EQUITY - equitable fraud - fourth category of Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125
28 ER 82 - relief against "underhand bargains" - general principles - need for a transaction - equitable intervention only where remedies at law are unavailable or inadequate
Source
Original judgment source is linked above.
Catchwords
EQUITY - equitable fraud - fourth category of Earl of Chesterfield v Janssen (1751) 2 Ves Sen 12528 ER 82 - relief against "underhand bargains" - general principles - need for a transaction - equitable intervention only where remedies at law are unavailable or inadequate
Judgment (2 paragraphs)
[1]
Judgment
Over three days, 6 August, 15 October and 20 November, I heard applications by both of the defendants in these proceedings for the plaintiffs' claims against them to be summarily dismissed, or alternatively, for the proceedings to be transferred to the Supreme Court of Queensland for determination in that State pursuant to the Jurisdiction of Courts (Cross-vesting) Act 1987 (Cth), s 5. Towards the end of the hearing on 20 November, counsel for the plaintiffs accepted that the claim against the first defendant was not sustainable. I thereupon made orders dismissing the plaintiffs' claim against the first defendant.
This judgment concerns the second defendant's application. Counsel for the plaintiffs continued to oppose the summary dismissal of the claims against the second defendant, but accepted that should the claims survive the summary dismissal application, the remaining proceedings against the second defendant should be transferred to Queensland.
The first plaintiff is a builder who formerly operated a building business through a company called Spectrum House & Land Pty Ltd ("Spectrum"). He was a director of that company. The second plaintiff was also a director. Apart from that, the second plaintiff is not featured in the evidence of this case and in the remainder of this judgment I will refer to the first plaintiff as Mr Samimi.
An order was made for the winding up of Spectrum in insolvency in February 2010. The winding up was completed and the company was deregistered. It has subsequently been re-registered.
The proceedings arise out of a building project undertaken by Mr Samimi at St Lucia in Queensland between 2006 and 2007. The land in question was owned by a company call Mehran Pty Ltd ("Mehran"). Mehran was controlled by the first plaintiff, Mr Djamshidi. It was the trustee of a unit trust.
The building works were the subject of a statutory insurance scheme under the Queensland Building and Construction Commission Act 1991 (Qld) administered by the second defendant, the Queensland Building and Construction Commission. At all relevant times, the Queensland Building and Construction Commission was called the Queensland Building Services Authority and the Act was called the Queensland Building Services Authority Act 1991 (Qld). In what follows, I will refer for convenience to the Act as the QBSA Act and to the second defendant as the QBSA.
The background is complex but the immediate origin of the present dispute was that after Spectrum went into liquidation, Mehran pursued a claim against the QBSA for compensation under the Statutory Insurance Scheme. The QBSA accepted the claim, but only in the sum of $200,000. Pursuant to a review procedure provided by the QBSA Act, Mehran challenged the decision in the Queensland Civil and Administrative Tribunal ("QCAT"). The Tribunal found that the proper insurance limit for Mehran's claim was $400,000 and made a determination accordingly: Mehran Pty Ltd as Trustee for the Djamshidi Unit Trust v Queensland Building Services Authority [2011] QCAT 420. The QBSA thereafter paid Mehran $400,000 in accordance with QCAT's decision. The payment was made on or about 10 November 2011.
The QBSA Act contains provisions which make an insured builder (in this case Spectrum) liable to indemnify QBSA claims paid out to its customers in certain circumstances (s 71(1)) and, where the builder is a company, make the directors of the company jointly and severally liable (s 111C(3) and (6)). In April 2012, QBSA began a claim in the District Court of Queensland to recoup the $400,000 paid to Mehran from the Samimis as directors of Spectrum. In September 2014, QBSA obtained summary judgment against the Samimis but the Samimis successfully appealed to the Queensland Court of Appeal which set aside the summary judgment: Samimi v Queensland Building and Construction Commission [2015] QCA 106. The claim is still pending in the District Court. The proceedings there were put on hold pending the outcome of these applications.
The Samimis complain about the way in which the QCAT proceedings were resolved. They say that Mehran's claim overstated its entitlements under the building contract or contracts under which the development was carried out. It was not necessary for the purposes of this application to go into the details, which involve allegations about the dealings between Mr Samimi on behalf of Spectrum and Mr Djamshidi on behalf of Mehran at the time the work was done. The dispute has evidently become a bitter one. Counsel for the Samimis did not shrink from putting to the Court, no doubt upon instructions, that the claims made on Mehran's behalf were knowingly false and fraudulent.
Neither Spectrum nor the Samimis were party to the claim process between Mehran and the QBSA. Nor were they party to the QCAT proceedings. But the outcome of the claim process did affect Spectrum, and through Spectrum, the Samimis indirectly, because it exposed them to liability to indemnify QBSA under the QBSA Act.
The QBSA Act, s 71(1) provides:
(1) If the commission makes any payment on a claim under the statutory insurance scheme, the commission may recover the amount of the payment, as a debt, from the building contractor by whom the relevant residential construction work was, or was to be, carried out or any other person through whose fault the claim arose.
In its terms, the section creates a liability to indemnify which is not necessarily limited to the builder's liability to the customer. All that is required is that there be a payment of a "claim under the statutory insurance scheme". Decisions of the Queensland Court of Appeal have recognised that this restricts the defences available to a builder on a claim for recovery by the QBSA under the section. In particular, it may not be open to the builder to challenge the exercise of the QBSA's discretion, or its evaluation of a contestable factual aspect of the customer's claim: Mahony v Queensland Building Services Authority [2013] QCA 323 at [34]-[37]. It is thus possible for a builder to be made liable indirectly, by being forced to indemnify the QBSA on a claim paid out by the QBSA, when in fact the builder had no direct liability to the customer.
The claim made by the Samimis in these proceedings is for equitable relief against an "underhand bargain". This is one of the categories of conduct regarded by equity as fraud which were described in the Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125 at 155-156; 28 ER 82 at 155-156. It is the fourth of five categories of equitable fraud identified by Lord Hardwicke LC in that celebrated case.
The Samimis' Statement of Claim alleges that in December 2005 Mr Samimi entered into an oral contract with Mr Djamshidi personally, for the development of the property and the carrying out of construction work at a cost of $250,000. It goes on to allege that in around May or June 2006 the scope of works was varied at a cost of a further $194,000. The Statement of Claim defines these oral arrangements as the "First Personal Contract".
The Statement of Claim then alleges that a further contract was made orally in about mid-September 2006 between Spectrum as builder and Mr Djamshidi in terms of a written form of residential building contract signed by Mr Djamshidi (but not by Mr Samimi or Spectrum) in November 2006. This is defined as the "Construction Contract".
The Statement of Claim sets out the course of the claim process at length. In particular, it states that in about June 2009 the QBSA obtained a report from a quantity surveyor, Mr Ford. The Statement of Claim alleges that the instructions given to Mr Ford were too narrow and left important difficulties with the claim out of account.
The "underhand bargain" upon which the Samimis rely is pleaded in the following terms:
In the period 1 February 2011 to 5 September 2011, MD [Mr Djamshidi] and QBCC [the successor body to the QBSA] concluded the terms of a clandestine private agreement which included that:
a. QBSA would accept the Claim;
b. QBSA was not to fully and properly investigate:
i. What were the terms of the contract for the building work upon the Land;
ii. Whether the parties to the contract were Spectrum and Mehran;
iii. The value of the building works to performed under the contract;
iv. Whether or not the contract had been terminated;
v. Whether or not Mehran and/or MD had validly terminated the Construction Contract;
vi. Whether or not there was any remaining liability of MD or Mehran under the Construction Contract;
vii. Whether or not the amount paid by MD or Mehran to Spectrum for the works was $700,000 and not $200,000 as asserted by Spectrum and KS:
viii. The scope of works to complete;
ix. The scope of the alleged defective works;
x. The additional costs to complete, if any, and the cost to remediate any alleged defective works, if any;
xi. What works were outside the Construction Contract works; and
xii. What works were pre-contract works to the First Personal Contract and not part of the works to the Construction Contract or variations to the Construction Contract works; and
c. QBSA would not cost the cost to complete or the cost to remediate and would not check any aspect of the Ford Report, Mr Ford's instructions or his costings; and
d. MD would not have to attend to be interviewed nor be cross examined as to all aspects of the Claim;
The essence of the fourth category of equitable fraud is the making of an agreement between the parties, which can be characterised in some way as underhand, when the agreement has an adverse effect on a third party or on the public generally. Lord Hardwicke LC (at 156) gave four instances of the fourth category in operation:
Of this kind have been marriage-brocage contracts; neither of the parties herein being deceived: but they tend necessarily to the deceit on one party to the marriage, or of the parent, or of the friend. So in a clandestine, private, agreement to return part of the portion of the wife or provision stipulated for the husband to the parent or guardian. In most of these cases it is done with their eyes open, and knowing what they do: but if there is fraud therein, the court holds it infected thereby, and relieves. So where a debtor enters into a deed of composition with his creditors for 10s. in the pound, or any other rate, attended with a proviso that all creditors executed this within a certain period, if the debtor privately agrees with one creditor to induce him to sign this deed, that he will pay or secure a greater sum in respect of his particular debt: in this there can be no particular deceit on the debtor, who is party thereto: but it tends to deceit of the other creditors, who relied on an equal composition, and did it out of compassion to the debtor. This court therefore relieves against all such underhand bargains (1 Wms. 768; 1 Atk. 105). So of praemiums contracted to be given for preferring or recommending to a public office or employment: none of the parties are defrauded; but the persons, having the legal appointment of these offices, are or may be deceived thereby: or if any person, agreeing to take the praemium, has authority to appoint the officer, it tends to public mischief by introducing an unworthy object for an unworthy consideration. These cases shew what courts of equity mean, when they profess to go on reasons drawn from public utility.
The authors of Snell's Equity (in editions prior to the most recent 33rd edition) suggested additional examples falling within this category of equitable fraud, including:
…loans to a woman to swell her dowry and thus deceive her husband, rewards for influencing a testator, and contracts in restraint of trade, such as a loan with such stringent restrictions on the borrower as to savour of serfdom.
(see John McGhee QC (ed), Snell's Equity (Sweet & Maxwell, 31st ed, 2005) 233-234 [8-55]).
In suggesting a rationale for equity's intervention in such cases, Lord Hardwicke LC in Earl of Chesterfield v Janssen said (at 156):
Particular persons in contracts shall not only transact bona fide between themselves, but shall not transact mala fide in respect of other persons who stand in such a relation to either as to be affected by the contract or the consequences of it; and as the rest of mankind beside the parties contracting are concerned, it is properly said to be governed on public utility.
The fourth category of Earl of Chesterfield v Janssen received extensive consideration by the Western Australian Court of Appeal in Westpac Banking Corporation v The Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157, a case which involved a company granting security interests over its property in a series of transactions shortly before it went into liquidation. Relief under the fourth category was refused.
In my view, the equitable fraud in the fourth category can only come into play in the present case to the extent that the so-called "clandestine private agreement" can be said to be the effective cause of imposing liability indirectly on the Samimis which did not exist directly. It is not enough for the Samimis to allege only that Mehran could not have recovered $400,000 directly from Spectrum. If that is so, but the $400,000 payment was not the payment of a "claim under the statutory insurance scheme" for the purposes of s 71(1), then the Samimis will have a defence in the Queensland District Court proceedings. Only complaints which would mean that there was no direct liability but which cannot be raised under s 71(1) could possibly give rise to equitable intervention.
I did not find it easy to discern what those complaints are, or indeed whether they exist at all. The whole point of the Samimis' successful appeal to the Queensland Court of Appeal was that the Samimis were found to have an arguable defence to the QBSA's claim against them under s 71(1). The submissions before me did not identify what, if any, particular aspects of the Samimis' complaints they say cannot be deployed as a defence under s 71(1) in the District Court proceedings. But in what follows, I will assume that the so-called "clandestine private agreement" may have prejudiced Spectrum, and through it the Samimis, in this way.
In the course of the hearing, I asked counsel for the Samimis to identify his best case on the application of the fourth category. By this I meant an instance of the fourth category actually being applied in circumstances which could be compared with the present. Counsel was only able to refer to the general statements of principle from Earl of Chesterfield v Janssen itself as supplemented by the statements of principle in The Bell Group.
I think it is vital, in trying to deduce a unifying principle or principles from the Earl of Chesterfield v Janssen categories, to bear in mind that the "underhand bargain" doctrine is an equitable one. Equity can only intervene if there is no relief at law, or the relief at law is inadequate.
Historically, a reason for the intervention of equity in some of the cases in the fourth category was that a bond had been given to secure the obligation in question. Equity would intervene to prevent the bond being enforced at law. This basis for equitable intervention may be compared with equity's jurisdiction to prevent enforcement of a bond which was penal in character: Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 at [33]-[45].
Outside the area of bonds, the historical explanation for equity's intervention in marriage brokage contracts was given in the English Court of Appeal decision of Hermann v Charlesworth [1905] 2 KB 123. Collins MR explained that a marriage brokage contract was unenforceable at law: the contract was "tainted with illegality" and if no step had been taken under it, relief was available at law on the basis of total failure of consideration. Thus equity's assistance was not needed if the contract was executory. But at law, once the contract had been carried out, relief was not available. Equity, however, took a wider view and allowed relief even if the contract had been partly performed or even if the marriage had taken place: see at 132-133.
Equity's intervention in this way is closely related to equity's approach procured by misrepresentation, which is another type of fraud cognisable in equity (it was Lord Hardwicke LC's first category). The common law would only allow the rescission of an agreement where precise restitution was possible: Alati v Kruger (1955) 94 CLR 216; [1955] HCA 64 at 223-225. Equity took a more robust approach, allowing the rescission if restoring the parties to their pre-contract position was "practically just" in the circumstances of the case.
All of the "underhand bargains" to which Lord Hardwicke LC referred involved the grant of equitable relief of this type. In a case where a bond was given to secure the obligations under the offending contract, equity would restrain proceedings to enforce the bond, and would order its delivery up and cancellation: Woodhouse v Shepley (1742) 2 Atk 535 at 539; 26 ER 721 at 724. If the transaction took the form of a simple contract, equity would restrain enforcement of it and would generally decree the return of any payments made under the contract: Hermann v Charlesworth at 137-138; see also Higgins v Pitt (1849) 4 Ex 312 at 323-325; 154 ER 1231 at 1236.
The cases involving compositions with creditors involve an extension to the fourth category. Not only would equity not enforce the side agreement between the debtor and the preferred creditor, but a third party who entered into the composition without knowledge of the side agreement could resist enforcement of the composition itself, which would be set aside. This is what happened in Dauglish v Tennent (1866) LR 2 QB 49. The defendant was in financial difficulty and had entered into a composition with his creditors, who included the plaintiffs. The plaintiffs later brought proceedings for the full amounts of the debts claimed by the defendant. The defendant set up the composition by way of defence. In reply, the plaintiffs alleged that the defendant had made a side agreement with certain of his creditors to pay them extra in consideration of executing the deed of composition. The Court of Queen's Bench held, on demurrer, that the deed was void against the creditors.
Equity's intervention in cases of the fourth category thus centres on relieving a party against the consequences of a transaction into which the party has entered or is otherwise bound to observe. Usually this takes the form of orders designed to set aside the transaction and deny any further enforcement of it. In cases where the transaction cannot be set aside it may be possible to obtain an award of equitable compensation. But the starting point is that some sort of transaction against which equity will relieve must be identified.
In my view, the Samimis' case based on the so-called "clandestine private agreement" is quite different from cases such as these. The alleged agreement was between the QBSA on the one hand and Mehran on the other. The Samimis were not party to the alleged agreement, nor were they bound by it. There is no question of the Samimis seeking to resist enforcement of the alleged agreement, or recovering payments made under it.
Nor is the Samimis' position comparable with that of the plaintiffs in Dauglish. The Samimis have not entered into any transaction, or taken any step, as a consequence of the alleged agreement. Their claim is simply that they have been damaged by it.
There may of course be a claim available in a case where A and B enter into a contract which has the effect of damaging a third party. In the present case, if the QBSA and Mehran had agreed among themselves that Mehran's claim would be allowed even though it was not a proper claim, to the intent that the cost of meeting it would then be imposed by the QBSA on Spectrum and the Samimis by the use of the QBSA's powers under s 71(1), that might amount to an actionable conspiracy to cause harm to Spectrum and the Samimis: see, eg, McKernan v Fraser (1931) 46 CLR 343; [1931] HCA 54; Williams v Hursey (1959) 103 CLR 30; [1959] HCA 51. Such conduct, if established, might also be actionable under the tort of misfeasance in public office: Northern Territory v Mengel (1995) 185 CLR 307; [1995] HCA 65 at 345-348. And even if there were no collusion between Mehran and the QBSA, it is conceivable that a duty of care might be recognised as being owed by QBSA to Spectrum and the Samimis on the basis of their vulnerability to QBSA's actions in handling Mehran's claim. If such a duty of care existed, then negligence in accepting Mehran's claim, even if there was no collusion, might be actionable. But each of these would be claims for damages at common law. The claim would either succeed or not; there will be no need for equitable intervention.
The Statement of Claim in these proceedings does not propound any such common law claims. Whether it would be open to the Samimis to bring such claims by way of defence or cross-claim in the District Court proceedings does not need to be determined in the current application. It is sufficient to say that, in my view, the equitable claim pleaded in this case based on an alleged "underhand bargain" is misconceived.
The Samimis' Statement of Claim was filed on 8 December 2017, more than six years after the determination by QCAT and the payment of $400,000 in question by the QBSA to Mehran. The defendants contended that the lapse of time meant that the Samimis' cause of action was statute barred. For the Samimis, this was disputed, and fraudulent concealment was also alleged. Given my earlier conclusions, it is not necessary to consider these arguments.
For these reasons, I consider that the claim pleaded by the Samimis against the QBSA is unsustainable. The proceedings should be summarily dismissed. I will hear the parties on costs.
The orders of the Court are:
Order that the proceedings be dismissed as against the second defendant.
[2]
Amendments
14 December 2018 - Amended cover page.
14 December 2018 - Fixed formatting issues.
14 December 2018 - Amended cover page.
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Decision last updated: 14 December 2018
Parties
Applicant/Plaintiff:
Samimi
Respondent/Defendant:
Djamshidi
Legislation Cited (3)
Queensland Building Services Authority Act 1991(Qld)