Michael Wilson and Partners Limited v Robert Colin Nicholls & Ors

Supreme Court of NSW|2009-08-06|Before: Einstein J, Mr J

CITATION : Michael Wilson and Partners Limited v Robert Colin Nicholls & Ors [2009] NSWSC 721

HEARING DATE(S) : 15/6/09, 16/6/09, 23/6/09, 24/06/09, 29/06/09, 30/06/09, 13/07/09, 14/07/09, 23/07/09, 24/07/09, 27/07/09 - 30/07/09

JURISDICTION : Equity Division Commercial List

CATCHWORDS : Practice and procedure - Pleading issue - Application to strike out misrepresentation defence and unclean hands defence - Misrepresentation is not by and of itself a defence but in certain circumstances may give rise to a cause of action - Explanation of futility of pleading seeking to raise a misrepresentation defence - Consideration of the history of the unclean hands maxim - To say that a man must come into a Court of Equity with clean hands does not mean a general depravity - There must have been an immediate and necessary relation to the Equity sued for-It must be a depravity in a legal as well as in a moral sense-Discussion of the principles which inform the defence of unclean hands

Black Uhlans Inc v New South Wales Crime Commission [2002] NSWSC 1060 Carantinos v Magafas [2008] NSWCA 304 Corin v Patton (1990) 169 CLR 540 Curwen v Yan Yean Land Co. Limited (1891) 17 VLR 745 Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 CASES CITED : Gibson Motorsport Merchandise Pty Limited v Forbes (2006) 149 FCR 569 Goddard v Midland Railway Co (1891) 8 TLR 126 Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 Kation Pty Limited v Lamru Pty Limited [2009] NSWCA 145 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 Meyers v Casey (1913) 17 CLR 90 Rawley Pty Limited v Bell (No 2) (2007) 61 ACSR 648

Michael Wilson & Partners (Plaintiff) Robert Colin Nicholls (First Defendant) David Ross Slater (Second Defendant) PARTIES : Temujin Services Limited (Third Defendant) Temujin International Limited (Fourth Defendant) Temujin International FZE (Fifth Defendant) Shaikenov & Partners, LLP (Sixth Defendant) Scoulton Holdings Limited (Seventh Defendant)

Mr M Walton SC, Mr J Carney (Plaintiff) COUNSEL : Mr G McGrath, Mr A Fox (First Defendants) Mr G Lindsay SC, Mr A Fox, Mr S Adair (Second to Fifth Defendants)

SOLICITORS : Clayton Utz (Plaintiff) Henry Davis York (First to Fifth Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50151/06 Michael Wilson & Partners v Robert Colin Nicholls & Ors JUDGMENT The plaintiff's strike out application 1 By notice of motion heard on 24 July 2009 the plaintiff sought to have the Court revoke a ruling granting leave to the defendants to amend the commercial list response by adding a pleading alleging misrepresentation and a pleading alleging that the plaintiff lacked clean hands. Following addresses by both parties the court allowed the plaintiffs application indicating that reasons would be furnished as soon as practicable, but making plain that in essence the court was of the view that the plaintiffs submissions were of substance. At the same time the court observed that the reasons, while generally following the approach taken by the plaintiffs in its submissions, were likely to omit a deal of the detail. This judgment gives the reasons for the above decisions. The application to strike out the misrepresentation defence 2 The so-called "Misrepresentation" defence was in the following terms:

"Further and alternatively, and in answer to the whole of the Plaintiff's Commercial List Statement, the Defendants say that such (if any) entitlement to relief that the Plaintiff might otherwise have against them cannot, or ought not to, be granted in circumstances in which, prior to any engagement of the First and Second Defendants respectively, the Plaintiff concealed from the First and Second Defendants and each of them that its principal (Mr Wilson) had engaged in "unethical activities" whilst acting as a lawyer in Kazakhstan in partnership with Baker & McKenzie, thereby inducing them to undertake work for the Plaintiff." 3 Although headed "misrepresentation", no misrepresentation is actually pleaded in the body of the Response. What is pleaded is concealment. However concealment of a fact is not, of itself, a misrepresentation. It needs to be linked to a positive representation that itself becomes false by reason of the concealment. [See Higinbotham CJ in Curwen v. Yan Yean Land Co. Limited (1891) 17 VLR 745 at 751 (referred to in Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 by Brennan, Deane, Gaudron and McHugh JJ at 575): "concealment of a fact may cause the true representation of another fact to be misleading, and may thus become a substantive misrepresentation. ... A true representation, coupled with concealment, thus became a positive misrepresentation calculated to deceive."]. No positive representation is pleaded. 4 In addition to this the pleading entirely omits the very matters that would make it possible to understand what the defendants' case is: that is what the representation was, who made it, how they made it, whether it was made innocently or dishonestly, whether it was relied upon and how it was relied upon. For this reason alone the pleading is embarrassing. 5 Beyond that, the pleading is unsustainable as a matter of substance for the following reasons.

i. First, misrepresentation is not by and of itself a defence. It may in certain circumstances give rise to a cause of action.

ii. Secondly, it is to be noted that no cross-claim is pleaded and no positive relief is sought against the plaintiff in respect of the alleged "misrepresentation".

iii. Thirdly, even if properly pleaded, it is no answer to the plaintiff's claim, which is based on breaches by the defendants of contractual, tortious and equitable duties owed to the plaintiff, that the defendants were induced by a misrepresentation to enter into employment with the plaintiff, even if this were the case. The remedies for such a misrepresentation would be damages or, possibly, a rescission of the contract of employment (neither of which is sought). Such remedies would in no way affect the plaintiff's right to pursue the causes of action pleaded in its Commercial List Statement. 6 The futility of the pleading can be illustrated by considering what the position would be if there were a further amendment which pleaded a misrepresentation in proper form and sought rescission. Even were the employment contracts avoided ab initio the fact remains first, that on the plaintiff's case the defendants performed work for the plaintiff occupying positions of responsibility in which trust and confidence was reposed in them, and second, on the plaintiff's case, they did actually exploit the opportunities that this work presented for them in terms of gaining access to the plaintiff's client contacts and work files to further the business of Temujin. The first of these matters if proven, of itself gave rise to the duties pleaded against them, the second the breach. The alleged defence is that the misrepresentation, if proved, somehow operates to absolve the defendants from their responsibility for these alleged breaches, both at law and in equity. There is however no relevant connection between the breaches and the representation and for this reason the defence simply cannot operate in the way the defendants would wish it to. 7 It is not in doubt that contractual and fiduciary relationships may co-exist (see Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 97, per Mason J) and that in such a case the fiduciary relationship must conform to the contract, but the fiduciary relationship does not owe its existence to the contract. Rather it owes its existence to the relationship of trust and confidence that exists between the parties so as to attract a reasonable expectation of loyalty: Gibson Motorsport Merchandise Pty Limited v Forbes (2006) 149 FCR 569 at 574-575, per Finn J; Rawley Pty Limited v Bell (No 2) (2007) 61 ACSR 648 at 710-711 [261]. Whether or not the employment had been induced by misrepresentation the relationship and therefore the duties it gave rise to existed as a matter of fact and law and on the plaintiff's case they have not been avoided. 8 I accept that the test of the present defence is whether a misrepresentation of the kind alleged here would exculpate a theft of money by an employee from his employer's cash drawer. Clearly it would not. The theft is not causally connected to the representation. The situation here in principle is no different. Conclusion 9 For those reasons the proposed pleading discloses no defence. It is unarguable on the test in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125: it cannot possibly succeed.

10 The defence of a lack of clean hands on the part of the plaintiff is sought to be pleaded as follows:

"Further and alternatively, and in answer to so much of the Plaintiff's Commercial List Statement as invokes the equitable jurisdiction of the Court, the Defendants say that the Court should decline to grant any relief to the Plaintiff because it lacks clean hands. " 11 Extensive particulars are provided of this allegation. 12 In relation to these particulars, first insofar as they are at all comprehensible, they refer to matters so unrelated to the equity that the plaintiff seeks in this proceeding to enforce that they cannot conceivably raise the issue of clean hands. 13 It is apparent that these particulars, extensive as they are [with the exception of the reference to the misrepresentation pleaded in paragraph 92], all relate to circumstances concerning the plaintiff's institution and maintenance of these proceedings and none relates to the equity itself. 14 Secondly, I accept that the particulars are embarrassing in form. Some relevant principles - unclean hands 15 The history of the unclean hands maxim was recently traced by Campbell J (as his Honour then was) in Black Uhlans Inc v New South Wales Crime Commission [2002] NSWSC 1060. In that case his Honour referred at [164] to Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184 where Lord Chief Baron Eyre said:

"It is not laying down any principle to say that his ill conduct disables him from having any relief in this court. If this can be founded on any principle, it must be, that a man must come into a Court of Equity with clean hands; but when this is said, it does not mean a general depravity; it must have an immediate and necessary relation to the equity sued fo r; it must be a depravity in a legal as well as in a moral sense." (emphasis added) 16 This passage from Dering was cited by Isaacs J in Meyers v Casey (1913) 17 CLR 90 at 123. That case concerned a horse-owner who had been disqualified for 12 months for "suspicious practices" in connection with a particular race. The disqualification had initially been effected by the stewards at Moonee Valley. He had appealed against that decision to the committee of the Victoria Racing Club, which had received fresh evidence, and upheld the decision. He also sought an injunction restraining the Victoria Racing Club from expelling him. In fact the stewards did not have power to disqualify a person (as opposed to a horse) for "suspicious practices", but the committee had such power. The majority in the High Court held that the decision of the committee was valid, even though it was taken on appeal from an invalid decision. The majority also held that the injunction restraining the Victoria Racing Club from expelling the horse-owner should be granted, because there was a threat to expel him without according him natural justice. After citing the above passage from Dering Isaacs J (with whom Rich J agreed) said at 123-124:

"... the rights asserted by the appellant, namely, membership of the club and public right under the by-laws to enter the racecourse, of course exist, if at all, by reason of circumstances wholly independent of the alleged misconduct; the wrong he complains of, namely, his condemnation by an incompetent and unauthorised tribunal in the one case, and a disregard of natural justice in the other, are equally independent of any misconduct by him. It is therefore impossible to say, in the Lord Chief Baron's words, that his alleged misconduct has "an immediate and necessary relation to the equity sued for," or that it was "a depravity in a legal as well as in a moral sense."

It is altogether different from the cases where the right relied on, and which the Court of equity is asked to protect or assist, is itself to some extent brought into existence or induced by some illegal or unconscionable conduct of the plaintiff, so that protection for what he claims involves protection for his own wrong. No Court of equity will aid a man to derive advantage from his own wrong, and this is really the meaning of the maxim." 17 In Black Uhlans Campbell J said at [181]:

"The two tests emerging from the portion quoted at para 164 above, from Dering v Earl of Winchelsea ("immediate and necessary relation to the equity sued for" and "a depravity in a legal as well as in a moral sense") do not provide a complete guide to the circumstances in which the "unclean hands" maxim will be applied to deprive the litigant with the unclean hands of a remedy. Those two tests are a necessary condition for the application of the "unclean hands" maxim, but not a sufficient condition. Equitable relief is always discretionary, and other factors can influence the exercise of the discretion. For example, a restrictive covenant arising under a common building scheme, which binds both plaintiff and defendant, might be enforced at the suit of the plaintiff even if the plaintiff has committed some slight breaches of the covenant: Goddard v Midland Railway Co (1891) 8 TLR 126. 18 At [184] his Honour said:

"In applying the unclean hands principle in the present case, it is necessary first to identify what is the equity which (absent unclean hands) I would be prepared to uphold." 19 The defence of unclean hands has been referred to in two recent cases in the Court of Appeal, in Carantinos v Magafas [2008] NSWCA 304, and in Kation Pty Limited v Lamru Pty Limited [2009] NSWCA 145. 20 In applying the defence it is necessary to keep in mind the caution voiced by Mason CJ and McHugh J in Corin v Patton (1990) 169 CLR 540 where their Honours said, in relation to the maxim that equity will not assist a volunteer, at 557:

"Of course it would be a mistake to set too much store by the maxim. Like other maxims of equity, it is not a specific rule or principle of law. It is a summary statement of a broad theme which underlies equitable concepts and principles. Its precise scope is necessarily ill-defined and somewhat uncertain." Applying the principles to the present case - unclean hands 21 Applying these principles to the facts of the present case one has first to identify what the equity is that the court is being asked to uphold. Here it is the plaintiff's claimed equity to have defaulting fiduciaries held to account for the proceeds of their alleged fraudulent conduct in exploiting their fiduciary positions for personal gain or alternatively to compensate the plaintiff for the losses they are said to have caused. The plaintiff's case is that circumstances of that fraudulent conduct are that both Mr Nicholls and Mr Slater, while employed by the plaintiff, and in breach of their fiduciary duties, each made use of his position to appropriate the business and business contacts of the plaintiff, taking that business from the plaintiff and capturing it for their own company Temujin International Limited. The plaintiff's case is that they allowed their interest and their duty to conflict. 22 On the plaintiff's case, one particular aspect of this equity involves the right of the plaintiff to enforce a constructive trust over the business of Temujin as a result of the defendants' alleged conduct in breach of fiduciary duty. A further parameter of the plaintiff's claim to be entitled to this relief is said to come about because of the conduct of Mr Nicholls and Mr Slater in knowingly assisting breaches of similar fiduciary duties owed to the plaintiff by Mr Emmott. 23 None of the matters in the particulars touch on the plaintiff's claimed right to uphold this equity. For the reasons set out above the misrepresentation that is alleged by the defendants does not have an immediate and necessary connection to the equity on which the plaintiff now sues. I accept that for that reason alone it can have nothing to do with a defence of a lack of clean hands. 24 In relation to the balance, the fact (which is denied) that the plaintiff may have abused the processes of the court in its prosecution of these proceedings, is also in no way connected to the equity itself or the plaintiff's right to bring a suit to uphold it. "General depravity", if that is what the plaintiff's conduct is said to amount to, is not enough: "it must have an immediate and necessary relation to the equity sued for". 25 The defence in this case on the particulars provided fails that test of immediacy. It fails to direct any complaint to the actual equity on which the plaintiff sues, concentrating instead on matters that occurred after the equity was complete. It demonstrates a misconception of the nature and application of the equitable defence. 26 It is necessary to return albeit briefly to the proposition that the particulars are embarrassing in form and make no sense. 27 The particulars provided set out eight grounds that supposedly support the plea of unclean hands. In not one case is it even suggested, let alone alleged, that they have any relation to the equity sued on in this proceeding. 28 I do not see it as necessary to repeat the particulars. Conclusion - the unclean hands defence 29 The only conclusion to be drawn from the above is that the defendants have sought to re-plead their abuse of process arguments in the guise of an unclean hands defence, and that insofar as they have tried to re-badge the abuse of process arguments they have done so through their particulars in a way that is not only incomprehensible and embarrassing but also to which it is impossible to plead except by a blanket denial. 30 In attempting this exercise the defendants have moreover completely eschewed any attempt to make the allegations, originally of an abuse of process, conform to the recognised principles that apply to the equitable defence of a lack of clean hands, namely that the lack of clean hands must have an immediate and necessary relation to the equity sued for. The particulars concentrate on matters pertaining to the plaintiff's conduct of these proceedings, which arose in time after the equity on which the plaintiff sues was complete. They do not, as they must do, attack the equity itself. 31 The defence as pleaded is bad, and as particularized it is unarguable. It cannot possibly succeed, hence the ruling that it be struck out. ******************

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