mr Marriner wished to construct to service the Laguna Quays resort and the surrounding area.

Stage Design Pty Ltd ('Stage Design'), the fifthnamed defendant, was a wholly owned subsidiary of ASD until, under cl 10 of the November 2000 heads of agreement, its shares were to pass to Goldworthy.

Cumberland Management Pty Ltd, a company wholly owned by ASD, was used by it for another joint venture project, the development of the Cumberland Lodge in Lorne.[6]

7 By early 2000, CBUS was becoming unhappy with Marriner's involvement in the joint venture and in mid 2000, the parties agreed to sever their relationship. The termination of the joint venture was accomplished by a series of agreements made in 2000 to 2001.

8 By Heads of Agreement entered into on 30 June 2000 between ASD, Matelda Oaks and Laguna Investments (both of which were wholly owned subsidiaries of ASD) and Laguna Australia (a Marriner company), ASD agreed to sell the Laguna Quays project to Laguna Australia ('30 June 2000 Heads of Agreement'). Marriner was not a party to the 30 June 2000 Heads of Agreement.

9 Under cl 9 of the 30 June 2000 Heads of Agreement, ASD agreed to:

forthwith and at its own cost and expense complete or procure the completion of the capital works described in the budget set out in Annexure 4 provided always that the liability of [ASD] to complete such works shall not exceed A$4.7 million.

10 The 30 June 2000 Heads of Agreement was superseded by a further agreement contained in a letter dated 19 October 2001 and the terms of the sale were settled and documented on 13 November 2001 when formal sale agreements were entered into.[7]

11 The dispute between the parties concerned two matters. First, it was alleged that bond moneys provided by CBUS, paid into a set-off account in the name of Laguna Management opened with the Bank of Queensland ('Bank'), and later released in three stages, were expended in breach of a trust of which ASD was the beneficiary. It was alleged that Marriner had knowingly procured or induced the breaches of trust, or alternatively, that he was liable for any misappropriation because he had breached his statutory duties as a director of ASD. The facts and legal issues relevant to the bond moneys claim are explained in more detail below.

12 The second matter related to Marriner's expenditure of moneys on capital works at the Resort after the joint venture had been terminated. As we have said, ASD alleged that this expenditure exceeded a cap of $4.7 million imposed on Marriner by the Board and/or under cl 9 of the 30 June 2000 Heads of Agreement. Again the facts and legal issues relevant to the alleged breach of the expenditure cap are described in greater detail in a later section of these reasons.

13 Although separate claims were made relating to the bond moneys and the breach of the expenditure cap, there was an overlap between the two claims, which is explained below.

14 The following summary of facts relevant to the bond money claim is based on the trial judge's reasons.

15 In 1997, ASD entered into a joint venture with Village Roadshow Ltd ('Village Roadshow') to acquire the Resort. Initially, ASD and Village Roadshow were equal participants in the joint venture, but ASD later became involved in negotiations to buy Village Roadshow out. The proposed sale was referred to the Board for approval on 11 March 1999.

16 Village Roadshow had previously provided a bank bond of $1.61 million to secure payment of a sum which would become due to the Mackay Electricity Board ('MEB') if the Resort failed to consume a certain amount of electricity ('the Bond'). At the Board meeting on 11 March 1999, Marriner informed Board members that $1.6 million would be required to cover the Bond and a further $400,000 was required to meet balance day adjustments (a total of $2 million).

17 The Board agreed to seek $2 million from CBUS.[8] On the same day, the CBUS investment committee resolved as follows:

to approve a further $2 million for Laguna Quays from the 'special project' funding allocation of $30 million, to cover $400,000 in settlement adjustments on purchase of the property and $1.6 million to underwrite a performance bond favoring [sic] the MacKay Electricity Board.

18 Initially it was agreed that ASD would give its solicitors Freehill Hollingdale & Page ('Freehills') a bank cheque for $1.6 million which was to be held by them until 12 May 1999. It would then be paid to Village Roadshow if Village Roadshow had not received return of the Bond, or to ASD if the Bond had been returned.[9]

19 On 12 March 1999, $2 million was transferred from CBUS into the ASD bank account with the National Australia Bank ('NAB'). These funds were held in ASD's bank account until 15 March 1999, when $1.61 million was paid by cheque to Freehills. The trust account receipt issued by Freehills recorded this as a 'Deposit to secure Bank G'tee To Mackay Electricity Authority'. On the same day, ASD recorded the payment to Freehills in its general ledger as a loan from ASD to Laguna Investments.

20 There was then a two month delay. On 19 May 1999, Freehills wrote to DDH Graham, a merchant banker, advising that it would transfer $1.61 million into DDH Graham's account so that it could arrange the issue of a new bond in favour of MEB in the name of Laguna Management. On the same day, Freehills wrote to MEB confirming that this would occur.

21 On 21 May 1999, the Bond was issued by the Bank for Laguna Management in favour of MEB. The Bank provided a guarantee facility to Laguna Management in the sum of $1.61 million for 10 years. As security for this facility, a letter of set-off was provided by Laguna Management in respect of a new account opened in its name on 20 May 1999. (It will be recalled that Laguna Management had no income, assets or liabilities, but acted as agent for Laguna Investments.)[10]

22 An amount of $1,615,903.77 was then deposited by DDH Graham into the new Laguna Management set-off account. This was recorded in ASD and Laguna Investment accounts as a loan from ASD to Laguna Investments to fund its operations under the joint venture. There was no evidence as to how it was treated in the books of CBUS.[11] His Honour described Laguna Management's treatment of the bond moneys as follows.

It will be recalled that Laguna Management had a nil balance sheet and recorded no transactions in its profit and loss account. The balance in the Laguna Management account was not shown as an asset in the Laguna Management balance sheet on 30 June 1999. The balance sheet of Laguna Investments on that date shows as a non-current liability, unsecured loans of $7,930,261. This is in fact the balance on that date of the Laguna Investments loan account shown in the general ledger of ASD. It appears from the ledger that this balance includes the sum of $1.61m deposited with Freehills on 22 March.[12]

23 Before the Bond was put in place, Marriner had negotiated an agreement with MEB to reduce progressively the amount required as security, if the consumption of electricity by the Resort was sufficient. It was agreed that the reduction would be made in three tranches.

24 As we explain below, ASD claimed that when the bond moneys were paid into the Laguna Management account, and/or when the second and third tranche repayments were made, they were held on trust for ASD.

25 The first reduction took place in 1999. The minutes of an ASD Board meeting held on 22 June 1999 recorded that MEB had agreed to release $400,000 and that '[t]hese funds would be applied in part to the cost of sealing a section of the Midge Point Road adjacent to the resort'.

26 On 2 December 1999, $330,170 was released by inter-bank credit to ASD's account with NAB, on the instruction of Mr Peter Jephson ('Jephson'), who was then joint company secretary of ASD with Mr John Whalley ('Whalley').

27 Subsequently, in late 2000, Ergon Energy (the successor of MEB) reduced the Bond by a further $426,600 ('the second tranche'). On 24 October 2000, Jephson wrote to the Bank instructing it to pay the second tranche as follows: $156,600 to JJ McDonald & Sons Engineering Pty Ltd ('JJ McDonald') and $270,000 to Cumberland Management Pty Ltd ('Cumberland'), then a wholly owned subsidiary of ASD.[13]

28 JJ McDonald was a contractor hired to undertake various works at the Resort. The payment to Cumberland was made to reimburse payments it had previously made to JJ McDonald for work done at the Resort. The circumstances in which Jephson instructed Cumberland (which had no involvement in the Laguna Quays project) to make those payments are discussed below.

29 ASD claimed, and both Marriner and Jephson denied, that Marriner directed Jephson to instruct the Bank to make the above payments out of the second tranche. On 30 November 2000, the payments were made in accordance with Jephson's instructions.

30 In addition to being the company secretary of ASD, Jephson had worked for a number of other Marriner companies. His various roles were described by the trial judge as follows:

Mr Jephson had worked in the Marriner organisation since about 1994. He joined the joint venture team of ASD in 1996 and served as company secretary of ASD, Laguna Investments, LQ Management and Cumberland Management until he relinquished these positions on 19 January 2001. He was also company secretary of Laguna Australia from 5 February 2001 to 19 October 2001 and of Laguna Airport from 4 October 2000 to 19 October 2001. He was an employee of Stage Design from 22 January 2001 or thereabouts until on or about 19 November 2001.[14]

31 The Bond was cancelled in early 2001, when the third and final tranche of $853,200 became available in the set-off account.

32 On 14 February 2001, Jephson sent a facsimile on Laguna Management letterhead instructing the Bank to pay this money to Wallace & Wallace ('Wallaces'), a firm of solicitors which represented ASD in relation to the Resort. It is not disputed that Jephson had resigned as secretary of Laguna Management on 19 January 2001. He also ceased to be employed by ASD on that day, although he continued working for the Marriner Group until November 2001.

33 Following the receipt of the third tranche moneys by Wallaces, Jephson directed a partner in that firm, Mr Paul Penridge ('Penridge'), to make various payments to meet debts owed to third parties. These amounts were disbursed progressively between February and June 2001. His Honour set out the history of these instructions as follows:

The Wallace & Wallace trust records show that the third tranche funds of $853,200 were received on 21 February 2001. The trust receipt for that sum bears a notation that it was credited to five files as follows:

These files and details of the application of the money were described by Mr Penridge as follows:

File 95925 - This file is described as 'Planning and Title Advices Club Villas'. The sum was applied in payment of a Wallace & Wallace account dated 28 December 2000 addressed to Laguna Airport.

File 96835 - This file is described as 'Laguna Quays Airstrip Advices'. The sum was applied in payment of a Wallace & Wallace account dated 29 December 2000 addressed to ASD.

File 98444 - This file is described as 'Laguna Australia Airport Pty Ltd purchased from ASD'. The sum was applied in payment of a Wallace & Wallace account dated 16 January 2001 addressed to Laguna Airport C/- 189 Flinders Lane, Melbourne.

File 96989 - This file is that dealing with the purchase of land for the runway by Laguna Airport from Mr Erbacher. In fact there were two contracts to purchase land from this vendor. This file deals with the purchase of an area of about 11 hectares being part of Lots 16 and 33 which was required for the runway extension. The purchase price was $82,000 and the sum $83,200 allocated to this file was paid into a separate trust account in the name of Erbacher in accordance with Mr Jephson's instruction of 19 February as 'settlement funds for Erbacher transaction'

Account 96978 - this was described as the 'General Advices File'. The trust ledger for this file shows the client to have been ASD. It was from this account that payments were made at Mr Jephson's direction.

For my present purposes, the position is that the third tranche funds were received by Wallace & Wallace for its clients ASD and Laguna Airport, and, with the possible exception of $86,500 which was paid to Mr Marriner's solicitors in Colac, the funds were applied for the benefit of the Laguna Quays project.

There is no doubt[16] that these funds, totalling $853,200, were dealt with by Wallace & Wallace as directed by Mr Jephson, except for one payment. On 22 May 2001 the sum of $80,000 was applied at Mr Marriner's own direction. With respect to the authority to give the instruction it is necessary that I examine the chronology in a little detail.

On 20 February 2001 the third tranche funds totalling $853,200 were received by Wallace & Wallace and treated in its accounts as follows -

• $31,005.08 to payment of its costs in respect of files 95825, 96835 and 98444, as directed by Mr Jephson's fax of 19 February.
• $82,300 to file 96989 for settlement of the Erbacher transaction, as directed by the same fax.
• $738,994.92, being the balance, to file 96978.

The instructions given to Wallace & Wallace on 19 February 2001 as to the application of the funds held in respect of file 96978 were subsequently varied or further instructions were given on 28 February 2001, 8 March 2001, 22 March 2001, 27 March 2001, 4 April 2001, 5 April 2001, 10 April 2001, 18 May 2001 and 16 June 2001. In each case the instruction was given by Mr Jephson, sometimes by fax from Stage Design letterhead, on two occasions by fax on Goldsworthy [sic] letterhead and on a number of occasions simply by his endorsement of an instruction to pay on a copy of the account to be paid.

With respect to the $82,300 lodged to file 96989, the position is rather different. The Erbacher purchase was not settled until some months later.[17] On 22 May 2001 Mr Marriner directed Mr Penridge to pay $80,000 from this fund in payment of an account of WS Group, the consulting surveyors engaged on various aspects of the Laguna Quays project. On 3 July 2001, when the time came to settle the Erbacher purchase, $82,000 was deposited in the Erbacher transaction account from an unknown source and this was paid out on 19 July 2001, presumably upon settlement.[18]

34 At the trial, Jephson denied that his directions to the Bank regarding the second tranche, and to Wallaces about the third tranche, were made by him on Marriner's instructions.

35 Although Marriner personally directed Wallaces to pay $80,000 to settle an account from the WS Group (surveyors who had worked on the Laguna Quays development), his instruction to pay this amount was not the subject of a separate claim.[19]

36 By June 2001, all but $555.34 of the third tranche had been disbursed. Marriner ceased to be a director of ASD on 3 November 2000. However, for some time, he continued to be responsible for the management of the Laguna Quays project.

37 His Honour described the pleadings in these proceedings as labyrinthine.[20] We agree with that description.

38 The claims which ASD made in relation to the bond moneys were as follows.

(a) The sum of $1.61 million paid into the set-off account in the name of Laguna Management was provided to ASD for the specific purpose of securing the Bond. This gave rise to a trust under Barclays Bank Ltd v Quistclose Investments Ltd.[21] Thus, the bond moneys never became part of the general funds of Laguna Investments, but were at all times held by Laguna Management[22] (or possibly Laguna Investments) as trustee for ASD. It followed that when the funds were no longer required for the purpose of securing the Bond, they were to be held on 'a second trust' for ASD.[23]

(b) Marriner 'procured and induced' a breach of trust by instructing Jephson to direct that JJ MacDonald and Cumberland be paid out of the second tranche moneys for the construction of an airstrip and associated work. It was also claimed that this was a breach of the statutory duties that Marriner owed ASD as a director and officer. As we explain below, there is an overlap between this aspect of the bond moneys claim and the claim that Marriner was liable for breach of the expenditure limit imposed on him by the Board.

(c) With knowledge that the bond moneys were held on trust for ASD, Marriner 'procured and induced' Laguna Management to pay the third tranche moneys to Wallaces. As his Honour pointed out, the difficulty with this claim was that 'it can hardly be a breach of trust for a trustee, [said to be Laguna Management] to pay its fund to the beneficiary, ASD';[24]

(d) Marriner 'knowingly induced and procured' a breach of trust by Wallaces by instructing Jephson to direct Wallaces to make various payments from the third tranche. (As we discuss below, there was some uncertainty in the pleadings as to whether this was based on the existence of a solicitor's trust or a pre-existing Quistclose trust.) With the exception of $86,500 paid to Marriner's solicitors in Colac, these payments were applied to the Laguna Quays project. The details of these payments have been set out above.

(e) Marriner's companies, Goldworthy, Laguna Australia, Laguna Airport and Stage Design, induced and assisted Wallaces' breach of trust,[25] by giving instructions to disburse trust moneys to third party creditors.

39 The claim that the bond moneys were held on a Quistclose trust was denied by the Marriner parties, which claimed that the funds in the set-off account were held by Laguna Management as agent for Laguna Investments, as a loan to that company from ASD. Thus the bond moneys were the property of Laguna Investments, subject only to the rights of ASD as an unsecured creditor. Marriner also denied that he or any of his corporate entities were liable for inducing or procuring any breaches of trust, which may have been committed by Jephson or Wallaces. He also relied on a number of other defences which are, to the extent necessary, discussed below.

40 The bond money claims were rejected by the trial judge, who made the following findings:

(a) although CBUS provided the funds for (among other things) the payment of the Bond, the funds were not held on a Quistclose trust;

(b) even if the bond moneys were held on a Quistclose trust for ASD, Marriner was not liable for procuring or inducing any breach of trust which occurred when Jephson directed the Bank to pay JJ McDonald and Cumberland out of the second tranche. (Nor had he breached the duty he owed to ASD as a director);

(c) no breach of trust occurred when Jephson directed payment of the third tranche to Wallaces;

(d) Wallaces did not commit a breach of solicitor's trust by disbursing the third tranche in accordance with Jephson's instructions; and

(e) even if the payments out of the third tranche were made in breach of a Quistclose trust or a solicitor's trust, neither Marriner nor his associated companies Goldworthy, Laguna Australia and Stage Design had knowingly procured or induced that breach.

41 The grounds of the cross-appeal relating to the bond moneys raise the following issues:

1. Were the bond moneys held on a Quistclose trust for ASD (cross-appeal ground 5)?[26]

2. Did Marriner procure or induce a breach of trust in relation to the second tranche funds (crossappeal ground 6)?

3. If Wallaces held the third tranche on either a solicitor's trust or a Quistclose trust for ASD, should the judge have inferred that Marriner procured or induced a breach of that trust by instructing Jephson to direct the disbursement of the $853,200 held on behalf of ASD in Wallaces trust account (cross-appeal ground 3)? It was contended that his Honour erred in holding that it was necessary to show that Jephson had acted on the specific instruction of Marriner.

4. Did Marriner's direction to Wallaces to pay $80,000 to the WS Group on 22 May 2001 amount to inducing or assisting Wallaces' breach of trust (cross-appeal ground 2)?

5. Did the judge wrongly conclude that Goldworthy, Laguna Australia and Stage Design (the second to fourth respondents to the crossappeal) did not procure Wallaces to breach their obligations as trustees (cross-appeal ground 4) and were not knowing recipients of trust moneys?

42 We now examine each of these issues in turn.[27]

Issue 1. Were the bond moneys held on a Quistclose trust?

43 The trial judge first considered the events between the receipt of funds by ASD from CBUS on 9 March 1999 and 21 May 1999 when the Bond was issued. He said that

it might be important to determine when it was that the suggested trust arose. But there was no evidence or submission as to this. For example, at the commencement of this period the funds were to be applied as contemplated by cll 6.4 and 6.5 of the sale agreement [with Village Roadshow]. There was no question, then, of the bond being reducible, so that the question as to the status of the funds to be released as a consequence did not arise. It may be, too, that, at this time, the question whether the bond should be provided to Laguna Management or Laguna Investments had not arisen ... It does not appear that, at that time or indeed at any time prior to the issue of the bond on 20 May 1999, anyone said anything or even turned their mind to the fate of any part of the funds which might be released as a consequence of a bond reduction. It seems that the first mention of this appears in cl 10(d) of the heads of agreement [covering Marriner's acquisition of Laguna Quays] of 30 June 2000.[28]

44 His Honour said that when ASD required funds for one of its projects, its practice was to make an informal request to Whalley, as the chairman and secretary of CBUS. The request was then dealt with by the CBUS finance committee. His Honour said that:

ASD was usually required to provide some justification for the funds requested and, for the purpose, would provide some indication of how the money was to be spent. Such was the case in March 1999 when the $2m was provided. It is therefore not surprising that the purpose for which the funds were provided was identified, as it was by both [CBUS] and ASD. Doubtless it was the expectation of both these parties that the funds would be so applied. And if they were not, this would be a matter of concern for [CBUS] rather than of ASD. The evidence showed that the funds in the hands of ASD were commonly applied to whatever project had an urgent need for them. This is how Mr Jephson, with Mr Marriner's concurrence, managed the creditors of ASD and its various subsidiaries. Having regard to this fairly cavalier attitude to the separate corporate identities comprising the ASD group, it would be the exception rather than the rule that money in the hands of one of the operating subsidiaries would be earmarked by ASD sufficiently to constitute a trust. In these circumstances a clear indication of such intention would be required.

Throughout the period from March to May 1999, Laguna Investments was a wholly owned subsidiary of ASD. Its only directors, Mr Kane, Mr Weaven, Mr Marriner and Mr Frost were all directors of ASD. It was the company through which ASD carried out the Laguna Quays project. Mr Marriner, the CEO of ASD, was also the directing force behind decisions made by Laguna Investments for that project. In these circumstances, it is not easy to draw a line between the two corporations and their decision-making with respect to this project. The question whether money in the hands of Laguna Investments was held in trust for ASD would not, therefore, arise, except perhaps insofar as the financial control procedures established by the ASD Board on 26 March 1998 constrained the application of funds by Laguna Investments where the transaction exceeded $50,000.[29]

45 His Honour noted that when the moneys which had been held in the ASD bank account were paid to ASD's solicitors on 15 March 1999, they were recorded in ASD's general ledger as a loan to Laguna Investments. His Honour said that:

Although it was clear enough that the expectation of the parties was that the money was to be applied for the purpose of acquiring the bond, there is nothing to indicate a reservation by ASD of an equitable interest. Rather the contrary. The money is treated as a further loan on the running account. The uncontradicted evidence of the accountants, Mr Whalley and Mr Blashki, was that, from an accounting point of view, the payment would not have been treated in this way if it were money paid on trust.[30]

46 In relation to the intention of the parties, his Honour found that there was

no evidence of any express contemporaneous statement by or on behalf of either of the suggested parties to the trust which indicated the existence of the trust. It was simply understood by ASD and Laguna Investments that the money was required for and was in fact provided for the purpose of obtaining the bank bond.[31]

47 Accordingly, his Honour held that the intention required for the establishment of a Quistclose trust had not been satisfied:

the sum of $1.61m standing in the set-off account in the name of Laguna Management was not held by it or by Laguna Investments on trust for ASD. It was money lent in turn by [CBUS] to ASD and by ASD to Laguna Investments, in each case with the expectation that it would be used for the obtaining of the bond. Laguna Management held the set off account as agent for Laguna Investments.[32]

48 In his view, it followed that when the bond moneys were released, that money was the property of Laguna Investments, subject to the right of ASD as an unsecured creditor, to call for repayment of its loan.[33]

49 ASD submitted that a Quistclose trust had arisen in favour of ASD because the moneys were advanced by ASD to Laguna Management for the specific purpose of providing the Bond. It relied on Gibbs ACJ's[34] statement in Australian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) that the decision of the House of Lords in Quistclose:

is authority for the proposition that where moneys is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust.[35]

50 Various matters were said to support the contention that ASD, Laguna Investments and/or Laguna Management intended that the bond moneys were to be used for the purpose of supporting the bank guarantee and had never intended that Laguna Management could use the moneys for any other purpose.

51 ASD relied on the fact that in the sale agreement between Village Roadshow and ASD and its associated companies, the parties agreed that if the performance guarantee could be discharged, the solicitors would 'pay the proceeds of the Guarantee Cheque together with any interest thereon to [ASD] or as directed by [ASD]'.[36]

52 It pointed to the statement in the ASD Board Minutes of 11 March 1999, which noted that the loan was required from CBUS to meet the Bond and to the fact that when Jephson approached CBUS for the loan of $2 million, he told the Investment Committee that this was to cover the Bond of $1.6 million. The fact that the minutes of an ASD Board meeting on 7 May 1999 recorded that 'significant concessions had been negotiated with the [MEB] to progressively reduce the $1.6 million deposit currently securing power usage arrangements' was said to confirm that these funds were to be treated differently from other loans made by CBUS for the purposes of the Laguna Quays project. It was submitted that '[t]here would be no point in reporting such matters to ASD if the funds were to be applied back into the general operating costs of [Laguna Management] or were to be available to be freely disposed of.'

53 ASD relied on the evidence in cross-examination of Mr Ralph Willis, one of the CBUS appointees to its Board, that the provision of $1.6 million by ASD to Laguna Management was not just an ordinary loan, but 'a special loan for a special purpose.' It also relied on the evidence of Mr Barry Frost ('Frost') and Mr George Wason ('Wason'), both directors of ASD, Laguna Investments and Laguna Management,[37] that the funds were provided solely for the purpose of providing the Bond and that if the funds were not required for the purposes of the Bond, they would be returned to ASD and Board approval would be required if they were to be used for any other purpose.

54 ASD also relied on answers in cross-examination given by Whalley, who at the relevant time was joint company secretary of ASD[38] along with Jephson, as well as company secretary of various ASD subsidiaries and Marriner companies. It submitted that Whalley had acknowledged that the funds which were the subject of the request to CBUS recorded in the Board minutes of 11 March 1999 were not for general operating costs. He said that the loan obtained from CBUS was for the purpose of the Bond 'in the sense that explained the use to which these funds were to be put'. Marriner had also acknowledged in cross-examination that the funds were advanced by CBUS to ASD for the purpose of providing the Bond.

55 ASD also relied on the fact that after the first tranche of bond moneys was returned to ASD, Marriner sought approval from the Board before these funds were re-applied. This was said to support the conclusion that the parties understood at the time when the moneys were deposited with the Bank, that they were impressed with a Quistclose trust in favour of ASD.

56 ASD criticised his Honour's reliance on the evidence of Whalley and Mr Gregory Blashki (the accountant called as an expert witness by Marriner) that the money was treated for accounting purposes as a loan from ASD. It submitted that the accountants could not give evidence about the intentions of ASD and Laguna Management (or presumably of Laguna Investments) at the time the money was paid into the Laguna Management account.

57 The Marriner parties argued that even if it were accepted that ASD and Laguna Investments (or Laguna Management acting as its agent) had intended the loan to be used to satisfy the Bond, this was not sufficient to establish a Quistclose trust. The relevant question was whether the borrower had the freedom to dispose of the moneys as it saw fit. The $1.6 million was paid by ASD to Laguna Management for the broader purpose of funding the development of the Resort. It submitted that the advance in question was no different from any other resortrelated advance made by CBUS to ASD.

58 In Barclays Bank Ltd v Quistclose Investments Ltd,[39] the House of Lords held that money lent by Quistclose Investments Ltd to Rolls Razor Ltd, which was then in financial difficulties, for the specific purpose of paying a dividend which had been declared by the latter, and which was paid into an account opened for that purpose with Barclay's Bank, was held on trust for Quistclose. The Bank was bound by the trust because it knew that the money was borrowed from Quistclose for the sole purpose of paying the dividend. Lord Wilberforce said:

Two questions arise, both of which must be answered favourably to the respondents if they are to recover the money from the bank. The first is whether as between the respondents and Rolls Razor Ltd. the terms upon which the loan was made were such as to impress upon the sum of £209,719 8s. 6d. a trust in their favour in the event of the dividend not being paid. The second is whether, in that event, the bank had such notice of the trust or of the circumstances giving rise to it as to make the trust binding upon them.

It is not difficult to establish precisely upon what terms the money was advanced by the respondents to Rolls Razor Ltd. There is no doubt that the loan was made specifically in order to enable Rolls Razor Ltd. to pay the dividend. There is equally, in my opinion, no doubt that the loan was made only so as to enable Rolls Razor Ltd. to pay the dividend and for no other purpose. This follows quite clearly from the terms of the letter of Rolls Razor Ltd. to the bank of July 15, 1964, which letter, before transmission to the bank, was sent to the respondents under open cover in order that the cheque might be (as it was) enclosed in it. The mutual intention of the respondents and of Rolls Razor Ltd., and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd., but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend. A necessary consequence from this, by process simply of interpretation, must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents: the word 'only' or 'exclusively' can have no other meaning or effect.

That arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.[40]

59 His Lordship rejected the proposition that a trust could not arise because there was also a debtor/creditor relationship between Rolls Razor and Quistclose.[41]

60 The effect of the decision was that after the loan was made:

Quistclose had both a contractual right of repayment out of the general assets of Rolls Razor, as a general creditor and the beneficial interest in a fund, whether by way of resulting trust [because the purpose for which the trust was established had failed] or as the second limb of an express trust.

61 The circumstances giving rise to a Quistclose trust were further examined in Twinsectra Limited v Yardley.[42]

62 In that case, Twinsectra had lent money to Yardley, on the basis of an undertaking by Sims and Roper, a firm of solicitors, that the loan moneys would be held by them until the moneys were applied for the acquisition of property by Yardley[43] and would be used 'solely for the acquisition of property' by the borrower and 'for no other purpose'.[44] Sims and Roper then paid the moneys to another solicitor ('the second solicitor') on Yardley's instructions, after Yardley gave an assurance to Sims and Roper that the money would be used to buy property. The second solicitor was aware of the undertaking which Sims and Roper had given to the borrower. The loan was not repaid and the solicitor who had originally received the money went bankrupt. The lender took proceedings to recover the moneys from (among others) the second solicitor, on the basis that he could be held liable for the breach of trust by Sims and Roper.

63 The House of Lords held that a Quistclose trust had arisen because the undertaking given to Twinsectra indicated that the money was not to be at the free disposal of Yardley and that the solicitors would ensure that the money would only be paid out for the property acquisition.[45] The majority (Lord Millett dissenting) also held that the second solicitor had not acted dishonestly and was not liable for the breach of trust.

64 In a frequently cited passage from the judgment, Lord Millett described the circumstances in which a Quistclose trust arises as follows:

Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and save to the extent to which he may have taken security for repayment the lender takes the risk of the borrower's insolvency. But it is well established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce. In the earlier cases the purpose was to enable the borrower to pay his creditors or some of them, but the principle is not limited to such cases.

Such arrangements are commonly described as creating 'a Quistclose trust', after the well known decision of the House in Quistclose Investments Ltd v Rolls Razor Ltd[46] in which Lord Wilberforce confirmed the validity of such arrangements and explained their legal consequences. When the money is advanced, the lender acquires a right, enforceable in equity, to see that it is applied for the stated purpose, or more accurately to prevent its application for any other purpose. This prevents the borrower from obtaining any beneficial interest in the money, at least while the designated purpose is still capable of being carried out. Once the purpose has been carried out, the lender has his normal remedy in debt. If for any reason the purpose cannot be carried out, the question arises whether the money falls within the general fund of the borrower's assets, in which case it passes to his trustee in bankruptcy in the event of his insolvency and the lender is merely a loan creditor; or whether it is held on a resulting trust for the lender. This depends on the intention of the parties collected from the terms of the arrangement and the circumstances of the case.[47]

65 The fact that Twinsectra relied for its security on Sims and Roper's undertaking, rather than intending to create a trust, was not inconsistent with the existence of a trust. As Lord Millett observed:

A settlor must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them. Whether paragraphs 1 and 2 of the undertaking created a Quistclose trust turns on the true construction of those paragraphs.

...Arrangements of this kind are not intended to provide security for repayment of the loan, but to prevent the money from being applied otherwise than in accordance with the lender's wishes. If the money is properly applied the loan is unsecured. This was true of all the decided cases, including the Quistclose case itself...

A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case.

The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd.[48] His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose, for as Lord Wilberforce observed in the Quistclose case:[49]

A necessary consequence from this, by a process simply of interpretation, must be that if, for any reason, [the purpose could not be carried out,] the money was to be returned to [the lender]: the word 'only' or 'exclusively' can have no other meaning or effect.[50]

66 In Twinsectra, Lord Millett referred to the objective intention of the alleged settlor/lender as determining whether a Quistclose trust arose. In the Federal Court decision in Re Australian Elizabethan Theatre Trust,[51] Gummow J (as he then was) held that '[o]rdinarily, the relevant intention is that of the alleged settlor', although his Honour accepted that in a situation such as arose in Quistclose, where the rights conferred by the settlor were for the benefit of third parties (the potential dividend recipients), it might be appropriate to consider the mutual intention of both settlor and trustee. Arguably it was therefore unnecessary for his Honour to take account of the intention of Laguna Investments (or Laguna Management) as well as that of ASD.

67 Be that as it may, we consider that his Honour correctly held that the question to be decided was whether ASD intended the funds to become part of the assets of Laguna Investments or its agent, Laguna Management. As he recognised, a Quistclose trust can co-exist with a contractual right to repay the debt.[52] However, as Twinsectra indicates, the fact that the parties intended that the money borrowed from CBUS by ASD and then lent by ASD to Laguna Management would be used to cover the bond moneys is not necessarily sufficient to establish the existence of a Quistclose trust.[53] What must be established is that ASD intended that it should retain a beneficial interest in the $2 million paid into the Laguna Management account. As this Court said in Legal Services Board v Gillespie-Jones:[54]

Critical to the establishment of the trust is an intention that the moneys are advanced for an exclusive and specific purpose and that those funds are not to form part of the assets of the trustee.[55]

68 In our opinion, his Honour correctly held that the bond moneys were not held on trust for ASD. Our reasons are as follows.

69 First, although the sale agreement between Village Roadshow and ASD contemplated that if the performance guarantee was discharged, any moneys received by Village Roadshow would be paid to ASD, this did not determine the character of the arrangement made between ASD and Laguna Management. It simply meant that if the performance moneys were returned, they became ASD's property. ASD could then deal with the money as it saw fit, subject to any obligations it owed to CBUS.

No one suggested that the funds were held in trust for [CBUS] as the party which provided them in the first place. No party suggested any scenario other than the suggested trust or a simple loan. It is not said that Laguna Investments was the trustee: it is Laguna Management which is said to have breached its trustee duties.' There was no evidence of any express contemporaneous statement by or on behalf of either of the suggested parties to the trust which indicated the existence of the trust. It was simply understood by ASD and Laguna Investments that the money was required for and was in fact provided for the purpose of obtaining the bank bond.[56]

71 Unlike the situation which arose in Quistclose, it was not contended that the effect of the $2 million advance by CBUS to ASD was that ASD held the moneys on a primary trust for CBUS and, if the trust failed because the moneys were not able to be used for the purpose of the Bond, on a secondary trust for CBUS (or perhaps more correctly, United Super which was the trustee company for CBUS). Rather, ASD claimed that it was the beneficiary of a trust of which Laguna Management was the trustee.[57] The evidence about the nature of the loan arrangements between ASD and CBUS, elided the question of whether a Quistclose trust arose in CBUS's favour with the question whether Laguna Management held the bond money on trust for ASD. For example, ASD relied on a facsimile from Jephson to Mr Peter Gebert, an officer of CBUS, advising him that the CBUS committee had approved:

a further draw down of $2 million to assist with completion of the purchase of Laguna Quays, specifically to provide a performance bond of $1.6 million favouring the McKay Electricity Board and settlement adjustments of $400,000

and asking him to arrange an urgent transfer of $2 million to ASD's bank account with NAB. The fact that CBUS intended the money to be used for that purpose did not necessarily determine whether ASD intended the money to be held by Laguna Management as a trustee for ASD.

72 Moreover, even if ASD established that CBUS was the beneficiary of a Quistclose trust, and that this in turn determined the nature of the relationship between ASD and Laguna Management (which would presumably be an express trust), ASD would have been confronted with the problem that CBUS had advanced $2 million and not $1.6 million (the amount required for the Bond) to ASD.

73 Third, the fact that Marriner sought approval from ASD before applying the first tranche funds when they were returned is not inconsistent with ASD having treated this as a partial repayment of the loan made by ASD. This treatment of the bond moneys by ASD did not necessarily prove that ASD intended that Laguna Management would hold the bond moneys on trust for it.

74 Fourth, although the funds were borrowed from CBUS and lent to Laguna Management with the understanding that they would be used to cover the Bond, there were no contemporaneous statements made on behalf of ASD indicating that the moneys were only advanced to Laguna Management on the condition that they would be used solely for the purpose of the Bond. The failure to differentiate this loan from other loans made to Laguna Investments or Laguna Management distinguishes this case from the facts in Quistclose, where evidence of the existence of the trust was supported by contemporaneous statements which included the bank being told that the money was to be used only for the payment of the dividend. It also distinguishes it from the facts in Twinsectra, where the first solicitors undertook that the moneys would be used solely for the acquisition of property.

75 At first glance, the creation of the set-off account could be regarded as evidence that the moneys in the setoff account were to be treated differently from other loans, thus making the situation somewhat analogous to the circumstances in Quistclose and Twinsectra. But the payment into the setoff account was equally consistent with the fact that this was what the Bank required as a condition of providing the Bond to MEB.[58] Further, the amount deposited in the Laguna Management account exceeded the amount of the Bond.[59] This provides support for the view that the purpose of the account was not to differentiate the $1.6 million used to support the guarantee separate from other advances made by ASD to Laguna Investments or its agent.

76 Fifth, his Honour correctly asked himself whether the evidence showed an intention that these moneys would be treated differently from other moneys advanced for the Laguna Quays project. Much of the evidence relied upon by ASD related to the circumstances in which CBUS provided the loan to ASD. As we have already said, such evidence does not determine the basis on which ASD advanced the moneys to Laguna Management.

77 Even if evidence about the basis of the CBUS loan to ASD was relevant to the question whether ASD was the beneficiary of a trust, it was equivocal. Wason said in his witness statement that he understood the funds had been provided solely for the purpose of meeting the electricity guarantee and that he expected that Board approval would be sought prior to the funds being used for any other purpose. But he also said that:

This transaction, and the way it was recorded, was typical of how funds were requested by [ASD] and approved by [CBUS]/United Super, from time to time. At the time, [CBUS] was regularly providing funds to [ASD] to cover operating expenses, including in relation to Laguna Quays. I recall that it was then providing about $300,000 per month to cover the operating costs of [ASD] and its subsidiaries, which were reliant on such funding.

78 In his witness statement, Whalley said that the funds provided to the Bank were debited to the Laguna Investments loan account and the annual financial statements of ASD recorded funds lent by ASD to Laguna Investments from time to time. This included the bond money. In cross-examination, Whalley accepted that the funds requested from CBUS were not funds for general operating costs, but were provided for the Bond. However, he also said that 'the funds that were being sought here were no different to other funds that were sought from time to time in relation to various matters at Laguna that required funding'. In cross-examination, Whalley said that the ASD Board Minute simply reflected the reason that the additional funding was sought and that this was part of the normal process.

79 Although Marriner conceded that the main purpose for which the $2 million was sought from CBUS was to provide the security for the Bond, he also said that ASD and CBUS had a flexible policy regarding repayment of loans by ASD to CBUS. In the absence of a resolution by ASD to return recovered loan moneys to CBUS, it was the practice to redeploy loan repayments into ASD projects which had the most urgent requirements.

80 Sixth, the evidence of Blashki, who was called as an expert witness by Marriner, was that the treatment of the loan in the Laguna Investment account indicated that it was lent by CBUS to ASD and then from ASD to Laguna Investments. If ASD had intended to treat it as trust moneys, it would have been put in a separate account and given a separate description.

81 We would reject ASD's complaint that his Honour gave too much weight to the evidence of Whalley and Blashki about the accounting treatment of the bond moneys in the books of the various entities, although this evidence was not decisive as to the existence of a trust. It is true that even if Laguna Management was treated in company books as a debtor of ASD, rather than a trustee of the bond moneys, a debtor/creditor relationship and a trustee/beneficiary could have coexisted. However, the fact that the bond moneys were treated in the same way as other loans in company accounts must have considerable weight in determining the intention of the parties.

82 Seventh, we note that his Honour observed that it was not until reference was made to the bond moneys in cl 10(d) of the 30 June 2000 Heads of Agreement that any attention was paid to it.[60] The fact that the bond money claim arose when the parties were negotiating the termination of the joint venture provides little assistance in determining the nature of the relationship between Laguna Management and ASD at the time when bond moneys were paid into the Laguna Management setoff account.

83 Finally (and we think that this point is determinative of itself), the primary purpose of the loan (that is the provision of the $1.6 million to secure the bank guarantee) had been satisfied. In Quistclose, Lord Wilberforce said that if the primary purpose of the trust (in that case the payment of the dividends) cannot be met, a secondary trust arises in favour of the lender.[61] But this principle does not apply if the purpose of the trust has been satisfied. As Lord Millett said in Twinsectra, once the purpose has been carried out, the lender has his normal remedy in debt.

84 For these reasons, the claim in the cross-appeal that the moneys were held on a Quistclose trust is not made out.

Issue 2. If the bond moneys were held on a Quistclose trust, did Marriner procure or induce a breach of trust by Jephson relating to the second tranche funds?

85 ASD claimed that Marriner (through Jephson) had directed the Bank to pay the debts incurred to JJ McDonald and to Cumberland out of the second tranche moneys. Jephson was said to have acted under Marriner's authority in arranging for the payment of these debts and consequently Marriner was liable for procuring and inducing the breach of trust.

86 Although his Honour held that the bond moneys were not held on a Quistclose trust, he went on to consider whether Marriner could be held responsible for procuring the breach of trust if, contrary to his view, a Quistclose trust had arisen.

87 There was an overlap between this claim and the claim that Marriner breached the duty he owed to ASD as a Director by causing it and a wholly owned subsidiary of ASD, Matelda Oaks, to expend money on capital works in excess of the $4.7 million expenditure cap imposed by the Board. The amount by which Marriner was said to have exceeded the expenditure cap included the payments to JJ McDonald and Cumberland Management totalling $426,000, which were made out of the second tranche repayment. This aspect of ASD's claim is discussed at paragraphs [170] to [275] below.

88 His Honour was sceptical of Marriner's evidence that he did not know what Jephson was doing to keep the creditors at bay.[62]

The Marriner parties ... take the rather unattractive position that Mr Marriner had no role in this; Mr Jephson was acting as a free agent for the benefit of Mr Marriner and his companies ...

My impression of Mr Marriner's manner of dealing with creditors and the money of companies under his control is that he was involved in every aspect of his various projects, including Laguna Quays. It was he who planned the strategies required and he who actively participated in their implementation. I am satisfied, however, that his eye was on the big picture rather than the fine detail and that this applied particularly to his dealings with his creditors. So far as this project, at least, was concerned, creditors appear to have been an on-going problem. This caused Mr Marriner to conduct his dealings with them with little regard to the niceties of corporate identity. When money was required he was content to take it from any company which had it available, leaving the detail to be picked up by the accounting staff in the inter-company loan accounts. It seems, too, that Mr Jephson, whose task it was to deal with the creditors, was allowed to pursue, or at least not discouraged from pursuing, a similar approach. As he put it in cross examination, '... it's all money out of the same - out of the same group of companies. That's how I had to manage the cash flows of the companies'. And it was consistent with Mr Marriner's lack of concern for detail or, perhaps, by a conscious decision on his part not to know too much about these matters, that he gave Mr Jephson a fairly free rein. While it is true that Mr Marriner took an active role in agreeing upon the payment schedule for the JJ McDonald debt, it is significant that he called Mr Jephson to enquire whether there were available funds, before he committed to the letter of 16 October 2000. I accept the evidence of Dr Greig that, in this conversation which he heard on speakerphone Mr Marriner asked Mr Jephson whether the commitments in the letter would be able to be made of ASD and that Mr Jephson responded that he could see no reason why Mr Marriner should not sign the letter. There is no evidence that Mr Jephson told Mr Marriner that he intended to make the weekly pre-payments from the second tranche funds or that Mr Marriner directed him to do this. My impression of Mr Jephson is that he was a compliant participant in this, without troubling himself to know much beyond his particular task.

I must confess to considerable scepticism about this evidence. I think it exceedingly unlikely that Mr Marriner did not have a good idea of what Mr Jephson was doing to keep the creditors at bay and that, on occasions, it was his decision whether a particular account should be paid and from what source the money should be drawn. Ultimately, however, this is speculation.

I was invited by counsel for [CBUS] to treat Mr Marriner as an unreliable witness and to reject his evidence. I was reminded that he was often evasive and was inclined to make self-serving speeches when in the witness box. This I observed. I observed, too, that he showed himself to be emotional and even outraged that this proceeding was brought against him. I have already remarked at his cavalier approach to the niceties of corporate independence: he appeared to be content that money within his control be used for a purpose notwithstanding that the money was that of a company unconnected with that purpose.

I am, however, confronted with the uncontradicted evidence of both Mr Marriner and Mr Jephson. Notwithstanding my reservations, I will act upon this evidence. I conclude that Mr Marriner did not direct Mr Jephson to apply the second tranche funds as he did. Mr Jephson, having access to these funds, applied them to such of the creditors with whom he was dealing as he saw fit. The claims against Mr Marriner which depend upon his responsibility for the acts of Mr Jephson, therefore, must fail.[63]

90 Although JJ McDonald had contracted with Laguna Management (probably acting as Laguna Investments' agent) to carry out works at the Resort,[64] on 16 October 2000 Marriner signed a letter of comfort prepared by JJ McDonald under which Laguna Management and ASD agreed to cover JJ McDonald's outstanding invoices and agreed that Laguna Management would pay $90,000 per week in advance 'to cover direct costs incurred, as a pre-payment for contract works undertaken after 16 October 2000 for a maximum period of 8 weeks' ('16 October

2000 Agreement').[65] That agreement was made in response to pressure by Dr Christopher Greig ('Greig'), the managing director of JJ McDonald, because progress payments on works done at the Resort had not been made.

91 ASD contended that, but for the breach of the duty committed by Marriner when he signed the 16 October 2000 Agreement making ASD contractually liable for the debt owed to JJ McDonald, the second tranche would have been transferred to ASD. For that reason, Marriner was said to be liable to ASD in the sum of $426,000.

92 In considering this argument, his Honour stated that:

The question here is whether the payments were not for the benefit of ASD. In the course of final address counsel for [CBUS] said that Mr Marriner ought not to have entered into the agreement with JJ McDonald by signing the letter of 16 October 2000 for payment of the outstanding and future debts. I am inclined to agree but this is not pleaded as a breach of duty.[66]

93 In support of its cross-appeal, ASD argued that his Honour had wrongly found that the entry into the 16 October 2000 Agreement was not pleaded as a breach of duty. That issue is discussed below.

94 As a secondary argument, ASD argued that his Honour had wrongly held that Marriner was not liable for any breach of trust which occurred when Jephson instructed the Bank to pay JJ McDonald and Cumberland out of the second tranche moneys.

95 Marriner argued that the payments to JJ McDonald and Cumberland could not have been made in breach of trust, because they were made to discharge a debt owed by ASD and therefore benefitted that company. Further, even if the payments were made in breach of trust, there was no evidence that the breach was instigated by Marriner. The allegation that the breach had been knowingly procured or induced by Marriner was a serious attack on his integrity. Under the principle in Briginshaw v Briginshaw,[67] powerful evidence would be required to support that claim. Further, his Honour's findings of fact on this issue should not be set aside because they were neither 'glaringly improbable' or 'contrary to compelling inferences'.[68]

96 Because his Honour correctly concluded that the amount paid into the setoff account was not held on a Quistclose trust for ASD, Marriner cannot be held liable for knowingly inducing a breach of trust by Jephson. If a Quistclose trust had arisen, it would have been necessary to decide whether Marriner was liable for procuring or inducing a breach of trust which occurred when Jephson directed the Bank to make payments out of the second tranche bond moneys to JJ McDonald and Cumberland. The basis on which a third person may be held liable for inducing a breach of trust is discussed under issue 3 below.

97 The trial judge did not discuss the authorities on the liability of third parties for inducing a breach of trust, having positively found that Jephson did not act under Marriner's instructions.

98 The relevant evidence was as follows. Whalley, Jephson and Marriner all said that Jephson had generally acted independently of Marriner in making arrangements for the payment of debts.

99 In his witness statement, Whalley said that during the period that Jephson was an employee of ASD, his duties required him to monitor receipts and outgoings and to manage the cash flow of each project. When there was a delay in funding by CBUS, Jephson often met pressing demands 'by funding from income and surpluses from other business activities including intercompany loans.' Marriner had instructed his executive staff that they should discharge their responsibilities without constantly referring back to him. He instructed his staff that he expected to be informed on a needs basis, but not on issues of detail.

100 In cross-examination, Whalley said that he had not had any discussion with Marriner or with Jephson about the payments made to Cumberland to meet the JJ McDonald debt and did not know that payments had been made out of the second tranche until around 2007. He also said that it was Marriner and Jephson who had been involved in 'negotiating the second tranche of the electricity guarantee moneys.'

101 Jephson said that he was first employed by Marriner in 1994 and that:

Marriner instructed me that the management of his business interests was to be conducted in such a way that I should only report to him when something out of the ordinary had arisen which required his assistance or authority to resolve. Marriner told me he required me to be self-reliant and to use my initiative.

102 He also said that while it was his role to manage the cashflow of ASD, '[i]f I had issues which needed to be raised in relation to the cashflow of ASD, then I would consult Marriner'.

103 Jephson did not appear to appreciate that it was not until Marriner signed the 16 October 2000 Agreement that ASD became liable to make payments to JJ McDonald. In his witness statement, he said that after CBUS stopped providing funding for the Laguna Quays project, ASD had to obtain the funds from elsewhere. He had directed Cumberland, a wholly owned subsidiary of ASD, which was not involved in the Laguna Quays project, to make three payments to JJ McDonald because he knew Cumberland had surplus funds and ASD did not.

104 He deposed that on 24 October 2000, he had sent a letter to Ergon Energy, the successor to the MEB, to remind it that the second tranche money was due, and had copied that letter to the Bank. Later that day, it had occurred to him that it was unnecessary to deposit the second tranche in the ASD account with NAB because the money could be transferred to discharge the debt owed to JJ McDonald and to Cumberland to reimburse it for the money it had already paid to meet JJ McDonald's earlier invoices. He said he did not discuss any of the payments which he had made with Marriner and that he had no reason to believe that Marriner was aware of them at the time.

105 He was extensively cross-examined about the circumstances in which he had directed that Cumberland pay JJ McDonald, and had later directed the repayment of Cumberland out of the second tranche. He said that he could not recall speaking to Marriner about the Cumberland transfer. It was put to him that he had previously told the trial judge that he now recalled the 16 October 2000 Agreement. There was then the following cross-examination.

Counsel: You recall that you had to make a transfer on 17 October 2000, don't you?Yes, that's right.

Counsel: I am suggesting to you that the person who told you to make the transfer, was David Marriner?I seem to recall I had this letter, and if this letter has got Mr Marriner's authorisation, he signed it as authorising it, then I have no need to speak to him. He has authorised the payment.

Counsel: Yes. You've got this letter though because it was sent to you by Mr Marriner on the fax, is that right?I don't know whether Mr Marriner sent it, I am not sure.

Counsel: But in response to the answer you just gave to me, I suggest to you that the reason that you were content to send the $90,000 to J.J McDonald on 17 October, is because this letter dated 16 October 2000 had been signed by Mr Marriner, is that right?I just stated that to you, he'd authorised the payment.

Counsel: He authorised the payment, thank you. The fact is that Mr Marriner's signature on the document was sufficient authorisation to you to send the money?Yes.

Counsel: Does that apply to the subsequent instalments that were due on 24 October and 31 October?I presume so, there's a schedule - there's a schedule here of payments that he made, six payments or eight payments of $90,000 a week I think was said in Clause 4 of this letter.

That's right?That's just the on-going adherence to that authorisation.

106 Jephson denied that he had written to Ergon Energy and the Bank about the reduction of the guarantee after speaking to Marriner. He said he could not recall why he had initially told the Bank to pay the amount into the ASD account and later the same day, had instructed the Bank to pay JJ McDonald and Cumberland. He denied that this change was made because he had spoken to Marriner about the second tranche of the bond moneys.

107 His Honour then asked 'You don't know why you sent this new letter?' Jephson said that his reason for changing his direction to the Bank might have been to save some money on FID[69] and BAD[70] taxes if money had gone into the ASD bank account and then been paid out of it to JJ McDonald and Cumberland.

108 Marriner's evidence was that neither Jephson nor any other person discussed the recovery of the second tranche moneys with him. There was no discussion with him about how these moneys should be expended and he was not informed about what had been done with the money. He had not given any instructions to anyone as to how to deal with them.

109 In cross-examination, Marriner said that he had asked Jephson whether they had the money to meet a payment of $90,000 due to JJ McDonald, after being pressured by Greig to pay the amount owed to JJ McDonald. He said that he had phoned Jephson:

because I didn't want to put him in a position that he didn't have the resources to make that payment the next day, and he - and they were - they were uncertain of that and so I put him on speaker and I said to Stephen - to Chris Gregg that he can confirm it, and he did.

110 Marriner said that he thought that the question of whether there was money to meet the payment was 'all at that time that I discussed with Peter.' He did not recall whether he had discussed with Jephson whether Laguna Management or ASD could meet the other payments required by the 16 October 2000 Agreement but 'he certainly would have got the documents later'.

111 He was taken to the letter which he signed on 16 October which provided that '[t]he first advance payment [of $90,000] will be made by ... electronic funds transfer to J.J. McDonald & Son Engineering Pty Ltd on 17 October 2000'. He said the only thing he could recall was asking Jephson 'whether we were in a position or whether we had available funds to make that payment'. He was then cross-examined on this issue as follows:

Counsel: You see the instruction here on 17 October, is for funds to be transferred by the Cumberland Lorne Resort, $90,000 to J.J. McDonald?Yes.

Counsel: This is the instruction that you gave Peter Jephson is it not?Well he would have been aware of the 90,000 payment, but I wouldn't have given him any particular direction to the way in which he was meeting his financial - how he was actually making the payment, no I wouldn't have.

Counsel: Well the day before, on 16 October, Mr Marriner, you telephoned Mr Jephson to see if there was sufficient funds to make the payment did you not, that's what your evidence is?Yes I did, but I didn't ask him where the funds were or how he was planning or obtaining the funding. He was given the knowledge that there was a payment needed tomorrow and whether he was able to have the funds to make that payment and he confirmed that was the case.

Then I suggest to you that the next day Mr Jephson makes this transfer from Cumberland Lorne Resort to J.J. McDonald?Yes.

Do you agree that that occurred?Yes, it would appear so.

I suggest that occurred because you had authorised it?No, I hadn't.

It just mysteriously happens does it?No, well he would have - he had a normal scope to carry out the payment. He had been made aware the payment was being sanctioned by me and he undertook to make the payment.

112 He was then asked whether he had instructed Jephson to make the next two weeks' advance payments and said that Jephson would have done this on the authority of the 16 October 2000 Agreement. It was these three payments made by Cumberland that were reimbursed out of the second tranche moneys.

113 It would seem to us that the inference was open on the evidence that Jephson was acting under Marriner's instructions in making the payments to JJ McDonald and Cumberland out of the second tranche. Our reasons are as follows.

114 First, Marriner was aware that substantial amounts were owed to JJ McDonald for work done on the Resort, and Greig had directly raised concerns with him regarding payment of outstanding invoices. Marriner signed the 16 October 2000 Agreement binding ASD to meet payments for work already done and future works at the Resort, as a result of this pressure.

115 Marriner was also aware that, as a result of the 16 October 2000 Agreement, Laguna Management, which had no funds or assets of its own,[71] was jointly and severally liable with ASD, to JJ McDonald for substantial amounts.

116 Second, Marriner knew that the Board of CBUS, which provided funding for all of ASD's activities, was concerned about expenditure on the Laguna Quays project.[72] His telephone call to Jephson prior to signing the 16 October 2000 Agreement indicated that he knew that ASD was short of funds to meet any debts which it had incurred.

117 Third, his Honour found that when Marriner needed money for the Laguna Quays project 'he was content to take it from any company which had it available, leaving the detail to be picked up by the accounting staff in the inter-company loan accounts'.[73] He had not discouraged Jephson from taking this approach. When he spoke to Jephson over the speaker phone he simply asked him if money was available to meet ASD's debt to JJ McDonald. As it turned out, the payments were initially made by Cumberland, which had no involvement in the Laguna Quays project.

118 Fourth, Marriner had negotiated the reduction of the Bond in three tranches and arguably remained aware of the dates when the second and third tranches would be repaid. The second tranche payment was due on 30 November 2000 − shortly after the 16 October 2000 Agreement was signed.

119 Fifth, his Honour had considerable reservations about Jephson's and Marriner's evidence. He considered it 'exceedingly unlikely' that Marriner did not know what Jephson was doing to pay debts arising out of the Laguna Quays project, and 'on occasions, it was his decision whether a particular account should be paid and from what source the money should be drawn'.[74]

120 Sixth, in discussing Marriner's liability for procuring or inducing a breach of trust in relation to the third tranche funds held by Wallaces, his Honour said that one reason for rejecting those claims was that he could not find that Jephson acted in accordance with Marriner's 'specific instruction'.[75] Although he did not make a similar comment in relation to Jephson's disbursement of the second tranche funds, it can be assumed that he imposed a similar requirement in relation to the claim that Marriner had brought about the expenditure of the second tranche. If he did so, this would have been an error. If the evidence gave rise to the inference that Marriner authorised Jephson to do what he did, knowing that the moneys were to be paid out of the second tranche, this would have been sufficient to make him liable for the breach of trust.

121 However, we do not think that the necessary inference, though open, was compelling. At least, it was open to his Honour not to be satisfied that Marriner was aware of the source of the payments made to JJ McDonald or that Jephson had acted on Marriner's instructions in directing that debts owed to that company be paid out of the second tranche of bond moneys. His Honour had the distinct advantage of seeing and hearing the witnesses and we are not in a position to say that his conclusion was glaringly improbable.

122 To summarise, ground 5 of the cross-appeal fails because we have concluded that the bond moneys were not held on a Quistclose trust. But, if a Quistclose trust had been established, we would not have been prepared to disturb his Honour's finding that Marriner was not liable for the breach of that trust.

Issue 3. Did Marriner procure breaches of trust by Jephson in relation to the $853,200 held on trust by Wallaces?

123 Although his Honour rejected ASD's submission that the third tranche moneys were held on a Quistclose trust, he held that they were held by Wallaces on a solicitor's trust. He said that:

It is clear on the evidence that Wallace & Wallace received the third tranche funds pursuant to the ordinary trust obligation which a solicitor owes to their client. This obligation was to deal with these funds in accordance with the directions of the client. The evidence showed that the solicitors for ASD were Freehills but that Wallace & Wallace were retained for legal work with respect to the Laguna project, which required local expertise. On 6 February 2001 Mr Penridge, a principal of Wallace & Wallace, at the direction of Mr Marriner, wrote to Ergon Energy, the successor to the Mackay Electricity Board, seeking cancellation of the bond and the release of the third tranche funds. In this letter Mr Penridge described his firm's position as acting on behalf of 'the owners of Laguna Quays Resort'. For what it is worth, he said in evidence that his understanding was that the owner, his client, was ASD.[76]

It is at this point necessary to identify what is the basis and nature of the trust which was said to have been breached. The statement of claim is unhelpful. All that is said is that, when the third tranche funds were paid into the trust account, the funds were 'impressed with a trust for the benefit of ASD. The duty of Wallace & Wallace as trustee was to deal with the money in accordance with the direction of ASD and to account to ASD.[77]

125 Later in his reasons, his Honour again referred to the unsatisfactory nature of the pleadings.

In the course of the trial, I sought to tease out the nature of this trust. Was it a trust which arose from the receipt of funds which the recipient, Wallace & Wallace, knew were impressed with the Quistclose trust? Was it a trust which a solicitor owes to the client with respect to money received for the client? Counsel for [CBUS] appeared uncertain about this and, in the end, said that it did not matter. In each case, Wallace & Wallace were bound by their trustee obligations to disburse the money only in accordance with the direction of ASD in its capacity as beneficiary under the second or ancillary Quistclose trust or in its capacity as client under the solicitor's trust. I am not at all confident that this distinction can be put to one side in this way. In the former case, ASD would have to establish the existence of the Quistclose trust and then, further, that Wallace & Wallace had the required knowledge that the funds received were impressed with that trust. In the latter case, it is sufficient that the funds were received on trust for the client. On the facts as I have found them, ASD has failed to establish the pre-condition to a breach by the solicitors of their obligations with respect to money coming into their hands impressed with a Quistclose trust. The trust does not exist; the funds in the hands of Wallace & Wallace cannot be subject to such a trust.

Nor is the position very much assisted by the fact that the Marriner parties do not plead to the allegation that the funds when received were impressed with a trust, that the solicitors owed ASD trustee duties or that the solicitors acted in breach of those duties.

With considerable misgiving, therefore, I put the pleadings on this point to one side and address what I was told in final address was the real issue. On behalf of ASD, it was said that the disbursement of the third tranche funds by Wallace & Wallace was not authorised by ASD and that Mr Marriner in various ways was responsible for this. The position adopted by Mr Marriner was that, this may be the case, but that he had nothing to do with it.[78]

126 In his separate reasons dismissing Marriner's counterclaim, his Honour reiterated his finding that the third tranche moneys were held by Wallaces in their capacity as solicitors for ASD.[79]

127 All of the disbursements out of the ASD trust account were made by Wallaces at Jephson's direction, apart from one payment of $80,000 which Marriner personally directed to be made. These payments were made after Marriner had ceased to be a director or CEO of ASD in November 2000 and Jephson had resigned as company secretary of ASD on 19 January 2001.

128 The evidence of Penridge, the solicitor at Wallaces who made the payments out of these moneys in accordance with Jephson's (and in one case Marriner's) instructions was that he believed that Jephson was authorised by ASD to give such instructions. This evidence was not disputed by the Marriner parties and was accepted by the trial judge.

I am troubled by the contention of ASD that Mr Jephson was not authorised to give the instruction to Mr Penridge on behalf of ASD which he gave on 19 February 2001. It appears to be accepted by the Marriner parties that Mr Jephson's instructions were not in fact authorised by ASD. They do not seek to justify his conduct, contenting themselves with disavowing any involvement in it or responsibility for it. Frankly, I am, in circumstances such as this, very reluctant to make a finding that a solicitor is in breach of trust, even an innocent breach of trust. As I have mentioned, I did not have the benefit of argument on the point on behalf of Wallace & Wallace.

Mr Penridge impressed me as a conscientious solicitor and an honest witness. I accept his evidence. I am satisfied that ASD who had previously authorised Mr Jephson and Mr Marriner to act generally on its behalf took no step to bring to his attention any change in that authority. Their authority previously was not solely dependent upon the fact that they were director and secretary respectively of ASD and its associated companies. In the circumstances ASD cannot now assert its solicitor is in breach of trust when he continued to act as it had instructed him to act in the past. I find that the plaintiffs have not established a breach of solicitor's trust by Wallace & Wallace or by Mr Penridge in disbursing the third tranche funds in accordance with Mr Jephson's and Mr Marriner's instructions.[80]

130 Because his Honour found that Wallaces did not breach the trust, the claim against Marriner for procuring or inducing that breach necessarily failed. As a consequence, his Honour dealt only briefly with the question whether, assuming there had been a breach of trust, Marriner had knowingly procured or induced it. His Honour simply held that:

I am unable to find that, in his dealings with the third tranche funds, Mr Jephson acted in accordance with Mr Marriner's specific instruction. He had a general mandate to pay creditors as and when necessary from such funds as were available within the ASD group of companies.[81]

131 In the case of the $80,000 which Marriner had personally directed Wallaces to pay to the WS Group, a firm of consulting surveyors, for work done on the Laguna Quays project, his Honour simply remarked that this was not the subject of a separate claim and that he would say nothing more about it.

132 ASD argued that his Honour had wrongly held that there was no breach of the trust because Wallaces had acted honestly. It also submitted that if breaches of trust had occurred, the judge's finding that Marriner had not knowingly induced or procured them was glaringly improbable.

133 ASD submitted Marriner was liable for inducing the breach of trust under the principle in Eaves v Hickson,[82] which held that a third party who knowingly procured or induced an innocent breach of trust by a trustee could be held liable for that breach, even though the trustee had not acted with an improper purpose.

134 ASD contended that the trial judge had incorrectly held that Marriner could only be liable for procuring or inducing the breach of trust if Marriner had specifically instructed Jephson to tell Wallaces to make the payments in breach of trust. ASD also contended that there was ample evidence to support the inference that Jephson had acted on Marriner's instructions.

135 In support of that inference, particular reliance was placed on Jephson's direction to Wallaces to pay $86,500 to Larkins McCarthy, Marriner's longstanding solicitors in Colac. Whalley, who had been Marriner's accountant for many years, said in his witness statement that the transfer of funds to Larkins McCarthy was for the purchase of property in Victoria by Goldworthy, one of Marriner's companies. Although Jephson's evidence was that he had not spoken to Marriner before giving this instruction to Penridge, ASD submitted that the probability of Jephson directing a payment to Larkins McCarthy without having discussed it with Marriner was remote, particularly given that Jephson was apparently unable to recall the purpose of the transfer, although he knew that Larkins McCarthy were Marriner's Colac solicitors. Marriner's evidence that he could not identify the purpose of the payment to Larkins McCarthy lacked any credibility.

136 ASD argued that, in relation to the second tranche payments, the trial judge had found that Jephson's denials and non-responsive answers in cross-examination lacked credibility.[83] The same could be said of his evidence that he had directed payments out of the third tranche independently of Marriner. It followed, so ASD argued, that his Honour's finding that Marriner was not liable for any breach of trust occurring as a consequence of Jephson's directions to Wallaces was 'glaringly improbable' and should be set aside.

137 The submissions made by Marriner on cross-appeal noted that the nature of the trust on which the third tranche funds were held was not identified at the trial and that the judge had rejected the existence of the Quistclose trust. This point was not pursued in the oral submissions made by Marriner's counsel, but in his reply on the cross-appeal, counsel challenged the finding that the funds were held on trust for ASD, because '[Wallaces] were the solicitors for all the relevant Laguna Resort companies, which are ASD, Laguna Investments and Laguna Management' and that the 'true owner was Laguna Management which had the bank account.'

138 The main focus of the argument on the cross-appeal related to his Honour's finding that Wallaces did not breach the trust, which Marriner sought to uphold. If there was a breach of a trust of which ASD was the beneficiary, counsel conceded that a defendant who knowingly participated in an innocent breach of trust could be held liable under the principle in Eaves v Hickson. (It is not clear whether this point was raised at trial, but no issue was taken by Marriner about the failure to do so.)[84]

139 However, Marriner submitted that with the exception of the 22 May 2001 direction to pay $80,000 to the WS Group which he himself made, all instructions to Wallaces about the disbursement of the third tranche moneys came from Jephson. It was submitted that both Jephson's and Marriner 's evidence supported his Honour's finding that Marriner had neither instigated nor procured the breaches of trust.

140 Moreover, even if Wallaces had breached the trust in favour of ASD and Marriner had instigated the disbursements from Wallaces' trust account, he had not done so dishonestly.

Was it open to his Honour to hold that Wallaces held the third tranche on a solicitor's trust?

141 Paragraph 49 of the Further Amended Statement of Claim alleged that when the balance of the bond moneys were paid into the trust account of Wallaces, they were impressed with a trust for the benefit of ASD. In our view, when read in their context, the words 'impressed with a trust' most probably referred to a Quistclose trust and not to a solicitor's trust. However, Marriner's submissions on the crossappeal did not argue that pleading inadequacies precluded his Honour from holding that the moneys were held on a solicitor's trust.

Who was the beneficiary of the solicitor's trust?

142 As we have said, the question whether ASD was the beneficiary of the solicitor's trust was only briefly raised by Marriner's counsel in his reply. The evidence was that in approximately 1998, Wallaces was retained by ASD to assist with freeholding and planning advice with respect to the development of the Resort.

143 Penridge's evidence was that he knew Marriner was a director of ASD and met him and each of the other directors, as well as both the company secretaries of ASD, Whalley and Jephson. He received day to day instructions from Graham Spence, and from time to time, received instructions from Marriner, Whalley and Jephson.

144 In June 2000, Penridge met with Marriner and Jim Pfeiffer ('Pfeiffer') from Freehills to discuss the proposed acquisition by Marriner of the Resort from ASD. At that time, Pfeiffer was ASD's Melbourne based solicitor.

145 Penridge's evidence was that during that meeting, it was agreed that Pfeiffer would act for ASD in respect of the acquisition arrangement, and Penridge would act for Laguna Australia. His understanding was that he would be 'looking after Marriner's interests' with respect to the acquisition, but would continue to act for ASD with respect to the Resort pending completion of the acquisition arrangement. He also said that he did not undertake work for Laguna Australia in the completion of the acquisition agreement until October/November 2001.

146 The third tranche bond moneys were received by Wallaces in February 2001, after the 30 June 2000 Heads of Agreement was entered into, but before the sale of the Resort to Marriner was finally completed in November 2001. We note that in the further amended defence, it was admitted that Jephson requested Ergon Energy release the moneys on behalf of ASD. Having regard to the agreement that Penridge would act for ASD with respect to the Resort pending completion of the acquisition arrangement, we do not consider that there is any basis for disturbing his Honour's finding that the third tranche was held on a solicitor's trust for ASD. Our view is reinforced by the fact that the question whether ASD was the beneficiary of the solicitor's trust was raised only in Marriner's submissions in reply. Furthermore, and this is probably decisive, as regards the file involved, the bulk of the third tranche moneys paid to Wallaces were paid into account 96978 and Wallaces' trust ledger for that file showed the client as ASD.

147 In our view, his Honour erred in holding that Wallaces were not liable for payments made in breach of the solicitor's trust, because they did not act dishonestly. A trustee is strictly liable for any breach of trust, even if the breach is entirely innocent.

148 His Honour may have considered that ASD should be estopped from claiming compensation for the breaches, because at the time when Jephson gave instructions for payment out of the third tranche, ASD had not informed Wallaces that Marriner and Jephson no longer had authority to give instructions on ASD's behalf.[85] But estoppel was never argued. Nor was it considered whether Marriner could take the benefit of the estoppel (if any). His Honour might also have considered that Wallaces should be relieved of personal liability for their breach of trust because Penridge acted honestly and reasonably and ought fairly be excused.[86] However, the power which statute confers on the Court to relieve a trustee from liability in such circumstances does not mean that the breach did not occur.

149 We now turn to the main point in issue, which is whether his Honour erred in holding that Marriner was not liable for any breach of trust which occurred as a consequence of Jephson's directions, or for the payment of $80,000 which Marriner directed Wallaces to pay the WS Group. As we have said, this issue was dealt with very briefly by his Honour, because he held that Wallaces had not breached the solicitor's trust.

What principles determine liability for procuring or inducing an innocent breach of trust?

150 Although this was a central issue in determining whether Marriner could be held to have procured or induced Wallaces' breach of trust,[87] the state of knowledge required for Marriner to be held liable for the disbursement instructions given by Jephson was not clearly argued at the trial, or, for that matter, on appeal (perhaps due to time constraints).

151 It seems that ASD initially relied on Barnes v Addy[88] as the basis for Marriner's liability. Clearly, Marriner was not liable under the 'first limb' of Barnes v Addy because he did not receive part of the trust property himself. Nor was he liable under the 'second limb', which requires the third party to have assisted the trustee (Wallaces) to engage in a dishonest or fraudulent breach of trust by Wallaces.

152 However, as the learned authors of Jacobs' Law of Trusts in Australia have observed, Barnes v Addy is not 'an exhaustive statement of the circumstances in which a third party may become accountable as a trustee.'[89]

153 On appeal, ASD argued that the principle in Eaves v Hickson[90] applied, because Marriner had wrongly induced trustees to commit an innocent breach of trust. This line of authority was accepted by the High Court in Farah Constructions:

[the second limb of Barnes v Addy] was not expressed by Lord Selborne LC as an exhaustive statement of the circumstances in which a third party who has not received trust property and who has not acted as a trustee de son tort nevertheless may be accountable as a constructive trustee. Before Barnes v Addy, there was a line of cases in which it was accepted that a third party might be treated as a participant in a breach of trust where the third party had knowingly induced or immediately procured breaches of duty by a trustee where the trustee had acted with no improper purpose; these were not cases of a third party assisting the trustee in any dishonest and fraudulent design on the part of the trustee.[91]

154 In Eaves v Hickson, the father of two beneficiaries to a will knowingly provided a forged certificate of his marriage to trustees. As a consequence, the trustees innocently paid out funds to his children, believing that they were legitimate. The father was held liable for the loss because he knew that his actions would result in the funds being paid out in breach of the trust. It will be noted that in that case the wrongdoer knew that the trust would be breached. The Eaves v Hickson principle was applied by the Privy Council in Royal Brunei Airlines SDN BHD v Tan.[92]

155 There is extensive discussion in the authorities about the level of knowledge which a third person must have in order to be held liable for a breach of trust or fiduciary obligation under the first and second limbs of Barnes v Addy. In Farah Constructions,[93] the High Court held that liability under the second limb (which only applies if the trustee or fiduciary has acted dishonestly or fraudulently)[94] arises where the third person had actual knowledge of the breach of trust, has wilfully closed his or her eyes to the obvious, has wilfully or recklessly failed to make enquiries that a reasonable person would make, or has knowledge of circumstances that would indicate the facts to an honest or reasonable person.[95] The High Court declined to overrule Consul Development Pty Ltd v DPC Estates Ltd,[96] which held that knowledge of circumstances which would put an honest or reasonable person on inquiry would not make a third person liable for inducing a dishonest breach of trust under the second limb in Barnes v Addy.

156 In Australia, it has not been decided whether the level of knowledge which makes a third party liable for procuring a dishonest breach of trust also applies to a third person who procures or induces an innocent breach of trust under the principle in Eaves v Hickson.

157 In early cases in which a third party was held liable for inducing an innocent breach of trust, the third party had actual knowledge that the breach was occurring and actively instigated it.[97]

158 In Royal Brunei Airlines, where the third party was alleged to have dishonestly assisted or procured a trustee to commit a breach of trust, the Privy Council said that regardless of whether the breach of trust by the trustee was innocent, or fraudulent and dishonest, the question was whether the third party had acted as an honest person. This was an objective standard. Lord Nicholls, who delivered the opinion of the Privy Council said:

Acting in reckless disregard of others' rights or possible rights can be a telltale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.

Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.

Before leaving cases where there is real doubt, one further point should be noted. To inquire, in such cases, whether a person dishonestly assisted in what is later held to be a breach of trust is to ask a meaningful question, which is capable of being given a meaningful answer. This is not always so if the question is posed in terms of 'knowingly' assisted. Framing the question in the latter form all too often leads one into tortuous convolutions about the 'sort' of knowledge required, when the truth is that 'knowingly' is inapt as a criterion when applied to the gradually darkening spectrum where the differences are of degree and not kind.[98]

159 In Farah Constructions, the High Court expressed reservations about this formulation:

there is a distinction between rendering liable a defendant participating with knowledge in a dishonest and fraudulent design, and rendering liable a defendant who dishonestly procures or assists in a breach of trust or fiduciary obligation where the trustee or fiduciary need not have engaged in a dishonest or fraudulent design. The decision in Royal Brunei has been referred

to in this court several times[99] but not in terms foreclosing further consideration of the subject in this court: in particular, further consideration of the apparent necessity to displace the acceptance in Consul Development[100] of the formulation of the second limb of Barnes were Royal Brunei to be adopted in this country. Until such an occasion arises in this court, Australian courts should continue to observe the distinction mentioned above and, in particular, apply the formulation in the second limb of Barnes.

On the present appeal, specific reliance was not placed by Say-Dee upon Royal Brunei, although there was a suggestion, not soundly based, discounting any difference between what might be called the traditional approach and that adopted in Royal Brunei. The changes to the law in Australia which were sought by Say-Dee did not include any adoption of a cause of action of the kind expressed in the passage in Royal Brunei set out above. Accordingly, it is unnecessary to decide now how far Royal Brunei, and subsequent decisions in the House of Lords and Privy Council,[101] have modified the second limb of Barnes or, rather, restated the form of liability operating antecedently to and independently of Barnes, and if so, whether these changes should be adopted in Australia.[102]

160 Given the approach taken by the High Court in Farah Constructions, it is not open to this Court to hold that Marriner could be held liable for inducing an innocent breach of trust because he knew of matters which would have put an honest or reasonable person on inquiry as to whether the disbursements being directed by Jephson were being made out of money held on trust for ASD.

161 Farah Constructions was concerned with the knowledge required to bring a third party within the second limb in Barnes v Addy. However, in deciding whether Marriner should have been held liable for procuring or inducing an innocent breach of trust by Wallaces, the question posed by the High Court in Farah Constructions may well be relevant in determining whether Marriner could be held liable for procuring that breach of trust.

162 Assuming that the principles applicable where it is sought to make a person liable under the second limb in Barnes v Addy also apply in the Eaves v Hickson situation, the relevant question would be whether Marriner had knowledge of circumstances which indicated the relevant facts to an honest and reasonable person (rather than merely putting that person on inquiry). Those relevant facts would be that Jephson was directing these payments to be made out of moneys of ASD. As the plurality of the High Court said in Farah Constructions:[103]

The result is that Consul Development supports the proposition that circumstances falling within any one of the first four categories of Baden[104] are sufficient to answer the requirement of knowledge in the second limb of Baden, but does not travel fully into the field of constructive notice by accepting the fifth category. In this way there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse should not escape failure to recognise an impropriety that would have become apparent to an ordinary person applying the standards of those persons acted dishonestly, judged by the standards of ordinary decent people, even if he did not appreciate that the act in question was dishonest by those standards.

163 There was considerable evidence bearing on the question whether Marriner had authorised Jephson to request Wallaces to make the disbursements, whilst at the same time knowing of the facts that would have indicated to an honest and reasonable person that the payments would be made from moneys held on trust for ASD.

164 We have considered that evidence, which came primarily from Jephson, Penridge and Marriner, but we do not set it out here because we have concluded that this issue should be remitted to a judge in the trial division. Our principal reasons for reaching that conclusion are:

(i) we do not have the assistance of any fact-finding or analysis by the trial judge on the question whether Marriner procured or induced the innocent breach of trust by Wallaces;

(ii) the arguments on appeal as to the relevant evidence were somewhat fragmentary;

(iii) we have not had the advantage of detailed argument (or indeed much argument at all) as to the nature of the applicable legal principles and their interaction with the fact-findings that might be open.

165 We think that it would be unfair to both sides to reach any conclusion in those circumstances and it is preferable that they each have an opportunity to fully ventilate these issues before a judge in the trial division.

Issue 4. Did Marriner induce or assist a breach of trust by directing Wallaces to pay $80,000 from the third tranche moneys to a third party?

166 For the foregoing reasons, we would also remit to the judge the question whether Marriner is liable for procuring or inducing a breach of trust in relation to the $80,000 paid to the WS Group.

Issue 5. Were Goldworthy, Laguna Australia and Stage Design liable for inducing or assisting Wallaces to breach the third tranche trust or as knowing recipients of the proceeds of the breach?

167 The judge held that these companies were not liable for inducing or assisting Wallaces to breach the trust because there was no evidence that they had any involvement other than by receiving accounts from creditors, which were then directly paid out of the Wallaces' trust account.

168 His Honour also held that they could not be held liable as knowing recipients of trust proceeds under the first limb in Barnes v Addy. He said:

The critical aspect of this claim is their guilty knowledge. This must be the knowledge of Mr Marriner, as no other person or entity was suggested to have had such knowledge. What then is said to be Mr Marriner's knowledge? I have found that he did not concern himself with matters such as the source of funds within the corporate group for payment of creditors. He certainly knew that substantial sums were due to many if not most or all of the creditors which received payments from Wallace & Wallace. He was doubtless content that the debts should be paid. There is no evidence, however, that he knew that they were paid from the third tranche funds. There is no evidence that he knew at the time of payment that these creditors had in fact been paid. In these circumstances, the knowledge of the companies within the Marriner group, which benefited from the payments, cannot be greater than his. This claim against those companies must therefore fail in turn.[105]

169 As the question of Marriner's liability is to be remitted, the question of the liability of his companies, which depends on much the same evidence, should also be remitted.

170 At trial, ASD claimed from Marriner the sum of $824,890. This sum was the difference between an alleged expenditure limit of $4.7 million which was said to have been imposed on Marriner, and the amount which he allegedly authorised to be paid to contractors for work at the Resort, in his capacity as a director of ASD.

171 The trial judge upheld ASD's contention that Marriner breached his director's duty owed to ASD by causing it and a wholly owned subsidiary, Matelda Oaks, to expend money on capital works in excess of a limit imposed by the Board. However, his Honour only allowed ASD's claim in the sum of $412,113. He arrived at that amount after deducting $410,777, holding that this amount fell outside the expenditure cap because it related to repairs and maintenance of the Resort.

172 On appeal, Marriner argued that the judge should not have found that his actions caused a breach of the expenditure cap. ASD crossappealed, claiming that his Honour should have awarded it the entire amount claimed.[106] By a notice of contention, which was in substance part of ASD's crossappeal, ASD contended that the trial judge was wrong to conclude that the $4.7 million expenditure cap did not apply to repairs and maintenance. In other words, ASD contended that the judge should not have deducted the sum of $410,777 from the amount awarded to it.

173 As we have previously explained, ASD's claim followed a prolonged process of negotiations to separate the parties' interests which began in early 2000. As part of that process, the 30 June 2000 Heads of Agreement was entered into by some of the corporate entities (but not Marriner). ASD relied on the terms of the 30 June 2000 Heads of Agreement to establish the existence of the claimed expenditure cap. The terms of that agreement are discussed in more detail below.

174 On 3 November 2000, Marriner resigned as CEO and director of ASD. On the same day, he signed a Unit Redemption and a Share Acquisition Deed. Under that deed, it was agreed that the shares in ASD held by Goldworthy would be sold to United Super, subject to certain conditions.[107]

175 On 19 October 2001, ASD made an offer to sell the assets of the project to Laguna Australia. The offer was accepted and became effective on 23 October 2001, following CBUS board approval. The agreement was formally documented when, on 13 November 2001, four agreements were executed under which ASD sold its shares in Laguna Investments to Laguna Australia. At the same time, liability for the debt which Laguna Investments owed to ASD was to be assumed by Fulham Holdings, another company controlled by Marriner. That assignment may not have been in the contemplation of the parties on 30 June 2000. Repayment of the debt was a term of the proposed sale. The trial judge found the debt to be $16,592,676.75. Under a separate agreement Laguna Australia acquired the Resort land from ASD and Matelda Oaks.

176 We mention this series of transactions because the amount claimed by ASD was calculated after loan account balances between Laguna Investments and ASD, assigned to Fulham Holdings, were unilaterally adjusted by ASD under a 'conclusive evidence' clause in the assignment agreement. The debt arising from use of the second tranche bond moneys by Laguna Investments was not included.

177 The trial judge explained that the excessive capital expenditure claim was based on two matters. He said:[108]

As pleaded, this claim falls into two parts. On 3 December 1999 the ASD project manager, Graham Spence, on behalf of Laguna Management, executed an agreement with JJ McDonald for certain construction works including the construction of road works and an airstrip on land being part of and adjoining to the Laguna project site at a total estimated cost of $4,431,141. It is not disputed that this bound Laguna Management. What is said is that he did so upon instruction from Mr Marriner and that Mr Marriner failed to inform the board of ASD of the contract.

The pleading then goes on to allege, that this failure by Mr Marriner was a breach of his statutory duties as director, a breach of a duty of care he owed ASD and a breach of fiduciary duties he owed to ASD. No loss or damage is alleged. As to this, the Marriner defendants do not admit that the Mr Marriner failed to inform the board of the contract entered into with JJ McDonald and, say further, that he had no obligation to do so. This claim goes nowhere.

The more serious part of the claim is that, notwithstanding the mandate and limit imposed by cl 9 of the June 2000 heads of agreement, Mr Marriner caused to be paid by ASD between December 1999 and 31 October 2000 sums totalling $5,524,890 in the on-going works so that the limit of $4.7m was exceeded by $824,890. These payments include the two payments totalling $426,600 made out of the second tranche funds from the Bank of Queensland so that this claim and the [second tranche bond money] claim substantially overlap. It is said that these payments in excess of $4.7m were made without the knowledge or approval of the board of directors of ASD and that they were for Mr Marriner's benefit, inasmuch as they increased the value of the asset which his company was purchasing. They, therefore, constituted breaches of his duties as a director pursuant to ss 180, 181 and 182 of the Corporations Act, the fiduciary duties he owed to ASD and his duty of care to ASD.

178 We have held that the judge correctly found that the second tranche bond moneys were not held on a Quistclose trust for ASD.

179 As to the capital expenditure claim his Honour said that:[109]

(i) the Marriner defendants accept that under the June 2000 heads of agreement their mandate to spend money on capital expenditure was limited to $4.7m, but they say that this agreement was superseded by the agreement of 19 October 2001 and was effective to release all parties from their obligations and liabilities under the June 2000 heads of agreement.

(ii) The Marriner parties deny that Mr Marriner without the knowledge or approval of the board of ASD instructed JJ McDonald to carry out the construction works in excess of the expenditure limit.

(iii) The Marriner defendants accept that, by 1 February 2001, costs in the sum of $5,098,290 had been incurred and, further, that payments to JJ McDonald in the sum of $426,600 had been spent. They say, however, that, of these payments, $4.7m was in respect of capital works and that the balance was in respect of maintenance and repair costs.

180 His Honour made the following findings on the capital expenditure claim:[110]

This is the claim that Mr Marriner caused to be paid sums totalling $5,522,890 between December 1999 and 31 October 2000 for the Laguna Quays project and that, of this, only $4.7m was authorised. The claim is therefore for an overpayment of $824,890. This amount is made up as follows:

Capital works expenditure incurred to 31 October 2000

The last two items represent the payments from the second tranche funds which I have already described. The expenditure of about $5m in the first item represents a large number of payments set out in two lists annexed to a letter prepared by Mr Whalley the secretary of ASD and sent to [CBUS] by letter dated 2 November 2000. The first list comprises payments made by ASD between 21 October 1999 and 13 October 2000 totalling $4,395,977. The second is a list of payments made by Matelda Oaks as trustee of the Victorian Property Trust between 1 October 1999 and 30 June 2000 totalling $767,313. No distinction for present purpose was drawn between these lists. The total expenses were $5,096,290.

It will be recalled that by heads of agreement dated 30 June 2000, ASD and Matelda Oaks agreed to sell the Laguna Quays project to Laguna Australia for a total price of $26,500,000. The subject-matter of the sale was the real estate which was owned in part by ASD and in part by Matelda Oaks, and the shares in Laguna Investments which were held by ASD. By cl 11 the parties agreed that the purchase price also included the repayment to ASD of an inter company loan owed to it by Laguna Investments and that the loan was approximately $10m. The heads of agreement contemplated that the purchaser would enter into possession upon payment of the second instalment price on 31 October 2000. The balance of the price was to be paid as to a further 10% on 28 February 2001 and the balance on 1 March 2001 by vendor finance. The agreement contains in cl 9 the following:

9 [ASD] to complete works

[ASD] shall forthwith and at its own cost and expense complete or procure the completion of the capital works described in the budget set out in Annexure 4 provided always that the liability of [ASD] to complete such works shall not exceed A$4.7 million.

Annexure 4 is in these terms:

Annexure 4 - Capital Works Budget

The Company will undertake the first stage of rectification and development works including the following:

• Repair of lodge roof to eliminate leaks
• Repairs to below ground membrane to waterproof the lodge building
• Waterproofing of Golf Buggy store
• Repairs to Concrete Bridge at Lagoon
• Expansion of water storage capacity
• Sealing of Midge Road
• Develop health spa in the lodge building
• Develop new airstrip on adjoining site

The total estimated cost of the above works is 4.7 million.

The matter is a little complicated by the fact that Mr Marriner was a director of ASD both before and in the months after the heads of agreement up to 3 November 2000. He was also the CEO of ASD for the same period with very wide powers. He was effectively the manager of the project and, indeed, still performed these functions after he had ceased to be director and CEO. He was therefore in a delicate position inasmuch as he was acting for the vendor and the purchaser pending settlement of the sale. And the sale was not settled on 31 October 2000 as contemplated; it did not occur until April 2002. It will appear from what I have already written that Mr Marriner adopted a fairly cavalier attitude to matters such as separate corporate identity. He was an enthusiast for the Laguna Quays project and he was prepared to spend much in pursuance of it. Since ASD was well resourced, he was content to use these resources on the project, leaving it to others to attend to the detail.

The case presented on behalf of [CBUS] accepted Mr Whalley's lists of expenditure as having been expended for the capital works referred to in Annexure 4. Mr Whalley's covering letter, however, makes no such assertion. He identifies in the lists items totalling $410,777 which are described as repair and maintenance costs. He said that the balance of $4.68m representing capital costs lay within the $4.7m limit.

In their submissions counsel for [CBUS] did not challenge the accuracy of Mr Whalley's lists and I see no reason to take a different position. The witness said that about $410,000 was spent by way of repair and maintenance costs upon the golf course, dams and the hotel lodge. I see no reason to doubt his allocation of this expenditure. Indeed, it is to some extent supported by the references to maintenance and repair items elsewhere in the correspondence. This maintenance and repair expenditure is not included in the capital works budget.

The remaining items, being the money spent from the second tranche funds, were applied directly or indirectly in payment to JJ McDonald after the time covered by Mr Whalley's lists. There is no evidence that the three payments of $90,000 made in October 2000 were applied to any particular activity on site. Likewise the $156,600 paid directly to the contractor. Given the nature of the work described in the JJ McDonald contract, I conclude that these payments were for capital works possibly works on the airstrip and roads. I am satisfied that they were Annexure 4 works.

I find, therefore, that Mr Marriner caused ASD and Matelda Oaks to expend a total of $ 5,112,113 on capital works. This is $412,113 in excess of the $4.7m limit.

I am satisfied that this excess was expended by Mr Marriner in breach of his statutory duty to ASD as a director. The evidence shows that, in this respect, as in others Mr Marriner was primarily concerned to continue the development of the Laguna Quays project for his own benefit. He was aware that expenditure beyond $4.7M was unauthorised. The best that might be said for him in this context is the he failed to keep track of the expenditure. He kept on spending so long as there was money available for him to use. It mattered not that it was the money of ASD which he was spending as its director pursuant to cl 9 of the June 2000 heads of agreement. He had a conflict of interest in dealing with this money since he represented the vendor as well as the purchaser. The heads of agreement permitted him to spend it, but his dual position required him to be meticulous in his exercise of this function. The evidence shows that he was less than meticulous. He put his interest as purchaser ahead of his interest as director of the vendor.

181 The grounds of appeal relating to the capital expenditure claim were prolix and confusing. Moreover counsels' oral submissions emphasised a more limited number of matters than those covered in the grounds of appeal and raised other issues as well. Doing the best we can, we summarise the issues which arise out of the appeal and cross-appeal as follows:

(1) Did ASD's business plan or the 30 June 2000 Heads of Agreement impose an expenditure cap on Marriner? As we explain below, this issue arose on the hearing of the appeal and was not raised at the trial.

(2) Assuming there was an expenditure cap and payments were made in excess of that cap, did Marriner breach his duty to ASD by causing it to make such payments? (Grounds 11(a) -(c),(f) and (g) and 12 to 16.)

(3) Was his Honour's finding that the repayment out of the second tranche of amounts already paid by Cumberland Management to JJ McDonald, or paid directly to JJ McDonald, was done on behalf of ASD inconsistent with his finding that the second tranche bond moneys were not held by Laguna Management on trust for ASD, but as an agent for Laguna Investments? (Grounds 1 to 3 and 11 (e).) We call this 'the inconsistent finding' argument.

(4) Did Marriner breach the director's duty he owed to ASD by signing the 16 October 2000 Agreement which made ASD directly liable to JJ McDonald? (Cross-appeal ground 1.)

(5) Had ASD established, as it was required to do, that the amount claimed to have been overspent, was in fact spent in respect of the works to which any limitation of authority or spending cap related. (Grounds 5 to 10.)

182 As a consequence of the way in which the case was argued on appeal, a further question, not being part of any ground, was argued - if expenditure exceeded the authorised limit, and Marriner had caused that expenditure to be made, could ASD establish any consequential loss?

183 Marriner relied on various defences at trial, including a contractual release and defences based on the conduct of ASD relating to estoppel, and misleading, deceptive and unconscionable conduct. The grounds of appeal relating to these defences are discussed separately.

184 In support of its claim that Marriner had breached his director's duty by authorising the spending of more than $4.7 million by ASD on works at the Resort, including the construction and development of a new airstrip, ASD relied primarily on:

(a) a business plan approved by the ASD which allegedly imposed an expenditure limit; and

(b) clause 9 of the 30 June 2000 Heads of Agreement.

185 At a meeting on 7 December 1999, the Board resolved:

To adopt the business plan of [ASD] subject to the inclusion of the Campbell Street, Hobart project.

186 The business plan covered numerous projects in which ASD was involved or its involvement was proposed, including the Laguna Quays development. It listed current investments including Herald & Weekly Times Properties, the Victoria Gardens Development site, City Square Apartments, the Forum Theatre, the Grand Central site in the Melbourne CBD, the Bouverie Street site in Carlton, Time Share Assets, the Hotel Lindrum, Mountain Maid Pty Ltd and, of course, the Resort. The report noted that the Resort assets had been purchased in March 1999. The Resort covered over 4,000 acres and included a 60 room five star lodge, 18 hole championship golf course, marina precinct with a leasehold harbour with 110 serviced berths, a water sports lagoon, swimming pool and tennis courts, convention centre, 12 condominiums, 300 serviced lots and substantial areas of undeveloped land.

187 Some assets mentioned in the business plan were earmarked for sale. The plan dealt with project funding requirements, noting that $4.3 million was required in 1999/2000 for Stage 1 development at the Resort. That amount corresponds generally with the estimate of costs in the JJ McDonald contract, to which we later refer. However, JJ McDonald was not the only supplier of services to the ASD group for the project.

188 The business plan included projected cash flows and budgeted profit and loss statements. Some of that information related to the Resort. When dealing with the major projects in the current year, the plan stated in relation to the Resort:

During the current year the Company will undertake the first stage of rectification and development works including the following.

Repair to lodge roof to eliminate leaks

Repairs to below ground membrane to waterproof the lodge building

Waterproofing of Golf buggy store

Repairs to Concrete Bridge at Lagoon

Expansion of water storage capacity

Sealing of Midge Road

Develop health spa in the lodge building

Develop new airstrip on adjoining site

The total estimated cost of the above works is 4.7 million[111]

189 The reference to 'the Company' was a reference to ASD.

190 There followed a 'strategy' - 'The decision has now been taken to realise this asset in the short term'. This scope of works was substantially replicated in Annexure 4 to the 30 June 2000 Heads of Agreement.

191 A few days earlier, on 3 December 1999, Graham Spence, an employee of ASD, had signed a contract of works with JJ McDonald on behalf of Laguna Management. The respondents alleged that this contract was signed on Marriner's instructions, without the authority of the Board.[112]

192 The contract of works provided for a commencement date on 4 January 2000 and a completion date of 31 May 2000. It was not a lump-sum contract. There was a schedule of rates for particular equipment and an estimate of the cost of particular works. The scope of works included the construction of an airport and roads, the upgrade of existing roads and landscaping. The total estimated value of the works described in Schedule 1 of the contract was a little over $4.4 million.

193 On 27 March 2000, Marriner made a written proposal to purchase, through Fulham Holdings, the interest of ASD in the assets and undertaking of the Resort for $26.5 million. Marriner was the CEO and a director of Fulham Holdings.

194 At a meeting on 16 May 2000, the Board authorised Marriner to proceed with detailed negotiation and documentation of the proposed sale to Fulham Holdings. The resolution included the following terms:

1. Completion by [ASD] of works as set out in the current business plan of [ASD] not exceeding the budgeted cost of $4.7M including sealed airstrip to the west of the resort.[113]

195 The trial judge noted that the Board resolution had the unusual effect of allowing Marriner to negotiate the detail of the sale of the Resort with himself.

196 As we have said, heads of agreement were prepared and executed on 30 June 2000. The parties were ASD, Matelda Oaks, Laguna Investments, all described as 'the Vendors'; and Laguna Australia as the purchaser. Under that agreement, ASD and Matelda Oaks agreed to sell all of the assets described in Annexures 1 and 2 for a total price of $26,500,000. A deposit of $250,000 was payable on signing. Further payments were required on 31 October 2000 and 28 February 2001 with the balance due on 1 March 2001. Clause 9 provided as follows:

[ASD] to complete works

[ASD] shall forthwith and at its own cost and expense complete or procure the completion of the capital works described in the budget set out in Annexure 4 provided always that the liability of [ASD] to complete such works shall not exceed A$4.7 million.

197 On appeal, ASD argued that cl 9 should be construed so as to impose an absolute limit on authorised work to be undertaken, not merely on ASD's liability to pay for the work. In addition, ASD argued that cl 9 imposed an obligation on Marriner, as a director of ASD, not to procure ASD to have JJ McDonald 'carry out construction works, the cost of which exceeded' $4.7 million. The respondents alleged that Marriner instructed JJ McDonald to do so without the knowledge, approval or authority of the Board.

198 They also alleged that Marriner's instruction to JJ McDonald in May 2000, to extend the airstrip so that it could accommodate larger aircraft was a breach of his director's duty.

199 Although ASD's argument relating to the operation of cl 9 was consistent with its pleaded case, the construction of cl 9 seemed to receive little attention at trial. The emphasis changed to accommodate the trial judge's rejection of ASD's claim that the second tranche of the Bond was held on a Quistclose trust.

200 Clause 10 of the 30 June 2000 Heads of Agreement provided that:

Transfer of risk

(a) ...

(b) ...

(c) ...

(d) Any deposits, bonds, guarantees or other sureties held by any authority with respect to Laguna Quays or its development shall be applied towards the costs and expenses of converting such crown leasehold land as is part of Laguna Quays to freehold title in the name of LA.

201 Marriner relied on cl 10 to support his contention that the bond moneys could be applied against the cost and expenses of converting leasehold land into freehold land. He argued that those costs exceeded the amount of the bond moneys, thus precluding any right to sue for repayment. The trial judge said in relation to Marriner's defence based on cl 10(d) that:[114]

The next defence relies upon cl 10(d). Under this provision the proceeds of the bond money might be applied to 'the costs and expenses of converting certain Crown leasehold land to freehold'. Counsel for the Marriner parties then applied a very wide interpretation to the expression 'freeholding costs'. It includes, it was said, any costs incurred in satisfying planning requirements for the project and in demonstrating to the statutory authorities the viability and efficacy of the development plans proposed by Mr Marriner and his companies. What was said was that these authorities would not support the application for freeholding or permit it to go ahead unless these matters had been attended to. A good deal of time at trial and many documents were deployed on this topic. I do not construe cl 10(d) in these wide terms. To my mind, the costs and expenses involved in freeholding are limited to the direct costs incurred in purchasing the freehold land and the associated conveyancing and other costs. The earthworks carried out by JJ McDonald in pursuit of Mr Marriner's vision for the project certainly do not fall within freeholding costs.

202 The grounds of appeal in relation to the defences are considered below. But because of the way in which Marriner sought to employ cl 10 against ASD's bond money case, it is convenient to say something more about his contentions in that regard at this point.

203 Marriner contended that the cost of purchasing the freehold was $950,000. That sum was specifically earmarked, in a letter dated 19 October 2001, as a payment to be reimbursed by Laguna Australia to ASD. Thus, Marriner contended, ASD was not entitled to make any claim in relation to the application of the bond moneys, at least up to the amount for which Laguna Australia was required to reimburse ASD, because Laguna Australia was expressly entitled to apply the bond moneys for that purpose.

204 The trial judge accepted that cl 10(d) extended to the cost incurred in purchasing the freehold. ASD did not challenge that finding. But the real difficulty with the way in which Marriner now wishes to employ cl 10(d) is that his argument was not advanced and explored at trial. At trial, Marriner had advanced the proposition that because the works performed by JJ McDonald related to the acquisition of the freehold, ASD was denied the right to bring its claim in respect of the payments made to it out of the bond moneys. Had Marriner advanced his new contention, limited so as to conform with the finding by the trial judge as to the true scope of cl 10(d), the issue for determination may have taken on a very different character and complexity. For example, what was to be made of the way in which the transaction for the sale of the Resort was structured under the November 2001 agreements? Could it be said that the purchaser's entitlement to have the bond moneys applied to the acquisition of the freehold survived in a form so as to support the more broadly based defence to the bond money claims?

Inter-Company Loan

The parties acknowledge that SDALI [SDA-Laguna Investments Pty Ltd] is presently indebted to [ASD] in the sum of approximately $10 million. The parties further acknowledge that the purchase price payable pursuant to this agreement is inclusive of the repayment of that sum. The parties agree that they will confer as to the appropriate manner of dealing with that debt and agree that payment of the sum of $26.5 million, will be apportioned in repaying any such debt to [ASD] and thereafter the balance of such moneys shall be apportioned between the assets sold by the Vendors pursuant to this agreement.

206 Marriner contended that the bond moneys, as a debt due from Laguna Investments to ASD, was to be discharged as part of the settlement of the overall transaction. Had that been done as contemplated, ASD would have had no basis upon which to bring the second tranche into account in its unauthorised expenditure case, or otherwise claim in respect of dealings with the bond moneys by Laguna Management or Laguna Investments. The difficulty with Marriner's contention was that the final agreements made in November 2001 provided that ASD would unilaterally calculate the amount of the debt which was to be assigned, and the bond moneys were not included.

LA Capital Expenditure

LA shall carry out at its own cost and expense capital expenditure at Laguna Quays of not less that $3 million on or before the expiration of 12 months from the date upon which the payments are made pursuant to clauses 1(b)(ii) and 2(b)(ii). If such expenditure is not incurred, the interest to be capitalised pursuant to clause 8(b) shall be paid at the expiration of the said period of 12 months.

208 The payments were to be made under cll 1(b)(ii) and 2(b)(ii) by 31 October 2000. Thus, assuming the payments were made on time, Laguna Australia was required to expend not less than $3 million by that date.

Did Marriner breach his duty to ASD by breaching an expenditure cap?

209 The trial judge proceeded on the assumption that the 30 June 2000 Heads of Agreement limited Marriner's authority to 'spend money on capital expenditure' exceeding $4.7 million. For the reasons discussed below, we consider that this was an incorrect construction of that agreement.

210 His Honour's assumption arose out of the parties' failure to adequately address the construction of cl 9 of the 30 June 2000 Heads of Agreement and the roles of the various corporate entities in the ASD group in their pleadings or at trial.

211 When the trial judge described the issue in the terms expressed in paragraph 36(i) of his reasons, he assumed that the contest between the parties was over the amount that would be spent on the Resort, rather than the amount for which ASD would be liable.[115]

212 Paragraph 82 of the statement of claim alleged that:

Clause 9 of the 30 June Heads of Agreement provided that ASD shall at its own cost complete and procure the completion of the construction works described in Annexure 4 to that agreement provided always that the liability of ASD to complete such construction works shall not exceed $4.7 million (the Expenditure Limit').

213 The reference to 'the Expenditure Limit' tended to confirm the view that this was an overall limit on expenditure, not a limit on ASD's liability. ASD alleged that Marriner's authority to spend on project works was limited. They alleged that the Board had imposed a spending limit of $4.7 million at its meeting on 7 December 1999, which was confirmed by the Board resolution on 16 May 2000.

214 Paragraphs 82 and 86 of the defence failed to clarify the issue. By their defence, the Marriner parties admitted cl 9, but went on to rely upon the claimed effect of the agreement dated 19 October 2001, which they alleged superseded and made the expenditure limit ineffective, with the consequence that ASD was precluded from claiming against Marriner that the limit had been exceeded.

215 In paragraph 86 of the defence, also referred to by the trial judge, Marriner denied ASD's allegation that 'expenditure of $824,890 in excess of the Expenditure Limit was incurred on the instructions and directions of Marriner'.

216 That denial requires some context. In paragraphs 83 to 85 of the statement of claim, ASD alleged that Marriner instructed JJ McDonald to carry out works in excess of the expenditure limit; that as a result of that instruction, ASD had incurred costs of $5,098,290 by 31 October 2000 and had paid JJ McDonald $426,000; that the total amount expended exceeded the Expenditure Limit by $824,890; and that the expenditure in excess of the limit 'was incurred on the instructions of Marriner without the knowledge, consent or authority of the board of directors of ASD'. Thus, while ASD's case as pleaded was concerned with Marriner's conduct causing the expenditure limit to be exceeded, it assumed, as did the trial judge, that there was a complete correspondence between the amount of the expenditure and the liability of ASD for that expenditure.

217 Consequently, any distinction between the works that Marriner might have been authorised to undertake under the 30 June 2000 Heads of Agreement and the liability of ASD for those works became blurred. The unsatisfactory slide in the statement of claim was, of course, compounded by the defence.

218 While Marriner contended on appeal for a construction of cl 9 that drew a distinction between expenditure and the liability of ASD for the expenditure, the focus of its attention at trial was quite plainly on the effect of the 19 October 2001 agreement and the amount and nature of the expenditure authorised by Marriner. In such circumstances, the trial judge can hardly be criticised for having overlooked the distinction which only became important on the appeal.

Can this Court re-consider the effect of clause 9?

219 On appeal, ASD argued that cl 9 meant that Marriner was required to stop the expenditure on Annexure 4 works immediately the accrued costs reached $4.7 million. Marriner submitted that cl 9 limited the amount for which ASD would be liable, but did not impose any corresponding limit on the authority on Marriner to incur project costs beyond $4.7 million.

220 While an appellate court is generally reluctant to entertain an argument not advanced at trial, the construction argument arose in unusual circumstances. Clause 9 attracted attention, perhaps for the first time, as a by-product of the grounds of appeal and crossappeal which invited, again for the first time, an analysis of the different roles of the various corporate entities in the project works. ASD did not contend that it suffered material prejudice by reason that the construction point was first advanced on appeal.

221 If the construction issue had been raised at trial, ASD would presumably have argued, as they did on appeal, for a construction consistent with its pleaded case. ASD could not have adduced additional evidence on the construction issue if Marriner had raised his new arguments at trial. As we have already observed, it was the inadequate definition of issues at trial that ultimately led to error.

222 There was another and related failure to identify the issues properly, which resulted in the trial judge overlooking an important distinction. That distinction concerned the role of the various corporate entities and Marriner's role in their administration. The entities are ASD, Laguna Investments and Laguna Management. Having regard to the fact that it was alleged that Marriner had breached a duty owed to a corporate entity, it is surprising that the parties were not astute to important differences between those entities. The imprecision had its origin in ASD's pleadings.

223 This imprecision was curious in circumstances where the distinction between roles was crucial to the resolution of the bond money claim. Ground of appeal 11(e) relied explicitly on the trial judge's finding that the bond money belonged to Laguna Investments, not ASD. Thus, Marriner contended, there was no basis on which the trial judge could properly conclude that the application of the second tranche, in payment of amounts owing to JJ McDonald, involved expenditure by ASD, procured by Marriner in breach of the duty he owed it, rather than by Laguna Investment or by Laguna Management as its agent. That ground will be discussed in more detail below.

224 The function of each entity in the ASD group, in relation to the works undertaken at the Resort, was quite different. ASD made advances to Laguna Investments, which in turn made funds available to its agent, Laguna Management, to meet project costs. Laguna Management was the party that contracted with JJ McDonald for the most significant construction works at the Resort. But the alleged duty was said to be owed to ASD, not Laguna Management.

225 The trial judge understood ASD's case to be that 'Marriner caused to be paid by ASD between December 1999 and 31 October 2000 sums totalling $5,524,890 in the on - going works so that the limit of $4.7m was exceeded by $824,890'. That contention, reflected in the statement of claim, ignored the important distinction between the role of ASD and Laguna Management. There are, of course, circumstances in which to consider the actions of a group is a triumph of substance over form. But when the allegation is that a director breached a statutory duty that he or she owed to a corporation, great care must be taken to define the duty precisely, identify its beneficiary, and define and particularise the conduct alleged to constitute the breach.

226 Marriner did not seem to advance a case at trial which specifically challenged ASD's characterisation of the duty as one owed to ASD, or so as to rely on the separation of functions. Thus, a question arises as to whether Marriner ought to be permitted to advance his argument that the judge's rejection of the second tranche Quistclose trust was inconsistent with his finding that Marriner caused ASD to expend these moneys in breach of his director's duty. As with the new construction argument,[116] ASD did not submit that it suffered any material prejudice by reason of Marriner's reliance on the distinction between corporate roles in relation to the over-expenditure claim.

227 Had Marriner squarely raised the separate roles of the group entities in relation to the over-expenditure claim at trial, ASD may well have reformulated their case to allege a breach by Marriner of the duty he owed to Laguna Management. But that would only have highlighted the more fundamental problem for ASD, which was the distinction between the role of Laguna Management incurring costs as the contracting entity, and the role of ASD as group banker, making advances. As we explain below, ASD's failure to focus attention on the various corporate roles was also reflected the way in which they calculated their claim.

228 We now turn to consider the effect of cl 9 of the 30 June 2000 Heads of Agreement, which is set out above. The clause is open to more than one interpretation, and may be construed against the background of facts of which the parties were aware when they made the agreement.[117]

229 Having regard to what a reasonable person would understand by the language of the parties in cl 9, in the context of the surrounding circumstances, and the purpose and object of the transaction,[118] we are of the opinion that cl 9 does not impose a limit on the work that Marriner could undertake at the Resort. Instead it imposed a limit on the extent to which ASD could be made liable for those works.

230 Contrary to ASD's submission that the business plan approved by the Board on 7 December 1999 created an expenditure limit of $4.7 million, the business plan referred only to 'estimated costs' of the works. The commonly understood facts also included the scope of works proposed to be undertaken by Marriner at the Resort. Those works extended well beyond the works described in the business plan and Annexure 4 to the 30 June 2000 Heads of Agreement. The most contentious item was the airstrip. The decision to build, and then to extend, a new airstrip, lay at the heart of the dispute over which entity was responsible for particular expenditure.

231 ASD's pleading and written submissions did not appear to rely upon Marriner's attempts to build or extend a new airstrip as an unauthorised enlargement of the scope of works, although it was alleged to constitute works which exceeded the Expenditure Limit. In oral submissions, ASD argued that Marriner had continued with the airstrip works in the first half of 2000, despite the Board's rejection of these works.

232 There were different facets to the airstrip issue, and perhaps some confusion. At the trial Wason said that there was an existing airstrip at the Resort which accommodated light aircraft but, as the planes flew low over residences, it was decided to relocate the airstrip at the western end of the Resort. He said that it was never contemplated that the new airstrip, mentioned in the business plan, would be other than an unsealed airstrip for light planes. The JJ McDonald contract made provision for a sealed airstrip. The business plan did not specify whether the airstrip was sealed or unsealed.

233 Wason said that although the Board approved the business plan which referred to an airstrip, it had not approved the capital expenditure on the airstrip - presumably any airstrip. Board minutes of 29 February 2000 supported his view, although the accuracy of the minute was challenged by Marriner.

234 At a Board meeting on 21 March 2000, it was resolved that 'work on the airstrip be suspended pending further consideration by the Board based on more substantial evidence supporting the feasibility of the proposed investment'. But in the 30 June 2000 Heads of Agreement, airstrip works were expressly authorised. A 'new airstrip' was part of the works described in Annexure 4.

235 The minutes of the Board meeting held on 16 May 2000, in which the Board effectively authorised Marriner to negotiate with himself on the terms and documentation of the proposed sale, recognised that the sum of $4.7 million was a budgeted cost, and that it included the 'sealed airstrip to the west of the resort'. The Board was aware of Marriner's desire to build an extended sealed airstrip and sought to place a limit on the liability of ASD.

236 Although the wording of Annexure 4 replicated the works set out in the 1999 business plan, the parties would have understood by June 2000 that the proposed works in relation to the airstrip were expanding. Whatever may have been the state of knowledge of the Board about the type of airstrip to be constructed at the time it adopted the business plan, or the fact that work was suspended, or Marriner's proposal to build a larger airstrip, the 30 June 2000 Heads of Agreement endorsed works to 'develop new airstrip on adjoining site' within the 'total estimated cost' of $4.7 million. It is not surprising that the Minutes of the Meeting of the Board held on 16 May 2000 made reference to a 'sealed airstrip', when approving the terms of sale to Marriner. There was also an obligation on Marriner's company to spend $3 million on capital works within a prescribed time. If those works related to the airstrip, they would directly overlap with the Annexure 4 works.

237 Clause 8 of the 30 June 2000 Heads of Agreement made provision for security for payment of the purchase price. The airstrip 'as described in an approved plan of subdivision' was included among the assets required to secure repayment. We were not told what kind of airstrip had been approved, but presumably it was the one under construction by JJ McDonald.

238 In construing cl 9, it was also relevant that the parties anticipated that Marriner was to be left in charge of the day to day operations of ASD as its CEO, following the execution of the sale agreement on 30 June 2000. He did not resign his position as an officer of ASD until 3 November 2000.

239 ASD also understood that work was being carried out at the Resort by contractors other than JJ McDonald, although that particular contractor was to carry out a substantial part of the road and other earthworks, including the airstrip. To support their construction of cl 9, ASD argued that it was Marriner's duty to manage the works so as to ensure that the 'costs incurred' for the Annexure 4 works did not exceed $4.7 million. In the context of this case, such a task would, in our view, have presented significant practical challenges to even the most sophisticated management structure. The contract with JJ McDonald was not a fixed price contract.

240 There was an added difficulty; at least some part of the airstrip work that had been or was being undertaken by JJ McDonald was to be paid for by ASD out of the $4.7 million limit for Annexure 4 works. The task of managing costs would have been further complicated because JJ McDonald and other contractors carried out general maintenance repairs that might not have been characterised as 'repairs and maintenance' in Annexure 4 works. These practical difficulties make it more probable that the parties did not intend cl 9 to operate so as to require Marriner to micro-manage the works in a way which would contain the Annexure 4 works within a $4.7 million cap. They support the construction contended for by Marriner, that cl 9 was intended to impose a limit on the liability of ASD, rather than on the scope of the work that could be carried out.

241 In our opinion, ASD's construction of cl 9 and their formulation of the limitation upon Marriner's authority, misunderstood the proper construction of the 30 June 2000 Heads of Agreement as a whole. That did not impose on Marriner a requirement to micromanage the work of JJ McDonald and other contractors so as to differentiate between Annexure 4 and other works, and bring Annexure 4 works to a halt when the potential exposure of ASD for the Annexure 4 works reached $4.7 million.

242 The trial judge pointed out that from June 2000, presumably as a consequence of the 30 June 2000 Heads of Agreement, progress claims made by JJ McDonald were divided between airstrip and associated works and other works. The airstrip and associated works were apparently billed to Laguna Management while the other works were billed to ASD. The trial judge seemed to proceed on the basis that the 30 June 2000 Heads of Agreement would, if completed, result in ownership of Laguna Investments and Laguna Management passing to Marriner.

243 While such an outcome may have been the expectation of the parties, the 30 June 2000 Heads of Agreement did not in terms express that intention. But no challenge was made to the correctness of that finding, and it would seem that the case proceeded on that basis. The splitting of invoices between Laguna Management and ASD was entirely consistent with Marriner performing the obligation to undertake capital expenditure following the 30 June 2000 Heads of Agreement, distinguishing between the expenditure for which ASD would be liable and that for which Marriner's companies would be liable. The trial judge found that such an arrangement was broadly consistent with Marriner's explanation as to why he had continued with the airstrip work, which was that it was to be at his own expense.

244 It seemed common ground that the works to be undertaken by Laguna Australia, as part of its obligation to spend not less than $3 million on capital works, related to the airstrip. Such works fell generally within the scope of Annexure 4 works. Thus, the additional expenditure required under the 30 June 2000 Heads of Agreement could not, if authorised by Marriner, amount to a breach of any constraint imposed upon him unless Marriner procured ASD to make advances for Annexure 4 works beyond the agreed limit of $4.7 million. But that was not ASD's case.

245 The breach alleged against Marriner was that he procured JJ McDonald to carry out works in excess of $4.7 million, when some of those works were to be paid for by him. If cl 9 is to be given its ordinary and natural meaning, having regard to the commonly understood facts, Marriner had every right to instruct JJ McDonald, or any other contractor for that matter, to build an airstrip of international standards, so long as ASD did not have to spend a cent more than $4.7 million on the works by way of advances made to Laguna Investments. It would be inconsistent with the 30 June 2000 Heads of Agreement to construe cl 9 as meaning that the works, undertaken by Laguna Management through its various contractors, including JJ McDonald, should be interrupted merely because someone decided that the potential cost of the Annexure 4 works, whatever their scope was by 30 June 2000, had reached $4.7 million.

246 For these reasons, we consider that the trial judge wrongly assumed that cl 9 imposed an expenditure limit (as opposed to a limit on liability) which was breached when Marriner authorised ongoing work on the Resort, including work on the airstrip.

Did Marriner breach his director's duty by making ASD liable to JJ McDonald?

247 ASD also claimed that Marriner had breached his director's duty by signing the 16 October 2000 Agreement purporting to sign on behalf of both Laguna Management and ASD. It will be recalled that prior to the signing of this agreement, it was Laguna Management which was liable under the contract of works entered into with JJ McDonald.

248 The 16 October 2000 Agreement made ASD directly liable for debts incurred by Laguna Management for development works at the Resort. It said the following:

As you know, we have performed significant works under the Contract and currently have progress claims outstanding in the sum of $4,352,046.30 in respect to those works. Of that sum, $833,775.42 was due for payment on 13 September 2000 and $2,271,550.96 was due for payment on 9 October 2000. The balance sum of $1,246,719.92 will be due for payment on 6 November 2000.

JJ McDonald & Sons Engineering Pty Ltd is extremely concerned by the nonpayment of the first two amounts referred to above. Obviously therefore, we also have grave concerns in respect to payment of our claim due on 6 November 2000.

Consequently, we request that both LQ Management Pty Ltd ACN 074 733 976 ('LQ Management') and Staged Developments Australia Pty Ltd ACN 058 626 761 ('SDA') [now ASD] execute this letter to provide us with some comfort in respect to performing further works under the said Contract.

LQ Management and [ASD] acknowledge that:

1. We entered into the Contract at the request of[ASD]. [ASD] and LQ Management are jointly and severally liable for and obligated to pay the Debt to us.
2. We are currently owed the sum of $4,352,046.30 in respect to works carried out by us pursuant to the Contract ('the Debt') which is further detailed under item 4.
3. As at the date hereof there is no default by JJ McDonald & Sons Engineering Pty Ltd in respect to the Contract and no dispute in relation to our performance under the Contract.
4. [ASD] and LQ Management agree to the following arrangements for the payment of the Debt and for further payments to cover works yet to be invoiced.
   • For works undertaken on and after 17 October 2000:

LQ management shall pay the sum of $90,000 per week in advance to cover direct costs incurred, as a prepayment for contract works undertaken after 16 October 2000 for a maximum period of 8 weeks. The first advance payment will be made by EFT to JJ McDonald and Sons Engineering Pty Ltd on 17 October 2000. The differential between the contract price schedule and the prepayment of direct costs shall be settled by 31 January 2001.

• For works completed up to and including 16 October 2000, LQ Management and [ASD] agree to the following payment schedule:

Estimate $150,000

To Be Invoiced at End October 2000

Estimate $1,200,000 To Be Invoiced at End October 2000

Estimate $100,000

To Be Invoiced at End November 2000

Estimate $250,000

To Be Invoiced at End November 2000

Estimate $50,000

To Be Invoiced at End December 2000

Estimate $100,000

To Be Invoiced at End December 2000

249 On appeal, ASD relied on the 16 October 2000 Agreement for two different purposes. The first purpose was to support the trial judge's decision that Marriner was liable to ASD in the sum of $412,113. As we have explained, ASD contended that the amount of the judgment representing the over-expenditure claim ought to have been $824,390.

250 Secondly, ASD argued that the decision of the trial judge, in awarding it $412,113, should be upheld despite his Honour's finding that the second tranche bond moneys, paid directly and indirectly to JJ McDonald, belonged to Laguna Investments and was not held on behalf of ASD under a Quistclose trust. They contended that the 16 October 2000 Agreement was signed by Marriner without authority.

Did ASD sufficiently plead the breach of duty arising out of entry into the letter agreement?

251 ASD argued that the breach by Marriner of his director's duty in committing ASD to liability under the 16 October 2000 Agreement had been sufficiently pleaded in paragraph 83 of the Further Amended Statement of Claim to support this aspect of their case.

252 Marriner argued that his conduct in signing the 16 October 2000 Agreement and binding ASD was not part of ASD's pleaded case. That submission is supported by a finding of the trial judge, who concluded that while Marriner ought not to have entered into that agreement, his conduct was not pleaded as a breach of duty. We agree. A breach by a director of his or her duty to a corporation is a very serious allegation. If such an allegation is to be made, the pleading must clearly identify the breach of duty and identify the body to which it was owed. No such case was pleaded in relation to the 16 October 2000 Agreement.

253 In paragraphs 83 to 85 of the Further Amended Statement of Claim, ASD alleged:

1. Between 3 December 1999 and 31 October 2000 without the knowledge, approval or authority of the Board of ASD, Marriner instructed McDonald to carry out construction works, the cost of which exceeded the Expenditure Limit.

PARTICULARS

(i) In May 2000 Marriner instructed McDonald to extend the airstrip so that it could accommodate Boeing 767 aircraft;

(ii) In mid July 2000 Marriner instructed McDonald to extend the airstrip so that it could accommodate Boeing 747 aircraft;

(iii) On or about 16 October 2000, Marriner on behalf of ASD entered into an agreement with McDonald whereby ASD would pay $90,000 per week to McDonald as an advance payment in consideration of McDonald agreeing not to suspend construction works for the airstrip at Laguna Quays. The advance payments were made to McDonald by Cumberland, a wholly owned subsidiary of ASD as follows:

1. 17 October 2000 - $90,000
2. 24 October 2000 - $90,000

(iv) Marriner authorised additional construction work including maintenance and repair work which exceeded the Expenditure Limit;

(v) On or about 30 November 2000, the Bank of Queensland, pursuant to the requests made by Jephson as alleged in paragraph 25 above, paid, inter alia, the sum of $156,600 to McDonald;

(vi) ASD will provide further particulars after discovery and inspection has been completed.

1. By 31 October 2000 as a result of the conduct of and instructions of Marriner:

(a) ASD had incurred costs of $5,098,290 in relation to the works described in Annexure 4 of the 30 June Heads of Agreement;

(b) ASD had made Advance Payments to McDonald in the sum of $270,000; and

(c) ASD had made the payment to McDonald in the sum of $156,600,

Which resulted in the Expenditure Limit being exceeded by $824,890.

PARTICULARS

(i) ASD refers to a letter from John Whalley, secretary of ASD dated 2 November 2000 to [CBUS] which enclosed the schedule of costs incurred by ASD up to 31 October 2000 in the sum of $5,098,290. A copy of the letter may be inspected at the offices of ASD's solicitors by appointment.

(ii) The Advance Payments were made to McDonald by Cumberland, a wholly owned subsidiary of ASD as follows:

1. 17 October 2000 - $90,000
2. 24 October 2000 - $90,000

(iii) On 30 November 2000, the payment by the Bank of Queensland of $156,600 to McDonald.

1. The expenditure of $824,890 in excess of the Expenditure Limit was incurred on the instructions of Marriner without the knowledge, consent or authority of the Board of Directors of ASD.

PARTICULARS

The Board of ASD had resolved at its meeting on 6 May 2000 that ASD would not expend more than $4.7 million on construction works at Laguna Quays. A copy of the said resolutions are referred to in the Minutes of the Board meeting dated 16 May 2000. A copy of the Minutes may be inspected at the offices of ASD's solicitors by appointment.

254 The particular conduct alleged against Marriner in paragraph 83 was not that, by entering into the 16 October 2000 Agreement with JJ McDonald, he imposed an obligation upon ASD which would not otherwise have existed. Instead, the complaint was confined to the instructions given to JJ McDonald to carry out construction works, the cost of which exceeded $4.7 million. That is the conduct alleged to be a breach of the duty owed to ASD. Reference to the 16 October 2000 Agreement explains the circumstances in which the three payments of $90,000 were made to JJ McDonald by Cumberland. In paragraph 84 of the Further Amended Statement of Claim, the quantum of the overpayment claim was calculated by reference to the second tranche amount and Whalley's assessment of 'costs incurred'.

255 In paragraph 87, ASD alleged breaches of director's duties by reason of the matters previously alleged, relying on duties under ss 180, 181 and 182 of the Corporations Act 2001 (Cth), followed by a raft of particulars which do not differentiate in their application. Notwithstanding the generality of the allegation, there is no reference to the execution of the 16 October 2000 Agreement as constituting conduct in breach of any duty.

Was the judge's finding inconsistent with his rejection of the second tranche Quistclose trust?

256 ASD's submissions on the status and significance of the 16 October 2000 Agreement were developed in response to Marriner's challenge to the trial judge's finding that he was liable for part of the allegedly unauthorised capital expenditure. Marriner argued, correctly in our view, that the judgment was inconsistent with the trial judge's rejection of the argument that the second tranche of the bond moneys was held on a Quistclose trust.

257 In response to Marriner's 'inconsistent findings' ground, ASD contended that, even if the bond moneys belonged to Laguna Management, ASD could still recover its loss of the amounts paid to JJ McDonald and Cumberland. The argument was put in a number of ways. ASD contended that payment of the second tranche of bond moneys to JJ McDonald had the effect of reducing the wrongfully imposed liability of ASD under the 16 October 2000 Agreement. They argued that if the 16 October 2000 Agreement had not been executed, the money would have been paid to ASD in reduction of the loan to Laguna Investments. Thus, ASD lost the use of that amount, receiving only the benefit of a debt owed to it by Laguna Investments instead.

258 ASD also argued that it was entitled to compensation, in the amount of the second tranche, as loss suffered by it by reason of Marriner's breach of duty, as a director of ASD, when executing a 16 October 2000 Agreement without its authority.

259 The trial judge noted in his reasons that when dealing with the application of the second tranche of the bond moneys, the moneys had been applied to reduce the debt to JJ McDonald. However, his Honour found that ASD had failed to plead a case against Marriner for breach of duty owed to ASD by executing the 16 October 2000 Agreement. His Honour said:[119]

The question here is whether the payments were not for the benefit of ASD. In the course of final address counsel for [CBUS] said that Mr Marriner ought not to have entered into the agreement with JJ McDonald by signing the letter of 16 October 2000 for payment of the outstanding and future debts. I am inclined to agree but this is not pleaded as a breach of duty. Once this agreement was signed, ASD was liable to pay JJ McDonald a substantial sum. The payments made by Cumberland Management and the payment from the second tranche funds had the effect of satisfying or reducing this liability. And so, it was said, it could not be said to have been a payment adverse to the interests of ASD. There is therefore no breach of the statutory or fiduciary duties of Mr Marriner by making these payments. It may be more correct to say that ASD, for this reason, suffered no loss. Either way, this, it was said, provides an answer to claims (i), (ii) and (iii).

260 We reject ASD's contention that it ought to be entitled to rely on Marriner's execution of the 16 October 2000 Agreement as conduct in breach of his duty owed to ASD. That agreement was no more than background to ASD's claim, which explained the circumstances in which the three payments of $90,000 were made to JJ McDonald in October 2000. As we have held, ASD did not plead that Marriner was not authorised to execute the 16 October 2000 Agreement on behalf of ASD, or claim consequential relief. ASD sought to support the judgment at trial by contending that it suffered its own separate and distinct loss caused by a separate breach of duty to it. It relied upon Johnson v Gore Wood & Co,[120] a case concerning the right of a shareholder to sue for the loss suffered by a subsidiary. Quite frankly, we do not understand this submission, unless predicated on the unpleaded breach of duty owed by Marriner to ASD.

261 ASD's case at trial proceeded on the basis that the bond moneys belonged to it. Thus, they were added to the calculation of the amount by which payments for the Annexure 4 works exceeded $4.7 million. ASD did not rely upon a claim for compensation made against Marriner for loss suffered by it as a consequence of a breach by Marriner of his duty by executing the 16 October 2000 letter agreement.

262 Had ASD pleaded such a case, the inquiry at trial would have been quite different to the one undertaken in relation to the capital expenditure claim. The inquiry would have involved an investigation of the extent to which ASD suffered any loss at all, and if so the nature of the loss consequent upon it having become obliged to JJ McDonald.

263 That investigation would have required a differentiation between the limits of ASD's liability under the 30 June 2000 Heads of Agreement for the Annexure 4 works, and its obligation to JJ McDonald, as well as the extent of any overlap between the Annexure 4 works and those for which Laguna Australia was responsible. As far as we can tell, little attention was directed to a detailed analysis or breakdown of the work so as to enable that kind of inquiry to be undertaken.

264 As pleaded, the breach by Marriner was that he had procured ASD to make payments to JJ McDonald in excess of an authorised limit. Had ASD pleaded a breach of duty by Marriner by his signing the 16 October 2000 Agreement, the resulting claim might have had little relationship to the loss claimed under the excess expenditure claim.

265 By the first ground of its cross-appeal, ASD contended that but for the breach by Marriner of his duties when signing the 16 October 2000 Agreement, the second tranche bond moneys totalling $426,000 would have been transferred to ASD in accordance with Jephson's initial instructions to the Bank. ASD argued that there would have been no reason for Jephson to vary his initial instruction that the funds be directed to ASD because ASD would not have been liable to JJ McDonald. ASD argued that because the payments to JJ McDonald, directly and through Cumberland Management, would not have been made but for the 16 October 2000 Agreement, Marriner ought to be found liable to ASD in the sum of $426,000.

266 This part of the crossappeal mirrors ASD's submissions in support of the trial judge's decision, although it is somewhat less elaborate. In order to succeed on ground 1 of the cross-appeal, ASD must establish that the payments were made as a consequence of the misconduct by Marriner, in breach of his duty owed to ASD, by executing the 16 October 2000 Agreement. We have concluded that such a case was not pleaded or advanced at trial. A case for a new, unpleaded liability cannot now be advanced on appeal. For that reason, the crossappeal relating to Marriner's alleged breach of duty must fail.

267 By their notice of contention, ASD contended that the judgment against Marriner should be affirmed on the basis that Marriner was liable to compensate ASD for the amount of $410,777, which the trial judge deducted from the amount calculated by Whalley for the capital works referred to in Annexure 4 on the basis that they were referrable to repairs and maintenance costs. The notice of contention is in reality a cross-appeal by which ASD contends for an order against Marriner in respect of the capital expenditure claim of $824,890.

268 Our conclusion that cl 9 did not impose an expenditure limit disposes of that argument. However, for the sake of completeness, we explain why we would have rejected the notice of contention, even if we had accepted that cl 9 imposed an expenditure limit.

269 ASD's argument that Whalley's calculation of repairs and maintenance should have been included within the total amount alleged to have been overspent is relatively straightforward. It argued that the approved expenditure limit of $4.7 million in cl 9 was not confined to capital works, but included elements of maintenance and repairs. It relied on the references within Annexure 4 to repairs and to the preface in the 1999 Business Plan to the approved works. They were described as 'first stage rectification and development works including the following...'.

270 Whalley's listed expenditure was prepared in response to a request from Mr Hewitt at CBUS. In his witness statement, Whalley said,

I informed [CBUS] that the Cap Ex had been expended to the sum of $4.68 million. I attach the spreadsheet which I had prepared with reference to the documents that Weiser had given me on 20 October 2000 and further information that Weiser had provided to me upon my request. This additional information related to the incurring of expenses between 1 July 2000 and 31 October 2000. The total expenditure by ASD for works done at Laguna Quays Resort from the acquisition VRL's interest to 31 October 2001 was $5,098,290 which included repairs and maintenance of $410,000.

271 The basis for the deduction of the amount calculated by Whalley for repairs and maintenance from the expenditure amount is not clear. As ASD contends, the authorised works included repairs and maintenance. However, we are of the opinion that the trial judge erred in deducting the sum of $410,777 from Whalley's overall calculation on the basis that any limitation imposed upon expenditure for Annexure 4 works was confined to capital works, as distinct from repairs and maintenance.

272 Marriner took the distinction made by the trial judge one step further. He argued that it was not only appropriate to deduct the repairs and maintenance identified by Whalley, but also that there was no basis for the trial judge's conclusion that the second tranche payments were for capital works, possibly works on the airstrip and roads. Marriner submitted that the conclusion was mere speculation, because the evidence did not analyse where these payments were applied.

273 There is no doubt that the payments found their way to JJ McDonald but, Marriner contended, JJ McDonald was involved in activity other than that described in Annexure 4. Marriner submitted that ASD had adduced no evidence to support the allocation of these funds to the Annexure 4 works and that they might well have been applied to other works carried out by JJ McDonald. A report prepared by Graham Spence, senior project manager for ASD dated 1 February 2001, providing a break down of works, identified numerous other contractors undertaking works for the project in addition to JJ McDonald, as well as works which may not have been included within the Annexure 4 works. The point of this contention by Marriner was to highlight the absence of evidence that might differentiate between works done by JJ McDonald and other contractors. On appeal, the distinction between work done by JJ McDonald and other contractors, and the distinction between work that fell within Annexure 4 and that which did not, assumed a prominence it did not have at trial. It was not part of ASD's case to draw any such distinction. On the contrary, it was antithetical to their case. But once it is accepted, as we do, that the distinctions are relevant, the absence of evidence in that regard becomes more potent.

274 Thus even if cl 9 were interpreted as an expenditure limit, the lack of evidence would have been fatal to ASD's contention.

275 For the reasons set out above, we have reached the following conclusions:

(1) Clause 9 of the 30 June 2000 Heads of Agreement did no more than impose a limit on the extent to which ASD was liable to contribute, by way of advances made to Laguna Investments, for the works described in Annexure 4 to that agreement. The 30 June 2000 Heads of Agreement was not intended to, and did not, limit the works that Marriner was authorised to undertake at the Resort.

(2) Insofar as it is relevant, we are satisfied that the evidence established that Marriner caused or procured the expenditure by Laguna Management on capital works, and the payments made to Cumberland Management and JJ McDonald from the second tranche bond moneys. But ASD's case was that he had 'caused to be paid by ASD... sums totalling $5,524,890 in the on-going works'. In truth, ASD only made advances to Laguna Investments. Marriner may well have authorised the drawdown or advance to Laguna Investments. But that was not the way in which ASD put its case for breach of director's duty against Marriner. The costs were incurred by Laguna Management, as agent for Laguna Investments.

(3) When paid to Cumberland Management and JJ McDonald, the second tranche bond moneys belonged to Laguna Investments, not ASD. That being so, there was no occasion to treat those amounts as ASD's money and include them in any calculation of the amount, if any, spent by Marriner in breach of his duty owed to ASD.

(4) His Honour's finding that payments made out of the second tranche bond moneys were made on behalf of ASD was inconsistent with his finding that the second tranche was not held by Laguna Management on trust for ASD. Accordingly, the judge erred when finding that Marriner breached his statutory duty to ASD by causing it to exceed a $4.7 million spending limit imposed under cl 9 of the 30 June 2000 Heads of Agreement by $412,113. Marriner has generally succeeded on grounds 2-5, 11 and 12 to 16.

(5) The trial judge found that ASD did not make a claim against Marriner for compensation for loss occasioned by ASD becoming liable to JJ McDonald as a consequence of him signing the 16 October 2000 Agreement. We agree. While that agreement had the effect of making ASD liable to JJ McDonald for work carried out by it at the Resort, ASD should not now be permitted to advance a claim against Marriner for breach of his duty owed to ASD, by reason of his conduct in signing the 16 October 2000 Agreement. Such a claim, if made, would have involved an analysis of the loss suffered by ASD which was not undertaken in the trial. The analysis would have been complex and the loss, if any, would not necessarily correspond with ASD's claims made against Marriner in the proceeding. Accordingly, ground 1 of the crossappeal fails.

(6) Contrary to the findings of the trial judge, the evidence did not support a conclusion that the second tranche bond moneys had been applied exclusively to Annexure 4 works. The work described in the 16 October 2000 Agreement did not correspond precisely with the scope of works in Annexure 4. The work undertaken by JJ McDonald probably extended beyond the Annexure 4 works. The airstrip work is one example. Further, the Annexure 4 works probably included works to be carried out by contractors other than JJ McDonald. The evidence did not address the extent of any overlap. Accordingly, Marriner has generally succeeded on grounds 5-10.

(7) Insofar as it is relevant, the Annexure 4 works included items of repair and maintenance. There was no basis for the trial judge to deduct from the total cost of the Annexure 4 works an amount of $410,777 for repairs and maintenance in the absence of evidence establishing that such works fell outside the Annexure 4 works.

(8) Finally, we are inclined to the view that if an analysis of the expenditure had been undertaken, ASD would not succeed in a claim for consequential loss arising out of it becoming liable under the 16 October 2000 Agreement because:

(a) It was not demonstrated by ASD that any amount for which ASD became liable to pay exceeded the limit of its liability under the 30 June 2000 Heads of Agreement.

(b) If ASD in fact made advances to Laguna Investments for work undertaken and paid for beyond the agreed limit, any such amount would have constituted an asset in the nature of a debt recoverable from Laguna Investments. The debt due to ASD from Laguna Investments was assigned to Fulham Holdings for consideration.

(c) Further, one might expect that such advances were applied to improve the land and facilities that were subsequently sold by ASD to companies associated with Marriner. The value of such improvements would surely have been reflected in the negotiated price but the parties did not direct any evidence to that issue.

276 We turn to the appeal grounds argued by Marriner in relation to some of the defences relied upon by him at trial that were rejected by the judge. The judge said[121] that, having reached certain conclusions, it was not necessary that he consider the further numerous defences offered on behalf of Marriner, but, in case the matter went further and in deference to the submissions of counsel, he would briefly venture his views upon them.

277 We will deal with these defences in the order that they are dealt with in Marriner's written outline of submissions.

Release of the [excess capital expenditure] claim under the 19 October 2001 agreement

278 Marriner said that he had contended at trial that:

(a) By the 19 October 2001 agreement, all claims between ASD and the Marriner parties were settled;

(b) The release arose from the terms of the 19 October 2001 agreement, and it was to be implied;

(c) This settlement included any liability of the Marriner parties to ASD in respect of the electricity bond moneys (including the [excess capital expenditure] claim);

(d) As a result of this settlement, ASD could not prosecute the pleaded claims against the Marriner parties.

279 In relation to these contentions, the trial judge said:

1. By the end of 2001 ASD was chafing at the continuing failure of Laguna Australia to perform its obligations for the purchase of the Laguna Quays project. Eventually in a letter dated 19 October 2001, by way of ultimatum, it made a final and non-negotiable offer to conclude the transaction on certain terms. Laguna Australia accepted this offer. By its acceptance, Laguna Australia agreed by cl 11 that the 19 October 2001 agreement was binding and that the June 2000 heads of agreement were cancelled.
2. Defence (xii) relies upon this agreement as amounting to mutual releases by the parties to the agreement. The agreement contains no such term. As pleaded, the release upon which Mr Marriner would rely is said to arise from the provisions of cll 3, 5, 6 and 11 of the 19 October 2001 agreement and to be implied. In fairness to counsel for the Marriner parties, little was said in support of this defence. I am not surprised. I will content myself with stating only that the 19 October 2001 agreement contains no such release.

280 However, the letter agreement of 19 October 2001 contained the following provision:

1. If this proposal is unconditionally accepted by LA and approved by [CBUS], it will

(a) constitute a binding agreement between ASD and LA until the contract for the sale of the Resort is signed by both ASD and LA; and

(b) supersede and be effective to cancel the Heads of Agreement and to release all parties from any obligations and liabilities under the Heads of Agreement

on and from the date on which ASD advises LA in writing that [CBUS] has approved this proposal.

281 It was common ground that Laguna Australia had unconditionally accepted the proposal contained in the letter of 19 October 2001 and that the proposal had been approved by CBUS. As cl 11(b) expressly refers to a release of all parties, it is difficult to understand the cryptic statements by the judge that the agreement contained no such term and no such release. In our view, prima facie, cl 11(b) contains a release and it is a matter of construction to determine the liabilities in respect of which the release operated (putting aside the separate question whether the release was superseded by subsequent agreements).

282 As can be seen from the above summary of Marriner's contentions and what was said by the trial judge, Marriner was contending that the release not only arose from the words of cl 11(b), but from other provisions of the agreement and was also to be implied. Marriner advanced, both in his written outline and in oral submissions, what can only be described as a tortuous and convoluted argument in support of a contention that the release was a settlement of all claims between ASD and the Marriner parties. Marriner contended that there was ambiguity in the agreement and in cl 11(b) and that he was therefore entitled to refer to prior communications and negotiations in support of his argument. However, Marriner did not ever explain why cl 11(b) or the agreement itself was relevantly ambiguous. We do not find it to be ambiguous.

283 In cl 11(b), there is an express and unambiguous cancellation of the Heads of Agreement and a release of all parties from any obligations and liabilities thereunder. In our view, this constituted, among other things, a release as between the parties to the agreement of any claim in relation to excess capital expenditure. However, there appears to us to be no justification for the contention that the release extends to claims relating to the electricity bond moneys or constitutes a release of Marriner or other non-parties to the agreement. It is perhaps for these reasons that Marriner sought to argue that there was an implied release of 'all claims' between ASD and the Marriner parties. We will not summarise here the extensive written material and oral submissions relied upon by Marriner to support the construction or the implication, but we do set out the relevant portion of the grounds of appeal on this aspect:[122]

1. The learned trial judge erred in finding that the 19 October 2001 Agreement did not contain the release term for which the Defendants contended at trial (and which term, according to the Defendants, applied to the matters the subject of the Capex claim) (Release Term).
2. In making that finding, the learned trial judge failed to take into account clause 11(b) and of ASD's letter to Laguna Australia dated 19 October 2001 (as signed by Marriner on behalf of Laguna Australia) as well as all of the matters and circumstances from which the Release Term was to be implied. In particular, the learned trial judge failed to take into account the following matters and circumstances (as identified in Section G of the Defendant's closing submissions dated 15 September 2009) -

(a) the letter from Laguna Australia to ASD dated 6 September 2001, following the meeting on 6 September 2001 at which Marriner, Whalley, Wason, Willis, Frost and Patience were present;

(b) the evidence that, during the course of this meeting, ASD's representatives did not raise the possibility of a claim against Marriner in respect of the application of the electricity bond moneys (including the 2nd Tranche Sum);

(c) the facsimile transmission from Laguna Australia to ASD dated 18 October 2001 (18 October letter);

(d) the fact that Patience did not recall the conversation to which the 18 October letter refers;

(e) the uncontradicted evidence of Marriner that, in a conversation at that time, Patience assured him that 'there would be no liabilities going forward whatsoever'; and

(f) the evidence of Patience that ASD did not respond to the 18 October letter.

1. In light of these matters and circumstances, and the principles identified in paragraphs 171 and 172 of the Defendants closing submissions dated 15 September 2009, the learned trial judge should have found that -

(a) the 19 October Agreement contained the Release Term; and

(b) that term released Marriner in respect of the matters the subject of the Capex claim.

1. Further the learned trial judge failed to provide any or adequate reasons for the finding regarding the Release Term.

284 It is sufficient to say that the material relied on does not on its face and in accordance with accepted contractual principles provide any basis for the construction of the agreement or the implication advanced by Marriner.

285 ASD appeared to accept that the release in cl 11(b) would have operated according to its terms but that for other reasons, it could not be relied upon. ASD's first argument was that Marriner was not a party to the release and could not get the benefit of it and that, in addition, it did not release Marriner from any breach of directors' duties or from any claim that might be made against him in relation to the bond moneys. We accept that argument. The release in cl 11(b), however construed, does not release Marriner from a claim against him for breach of his duty as a director of ASD because he was not a party to the agreement. Marriner did not advance any argument as to how he, as a non-party, might take the benefit of the release.

286 ASD raised a further argument. It submitted that the agreement of 19 October 2001 was expressed to be an interim agreement and was in fact replaced by other agreements which contained no releases, namely, the final suite of agreements entered into between the parties on or about 13 November 2001. ASD relied upon cl 11.1 of the Sale of Shares Agreement between ASD and Laguna Australia dated 13 November 2001 which provided:

Entire agreement

This agreement constitutes the entire agreement between the parties regarding the matters contained in it and supersedes any prior representations, understandings or arrangements made between the parties, whether oral or written.

287 We do not consider that the 'replacement' of the agreement of 19 October 2001 by the subsequent final agreements has the effect of extinguishing the operation of cl 11(b) of the earlier agreement. We would reject the contention that the cancellation of the 30 June 2000 Heads of Agreement and the release of claims thereunder under cl 11(b) could be cancelled merely by virtue of these final agreements being entered into and without express provision to that effect. Nor, in our opinion, does a reasonable construction of cl 11.1 of the Sale of Shares Agreement lead to that conclusion. All that cl 11.1 provides is that the agreement supersedes prior representations, understandings or arrangements made between the parties, whether oral or written. We do not think that the phrase 'prior representations, undertakings or arrangements' extends to a prior binding agreement or, at least, to a provision of the kind contained in cl 11(b) of the agreement dated 19 October 2001. We think that it would be a very surprising consequence if language of this generality were to have the effect of reviving a previously cancelled agreement and liabilities under that agreement. However, our rejection of that submission would not have assisted Marriner having regard to our conclusion that he is not protected by the release in cl 11(b).

Conduct of ASD leading to the 19 October 2001 agreement

288 Marriner said that, at trial, he relied on affirmative defences resting upon the misleading conduct of ASD and United Super in the period leading to the 19 October 2001 agreement and that, according to these defences, ASD and United Super failed to disclose an intention to sue Marriner or his companies to recover the bond moneys as well as an amount equal to the excess capital expenditure.

289 The judge summarised these defences as follows:

(xiii) Prior to the entering into of the 19 October 2001 agreement, ASD and United Super made certain representations to Laguna Australia which were false, as a consequence of which Laguna Australia has suffered loss which it sets off against the ASD claims.

(xiv) The representations caused Laguna Australia to assume that the subject-matter of the sale to it included the debt owed by Laguna Investments to ASD in respect of the bond money and that Fulham would later take an assignment of this debt. ASD and United Super are estopped from denying these matters.

(xv) The representations constituted misleading and deceptive conduct contrary to the Trade Practices Act 1974 (Cth) ss 51A and 52, and the Fair Trading Act 1999 ss 4(1) and (9) as a consequence of which Laguna Australia has suffered loss.

(xvi) By an entry in the relevant accounts, on or about January 2002, the asset of ASD, being the debt owed by Laguna Investments to it, representing the second and third tranche funds, was changed to a third party receivable. In the circumstances, this constituted unconscionable conduct in contravention of the Trade Practices Act s 51AA, the Fair Trading Act s 7 and the unwritten law. As a consequence, Laguna Australia and Fulham Holdings Ltd suffered loss which they set-off against the claims of ASD.

290 The judge dealt with these defences in the following terms:[123]

The representation upon which the Marriner parties rely is that ASD and [CBUS] had or would release all claims against Mr Marriner, Goldworthy, Laguna Australia and Fulham Holdings arising out of or relating to the Laguna Quays project. It is then said that ASD and [CBUS] had no such intention. This defence, to a large extent, depends upon a rather complicated conspiracy theory mounted on behalf of the Marriner defendants, a theory which also underlay the defences of estoppel and that relating to unconscientious conduct.

In brief, it was said that, at the time that [CBUS] and ASD were agreeing the final arrangements for the sale of the Laguna project to Laguna Australia in September and October 2001, they had in mind that they would sue Mr Marriner or his companies to recover the bond money misappropriated and the excess capital expenditure which he had made. They did not disclose this intention at the time. He then caused his company to enter into the October 2001 agreement and the formal agreements entered into on 13 November 2001 to complete the sale, thinking that no such claim might be made.

There are many difficulties with this analysis. Perhaps the most obvious is that I find that ASD and [CBUS] were not guilty of this duplicity. At the time the agreements were entered into in October and November 2001, their thinking was to look to the Bank of Queensland to recover the bond money on the basis that the bank had paid it out inappropriately. Whatever might have been the strength of this contention, it was later seen as without prospect and attention shifted to Mr Marriner. Much evidence was led about a reversal entry in the ASD accounts made in January 2002. The evidence demonstrated that this entry was suggested by the auditors and for good reason. The factual basis for these defences turns out to be totally insubstantial.

291 Marriner's grounds of appeal in relation to the judge's above conclusions set out at length the bases of their challenge to those conclusions. The grounds read as follows:

1. The learned trial judge erred in finding that the evidence adduced in support of the estoppel defence was 'totally insubstantial'.
2. In making that finding, in respect of the allegation that ASD in the relevant negotiations failed to disclose intended claims against Marriner, the learned trial judge failed to take into account these matters and circumstances -

(a) in respect of Jephson's application of the 2nd Tranche Sum, ASD never had any claims against the Bank of Queensland;

(b) the evidence of Patience that, in advance of the ASD board meeting on 15 August 2001 he formed the view that Marriner was liable in respect of the bond moneys (which moneys included the 2nd Tranche Sum paid to McDonald);

(c) the ASD board meeting on 15 August 2001, at which the board referred to Marriner having 'wrongly expended moneys', and at which it discussed what action 'could and should be taken against Mr Marriner' (see exhibit 108 [13 CS 5292f]);

(d) the written evidence of Wason that, as at 6 September 2001, the directors of ASD were considering legal action against Marriner 'about the electricity guarantee funds' (which funds included the 2nd Tranche Sum));

(e) the 'focus notes' prepared by Patience, in which he recommended the 'integration' of the bond moneys issues into the final agreement with the Marriner parties;

(f) the undisputed fact that, in advance of the meeting on 6 September 2001, Patience gave his 'focus notes' to the directors of ASD;

(g) the evidence of Willis that, in advance of the meeting on 6 September 2001, Frost decided that the ASD directors would not raise the bond moneys issue with Marriner at that meeting (notwithstanding Willis' desire to so);

(h) the evidence of Paence that, at the meeting on 6 September 2001, no one raised the bond moneys issue with Marriner;

(i) the ASD board meeting on 18 September, at which the directors focused on Marriner and the Bank of Queensland in terms of recovering the bond moneys;

(j) the evidence of Patience that ASD's directors instructed him not to raise the bond moneys issues with Marriner;

(k) the debt schedule prepared by Patience on 21 September 2001, in which Marriner is listed as a debtor to ASD in respect of the 2nd Tranche Sum;

(l) Patience's memorandum to the ASD directors dated 8 October 2001, in which he recommended the finalisation of all outstanding issues in the proposed deal with Marriner;

(m) the facts and matters identified in paragraphs 19(b) to 19(f) above;

(n) the undisputed fact that, after 5 September 2001 no one disclosed to Marriner that ASD might pursue him in respect of the application of the bond moneys;

(o) the evidence that, in order to stem operational losses, ASD wanted to sell the Resort as quickly as possible;

(p) the undisputed evidence that Marriner was the only prospective purchaser of the Resort;

(q) the unchallenged evidence of Marriner that he would not have proceeded with the purchase of the Resort unless the bond moneys issue had been addressed and resolved in his favour; and

(r) the other relevant facts and mailers identified in section .3 of the Defendants' closing submissions dated 15 September 2009.

1. In light of these matters and circumstances, and the principles identified in section 1.2 of the Defendant's closing submissions dated 15 September 2009, the learned trial judge should have found that -

(a) in the negotiations leading to the October 2001 Agreement, Marriner raised squarely the issue of claims and liabilities;

(b) Marriner asked ASD to disclose all such matters so that they could be incorporated in the proposed agreement;

(c) ASD thus came under a positive duty to respond accurately and truthfully to Marriner's direct enquiries in this regard;

(d) ASD did not disclose the putative claim against Marriner in respect of the 2nd Tranche Sum;

(e) in these circumstances, ASD represented that Laguna Australia would acquire inter alia the release of the claims the subject of the Plaintiffs' proceeding (including the Capex claim);

(f) ASD also represented that Fulham Holdings Ltd would become entitled in place of ASD to the full benefit of the debt the subject of the Laguna Investments loan account no, 1- 7080 (which debt included the amount in respect of the 2nd Tranche Sum);

(g) in reliance upon these representations, Laguna Australia and Fulham entered into the relevant deeds and contracts in November 2001;

(h) each of the Defendants suffered detriment as a result of ASD's departure from the assumptions it engendered (including exposure to the claims in the proceeding as well as loss of the contemporaneous opportunity to change ASD's views in respect of these matters); and

(i) ASD is thus estopped from bringing and prosecuting the Capex claim.

1. In making that finding, in respect of the allegation that ASD in the negotiations failed to disclose the removal of part of the intercompany debt the subject of the debt assignment deed dated 13 November 2001, the learned trial judge failed to take into account these matters and circumstances -

(a) the ASD books disclose that on 1 August 2001, ASD reversed $1,279,000 from loan account no. 1-7080 (being the loan account by which ASD lent funds to Laguna Investments);

(b) this reversal sum was equal to the 2nd & 3rd tranches of the electricity bond moneys;

(c) at the ASD board meeting on 15 August 2001, the directors considered the proper accounting treatment of the electricity bond moneys;

(d) the uncontradicted evidence of Whalley that, as at 6 September 2001, he believed and expected that the debt the subject of loan account no. 1-7080 included an amount equal to the 2nd Tranche Sum and the 3 Tranche Sum;

(e) the evidence of Frost that, as at 6 September 2001, Marriner wanted to acquire this debt;

(f) in the period between 4 and 10 September 2001, Frost instructed Lewis (an internal accountant or bookkeeper) to treat the bond moneys sum as a receivable in the accounts of ASD;

(g) the written evidence of Frost that this instruction reflected ASD's intention to recover the moneys from Marriner;

(h) in the course of the negotiations, ASD did not disclose this intention to Marriner;

(i) in the same negotiations, ASD did not disclose the loan account reversal to Marriner;

(j) throughout these negotiations, ASD knew that Marriner's interests wanted to acquire the entire debt the subject of loan account no. 1-7080;

(k) Fulham executed the debt assignment deed dated 13 November 2001;

(l) Fulham took that step on the basis that ASD had not made any material changes to the inter-company debt;

(m) pursuant to that deed, in April 2002, ASD determined 'conclusively the amount of the debt the subject of the assignment; and

(n) the amount so fixed did not include an amount equal to the 2nd and 3rd Tranches of the electricity bond moneys.

1. In light of these matters and circumstances, and the principles identified in section 1.2 of the Defendants closing submissions dated 15 September 2009, the learned trial judge should have found that -

(a) in the negotiations leading to the execution of the agreements and deeds in mid November 2001, the Marriner parties assumed that the relevant loan account debt included the amounts referable to the 2nd and 3rd tranches of the electricity bond moneys;

(b) the Marriner parties assumed that, through the acquisition of the loan account debt, they would resolve all issues and possible claims in respect of the 2nd and Tranches of the electricity bond moneys;

(c) Although it knew as much, ASD did not disclose to the Marriner parties (i) the loan account reversal and (ii) the putative claims against them in respect of these tranches of the electricity bond moneys;

(d) ASD should have disclosed these matters to the Marriner parties before Laguna Australia and Fulham entered into the relevant deeds and agreements;

(e) ASD thus represented that under the proposed assignment of debt Fulham would become entitled in place of ASD to the full benefit of the debt the subject of loan account no. 1-7080 (which debt included the amount in respect of the 2 Tranche Sum);

(f) in reliance upon these representations, Laguna Australia and Fulham entered into the relevant deeds and contracts in November 2001;

(g) each of the Defendants suffered detriment as a result of ASDs departure from the assumptions it engendered (including exposure to the claims in the proceeding as well as loss of the contemporaneous opportunity to change ASD's views in respect of these matters); and

(h) ASD is thus estopped from bringing and prosecuting the Capex claim.

1. Further the learned trial judge failed to provide any or adequate reasons for the finding that the evidence adduced in support of the estoppel defence was 'totally insubstantial'.

F. The learned trial judge's rejection of the unconscionable conduct allegations

1. The learned trial judge erred in finding that the evidence adduced in support of the unconscionable conduct allegations was 'totally insubstantial'.
2. In making that finding, the learned trial judge failed to take into account the matters and circumstances set out in paragraphs 13 and 15 above.
3. In light of these matters and circumstances, and the principles identified in section J of the Defendant's closing submissions dated 15 September 2009, the learned trial judge should have found that -

(a) During the negotiations in late 2001, the Marriner parties made it clear that they wanted to resolve all of claims and liabilities (including the claims in respect of the 2nd Tranche Sum).

(b) Notwithstanding the plain request to disclose all 'undisclosed liabilities', the ASD parties failed to disclose the intention to pursue the Marriner in respect of claims referable to the electricity bond moneys.

(c) The Marriner parties entered into the October 2001 Agreement in the mistaken belief that the ASD parties were resolving all claims (including the claim in question).

(d) The non-disclosure was deliberate and unconscientious, particularly where Marriner had pressed ASD to disclose all liabilities for the purpose of resolving all matters between the parties.

(e) Laguna Australia and Fulham entered the relevant agreements in the mistaken belief that the ASD parties were resolving all claims (including the claim in question); The non-disclosure was deliberate and unconscientious, particularly where Mr Marriner had pressed ASD to disclose all liabilities for the purpose of resolving all matters between the parties.

(f) ASD failed to disclose the loan account reversal to the Marriner parties.

(g) Fulham thus executed the debt assignment deed in the mistaken belief that it would acquire the entire debt owed by Laguna Investments to ASD (including an amount based on the 2nd Tranche Sum).

(h) In contravention of section 51AA of the TPA, the ASD parties knowingly exploited these mistakes in order to sell the resort to Marriner and preserve the ability to pursue him in respect of the electricity bond moneys.

(i) In removing part of the debt from the loan account, and doing so without disclosure to Fulham, ASD contravened section 51AA of the TPA.

(j) Accordingly, ASD's reliance upon the 'conclusive debt fixing mechanism in the debt assignment deed is unconscientious.

(k) Further ASD has no standing to prosecute the Capex claim.

1. Further the learned trial judge failed to provide any or adequate reasons for the finding that the evidence adduced in support of the unconscionable conduct allegations was 'totally insubstantial'.

292 As can be seen, these defences relied upon a complex web of facts and inferences. Marriner in his written outline submitted that the judge 'did not grapple at all with the detailed evidence regarding these matters.' He referred to a number of aspects of the evidence upon which he relied at trial and added that this evidence was the subject of detailed analysis in his closing submissions at trial. Marriner submitted that the judge had failed to provide adequate reasons for his decision to reject these defences. When it came to oral submissions by the parties, probably by reason of time constraints, there was little, if any, argument about the misleading conduct, estoppel and unconscionable conduct defences.

293 With respect to the learned trial judge, we think that it is clear that his Honour failed to provide adequate reasons for rejecting these defences and we would have to reluctantly conclude that he did not evaluate, or fully evaluate, the considerable body of evidence involved. As we have decided to remit the question of Marriner's liability for breach of the solicitor's trust to the Trial Division, it is appropriate to also remit this aspect of the matter to the same judge in case any of these defences are open to be relied upon (as to which, having regard to the state of the pleadings, we express no opinion).

Reimbursement of freeholding costs out of the second tranche sum

294 The judge summarised this defence as follows:[124]

By cl 10(d) of the June 2000 heads of agreement, any security held by an authority with respect to the Laguna Quays project was to be applied towards the costs of converting Crown leasehold land to freehold land. The work performed by JJ McDonald for which payment from the second tranche funds were made were freeholding costs.

295 We refer to and repeat paragraphs [201] to [204] above, dealing with how the judge rejected that defence. We find no error by the judge. We would therefore reject ground 35 of the amended notice of appeal.

296 There was a counterclaim by Marriner, Goldworthy, Laguna Australia and Fulham Holdings. The counterclaim sought damages and/or declarations based on the same or similar matters as those to which we have referred in paragraphs [288] to [293] above. In the amended notice of appeal, grounds 36 and 37 relate to the counterclaim. The relevant appellants contend that the judge erred in failing to decide the counterclaim or in dismissing the counterclaim without deciding the same and that the judge should have made certain findings as set out in ground 37.

297 It is appropriate to remit these matters on the same basis as referred to in paragraph [293].

298 The broad result is that the appeal succeeds and that the orders made below on 16 April 2010 must be set aside. The crossappeal succeeds in part and the issues that we have identified must be remitted to a judge in the trial division.

299 We will hear submissions from the parties as to orders for costs after they have had an opportunity to consider these reasons.

[First Defendant/First Plaintiff by Counterclaim]

[Second Defendant/Second Plaintiff by Counterclaim]

[Third Defendant/Third Plaintiff by Counterclaim]

Fifth Appellant [Sixth Defendant/Fourth Plaintiff by Counterclaim]

AUSTRALIAN SUPER DEVELOPMENTS PTY LTD (ACN 058 626 761)

[1] Known as Staged Developments Australia Pty Ltd until May 2001.

[2] The proceedings involved two claims. There were originally three claims, but one of these was resolved: see Australian Super Developments Pty Ltd & Ors v Marriner & Ors [2010] VSC 41 [4] ('Reasons').

[3] The trial judge referred to both a Quistclose trust and a solicitor's trust: see, eg, Ibid [146]. As we explain below, there is some doubt as to whether breach of a solicitor's trust was pleaded.

[5] Ibid [171]. The judgment on the counterclaim was delivered on 16 April 2010: see Australian Super Developments Pty Ltd v Marriner (No 2) [2010] VSC 66.

[13] Earlier on the same day, he had written instructing the Bank to transfer the released funds to ASD's account with NAB.