Sino Iron Pty Ltd & Anor v Palmer & Anor [2015] QSC 94 | Case summary

Supreme Court of Queensland|2015-05-04|Before: Jackson J

1. Paragraphs 50 to 100 of the amended defence are struck out.

3. Any application for costs is to be made by submissions in writing not exceeding seven pages in length on or before 10 days from the date of these orders.

4. Any responsive submission is to be made in writing not exceeding seven pages in length on or before 10 days from receipt of the applicants' submissions.

EQUITY - TRUSTS AND TRUSTEES - IMPLIED TRUSTS - CONSTRUCTIVE TRUSTS - KNOWING PROCUREMENT OR INDUCEMENT OR KNOWING RECEIPT - where the first defendant is a director of the second defendant - where the first defendant drew two cheques on the bank account where the cheques were paid - where the payments were not made for permitted purposes- where the plaintiff alleges that the payments were made in breach of trust - where the plaintiffs allege that the defendants are liable in equity on the basis that they had knowledge of the breach of trust - whether knowledge of the existence of a trust is a requirement of liability

PROCEDURE - SUPREME COURT PROCEDURE - QUEENSLAND - PROCEDURE UNDER UNIFORM CIVIL PROCEDURE RULES AND GENERALLY - PLEADING - DEFENCE AND COUNTERCLAIM - where the defendants plead an unclean hands defence to the plaintiffs' claims for liability against parties to alleged breaches of trust - where the defendants' unclean hands defence was struck out - where the defendants were given leave to replead the defence - where the amended defence alleges additional facts in support of an unclean hands defence - whether the amended defence should be struck out as not sufficiently arguable

Uniform Civil Procedure Rules 1999 (Qld), rr 159(2), 159(3), 171

Alleyn v Darcy (1854) 4 I Ch R 199, cited

Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) & Anor (2000) CLR 588; [2000] HCA 25, applied

Australian Super Developments Pty Ltd v Marriner [2012] VSCA 171, referred to

Australian Super Developments Pty Ltd v Marriner [2014] VSC 464, followed

Bahr v Nicolay (No 2) (1988) 164 CLR 604; [1988] HCA 16, cited

Balog v Independent Commission Against Corruption (1990) 169 CLR 625; [1990] HCA 28, considered

Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; [1968] UKHL 4, considered

Barlow Clowes International Ltd (In Liquidation) v Eurotrust International Ltd [2006] 1 WLR 1476; [2005] UKPC 37, considered

Barnes v Addy (1874) LR 9 Ch App 244, followed

Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26, cited

CITIC Pacific Pty Ltd v Mineralogy Pty Ltd [2014] WASC 358, referred to

Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24, cited

Commonwealth Bank of Australia v Barker (2014) 312 ALR 356; [2014] HCA 32, applied

Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; [1975] HCA 8, followed

Coulls v Bagot's Executor and Trustee Co Ltd (1967) 119 CLR 460; [1967] HCA 3, cited

Eaves v Hickson [1861] EngR 849; (1861) 30 Beav 136; 54 ER 840, cited

Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175, considered

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22, followed

Fyler v Fyler [1841] EngR 463; (1841) 3 Beav 550, 561-562; [1841] EngR 463; 49 ER 216 , cited

Gosper v Sawyer (1985) 160 CLR 548; [1985] HCA 19, followed

Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6, followed

Hasler v Singtel Optus Pty Ltd (2014) 311 ALR 494; [2014] NSWCA 266, followed

Re Kit Digital Australia Pty Ltd (in liq) [2014] NSWSC 1547, considered

Jessup v Queensland Housing Commission [2002] 2 Qd R 270; [2001] QCA 312, followed

Kauter v Hilton (1953) 90 CLR 86; [1953] HCA 95, applied

KBH Construction v Lidco Aluminium Products Pty Ltd (Unreported, Supreme Ct of NSW, Common Law Division, Giles J, 27 June 1990, No. 12903 of 1990), considered

Korda & Ors v Australian Executor Trustees (SA) Ltd (2015) 317 ALR 225; [2015] HCA 6, followed

Mineralogy Pty Ltd v Sino Iron Pty Ltd [2013] WASC 194, related

Mineralogy Pty Ltd v Sino Iron Pty Ltd [2014] FCA 1326, related

Nicholson v Morgan (No 3) [2013] WASC 110, referred to

Parkview Qld Pty Ltd v Commonwealth Bank of Australia [2013] NSWSC 79, considered

Puma Australia Pty Ltd v Sportsman's Australia Ltd [No 2] [1994] 2 Qd R 159, referred to

Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia & Ors (1991) 30 FCR 491; [1991] FCA 344, considered

Re Schebsman (dec'd) [1944] Ch 83, applied

Saloman v Saloman & Co Ltd [1897] AC 22; [1896] UKHL 1, referred to

Sino Iron Pty Ltd & Anor v Palmer & Anor (No 2) [2014] QSC 287, related

Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2009] 1 AC 61; [2008] UKHL 48, considered

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; [1988] HCA 44, cited

Twinsectra Ltd v Yardley & Ors [2002] 2 AC 164; [2002] UKHL 12, followed

Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956) 95 CLR 43; [1956] HCA 8, cited

A Bell SC, M Thangaraj SC and S Free for the applicants/plaintiffs

S Couper QC and D Atkinson for the respondent/defendants

[1] JACKSON J: On 8 August 2013 the first defendant, Mr Palmer, drew a cheque on the account of Mineralogy Pty Ltd ("Mineralogy") at the National Australia Bank No. 16-939-3487 styled "Port Palmer Operations" ("the bank account"), payable to the second defendant, Cosmo Developments Pty Ltd, in the sum of $10,000,000.

[2] On 2 September 2013, the first defendant drew another cheque on the bank account payable to Media Circus Network Pty Ltd ("Media Circus") in the sum of $2,167,165.60.

[3] Both cheques were presented and paid by the bank to the payees ("the challenged payments").

[4] The plaintiffs, Sino Iron Pty Ltd and Korean Steel Pty Ltd, allege that the challenged payments were made by Mineralogy in breach of trust. They claim that the first defendant procured or assisted in Mineralogy's breaches of trust, or knowingly participated in them. They allege that the second defendant knowingly received the $10,000,000 payment.

[5] Against the first defendant, the plaintiffs claim declaratory relief that he dishonestly procured or was involved in or assisted Mineralogy's breaches of trust or knowingly assisted Mineralogy in its dishonest and fraudulent breaches of trust and that he is liable to account to the plaintiffs, as constructive trustee, in relation to the payments.

[6] Against the second defendant, the plaintiffs claim a declaration that it is liable to account as a constructive trustee to Mineralogy, for the $10,000,000 payment, and that the second defendant received that payment in breach of trust and with knowledge of (Mineralogy's) breach of trust.

[7] Against both defendants, the plaintiffs further claim a declaration that they are entitled to an enquiry in relation to any profits made or benefits derived by the defendant and, if so advised, to elect for an account of profits or alternatively equitable compensation.

[8] The hearing of liability issues began on 26 November 2014. It was agreed that not all issues of liability could be resolved in the days that had been set down to hear them. The difficulty was created by a plea of unclean hands raised in the defence. The plea was raised late. The plaintiffs applied to strike it out. On 26 November 2014, I ordered that it be struck out but gave leave to replead the relevant paragraphs. Consistently with the philosophy of the Uniform Civil Procedure Rules 1999 ("UCPR"), I ordered that the trial proceed on the balance of the issues of liability raised on the pleadings, so that it would be adjourned after hearing the evidence on those issues, to await determination of whether an unclean hands defence would proceed to trial.

[9] As matters turned out, the defendants filed an amended defence again raising an unclean hands defence. The plaintiffs made a second application to strike out the relevant paragraphs of the amended defence. It was heard on 29 January 2015. These reasons for judgment deal with the hearing of the liability issues and the second application to strike out the unclean hands defence.

[10] A curious feature of the case is that shortly before the hearing began, Mineralogy paid to the plaintiffs, and they accepted payment of, a sum including an amount of $12,167,000 on account of the challenged payments. Neither the plaintiffs nor the defendants disclosed that fact to the Court at the time. By 29 January 2015, it was apparent from the material filed after the earlier hearing that payment of $12,167,000 had been made.

[11] Notwithstanding the payment, the plaintiffs persist in their claim against the defendants on the footing that they might still elect to claim interest under s 58 of the Civil Proceedings Act 2011 (Qld) for an amount that exceeds the jurisdiction of the District Court. As well, they submit that they are entitled still to an inquiry in relation to any profits that may have been made by the first or second defendants so as to be able to elect for an account of profits if so advised. I observe that no claim for interest is made by the plaintiffs in the claim or statement of claim up to this point. Rule 159(3) of the UCPR requires that if a party intends to apply for an award of interest the party must allege particulars of the interest in the party's pleading.

[12] Apart from the unclean hands defence, the issues for determination may be divided in two. First, were the funds in the bank account held by Mineralogy on trust for the plaintiffs? Second, if they were held on trust, are the defendants liable to the relief claimed against them?

[13] Another unusual feature of the way in which the matter proceeded was that the defendants made a number of concessions when the hearing of the liability issues began. For clarity, I have reorganised the order in which they were made.

[14] Paragraphs 71 and 72 of the statement of claim allege that Mineralogy did not have any need to incur expenses in relation to the Port, or for Port management services at the Port, as referred to in the Facilities Deeds. Paragraph 23 of the defence alleges that on 1 June 2013 Mineralogy agreed with Qld Nickel Ltd ("QNI") that QNI would provide services and discharge the responsibilities of Mineralogy pursuant to the Facilities Deeds for a fee of $12,000,000 and that $12,000,000 of the challenged payments was made in payment of that fee. The defendants abandoned par 23 of the defence.

[15] Only if I find that the challenged payments were made from funds held on trust, the defendants made three other concessions. First, they concede that the challenged payments were made by Mineralogy in breach of trust. Second, if I also find that the first defendant had knowledge of the trust, they concede that the first defendant procured the breaches of trust constituted by making the challenged payments. Third, if those findings are made, they concede that the plaintiffs do not need to prove that the breaches of trust were fraudulent or dishonest or that the first defendant in procuring the breaches of trust acted fraudulently or dishonestly in order to obtain the relief they seek, subject to any other defences (it would seem the unclean hands defence) not being accepted.

[16] The defendants submit that the consequence of those concessions is that any question of fraud or dishonesty, either by Mineralogy as trustee, or by the first defendant, has no further relevance. Accordingly, they submit that the only issues which remain live questions are: was there a trust? Did the first defendant by any of the recognised tests of knowledge know there was a trust? Are the plaintiffs disentitled to any relief because of "unclean hands", as a defence?

[17] For their part, the plaintiffs refused to accept these concessions. They persisted with the tender of evidence intended to prove that Mineralogy's breach of trust was dishonest and fraudulent and they seek findings of dishonesty against the first and second defendants.

[18] The material facts relied upon by the plaintiffs for the existence of a trust are largely not in dispute but should be set out in the following findings.

[19] Each of the plaintiffs and Mineralogy are parties to a deed relating to the approval, development, administration and maintenance of facilities to be constructed on an area at or near Cape Preston in Western Australia. The deed between the first plaintiff and Mineralogy is called the "Sino Iron Facilities Deed". The deed between the second plaintiff and Mineralogy is called the "Korean Facilities Deed". The Sino Iron Facilities Deed (as amended) and the Korean Steel Facilities Deed (as amended) are in near identical terms. Together, I will describe them as "the Facilities Deeds". Each of the first plaintiff and second plaintiff is defined therein as "Company".

(a) By recital D, the parties have agreed to enter into a contract in respect of the procedures for the approval, Development, operation, administration and maintenance of Facilities in the Preston Area, on the terms and conditions of the Deeds.

"Mineralogy may establish an Administrative Fund at any time after the Commencement Date, Mineralogy must use the Administrative Fund only to:

(a) pay Administration Costs and the day to day expenses of operating, maintaining and repairing Approved Facilities; and

(b) reimbursing (sic) Company and Third Parties for operational, maintenance and repair work they have carried out to Approved Facilities which is approved by Mineralogy;

(c) any other matter needed to establish, maintain and operate Approved Facilities for Company, Mineralogy and/or Third Parties."

(c) By clause 7.1, Mineralogy may prepare an annual budget for Administration Costs before the start of each Production Year and give the Company a copy of such budget.

(d) management fees and other costs payable by Mineralogy to any party;

(e) fees and other costs payable to an auditor or accountant appointed by Mineralogy;

(f) costs and disbursements for stationery, postage, photocopying and related management costs; and

(g) any other costs incurred by Mineralogy which are not costs for Shared Facilities according to clause 17.1 and the Shared Facilities Register."

Mineralogy may include in a budget for Administration Costs:

(a) how much money it will need during the next Production Year for its Administration Costs;

(b) money (other than Administrative Fund contributions) expected to be received in the next Production Year for Administration Costs;

(d) the proportion which Company and each Third Party must contribute to Administration Costs for the next Production Year;

(e) the amount of the proportion which Company and each Third Party must contribute to Administration Costs for the next Production Year; and

(f) any other matter Mineralogy deems appropriate."

Mineralogy must prepare budgets for the Administrative Fund and the Sinking Fund on a reasonable basis and must use its best endeavours to prepare budgets that are consistent with the reasonable operating costs and capital replacement requirements of the Facilities."

(g) By clause 8.1, Mineralogy shall levy Company the contributions it will need for its Administrative Fund for each Production Year 120 days in advance and Company must make payment no later than 60 days before the commencement of each Production Year.

(h) By clause 8.2(a), the amount of contributions for the Administrative Fund must be the amount determined by Mineralogy in the budget for Administrative Costs under clause 7.2 plus a margin of 5% and Company's contribution shall be calculated according to the formula stated in that clause.

(i) By clause 9.2(a), Mineralogy must keep separate records and account separately at Company's costs for, inter alia, Administration Costs.

Within three months after the end of each Production Year (or more often it (sic) determined by Mineralogy), Mineralogy must reconcile the amount of contributions it has received from each User against the use by (or benefit to) each User of each Shared Facility. The purpose of the reconciliation is to ensure that a User pays for their proportion of actual use of (or benefit derived from) each Shared Facility over the reconciliation period (regardless of the apportionment of costs in the budget for the reconciliation period). In the reconciliation, Mineralogy must identify:

(a) whether Company has overpaid any contributions and the amount of overpayment; and

(b) whether Company have [sic] underpaid any contributions and the amount of underpayment, based on the Company's actual use of (or benefit derived from) Shared Facilities during the reconciliation period.

Within 14 days after it carries out the reconciliation, Mineralogy must refund to Company any contributions Company has overpaid during the reconciliation period."

(a) establish and maintain a bank or building society account or accounts in its name;

(b) deposit all contributions and any other money paid to Mineralogy into its bank or building society accounts."

"Mineralogy may place money in an interest bearing deposit account at a bank or building society. If the account earns interest, Mineralogy may treat it as surplus funds and return it to any Third Party or maintain such fund in the relevant fund as additional security or for future use."

"If, at the end of a Production Year, the Administrative Fund has unspent amounts, those unspent amounts shall be refunded to Company and any other company that has contributed to the Administrative Fund ... in proportion to their respective contributions to the Administrative Fund ... during the Production Year, provided that such unspent amounts are not required:

(ii) for environment rehabilitation plans which have been developed by Mineralogy in accordance with Legislative Requirements or are required for the operations and are provided for in the budget for the relevant Production Year."

(a) If Mineralogy has made payments to service providers, Government Authorities or other parties, including payments for the provision of services or the replacement of Approved Facilities, from its Administrative Fund or Sinking Fund or from payments made directly by Company and Third Parties; and

(b) The service provider, Government Authority or other party refunds to or reimburses Mineralogy for some or all of those payments.

If Mineralogy receives a payment under this clause, Mineralogy may, reimburse the payment to whoever contributed towards the payment or maintain such amount in the relevant fund.

Mineralogy may reimburse payments under clause 16.2 to Company and Third Parties in shares proportional to the payment made by them."

(o) By clause 1.1, "Approved Facilities" means, inter alia, Approved Company Facilities.

(p) By clause 1.1, "Approved Company Facilities" means any one or more Company Facilities approved by Mineralogy in accordance with clauses 3 or 4.

(q) By clause 1.1, "Company Facilities" means any one or more of the Facilities described in the Company Development Proposal from time to time to enable Company to export Company's Product for the purposes of the Company Project, or any item or land being used by Company for any purpose related to the Company Project or Company's operations.

(r) By clause 1.1, "Facilities" means any one or more of the:

(i) Marine Facilities (being the port to be developed at Cape Preston, including jetties, loading and unloading facilities and related infrastructure and any additional requirements of Mineralogy in accordance with sound operations of the Cape Preston Port);

(ii) Transport Facilities (being corridors, from Company's mine on the Project Area to or around Cape Preston, for power lines, pipelines, roads, bridges, causeways, railways, pipelines and maintenance facilities and other facilities necessary for Company's Development Proposal or Third Party Development Proposals or any other Approved Development Proposal);

(iii) Preston Facilities (being rail and rail unloading facilities, materials handling, conveyors, stock piles, stackers and reclaimers, desalination plants, power transmission lines, power plants, pipelines, marine facilities, jetties, tugs, causeways, ship loaders, port facilities, including but not limited to navigational aids, beacons, lighting, railway, roads and other appropriate infrastructure for the development of port facilities necessary to export hot briquetted iron and/or direct reduction iron, pellets produced from Iron Ore and/or concentrated forms of Iron Ore or Magnetite Ore not exceeding 72% Fe); and

(iv) any other Facilities approved by Mineralogy from time to time.

(s) By clause 1.1, "Shared Facilities" means the Facilities identified by Mineralogy in the Shared Facilities Register as facilities which may service more than one user.

(t) By clause 22.1, Mineralogy must operate and maintain the Shared Facilities on behalf of the users.

(u) By clause 32.1, the Facilities Deeds shall be construed exclusively in accordance with the Laws for the time being in force in the State of Western Australia.

[21] In all relevant dealings between Mineralogy and the plaintiffs:

(a) CITIC Pacific Mining Management Pty Ltd (CITIC) acted on behalf of both plaintiffs; and

(b) Mineralogy and the plaintiffs conducted themselves on the footing that there was one Administrative Fund, contributions to which were regulated by the Facilities Deeds.

[22] On or about 22 February 2010, consistent with its obligation under clause 13.1 of the Facilities Deeds, Mineralogy caused the bank account to be opened.

[23] Port Palmer is a name used by Mineralogy and the first defendant to describe the port at Cape Preston.

[24] On the dates appearing below, CITIC, on behalf of the plaintiffs, made contributions to the Administrative Fund by making the following payments into the bank account ("Administrative Fund contributions"):

[25] The Administrative Fund contributions were made following the issue of invoices by Mineralogy to CITIC on behalf of the plaintiffs in respect of budgeted Administration Costs for calendar years 2010, 2011, 2012 and 2013.

[26] The Administrative Fund contributions were made under cl 7.4 of the Facilities Deeds.

[27] At the time of the challenged payments, the first defendant, as signatory of the Facilities Deed, and as a director of Mineralogy, had knowledge of the terms of the Facilities Deeds.

[28] At the times when the Administrative Fund contributions and the challenged payments were made, Mineralogy maintained, in addition to the bank account, another bank account or other bank accounts for the purpose or purposes of its business.

[29] With a few minor exceptions, the Administrative Fund contributions were the only funds contributed to the bank account before the challenged payments were made.

[30] The exceptions included two amounts payments for royalties owed by the plaintiffs to Mineralogy. Mineralogy had directed that the royalty payments were to be made into another bank account. The two payments were deposited into the bank account because of an administrative error on the part of one of the plaintiffs' or CITIC's agents. There were some other small credits which appear to be clerical errors and were immediately cancelled or reversed.

[31] After 2 September 2013, and after the bank account had become overdrawn, Mineralogy made a deposit totalling $1,150,000 into the bank account.

[32] In detailed written and oral submissions, the plaintiffs developed a number of propositions about whether the Administrative Fund contributions were held in the bank account by Mineralogy on trust. They submit that there should be no general reluctance to infer an intention to create a trust and there is no need for particular caution in drawing an inference that a trust was intended. They submit that there is a greater readiness on the part of Australian courts to discern an intention to create a trust, relying on the view of the authors of Jacobs' Law of Trusts in Australia.[1]

[33] The plaintiffs rely on the following indicia of a trust: first, a prescribed, dedicated or exclusive purpose for the use of the contributed funds; second, a requirement that the funds be kept separate from other moneys; and, third, an obligation to account for the funds to the plaintiffs. They place particular reliance on the conceptual model of the "Quistclose trust",[2] as a relevant species of trust.

[34] Relying on those propositions, the plaintiffs make detailed submissions about the operation of the clauses of the Facilities Deeds set out above. First, they submit that although cls 7.1 and 7.2 refer to a budget for Administration Costs and cl 7.4 refers to budgets for the Administrative Fund, their subject matter is the same. They submit that the concept or notion of Administration Costs and the object of the Administrative Fund overlap and that the use of the expressions "Administrative Fund" and "Administration Fund" in cl 8.2 supports that conclusion.

[35] As an overarching summary, the plaintiffs submit that the transactions provided for in the clauses of the Facilities Deeds set out above involve payment in advance for services to be provided, with a refund of advances not spent on providing particular identified services and costs. The commercial objective is to put Mineralogy in funds to enable it to provide the services. The amount to be advanced is to be fixed by a budget given to the plaintiffs beforehand to allow their comment or complaint but without a right to reject the budget. The advances are to be paid into a bank account opened for that purpose. Separate records are to be kept of the moneys received into and paid out of the fund so created and an annual accounting and reconciliation of receipts and payments is to occur. Any surplus is to be paid back to the plaintiffs. Alternatively, if the money advanced is insufficient, Mineralogy can call for the shortfall. Interest earned on the moneys in the fund is to be paid to the plaintiffs, or held in the fund to be spent on an allowable purpose.

[36] The plaintiffs submit that the whole tenor of the relevant provisions is that the fund constituted by the contributions is to be maintained so that only authorised payments can be made and the unspent balance is to be returned to the plaintiffs. Therefore, the fund is to be kept separate and distinct from Mineralogy's own moneys. The last point is strengthened by the express requirement that a bank account be opened for the receipt of the advances and by the provision that payment for the services is to be made from the bank account.

[37] The plaintiffs submit that cl 5 of the Facilities Deeds evinces the intention that the moneys advanced are only to be expended for exclusive and specific purposes.

[38] Next, the plaintiffs submit that the requirement that Mineralogy keep separate records and accounts bespeaks a requirement that the Administrative Fund is to be kept distinct, as do the mechanisms for budgets for Administration Costs, the Administrative Fund and the Sinking Fund to be prepared in advance and requiring contributions based on the budgets.

[39] The plaintiffs particularly rely upon the requirement under cl 13.1 of the Facilities Deeds that Mineralogy open a separate account. They submit there would be no occasion to require the opening of a separate account for the Administrative Fund if it were intended that Mineralogy be entitled to use any contributions as it saw fit and to mix those contributions with its other funds. They submit that the separation of the funds in the bank account is inconsistent with Mineralogy having any absolute entitlement to them. They further rely on the provisions in cl 13.2 of the Facilities Deeds that interest earned on an interest bearing deposit is to be returned, or maintained in the Administrative Fund as additional security for future use, and cl 16 of the Facilities Deeds that refunds from government authorities or third party service providers are to be held in the Administrative Fund or refunded to contributors.

[40] Penultimately, the plaintiffs submit that the provisions in cls 15 and 16 of the Facilities Deeds for the return of surplus funds and for amounts to be returned to the fund reinforce the fact that there are strict restrictions on the use to which Mineralogy can apply contributions to the Administrative Fund and that Mineralogy is not at liberty to treat them as its own.

[41] Lastly, the plaintiffs submit that the whole context of the requirement to make contributions to the Administrative Fund informs the characterisation of the funds held in the bank account as moneys held in trust because expenditure from the Administrative Fund (or the Sinking Fund for that matter) is to be for the benefit of the users of the Port facilities. In that sense, the provisions of the Facilities Deeds may be seen to contemplate Mineralogy's use of the funds for the benefit of the users of facilities at the Port who contribute to the funds. The requirement for adjustment among the users does not operate inconsistently with that.

[42] The defendants submit that a trust does not necessarily arise merely because money is provided for a particular purpose.

[43] The defendants submit that by cl 24(b) of the Facilities Deeds the Port facilities are acknowledged to be vested in Mineralogy and Mineralogy undertakes the obligation to operate and maintain the facilities. The defendants submit that the Administrative Fund structure provides for payments by users of the facilities to Mineralogy, consistently with Mineralogy's obligation to incur expenditure with respect to the operation and maintenance of the facilities. The contributions are to defray those operating and maintenance expenses. The mechanism provided is for the cost to be defrayed in proportion to the benefit a user receives, by reference to the volumes of product they ship through the Port.

[44] The defendants submit that the provisions for budgets and reconciliations are required because the actual amount of the expenses to be incurred cannot be calculated with precision in advance. Seen in that way, those provisions do not point to the user retaining any beneficial ownership of the sums contributed. The sums contributed are not paid on behalf of a user to meet the user's liabilities to third parties.

[45] The defendants also submit that the indefinite nature of the expenses Mineralogy is to incur has the consequence that contributions cannot be held on trust for the intended payees. They submit that this is not a trust where the funds held in the bank account are held on trust for intended payees with a secondary or resulting trust in favour of the contributors. The defendants submit that the arrangements provided for under the Facilities Deeds are not capable of constituting a trust of that kind.

[46] The defendants submit that cl 14.4 of the Facilities Deeds provides that Mineralogy may recover unpaid contributions and any other money owed to it as a debt. They further submit that cl 23.3 of the Facilities Deeds provides that the plaintiffs are not entitled to set off any amounts owing under any contract with Mineralogy in reduction of any contribution they are liable to pay for the Administrative Fund or Sinking Fund. They submit that those provisions are inconsistent with the contributions being held in the bank account by Mineralogy on trust.

[47] The defendants submit that the express provision in cl 13.1(b) of the Facilities Deeds, that Mineralogy must deposit not only contributions but "other money paid to Mineralogy" into its bank or building society accounts, anticipates that other money will be mingled with the contributions in the bank account, inconsistently with the contributions being held on trust. They submit that royalty payments due and owing by the plaintiffs to Mineralogy might be deposited to the bank account. Any account established or maintained under cl 13 is to be viewed as a clearing point, not a separate account to hold contributions to the Administrative Fund as trust funds.

[48] Further, the defendants submit that the provisions for reconciliation are inconsistent with a trust. Pursuant to cl 10.1 of the Facilities Deeds, the reconciliation is to occur up to three months after the production year. The outcome is to be a refund of overpaid contributions or a further payment by the plaintiff if there has been an underpayment.

[49] The defendants submit that these provisions permits the plaintiffs' contributions to be applied to meet another party's share of the Administration Costs, with adjustment to be made later. They submit that arrangement is inconsistent with the sanctity of trust property.

[50] Penultimately, the defendants submit that although overpaid contributions are to be refunded in certain circumstances, nothing requires that the moneys to be refunded are to be those paid by the plaintiffs or either of them. The account is to receive the contributions but also other money paid to Mineralogy and other users' contributions. It follows that the moneys returned may come from a different contribution or source. The provisions do not require that a particular contributor's contributions be kept quarantined.

[51] Finally, the defendants submit that, on the proper construction the Facilities Deeds, Mineralogy is entitled to receive payment from the bank account as its own money and to pay money out for its own purposes. Where the plaintiffs pay money by way of contributions they are contractually entitled to see that an equivalent sum is applied for the purposes under cl 5 but they do so by way of reconciliation of the Administrative Fund. They do not have the interests of a beneficiary under a trust in respect of the funds in the bank account

[52] The plaintiffs submit that subsequent conduct is admissible evidence upon the question of whether the parties intended to establish a trust.

[53] They rely upon the fact that the Administrative Fund contributions were the only moneys paid into the bank account, with irrelevant exceptions. They submit that later payments by Mineralogy or on its behalf are not relevant. There was no suggestion that in making the Administrative Fund contributions, the plaintiffs sought any assurance from Mineralogy that the contributions would be kept separate from Mineralogy's other moneys beyond the terms of the Facilities Deeds. Nor was it suggested that Mineralogy made any representation that it would do so beyond the terms of the Facilities Deeds.

[54] The defendants submit that subsequent conduct may not be considered in ascertaining whether or not there was a trust of the Administrative Fund contributions. It submits that in determining whether or not a trust is created the court is construing the two written contracts and the parol evidence rule denies recourse to evidence of subsequent conduct in construing a written contract.

[55] In reaching my conclusions, I have not found it necessary to resolve the dispute as to the admissibility of subsequent conduct. That is because I do not consider that the fact that Mineralogy did not mix its own monies in the bank account with the Administrative Fund contributions is relevant to whether or not Mineralogy was obliged not to do so as a contractual obligation under the Facilities Deeds.

[56] It may seem surprising that there might be uncertainty about whether there is a trust in circumstances like the present. By and large, the relevant principles are not in doubt. And there are many reference points in the decided cases which can be deployed by way of analogy in reasoning to a positive or negative answer. Yet, I acknowledge at the outset that the accepted principles must be deployed carefully. Learned writers in this field of discourse have recognised the difficulties. The authors of Jacobs' Law of Trusts in Australia have lamented that it "is difficult to understand about the cases... how the principles... can lead to such bewildering multifarious results."[3]

[57] One relevant example may serve to show that deep in the case law there are difficulties that are not easily solved. The most recent High Court case dealing with whether or not an implied trust should be found was decided only weeks ago (and after the decision in the present case was reserved): Korda & Ors v Australian Executor Trustees (SA) Ltd.[4] The questions in that case were whether the proceeds of sale of timber produced from trees grown under a forestry investment scheme or the proceeds of sale of the land used to grow the trees were held on trust for the investors in the scheme. The answers to those questions depended on the terms and incidents of the arrangements contained in or evidenced by a number of contracts and deeds. Keane J referred to a well-known judgment of McPherson A-CJ in Jessup v Queensland Housing Commission.[5] The judgment has been referred to before in the High Court in a cognate context. No doubt, that is because of the respect accorded to McPherson A-CJ's views on equitable principle.

[58] A passage from Keane J's reasons in Korda deals with the significance of provisions for the keeping of records as follows:

"Jessup v Queensland Housing Commission is again of assistance. In that case, McPherson JA considered provisions, at least as rigorous as cl 8, for the keeping of records of moneys received by a putative trustee, and said (at [9]):

'[9] All of these are or resemble obligations like those imposed by equity on a trustee in similar circumstances. In the end, however, they tell against rather than in favour of the existence of a trust. If [the provider] as settlor had intended to create a trust, it would have been simple to have said so, instead of descending to the detail it did in the Agreement; or, if the reason for including the detail was to point up the specific obligations of [the recipient] as trustee, it would have been cautionary to have done both. It is true, said du Parcq LJ in Re Schebsman, that:

"by the use possibly of unguarded language, a person may create a trust, as Monsieur Jourdain talked prose, without knowing it, but unless an intention to create a trust is clearly to be collected from the language used and the circumstances of the case, I think that the court ought not to be astute to discover indications of such an intention."

If the purpose of [the provider] was to inspire the poetry of trusts, it is odd that it chose to express itself in common law prose.'"[6]

[59] The reasons of du Parcq LJ in Re Schebsman (dec'd)[7] have been referred to with approval in a number of earlier High Court cases.[8] It is not necessary to unravel the work of Moliere to grasp the meaning of his Lordship's metaphorical reference to Monsieur Jourdain talking prose without knowing it.[9] But McPherson A-CJ's additional juxtaposition of the "poetry of trusts" and the expression of "common law prose" is perhaps not so clear.[10]

[60] It may lie in his Honour's earlier statement that if a trust is intended it is simple enough to say so. That is done by using express language that the putative trustee is a trustee of the particular assets that are to be held on trust for the identified beneficiaries or class of beneficiaries. If that is what his Honour meant, however, the question is begged. The question is what impliedly creates a trust, short of express language? It cannot be answered by saying "express language".

[61] The parties in the present case relied on very many cases in support of their respective submissions. It is neither practical nor would it be helpful to deal with most of them in these reasons.

[62] The starting point for analysis, in my view, is that the relevant field of discourse is that relating to a finding, by inference, that the parties intended that there should be a trust as a species of implied trust. In particular, short of a finding that there was a trust over the funds held by Mineralogy in the bank account, the plaintiffs do not contend for a fiduciary relationship between them and Mineralogy. Cases of that kind may be put to one side.

[63] The leading statement as to the requirements for either an express or implied trust is to be found in Kauter v Hilton,[11] expressed by Dixon CJ, Williams and Fullagar JJ as:

"...the established rule that in order to constitute a trust the intention to do so must be clear and that it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries."[12]

[64] These requirements were later described by the High Court as "the three certainties".[13] The parties' submissions focussed exclusively on the first requirement as to a clear intention to constitute the trust.

[65] If there is a trust, some obvious consequences follow. A beneficiary has a right to the due administration of the trust and, except in a discretionary trust, an equitable proprietory interest in the trust assets. Subject to the terms of any trust instrument, a trustee has the powers of a trustee and the duties and responsibilities of a trustee. They are conferred and imposed both by equity and by statute. The trustee must adhere to the terms of the trust, in exercising the powers of the trustee and in dealing with the trust assets. Failure to do so is a breach of trust, subject to defences I need not mention.

[66] As applied to this case, if there is a trust of the Administrative Fund contributions to the bank account, the defendants concede that the challenged payments were made in breach of trust by Mineralogy.

[67] Next, if there is a breach of trust, a stranger to the trust who is involved in a dealing with the trust assets is potentially subject to the rights or interests of, or may incur personal obligations to, the beneficiaries. The position of a stranger to the trust is often associated with the statement of principle made by Lord Selborne LC in Barnes v Addy.[14] In this case, the plaintiffs allege that the defendants are liable to them on that basis. In addition, they allege that the first defendant is liable for knowingly inducing or procuring the alleged breaches of trust.

[68] As both parties' submissions accept, whether or not there is a trust turns on a close consideration of the arrangements constituted by the contracts comprised in the Facilities Deeds. However, the analysis is also informed, in my view, by keeping in mind the structure of the relationship, rights and obligations which those contracts create.

[69] The commercial objective of the Facilities Deeds is to provide for the construction and use of facilities to receive, unload, handle and load mining products to be shipped from a port at Cape Preston, Western Australia. A contextual fact is that the plaintiffs and Mineralogy are associated in the development and conduct of mining operations to extract and produce iron ore from mining leases or tenements in Western Australia for transport by rail to the port for shipping.

[70] Second, the Facilities Deeds provide in detail for the plaintiffs to have access to areas for the purpose of constructing the proposed facilities.

[71] Third, the Facilities Deeds provide that after construction of the facilities, Mineralogy is to operate the port and the facilities' operation shall "vest" in Mineralogy. The plaintiffs are to be users of the facilities who acquire services including port services from Mineralogy. It is in that context that the Facilities Deeds provide for contributions to be made to the bank account by the plaintiffs to fund Mineralogy's activities in carrying out Mineralogy's obligations to operate the port and to provide the facilities and the services.

[72] Fourth, the contributions which comprise the Administrative Fund must only be used for identified purposes and costs.

[73] Fifth, from that context, the subject matter of cl 5 of the Facilities Deeds emerges. The identified purposes and costs are for operational, maintenance and repair work carried out to the Approved Facilities or any other matter needed to establish, maintain and operate the Approved Facilities and Administration Costs. The Administration Costs are insurance costs, management fees and other costs payable by Mineralogy to another person, accounting and office management costs and other costs incurred by Mineralogy not for Shared Facilities.

[74] This is a simplified summary. It may be too simple. But it serves to identify some features of the structure of the relationship between the plaintiffs and Mineralogy that either resemble or differ from the relationships considered in other cases.

[75] Take a Quistclose trust as an example. In that case, Q lent money to R to fund a dividend declared by R to be paid to R's shareholders. The loan contract provided that the loan was only to be used for that purpose and that R should deposit the loan funds into a separate account from which it would be disbursed to the shareholders. Before the dividend was paid R went into liquidation. The question was whether the funds held by R in the bank account were subject to a trust. It was held that they were. The purpose of the loan had failed. Q retained a beneficial interest in the funds in the bank account that were recoverable from R's banker.

[76] There is some resemblance to the arrangements in the present case. In Quistclose, had the funds been paid from the bank account to the shareholders in payment of the dividend, Q would have retained no interest in the money in the hands of the recipients. The relationship between Q and R would have been lender and borrower only. But when the purpose of the loan failed, it was held that Q retained a beneficial interest in the funds of which R was the trustee. That conclusion was reached by analogy with case law dealing with loans made by a person to an insolvent person for the restricted purpose of paying the insolvent person's creditors. The species of the relevant trust was analysed by Gummow J in Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia & Ors,[15] in my view correctly, as "an express trust with two limbs rather than an express trust in favour of the shareholders and a resulting trust in in favour of [Q] which arose by reason of an incomplete disposition by [Q] of the whole of its interest in the money lent to [R]."[16]

[77] In the present case, if funds in the bank account are used in accordance with cl 5, the plaintiffs retain no interest in the money in the hands of the recipient. Their argument must be that, until that point, they retain a beneficial interest in the funds of which Mineralogy is the trustee.

[78] There are differences between the structure of the arrangements in the present case and those in Quistclose. First, the contributions in the present case were not a loan. Second, there was no failure of the purpose for which the contributions were made. In this case, the contributions were in the nature of a pre-payment on account of expenses to be incurred. The expenses were to be incurred by Mineralogy in carrying on its business. It was not doing so on behalf of the plaintiffs. Rather, they had agreed to pay Mineralogy for expenses Mineralogy was to incur (or in a limited respect they might incur with Mineralogy's approval). The plaintiffs had agreed to pay for those expenses by the mechanism of contributions to the bank account, supported by Mineralogy's promise to use the funds only for the agreed purposes or costs, to be followed by an account of the expenditure at the end of the period and reimbursement of the surplus to the plaintiffs or payment of any shortfall to Mineralogy.

[79] Jessup is closer factually to this case than Quistclose. However, the reasoning requires some analysis. The Queensland Housing Commission ("QHC") was a Government agency established in 1945 to assist with the provision of housing to Queenslanders. It was responsible for the construction and provision of suburbs of houses in Brisbane in a post-war environment, although it continued to exist long after that. It was abolished in 2004.

[80] The events in Jessup concerned a governmental program administered by QHC, named the Home Assist Home Secure Program. It provided eligible persons with information, advice and other services in relation to home maintenance, repairs, modifications and security. The target group were older or disabled people and other pensioners who wished to continue living in their own homes. QHC entered into a contract with an incorporated association, Cairns Career Training Inc, ("CCT") to provide services by way of coordination and supervision and to see to the carrying out of the work for the program. QHC made funding payments to CCT under a formal contract described as a funding agreement. The payments were used by CCT to fund its expenses by way of wages, motor vehicle expenses and administrative expenses.

[81] CCT was wound up in insolvency. The question was whether the funds in CCT's bank account attributable to funding payments not yet spent were held on trust. The funding agreement did not expressly provide that the funds were held on trust, but contained a number of provisions similar to those in the Facilities Deeds in this case.

[82] First, the funding agreement provided that CCT accepted that it was responsible for the proper expenditure of taxpayer money. Second, it provided that the funds were to be provided in instalments and were to be spent within the funding period of 8 months for specified purposes for the locations of Cairns and two other nearby towns. Third, it provided that all funds provided must be deposited to a nominated account at an approved financial institution and retained in the account. Fourth, it provided that all income generated by CCT under the funding agreement and all interest earned on the funds must be deposited in the nominated account and used only for the specified purposes. Fifth, it provided that CCT must immediately return unspent funds at the end of the period to QHC. Sixth, it provided that CCT must organise its accounting system so that so that the income expenditure assets and liabilities for each amount of funding could be accurately identified.

[83] McPherson A-CJ (with whom the other Judges agreed) held that these arrangements did not constitute a trust. His Honour's starting point was that the funding agreement was a formal contract designed to impose enforceable contractual obligations. In approaching the question whether a trust was to be inferred, his Honour found it "difficult to ignore the fact that in all the lengthy and detailed provisions of the Agreement there is nowhere any reference to the existence of a trust at all."[17] He acknowledged that the agreement imposed obligations characteristic of trustees, as summarised above. But he held that "they tell against rather than in favour of the existence of a trust."[18] The reason was that it would have been simpler to say that a trust was intended, in which case the obligations of a trustee would have been implied, instead of descending into the detail in the funding agreement. Because the funding agreement said "too much rather than too little", there was "not much room or reason to imply any further intention beyond what was expressed."[19]

[84] Second, his Honour found that it was significant that the funding agreement said "nothing to the effect that the other money not derived from QHC may not be deposited, and so intermixed, with those funds."[20] On other evidence, it appeared that the omission was not accidental, so that his Honour found that the alleged trust instrument "deliberately refrains from prohibiting any such intermixing of funds."[21] Such a requirement had existed under earlier agreements but had been deleted by the time of the funding agreement. Referring to the duty of a trustee to keep trust funds separate and not to mix them with money from other sources as "a hallmark duty of a trustee"[22], McPherson A-CJ held that a deliberate refraining from prohibiting the intermixing of funds was an indication that no trust of the funding payments was intended.[23]

[85] Lastly, McPherson A-CJ held that if CCT was a trustee of QHC in carrying out its functions in relation to the Home Assist Home Secure Program, then as trustee it would have been entitled to indemnity payable out of the trust assets for liabilities properly incurred and a possible further right to indemnity from QHC personally. QHC's right to the return of unspent funds at the end of the period was inconsistent with those rights of indemnity.

[86] With all respect, some of this reasoning must be further considered. As previously stated, in my view, the failure to expressly provide that there is a trust is the occasion for ascertaining whether an intention to create a trust is to be inferred, not a reason, per se, to reject the inference. By the time of Gosper v Sawyer,[24] it was possible for Mason and Deane JJ to say that under common law and equitable principle in Australia:

"The contractual relationship provides one of the most common bases for the establishment or implication and for the definition of a trust."[25] (emphasis added)

[87] It is a relevant fact that parties do not expressly mention a trust in a detailed contract prepared with the assistance of lawyers. However, in my view, detailed contractual provisions that are consistent with the obligations of a trustee do not necessarily speak strongly against an inference of an intention to create a trust. The contrary view is a variant of the principle expressed in the latin maxim "expressum facit cessare tacitum." Although the laws for the interpretation of instruments, whether they be statutes or contracts, recognise such reasoning, it is often a weaker factor than other factors.[26] In the context of statutory interpretation, the High Court said in Balog v Independent Commission Against Corruption:[27]

"However, that maxim, whilst a valuable servant is a dangerous master and it is necessary to seek confirmation in the broader context of the whole Act."[28]

[88] In the context of contractual interpretation, there are other relevant statements. For example, in Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas),[29] Lord Hoffman said:

"I suppose it can be said of many disputes over interpretation, especially over implied terms, that the parties could have used express words or at any rate expressed themselves more clearly than they have done. But... the court is engaged in construing the agreement to reflect the liabilities which the parties may reasonably be expected to have assumed and paid for. It cannot decline this task on the ground that the parties could have spared it the trouble by using clearer language."[30]

[89] Quistclose and other cases show that there can be a trust of funds provided on loan or of goods supplied as if on credit without it following, as well, that the recipient is carrying on a business as trustee for the putative beneficiary. Where the funding agreement does not empower or provide for the putative trustee to carry on business on behalf of the putative beneficiary or beneficiaries, the possible indemnity of a trustee for properly incurred debts of a trustee carrying on such business does not necessarily speak clearly to whether the funds provided are held on trust. In the present case, in any event, there is a contractual right in Mineralogy to recover any shortfall under cl 8.8 of the Facilities Deeds, following the accounting mechanism and reconciliation process.

[90] On the other hand, in my view, it is a critical point that there is no provision (or other obligation) prohibiting the mixing of funds in the accounts of the putative trustee. The point is irresistible when it further appears, as it did in Jessup, that the omission is deliberate. The strength of the consideration that there is no requirement not to mix funds - a "hallmark"[31] of the duties of a trustee as McPherson A-CJ described it - appears in other cases of highest authority.[32] In my view, it explains both the decision in Jessup and it provides the answer in the present case.

[91] It is not necessary to essay the numerous cases as to the general significance of the absence of a provision prohibiting the mixing of funds. Most recent among them is Korda. Each of the judgments in that case held that the absence of such a requirement from the contractual relations of the parties in that case was an important or dispositive element in favour of the conclusion that no trust was intended. Thus, French CJ held that "the milling company was not required to keep the sale proceeds intact as a fund."[33] Hayne and Kiefel JJ held that "the amounts which Forest Co and Milling Co received could and would be mixed with the company's own moneys and that payments due from Milling Co to Forest Co and from Forest Co to the Trustee Co would be made out of the relevant company's own moneys."[34] Gageler J held that "one contractual omission [was]... decisive. It is the acknowledged absence of any contractual indication that Forest Co and Milling Co should hold the proceeds separately from other moneys of their own."[35] Keane J held that "[a] significant textual consideration is that no provision in any of the relevant documents required either the forest company or the milling company to create and maintain an account separate from its general funds to safeguard the timber proceeds from the vicissitudes of their business... these provisions [of the tripartite deed] fell far short of requiring that the moneys invested by covenantholders not be used as part of the assets of the forest company".[36]

[92] In Jessup, there was no express contractual provision prohibiting the mixing of the funds provided and other moneys in the funding account. The point does not appear to have been argued, but as a matter of contract law, there would have been no implied term to that effect. First, such a term is not necessary, in accordance with the general principles for the implication of an implied term ad hoc or as a matter of fact. The remaining contractual provisions worked perfectly well to provide for a system of funding, expenditure and refunding, as a matter of contractual obligations and debt. As well, in Jessup, evidence was received as a matter of context to show that an anti-mixing contractual provision had been included in prior contracts between the parties and that its omission from the funding agreement was not a mistake.

[93] Of course, if it is concluded that there is a trust, the obligation not to mix trust funds follows, at least in most cases. But absent an express or statutory trust, the obligation must be found in some other source, so as to support the inference that a trust is intended. Where the relationship of the parties is otherwise contractual, it must be sourced in the express or implied contractual terms.

[94] In the present case, there is no express provision prohibiting the mixing of contributions and other moneys in the bank account. The plaintiffs did not submit that such a term should be implied as a term of the contract comprised in the Facilities Deed. Absent an express or implied term, the plaintiffs did not identify the source of an obligation not to mix other funds with the contributions in the bank account.

[95] Instead, the plaintiffs submit that the maintenance of a fund with the incidents provided for in cls 8.8, 13, 15 and 17 of the Facilities Deeds suggests that it is to be separate and distinct from Mineralogy's other moneys. The plaintiffs further submit that the suggestion is strengthened by the requirement that an account be opened for receipt of the advances and payment for the authorised expenses and other factors. Most of the factors relied upon were present in Jessup. In particular, the plaintiffs rely on cls 13.2 and 16 as inconsistent with Mineralogy having any absolute entitlement to the funds.

[96] Clause 13.2 permits but does not require Mineralogy to place money in an interest bearing deposit. Mineralogy may treat the interest as surplus and return it or maintain it for additional security or for future use. Either way, the interest earned on the money is to the benefit of the account of the contributor and not for Mineralogy's benefit.

[97] Clause 16 provides that a refund from a payment to a service provider, Government Authority or other party is to be reimbursed to the contributors towards the payment in proportion to the payment made by them or to be maintained in the relevant fund. Again, the refund is to the benefit of the contributor not Mineralogy. However, cl 16 does not deal with the legal or equitable entitlement to the money in the bank account.

Sino Iron Pty Ltd & Anor v Palmer & Anor

At a glance

Court

Decision date

Before

Source

Judgment (463 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (19)