The primary remedy for breach of contract and the tort of inducing breach of contract is damages. However, the court may in its auxiliary jurisdiction in equity make orders by way of mandatory or negative injunction, so that the remedies granted more effectively make good the consequences of the respondents' wrongdoing. In an exceptional case, the principles stated by Deane J in Muschinski v Dodds (1985) 160 CLR 583 at 619-20; 62 ALR 429 , and by Mason CJ, Wilson and Deane JJ in Baumgartner v Baumgartner (1987) 164 CLR 137 at 148; 76 ALR 75 , could warrant the intervention of equity to impose a constructive trust upon property gained by a party through its breach of contract or tortious conduct. This might be the case if damages were not an adequate remedy and it would be unconscionable to allow the respondent to retain the property: see also Australian and New Zealand Banking Group Ltd v Westpac Banking Corp (1988) 164 CLR 662 at 673. "
22 The cross-defendants say that this is wrong, and that in any event, the cross-claimants have not pleaded and there is no basis for inferring that damages would not be an adequate remedy for the alleged breaches of contract.
23 The complaint that the proposed cross-claim does not plead that damages would not be an adequate remedy could readily be addressed by further amendment. The question is not whether the Full Court's statement of the principle is right or wrong, but whether it is reasonably arguable. There are obvious difficulties in the cross-defendants' submission that it is not reasonably arguable that the Full Court's statement of the principle is correct. There are serious questions as to whether Muchinski v Dodds and Baumgartner v Baumgartner justify the proposition enunciated by the Full Court. (See the explanation of these cases in West v Mead [2003] NSWSC 161 at [52]-[64] per Campbell J). It is not clear what would make a case exceptional to bring it within the principle enunciated by the Full Court, or, if the principle is correct, why it should apply only in exceptional cases. There is also uncertainty as to what, in the context of a breach of contract, would amount to an unconscionable retention of property acquired through breach of contract. Nor is it clear what causal relationship between the breach of contract and the acquisition of property is required. In my view, the uncertainty attending these questions indicates that there is scope for reasonable argument on them. The contrary arguments were not fully developed.
24 No separate submission were addressed to the claim for an account of profits. There are formidable obstacles to a claim for an account of profits for breach of contract. (See Town & Country Property Management Services Pty Ltd v Kaltoum [2002] NSWSC 166 at [78]-[85] and Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874 at [228]-[237]). However, the observations of Deane J in Hospital Products Ltd v US Surgical Corp (1984) 156 CLR 41 at 124-125, and the decision of the House of Lords in Attorney-General v Blake [2001] 1 AC 268, (which may themselves support the statement of the Full Federal Court quoted in para 21 above), show that at least at an appellate level, the claim is not obviously futile.
25 I will grant leave to the cross-claimants to plead these causes of action. I take into account what Kirby P said in Wickstead v Browne (1992) 30 NSWLR 1 at 5:
"… as the trial must now proceed, there is merit (as it seems to me)
in permitting the appellant to present his case in various ways. The marginal utility to the respondent of preventing the appellant from proceeding upon the alternative cause of action in negligence is minimal. But the marginal cost of doing so would be very great if, subsequently, the trial was concluded, limited by the orders proposed, and it was then held, either by this Court or by the High Court of Australia, that the appellant's cause of action in negligence was viable;
2. Common experience teaches that it is usually more efficient and just to
consider the viability of a cause of action when the facts said to support it are adduced and the suggested action can be judged with a full understanding of all relevant evidence. Testimony gives colour and content to the application and development of legal principle. "
26 During the hearing I raised the question whether the claims for the alleged breaches of agreements to provide securities, and the alleged breaches by Mr Short of his director's duties, together with the alleged breach of the agreement to share opportunities and the other claims which have previously been allowed, should be tried separately and in advance of the other issues arising on the cross-claim. I understood the parties to have accepted, or at least not disputed, that claims for relief which arise only if the breaches of contract or duty are established, should be deferred. This would include the deferral until after the determination of the other issues on the cross-claim, of the claims that the executrix of Mr Short's estate, and Nabatu, hold the property acquired by Mr Short and Nabatu allegedly through their breaches of contract, and Mr Short's breach of duty as a director, on constructive trust, or are liable to account for profits. I will make orders accordingly, but the parties will have liberty to apply to vary the orders in case it appears that all or some of the new claims for consequential relief against the existing cross-defendants can be dealt with in the hearing fixed for February.
Claim Against the new Cross-Defendants
27 The claims against the proposed new cross-defendants are put in various ways. Paragraph 203 alleges that each of Quadrafox, Mrs Short, Fraser Short, Martin Short and Paris Short were active and knowing participants in Mr Short's breach of duty as a director of J&J O'Brien, Marsico and Trudale, in connection with the acquisition by Mr Short, Mrs Short, Fraser Short, Martin Short and Paris Short of shares in Quadrafox, and the acquisition by Quadrafox of the leasehold of the Scubar premises, the establishment of the Scubar Downunder business, the acquisition of the leasehold of the Australian Hotel premises, and the acquisition and development of the Australian Hotel business.
28 The cross-claimants claim the personal remedy of equitable compensation. They also claim that the cross-defendants hold assets on constructive trust for them, or are liable to account for the value or profits "attributable" to those assets. It is contended that Quadrafox hold its assets as constructive trustee for J&J O'Brien, Marsico and Trudale and is liable to account for the value and profits attributable to those assets as a consequence of its knowing and active participation by Mr Short in his breach of director's duties towards those companies, and that Mrs Short, Fraser Short, Martin Short and Paris Short hold their shares in Quadrafox, (and are liable to account for profits "attributable" to those shares), as a constructive trustee for those companies because of their knowing and active participation in Mr Short's breach of duty.
29 It is said that Mr Short's knowledge constituted the knowledge of Quadrafox as it acted in accordance with his directions. It is said that Mrs Short had actual knowledge of the matters about which Mr Short knew (paragraph 141) and that she, with Mr Short, directed, procured and funded the incorporation of Quadrafox, the acquisition of shares in Quadrafox, and the acquisition by Quadrafox of the promises and businesses. (para 150).
30 It is alleged that each of Fraser Short, Martin Short and Paris Short permitted Mr Short to act on their behalf in respect of all matters relating to their acquisition of shares in Quadrafox in his discretion, and that by reason thereof his knowledge constituted their knowledge in connection with the acquisition of those shares. In other words, it is alleged that Mr Short acted as their agent in connection with the acquisition of shares in Quadrafox, and that the agent's knowledge should be imputed to his principals.
31 The same matters are relied on for the contentions in paragraph 200 of the cross-claim that Quadrafox holds its assets on a constructive trust for the "continuing parties" to the Westpac and BAC Securities Agreements and the agreement to share opportunities, and is liable to account to those parties for the value and profits attributable to those assets. The same matters are also relied on against each of Mrs Short and Fraser, Martin and Paris Short for the claim that they hold their shares on a constructive trust for Mr Crawley or are liable to account to him for profits attributable to those shares, because of the alleged breaches by Nabatu and Mr Short of those agreements. It is not alleged that they were active and knowing participants in a breach by Nabatu or Mr Short of duties as constructive trustee. The pleader appears to have assumed that the alleged constructive trust arising from the taking of unconscionable advantage of a breach of contract is a trust which is to be imposed as a remedy by the Court if the claim is established.
Claim Against Quadrafox
32 I do not consider that the allegation that Quadrafox knowingly and actively participated in Mr Short's alleged breach of director's duties, because he was the governing mind of Quadrafox, is obviously futile. Nor are the claims that it holds its assets which represent a diverted corporate opportunity on trust for J&J O'Brien, Marsico and Trudale, or is liable to account to them for its profits, obviously futile.
33 The claim that Quadrafox hold its assets on a constructive trust or is liable to account for profits, because its director, Mr Short, took an unconscientious advantage of a breach of contract, is novel. The passage relied on by the cross-claimants from News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 517, does not directly support such a claim. The Full Court only referred to the position of the contract breaker. However, if a constructive trust can arise in respect of property acquired through a breach of contract where it is unconscionable for the contract breaker to retain the property, then it is arguable that a constructive trust may be imposed on assets acquired by a third party through that breach of contract, with knowledge of the breach, where it would be unconscionable to allow the third party to retain the assets. It is reasonably arguable that that is the logical extension to this suggested species of constructive trust for breach of contract, of the principles relating to third parties who acquire assets with knowledge that the property assigned was acquired by the assignor in breach of fiduciary duty. (United States Surgical Corp v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 247, 253-254). The same arguments can be advanced in relation to the claim for an account of profits.
34 Subject to the questions of the effect of delay, I would grant leave to the cross-claimants to bring their claims against Quadrafox.
Claim Against Mrs Short in her Personal Capacity
35 If it is established that Mrs Short directed, procured and funded the incorporation of Quadrafox and the acquisition of shares in it in conjunction with Mr Short and with actual knowledge of his breach of duty, it is reasonably arguable that she has a personal liability for knowingly assisting Mr Short's breach of fiduciary duty. If she acquired her shares in Quadrafox as a result of Mr Short's breach of fiduciary duty of which she knew, then it is arguable that she might hold them on trust for J&J O'Brien, Marsico and Trudale, or be liable to account for profits derived from her shareholding. For the same reasons as I have given in respect of Quadrafox, it is arguable that she could also hold those shares on a constructive trust, if she knew that they were acquired through a breach of contract and it is unconscionable for her to retain them. Again, subject to the question of delay, I would grant leave to the cross-claimants to bring their claim against Mrs Short in her personal capacity in respect of her acquisition of shares in Quadrafox.
Claim Against Fraser, Martin and Paris Short in Respect of Their Shares in Quadrafox
36 The claim that Fraser, Martin and Paris Short are personally liable for assisting a breach of fiduciary duty and that they hold their shares in Quadrafox on constructive trust for J&J O'Brien, Marsico and Trudale, or are liable to account for profits derived from their shareholding, raises different questions. The claim against them is that they were active and knowing participants in Mr Short's breach of duty as a director. However, all that is alleged against them in that respect is that they permitted Mr Short to act on their behalf in respect of all matters relating to their acquisition of shares in Quadrafox in his discretion.
37 It was submitted that this is insufficient to establish a claim for knowing assistance in a breach by Mr Short of his fiduciary duty. It was submitted for the proposed cross-defendants that it was not alleged that they had actual knowledge of the alleged breaches of duty, or knowledge of facts which would communicate to a reasonable person a general understanding that there was a fraud, breach of trust, or breach of fiduciary duty. Nor was it alleged that they did not act as honest persons would act in their position. Therefore, it was submitted, it was not reasonably arguable that they could be liable as constructive trustees for knowingly assisting a breach of fiduciary duty. (See Yeshiva Properties No. 1 Pty Ltd v Marshall [2005] NSWCA 23 at [18]-[22]).
38 In response, the cross-claimants submitted that they allege that Mr Short acted as agent for Fraser, Martin and Paris Short in relation to their acquisition of shares in Quadrafox and that it is reasonably arguable that his knowledge of his own breach of duty should be attributed to them, on the grounds that it was knowledge of matters of a kind that it was his duty to communicate to his principals. It was submitted that the knowledge of an agent which is so attributed to a principal is actual knowledge, not constructive knowledge, and they are fixed with Mr Short's knowledge. (Ford Excavations Pty Ltd v Do Carmo [1981] 2 NSWLR 253 at 266-267). (See also Vane v Vane (1873) 8 Ch App 383 at 399-400; but compare In re Montagu's Settlement Trusts [1987] Ch 264 at 283).
39 I was not referred to any case where this precise issue was determined in the context of a claim against a third party for knowing assistance of a breach of trust or fiduciary duty, although there are useful observations on the subject by Sir Robert Megarry VC in In re Montagu's Settlement Trusts [1987] Ch 264.
40 It is not alleged that Fraser, Martin and Paris Short are vicariously liable for the conduct of their agent. (Compare Agip (Africa) Ltd v Jackson [1990] Ch 265 at 296; [1991] Ch 547 at 570 where the defendant was vicariously liable for the acts of his employee and partner.)
41 In Yeshiva Properties (No. 1) Pty Ltd v Marshall [2005] NSWCA 23, Bryson JA, who gave the leading judgment, said (at [21]) that he found it difficult to distinguish the exposition of the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378, from that of Stephen J in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 408-412. The Privy Council emphasised that a third party may be liable as a constructive trustee for assisting a breach of trust or fiduciary duty, where the third party's actions which assist the breach are actions which an honest person in his or her position would not take. According to their Lordships, dishonesty is a necessary and sufficient ingredient for accessorial liability.
42 If this is the correct test, then I think it plain that the imputation of the actual knowledge of Mr Short as the actual knowledge of his children could not be sufficient to render them liable as constructive trustees. They could not be charged with acting otherwise than as honest persons in their position would act. It is also clear that neither Stephen J in Consul Developments, nor Bryson JA in Yeshiva Properties was concerned with the attribution of knowledge of an agent to his principal.
43 It seems to me that this area of the law is too unsettled to decide the sufficiency of the allegation as a pleading point. It has been suggested that the formulation of accessorial liability in Royal Brunei Airlines v Tan may not represent the law in Australia, (Gertsch v Atsas (1999) 10 BPR 18,431 at 18,440; New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781 at [17]). In any event, its status has to be considered in the light of the House of Lords' retreat in Twinsectra Ltd v Yardley [2002] AC 164, (see Cadwallader v Bajco Pty Ltd [2002] NSWCA 328 at 198-199).
44 For the reasons given in para 33 in relation to the "constructive trust" claim against Quadrafox in relation to its acquisition of property through Mr Short's and Nabatu's alleged breaches of contract, and in paras 38-43 in relation to imputation of Mr Short's knowledge to his children, I do not consider that I should refuse leave to the cross-claimants to plead against Fraser, Martin and Paris Short that they hold their shares in Quadrafox on a constructive trust for the "continuing parties" to the alleged agreements to provide securities and to share opportunities. It is preferable to establish the facts. (Wickstead v Browne at 5).
Claim Against Fraser Short in Respect of Shares in Green Slip and Beverage Boys
45 The last claim relates to shares held by Fraser Short in Green Slip and Beverage Boys. It is alleged that Green Slip was incorporated in 1999 and acquired the sub-leasehold of the Cargo Bar and Lounge premises at King Street Wharf and conducted the Cargo Bar and Lounge business.
46 It is alleged that Beverage Boys was incorporated in 2003 and in and from 15 July, 2003 acquired the sub-leasehold of the Bungalow 8 premises and the Loft premises at King Street Wharf and conducted the Bungalow 8 and Loft businesses from those premises.
47 It is alleged that Fraser Short holds his shares in Beverage Boys on an express or resulting trust for the estate of Mr Short, and that Mr Short held the shares on a constructive trust for Mr Crawley by reason of Mr Short's alleged breaches of contract.
48 It is also alleged that Fraser Short permitted Mr Short to act on his behalf in respect to all matters in connection with the acquisition of shares in Green Slip and Beverage Boys and the taking of any step or decision as a shareholder in Green Slip and Beverage Boys. It is alleged that Mr Short provided the funds for the acquisition of the shares, and directed that they be put in the name of Fraser Short. It is alleged that by reason of these matters, Mr Short's knowledge constituted the knowledge of Fraser Short, and that even if there is no express or resulting trust, Fraser Short holds the shares on a constructive trust for Mr Crawley.
49 It was submitted that Mr Crawley has no interest in these proceedings in contending that Fraser Short held shares on trust for Mr Short. It the cross-claimants are entitled to judgment against Mr Short, they can recover against his estate, of whatever it consists. However, the cross-claimants say that Mr Short held his alleged beneficial interest in the shares held by Fraser Short on a constructive trust for them, and they seek declarations that Fraser Short, as the legal holder of the shares, holds the property on trust for them, so that Mr Short's interest as a sub-trustee disappears. That claim is not manifestly groundless if it is reasonably arguable that: