Sommerfeld v Dylcrew Pty Ltd

4 The material set out above is derived from the affidavit of the plaintiff sworn 18 November 2009, the affidavits of Mr Aherne sworn 25 August 2009 and 17 December 2009, and the affidavit of Mrs Aherne sworn 17 December 2009. At the hearing, a further affidavit of the plaintiff, sworn 30 April 2010, was relied on. 5 Both Mr and Mrs Aherne were cross-examined by counsel for the plaintiff, Mr P J Woods, and both gave short supplementary evidence (see T6-10 and T24-25). Mr C Simpson of counsel appeared for Dylcrew.

6 It is apparent that Mr Allen's account was permitted to remain in debit for lengthy periods and reached an amount of approximately $50,000 in January 2008, but was reduced to approximately $22,000 in April 2008. Dylcrew was quite relaxed in its approach to debtor management.

7 Mrs Aherne said that if debts on an account were more than 45 days in arrears (the account showed the age of debts), then this might result in a call by another office assistant to the customer. She said that if debts were 90 to 120 days old, it was not within her authority to refuse to supply materials in those circumstances, but it might result in Mr Aherne contacting the customer and having a "one to one" (see T21-22). Mr Aherne said that he would not have had difficulty with Mr Allen having a debit balance of $70,000 (see T34.31-34).

8 Mr and Mrs Aherne's evidence was that they did not know that Mr Allen was in financial difficulty until they learned of his bankruptcy. Mr Aherne could not recall whether he noticed the name of the drawer of the cheque, but he said he would not have been concerned had he noticed that it was not Mr Allen who had drawn the cheque, since it was not uncommon for builders to present cheques drawn by someone else to enable their account to be credited.

9 The account documents which were presented by Dylcrew for the 12 month period prior to the receipt of the cheque and for the few months subsequent to that do not themselves directly indicate amounts received from Mr Allen. However, Mrs Aherne explained that there was a transaction listing for each customer which showed cheques received, and that the procedure was to remove items that were covered by any cheque received so that the accounts would show only purchases for which payment had not been received. Although transaction listings were identified, and indeed marked for identification, they were not tendered by either party.

The plaintiff's case 10 The plaintiff's case, as presented at the hearing, is that: (1) Mr Allen's conduct in instructing Dylcrew to apply the cheque proceeds as he did was: (a) dishonest and fraudulent; and (b) a breach of trust or fiduciary duty owed to the plaintiff; and (2) Dylcrew knowingly assisted Mr Allen in his breach of trust or fiduciary duty. 11 The trust which is asserted can be described as a type of "Quistclose trust", after Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, or alternatively, as a constructive trust.

12 The case was presented as one based on what is known as the second limb of Barnes v Addy (1874) LR 9 Ch App 244 and sometimes called a "knowing assistance" case; that is, the plaintiff alleges that Dylcrew, through its officers, the Ahernes, "assisted with knowledge in a dishonest and fraudulent design" on the part of the trustee, Mr Allen: see Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89, where the rule in Barnes v Addy is set out at page 140 ([111]); see also Farah at 159 ([160]).

13 No claim was made under the first limb of Barnes v Addy, which requires the beneficiary to establish that the trust property was received by the defendant with notice of the trust: see Farah at 140-141 ([112]) and see In re Blundell (1888) 40 ChD 370 at 381, cited by Gibbs J (as his Honour then was) in Consul Development Pty Limited v DPC Estates Pty Limited (1974) 132 CLR 373 at 396 and referred to in Farah at 151 ([134]).

The defendant's submissions 14 Dylcrew resists the claim on a number of bases. Its principal defence is that Mr and Mrs Aherne, and hence Dylcrew, had no knowledge of the arrangements made between the plaintiff and Mr Allen. There was nothing in the presentation of the cheque and the instructions given by Mr Allen to establish that Dylcrew had knowledge of Mr Allen's dishonest and fraudulent design.

15 Mr Simpson also makes the point that the cheque was a bearer cheque which gave Mr Allen authority to treat the cheque as his own, and that he was, in any event, providing a cheque made payable to Dylcrew, which is what the plaintiff intended.

16 What was not known to Dylcrew was that Mr Allen had misrepresented his need for the cheque and his intended purposes for the use of the proceeds, and if this constituted Mr Allen a trustee or made him a fiduciary in breach of his fiduciary obligations (which the defendant does not accept), then neither the trust nor the fiduciary relationship were known to the Ahernes or could be discerned by them, and Dyclrew did not have knowledge of Mr Allen's dishonest and fraudulent design.

17 Dylcrew accepts that what Mr Allen did was dishonest and amounted to a misrepresentation, even possibly a fraudulent misrepresentation, but it does not accept that it should be concluded that Mr Allen had a fraudulent design or intent in directing the payment of the proceeds of the cheque as he did, because, it is said, it is by no means clear that Mr Allen was not intending to build the house for the plaintiff, as contemplated by the contract between the plaintiff and Mr Allen, for the contractually-agreed sum.

18 In a subsequent email dated 14 June 2008 from Mr Allen to the plaintiff, Mr Allen went to some lengths to explain what had occurred in relation to the project and his own personal problems, and he essentially offered to supervise the work, but on the basis of being an employee of the plaintiff as an owner-builder. He said in the email: "My most major concern, through all of this has been to finish your job as quick as possible, and as close as possible, to the agreed price."

19 He mentioned in the email that he had to, as he put it, volunteer himself bankrupt. He referred, incidentally, to a level of stress that he had as a result of a number of matters, including a divorce and problems with a former accountant, leading to a need for him to pay not only amounts to his ex-wife, but also large amounts to the Australian Taxation Office.

20 Further, Dylcrew argues that the case does not fall within Quistclose. Little was said by either party about constructive trusts.

21 Finally, Dylcrew pleaded a defence of bona fide purchase for value. There have been cases which establish that applying the proceeds of a cheque to an account that is in debit constitutes consideration for the purposes of that description. Mr Simpson, whilst ready to argue the point, accepted that if the Court were to find that Dylcrew had knowledge, then establishing that Dylcrew was a bona fide purchase for value would not assist and was not otherwise relevant to the case as mounted by the plaintiff, and in those circumstances, he indicated that he would say no more about that issue.

The credibility of the witnesses 22 Before turning to each of the remaining issues, I should say something about the credit of the witnesses.

23 The plaintiff, who was not required for cross-examination, has had no challenge made to her evidence. I accept her evidence. Mr and Mrs Aherne were both cross-examined. Although in cross-examination they, but more particularly Mr Aherne, were taxed with questions that challenged some of their evidence, for example, whether Mr Aherne had noticed that the cheque was drawn by the plaintiff and the degree to which credit was and would have been extended to Mr Allen, no submission was made to the effect that they were not credible witnesses.

24 The impression I formed was that they gave their evidence honestly, and I have no reason to doubt their credibility. They both made clear the areas where they had a lack of recollection, and Mrs Aherne indicated the matters upon which she could not express an opinion. 25 I accept the evidence of Mr and Mrs Aherne. I find that: (1) Mr Allen was in financial difficulty in May 2008; (2) the Ahernes did not have any concerns that Mr Allen could not pay for materials within the normal pattern of payment by him, which involved reduction of the debt on the account by payment of items unpaid for more than 60 days; (3) Dylcrew had not enforced its 28 days for payment term in respect of Mr Allen and other building customers for some time; (4) Mr Aherne did not pay attention to the drawer of the cheque handed over to him by Mr Allen; (5) had Mr Allen noticed that the drawer of the cheque was Mrs Sommerfeld and had he appreciated that she was a client of Mr Allen, this would not have been something he would have regarded as unusual; and (6) Mr and Mrs Aherne did not regard it as unusual or surprising that Mr Allen directed that part of the proceeds of the cheque be applied to a reduction of the account of Mr Kerrigan with Dylcrew, and then subsequently that monies be taken from the account of Mr Allen to be paid to the accounts of Mr Ellis and Mr Whelan. Trust 26 I deal now with the question of the trust.

27 The first defendant points out that the cheque was, according to Mr Allen's email, to be treated as an early payment of a contractual obligation. The first defendant drew the Court's attention to McManus RE Pty Ltd v Ward [2009] NSWSC 440 and Twinsectra Ltd v Yardley [2002] 2 AC 164. There was a passage in Twinsectra to which reference was made. It is from the decision of Lord Millett in that case.

28 Twinsectra concerned a loan to a borrower which was said to have attached to it a requirement that the loan monies were to be used for no other purpose than the purchase of a particular property. There was an issue as to whether or not a solicitor who had received some of the funds could use them for a purpose other than the purchase of the property as directed by the borrower, first, in payment of the solicitor's fees, but secondly, for other purposes, and whether the solicitor was to be held liable as having assisted the breach of trust by the borrower. It was held at first instance that there was no trust and that the solicitor had not acted with knowledge in accordance with the requirements of the law as set out in Royal Brunei Airlines Sdn. Bhd. v Tan [1995] 2 AC 378. The Court of Appeal reversed the trial judge's conclusions on those matters and found that there was a trust and that the solicitor had knowingly assisted in the breach.

29 The House of Lords unanimously agreed with the Court of Appeal's decision that there was a trust constituted by the agreement between the borrower and the lender, and by a majority, was of the view that the Court of Appeal had wrongly overturned the trial judge on the issue of knowledge. The speeches of their Lordships on the question of the trust are all, except for Lord Millett's, short. Lord Millett dealt with the issue of the trust in some detail, saying at 185 ([73]): "A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case."

30 Palmer J referred to that passage with approval in McManus, a case involving the payment of a deposit in advance of a proposed entry into a conveyancing contract for the purchase of land.

31 However, there is another important passage in Lord Millett's decision which is found at 186 ([76]), in which his Lordship said the following: "Mr Leach insisted that such a payment would, no doubt, constitute a breach of contract, but there was no reason to invoke equitable principles merely because Mr Sims was a solicitor. But Mr Sims's status as a solicitor has nothing to do with it. Equity's intervention is more principled than this. It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. As North J explained in Gibert v Gonard (1884) 54 LJ Ch 439, 440: 'It is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.'"

32 Lord Millett continued: "The duty is not contractual but fiduciary. It may exist despite the absence of any contract at all between the parties, as in Rose v Rose (1986) 7 NSWLR 679; and it binds third parties as in the Quistclose case itself. The duty is fiduciary in character because a person who makes money available on terms that it is to be used for a particular purpose only and not for any other purpose thereby places his trust and confidence in the recipient to ensure that it is properly applied. This is a classic situation in which a fiduciary relationship arises, and since it arises in respect of a specific fund it gives rise to a trust."

33 As I have indicated, all members of the House of Lords and the Court of Appeal were of the view that there was a trust created.

34 This is not the usual situation where a builder entitled to money under a building contract seeks payment, and when he receives the payment he is free to do with it what he wishes. Here, the plaintiff provided the cheque for a specific purpose known to the recipient, Mr Allen. I think that she was relying on him to fulfil the terms of that trust, which was to apply the funds to the purchase of materials for the building site.

35 It is undoubtedly correct that there is no fiduciary relationship normally created between a builder and his client, and Mr Woods indicated that he could find no authorities that suggest otherwise. That, however, is not the question here.

36 Rather, the question is whether, in the specific arrangements that were made, albeit against a contractual background but in terms different to the contract, there was a trust created. I do not accept that what occurred as between the plaintiff and Mr Allen was simply an early payment of money on the contract. There was an agreement that the plaintiff would pay for goods which would be utilised for the project, and it was an exceptional and specific agreement that contains the essence of a trust as described by Lord Millet. If it was a variation of the contract, it would not be inconsistent with a Quistclose-type arrangement.

37 It follows that, in my view, the plaintiff has established the existence of a trust in respect of the cheque whereby Mr Allen was, as trustee, required to use the proceeds of the cheque to purchase materials for the construction of the plaintiff's house.

Dishonest and fraudulent design 38 I deal now with the question of whether Mr Allen's conduct was dishonest and fraudulent.

39 Mr Allen, as I indicated, was not present during the hearing. The allegation that he has been dishonest and fraudulent is one which has to be established on the balance of probabilities, but bearing in mind the seriousness of the allegation and the significance of the finding: see Briginshaw v Briginshaw (1938) 60 CLR 336 (see also s 140 of the Evidence Act 1995 (NSW)). Mr Allen has had no opportunity to be heard on the allegations made against him, but I have to determine as between the plaintiff and Dylcrew whether Mr Allen's conduct meets the description of "dishonest and fraudulent".

40 I have referred to Mr Allen's email of 14 June 2008, in which he endeavours to explain the financial and personal crises that had befallen him, due, amongst other things, to a divorce. This may explain his conduct, but in my view, it does not excuse it. It is apparent from his email of 19 May 2008 to the plaintiff (pages 148-149 of Exhibit A1) that Mr Allen told the plaintiff that he had ordered goods from various suppliers, including Dylcrew, and that he needed cheques to ensure the release of materials, including the cheque for $46,759 to Dylcrew. He asked the plaintiff whether she would make the payments directly to these suppliers, which he said would be treated as payments against the total contract price. The plaintiff acceded to this request, and drew the cheque and two other cheques to Coastal Fabrications and Williams Windows, the total amount being $222,586.09.

41 It is apparent that Mr Allen had not ordered any goods from Dylcrew (see Mr Aherne's evidence at T25.13-20) and was not coming under pressure from Dylcrew to pay any money other than arguably monies for purchases that were more than 90 days old, and it is clear that the proceeds of the cheques were not used to pay for any materials ordered by Mr Allen on behalf of the plaintiff but not yet delivered.

42 Mr Allen's conduct was, I find, dishonest. I think that his conduct in obtaining a cheque from his client, the plaintiff, for a stated purpose and then using at least part of the proceeds for a completely unconnected purpose is fraudulent. I say "at least part" because it could be said that by crediting his account to wipe the debit balance, he was thereby ensuring that he could order materials for the plaintiff's project, but even if that view were taken - and I doubt that it should be - it would not justify the payment from the proceeds of the plaintiff's cheque to third-party builders.

43 I therefore find that Mr Allen's conduct was both dishonest and fraudulent. I do not think that the fact that he subsequently offered to carry out work on the property as an employee of the plaintiff or that he indicated that his "most major concern" was to complete the house detracts from this.

Knowledge 44 The question of what knowledge or "scienter" is required for the purposes of Barnes v Addy has been the subject of much judicial examination and academic discussion (see Baden v Société Générale Pour Favouriser le Développement du Commerce et de l'Industrie en France S.A. (1993) 1 WLR 509; Royal Brunei Airlines; Twinsectra; Farah). In this case, it was accepted by the plaintiff that of the five categories identified by Peter Gibson J in Baden at 575-576, only categories (ii)-(iv) were potentially relevant. The five Baden categories are: (i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and (v) knowledge of circumstances which would put and honest and reasonable man on inquiry. 45 Category (i) is not relevant because no case of actual knowledge was asserted, and category (v) is not relevant in the light of the High Court's decision in Farah at 163 and Consul Developments at 412 per Stephen J (Barwick CJ concurring at 376-377) and Gibbs J at 398.

46 The plaintiff, in written submissions provided by Mr Woods before the commencement of the hearing, indicated that it relied on the following matters: (a) The cheque was drawn by the plaintiff. (b) The cheque's amount was for "a peculiar sum". (c) Dylcrew knew of Mr Allen's insolvency. (d) Mr Allen instructed Dylcrew to apply the cheque proceeds to reduce both his indebtedness and that of the three builders, Mr Kerrigan, Mr Ellis and Mr Whelan. (e) Consequent upon the application of the monies, Mr Allen's account went into credit (to the extent of $330.23).

47 There are some preliminary matters to be noted here: (1) The plaintiff accepts that the allegations made against Dylcrew are also of a serious kind and that, again, the Briginshaw test is the appropriate test in relation to establishing, on the balance of probabilities, that Dylcrew has knowingly assisted in the breach of trust by Mr Allen. (2) It was said in Baden at 582 by Peter Gibson J that a court should not be astute to impute knowledge when no actual knowledge exists, and this was cited with approval in Gertsch v Atsas [1999] NSWSC 898 at [33] per Foster AJ. (3) In considering each of the decisions to be made in relation to whether Dylcrew had knowledge within categories (ii), (iii) and (iv) of Baden , it is necessary to consider what is said to be "obvious" as to what enquiries are said should have been made, and in relation to the fourth category, what facts the circumstances are said to indicate. (4) It is important to prevent distortion of the image revealed as at 23 May 2008 with the wisdom of hindsight.

48 The plaintiff's submissions ultimately crystallised into a case based on category (iv) of the Baden categories (see T48) and the "facts" which the plaintiff asserts ought to have been plain to an honest and reasonable man are that the cheque was "for nothing more than the delivery of building materials" (see T49.41-42), based upon the circumstances that I have earlier referred to and the further circumstances that were identified by Mr Woods that: (a) Mr Allen was well known as a significant building customer; (b) he had not been paying invoices to Dylcrew in accordance with the printed terms; (c) there might have been a call to Mr Allen in relation to debts in excess of 45 days old; and (d) between May 2007 and May 2008, the statements do not reveal any other payment as large as $46,000 (see T49.24-27).

49 None of these further matters were originally particularised, but no complaint was made by Mr Simpson about that.

50 If Mr Aherne thought the cheque was drawn by Mr Allen, he would have had no cause for concern at all. If he was aware that the cheque was drawn by a third party but did not know that the third party was a client of Mr Allen's, it would not be apparent that the cheque was intended as a payment for building supplies. It could have been a cheque paid to Mr Allen for anything.

51 If Mr Aherne did know that the cheque was drawn by a client of Mr Allen's, or surmised correctly that it was, he did not know what the contractual arrangements were between Mr Allen and the plaintiff, he did not know what had been done on site or by whom, and he did not know what Mr Allen had said to the plaintiff. It follows that he did not know that Mr Allen had deceived the plaintiff as to the purpose for which he needed the cheque.

52 In short, Mr and Mrs Aherne had no knowledge of the trust created between Mr Allen and the plaintiff, and they had no knowledge of the facts giving rise to that trust.

53 The plaintiff's characterisation of the cheque as being for a "peculiar" sum is inaccurate. It was for an amount that was not an even figure. Once it is accepted as a possibility consistent with a regularly-obtained cheque that the payer intended to pay a specific amount due to Mr Allen pursuant to an obligation, whether derived from contract or otherwise, the significance of the cheque being for an uneven amount is considerably reduced. If Mr Aherne did notice that the cheque had been drawn by the plaintiff, that is not inconsistent with appropriate conduct on the part of Mr Allen.

54 I do not accept the contention that Dylcrew knew of Mr Allen's insolvency. What Dylcrew knew was that: (1) Mr Allen had been a significant customer for at least 10 years; (2) he had reduced his debt from approximately $50,000 in January 2008 to $22,000 by April or early May 2008; (3) he had some amounts that were due in respect of items for which payment had not been made for 90 days, but they were in the order of between $7000 and $12,000 over the preceding year, and he was a slow payer.

55 It was not suggested that he had become a slower payer in 2007 to 2008 than he had been previously. That factual issue was not investigated.

56 Unless it can be said that Mr Aherne, if acting honestly, would have appreciated that the cheque was drawn only to pay for building materials yet to be ordered, a central plank of the plaintiff's case is removed.

57 I do not think that the only conclusion that an honest man could come to was that the cheque was for building materials ordered or, more accurately, yet to be ordered, since there is no evidence that Mr Allen had ordered anything on behalf of the plaintiff.

58 Mr Aherne may have provided a quotation for the plaintiff's project in March 2008. The evidence does not support any positive finding, but if he did provide a quotation in March, it is hardly surprising that by May he would not link the name of the project to the name on the cheque, particularly since his evidence, which was unchallenged, is that the projects are, in the main, referred to by their address rather than by the name of the client of Mr Allen.

59 Mr Aherne said in his affidavit that had he known that Mr Allen was in financial difficulties, he would not have permitted him to continue ordering materials and increase his debit balance after 23 May 2008, as in fact occurred (although only to the extent of a few thousand dollars, presumably because Mr Allen ceased trading in June), and from Mr Allen's email of 14 June 2008, he was certainly in a state of financial crisis before the date of his email.

60 Mr Woods made the point at T45.45-50 that the other two recipients of the cheques returned those cheques. That is not an accurate summary of the evidence because, according to the plaintiff's evidence in paragraph 9 of the her affidavit, to which no objection was taken by the defendant, Coastal Fabrications and Williams Windows "confirmed that they were holding money on my behalf and for my project". There is no evidence as to what those companies did with the cheques they received and whether there was any debit balance relating to Mr Allen, or whether any instructions were given by Mr Allen when he gave them the cheques. 61 Mr Woods argued that "the right thing to do" would have been for Dylcrew to return the money, which imports some ethical standard to be applied in commerce. It is no part of the issues that were advanced on the pleadings by the plaintiff.

62 So far as the reduction of the account and the payment to third-party builders is concerned, the direction to pay other builders had the appearance of being payments for building work done by those other builders on jobs run by Mr Allen. In itself, it is not obvious that it ought to have given any cause for alarm. Reduction of Mr Allen's own debit account not only does not seem suspicious, but like the payments to the builders, it seems to be the opposite of what might be expected from a person who has fraudulently duped a client. There does seem to be tension in Mr Woods' submission that whilst Mr Aherne should have recognised that Mr Allen was insolvent, the receipt of a cheque discharging his debt was said to bespeak dishonesty.

63 It would appear that Mr Allen thought that he could solve his problems by paying off existing debts with money to which, in reality, he was not yet entitled. There is no evidence that Mr Allen had ever done anything like this before, or that he was in any way the object of suspicion as to his conduct, being facts which, if proved, might support a conclusion that Dylcrew appreciated or ought to have appreciated that Mr Allen was untrustworthy.

64 Close analysis of all the facts might lead to caution being exercised, but that is quite a different matter to holding that Mr Aherne could not have been acting honestly because he did not appreciate that a cheque handed to him by a long-time, large-scale customer of the business and accompanied by instructions as to how the proceeds should be dispersed was part of a dishonest and fraudulent scheme by that customer in breach of trust, of which Mr and Mrs Aherne had no knowledge and where it cannot be suggested that they were told by Mr Allen or the plaintiff of the trust or the circumstances giving rise to it.

Conclusion 65 I do not accept that the matters that are relied on by the plaintiff and established, taken together, would indicate to an honest person in Mr Aherne's and/or Mrs Aherne's position that there was a trust in existence, or its nature, or that the instructions given by Mr Allen constituted a breach of trust, or that Dylcrew assisted, with knowledge, in the dishonest and fraudulent design of Mr Allen. It follows that none of the other categories previously relied on would have been made out either.

66 It follows that the plaintiff has not made out her claim against Dylcrew, and it was accepted by counsel that costs should follow the event.

67 Therefore, it follows that there should be judgment for Dylcrew on the plaintiff's claim and an order that the plaintiff pay the costs of Dylcrew.

68 So far as the claim against Mr Allen is concerned, no leave having been obtained against him, that claim should be dismissed, but with no order as to costs.

69 Exhibits may be returned on the expiry of 28 days in the absence of an appeal.

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