Remedy
87 There are two species of remedy available to a plaintiff where the defendant has breached his or her fiduciary duty - proprietary and personal remedies. The proprietary remedies are:
(1) constructive trust;
(2) equitable charge or lien; and
(3) equitable right of subrogation
see Boscauer v Bajwa [1996] 1 WLR 328 and Foskett v McKeown [2001] 1 AC 102. The personal remedies are:
(4) an account of profits;
(5) restoration of property; and
(6) equitable compensation for loss caused
see Nocton v Lord Ashburton [1914] AC 932 and see also A Stafford and S Ritchie, Fiduciary Duties: Directors and Employees (2008), Jordan Publishing Ltd, Bristol, in which the categorisation set out above is helpfully enumerated.
88 As I have noted, the only personal claim now advanced by Mr Sewell is (4), an account of profits.
89 It will be observed that since Henamast was the vendor on the conveyancing transaction, Mr Zelden has received no profit per se, since he did not own the property. The plaintiff's argument is that in fact the proceeds of sale, or at least a significant portion of the proceeds, did find their way to Mr Zelden, because the cheque paid by the plaintiff went to the NAB and thereby reduced the debt owed by Mr Zelden jointly with his wife, as well as Henamast's debt to the NAB. The solicitor obtained a "benefit", argues the plaintiff, and the cases do not limit the claimant to "profit" in the strict sense. In Phipps v Boardman [1967] 2 AC 46 and Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, there were statements indicating the width of the notion of "benefit". In Hospital Products, Mason J referred at page 107 to the principle that "the fiduciary cannot be permitted to retain a profit or benefit which he has obtained by breach of his fiduciary duty" (emphasis added). In Chan v Zacharia (1984) 154 CLR 178, Deane J expressed the view at pages 204-205 that the requirement for an accounting of benefit or gain was not necessarily as absolute as some of the earlier cases had viewed it, noting that there may be circumstances where it would be:
"unconscientious to assert it or in which, for example, there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interests of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed".
90 In Warman International Limited v Dwyer (1995) 182 CLR 544, the High Court considered the appropriate remedy for the actions of a former employee of Warman who, in breach of his fiduciary duty to Warman, established two companies to operate as agents of an Italian manufacturing company with which Warman previously had an agency agreement. The Court concluded that the company in which Dwyer was one of the shareholders and the company in which he owned all of the shares were liable to pay two years of profits of their businesses to Warman. The Court said at pages 562-563:
"it is firmly established that the liability of a fiduciary to account for a profit or gain made in breach of fiduciary duty does not depend upon the person to whom that obligation is owed suffering a loss or injury; and it is ordinarily immaterial to the fiduciary's liability to account that the person to whom the fiduciary obligation is owed could not have earned the profit or gain. The courts have always insisted on compliance by fiduciaries with strict and rigorous standards with a view to ensuring that they do not expose themselves to a conflict of interest and duty. The point is that a fiduciary is not entitled to make a profit out of, or by reason of, a fiduciary position without the knowledge and assent of the person to whom the fiduciary duty is owed. It follows that, if a profit has been made in breach of fiduciary duty, the person to whom the duty is owed is entitled to an account subject to the considerations discussed above and to the making of any appropriate allowance."
(emphasis added)
The Court also said at pages 556-558:
"The remedy is ancient and notoriously difficult in practice and it gives rise to a liability, even in a case of a fiduciary, which is personal. In the context of patent infringement, the purpose of ordering an account is not to punish the defendant, but to prevent the defendant's unjust enrichment. But the liability of a fiduciary to account differs from that of an infringer in an intellectual property case. It has been suggested that the liability of the fiduciary to account for a profit made in breach of the fiduciary duty should be determined by reference to the concept of unjust enrichment, namely, whether the profit is made at the expense of the person to whom the fiduciary duty is owed, and to the honesty and bona fides of the fiduciary. But the authorities in Australia and England deny that the liability of a fiduciary to account depends upon detriment to the plaintiff or the dishonesty and lack of bona fides of the fiduciary. Gibbs J in Consul Development Pty Ltd v DPC Estates Pty Ltd stated:
'Where the rule applies, the liability of the person in a fiduciary position does not depend on the fact that the person to whom the duty is owed has suffered injury or loss.'
A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves "at a level higher than that trodden by the crowd". The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage.
…
What is necessary however is to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty."
(emphasis added)
and said at page 559: "It is necessary to keep steadily in mind the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts."
91 Out of the settlement proceeds, a cheque for $217,662.63 was paid into the Zelden joint account and $43,741.41 was credited to the Henamast account, which Mr Zelden and Mrs Zelden had guaranteed. The total, approximately $260,000, is capable of being viewed as the benefit which Mr Zelden (and Mrs Zelden) obtained by the sale of the Eastwood property. If one were to focus only on Mr Zelden, the benefit might be viewed as a notional benefit to him of $130,000. I say "notional" because a joint account is in law "simply a debt owed to the account holders jointly": see M Hapgood, Paget's Law of Banking (13th ed., 2007), LexisNexis Butterworths, London citing In re Head, Head v Head (No. 2) [1894] 2 Ch 236.
92 The plaintiff claims that the "benefit" which Mr Zelden obtained was the discharge of the debt owed to the NAB and the mortgage, and hence an amount of $260,000, because that is what was paid to the NAB and it left the home of Mr and Mrs Zelden unencumbered. There are, I think, two essential problems with that. First, Mr Zelden and Mrs Zelden are joint tenants as to 70 per cent of the property, and Henamast is a tenant in common as to 30 per cent; and secondly, to require Mr Zelden to repay $260,000 to Mr Sewell would produce the result that Mr Sewell would receive a unit worth $280,000 in 2005 for approximately $55,000, which I think can only be described as a windfall. Mr Drew's riposte to the second issue is a bold "so what?" - that, he submits, is the remedy which courts will grant a person to whom a fiduciary obligation is owed when the obligation has been breached, particularly when the fiduciary has been dishonest and fraudulent. To the first point, Mr Drew's response, in effect, is that Mrs Zelden and Henamast were involved in the breach, and hence there is no need to apportion the benefit.
93 In my view, Mr Drew's submission as to the benefit to be disgorged treats the earlier authorities too literally, and more importantly, ignores what has been said in the High Court about proportionality of remedy, however Mr Zelden's conduct is categorised. So far as the first point is concerned, even if Henamast and Mrs Zelden were involved in the breach, it would still be necessary to consider what benefit was derived by them. Henamast, at least, did not obtain the benefit of the sale to Mr Sewell without transferring title to Mr Sewell.
94 The approach urged on behalf of Mr Zelden in relation to the account of profits was to deduct from the sale price of $315,000 the amount of $280,000 (that is, the agreed value), leaving $35,000, and to treat Mr Zelden has having received 50 per cent of that profit, that is $17,500. Reference was made to the statement in Warman International that has been extracted above, with focus upon the words "the true measure of the profit or benefit obtained by the fiduciary in breach of his duty" at page 558. Reference was also made to the decision of Bergin J (as her Honour then was) in Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 at [31].
95 The first defendant's submissions pointed out that a constructive trust remedy is not a separate remedy, but rather it is a means of securing by a proprietary remedy profits made by a defaulting fiduciary that are traceable into property held by the fiduciary. I should note that the High Court in a number of cases, and most recently in John Alexander's Clubs Pty Limited v White City Tennis Club Limited; Walker Corporation Pty Limited v White City Tennis Club Limited [2010] HCA 19, has emphasised that the remedy to be granted ought to take into account the rights of third parties and that a constructive trust should be imposed only when that is absolutely necessary.
96 I think that the approach urged by the plaintiff produces a result that effectively gives a windfall to the plaintiff and does not adequately take into account the fact that he obtained a property with a market value then of $280,000, but the approach urged by the defendants is inadequate taking into account the benefit which Mr Zelden (and Mrs Zelden) obtained from the transaction and as a result of a very clear breach of fiduciary duty. Having regard to the broad principles discussed in Warman International, I think that the approach to be taken is to focus on the difference between what Henamast bought the property for in 2004 and what it sold it for in 2005 (that is, $255,000 and $315,000 respectively). That "profit" of $60,000, although derived by Henamast, is the amount that should be taken to be the benefit received by Mr Zelden and Mrs Zelden for which they are liable to account to Mr Sewell by reason of Mr Zelden's breach of fiduciary duty. It is an amount, it will be observed, which is less than 50 per cent of the $130,000 notional benefit to Mr Zelden to which I referred earlier, and it is an amount I would arrive at irrespective of whether Mrs Zelden and Henamast have an accessorial liability, as I have held they do.