Equity - Trusts and trustees - Constitution and classification of trusts generally - Powers, duties, rights and liabilities of trustees - Liability for breach of trust - Liability for interest.

Wallersteiner v Moir (No 2) [1975] 1 All ER 849; followed.

Hagan & Ors v Waterhouse (1991) 34 NSWLR 308; iWave Pty Ltd v Break O'Day Business Enterprise Board Inc [2004] TASSC 43, considered.

Procedure - Supreme Court Procedure - Tasmania - Practice under Rules of Court - Payment into and out of Court - Offer of compromise.

Heather v Vita Pacific Ltd (1996) 6 Tas R 120; National Mutual Life Association of Australasia Limited v Chris Poulson Insurance Agencies Pty Ltd (No 6) [1998] TASSC 113, referred to.

Procedure - Costs - General rule - Costs follow the event - Costs of issues - Exercise of the discretion.

Judgment Number: [2004] TASSC 91

TASMANIAN SEAFOODS PTY LTD v MALCOLM CLIVE MacQUEEN

1 Three issues remain to be determined following the publication of reasons for judgment ([2004] TASSC 40) namely, the amount of judgment, the terms of a declaration and the award of costs. The amount of judgment, in turn, depends on the rate of interest which ought be awarded on the amount determined as an equitable remedy. The reasons for judgment contained an arithmetical error in the assessment of the award which has been corrected for the purpose of these calculations. For the purpose of judgment, no distinction is made as between the defendants. Both parties conducted their respective cases on the basis that Mr and Mrs MacQueen were in partnership and jointly liable to the plaintiff for unpaid money arising from the relationship between the parties. Evidence given at trial showed that the defendants had conducted joint farming and investment operations which presumably had returned a joint profit, and that each defendant had had the benefit of the money retained.

2 The plaintiff seeks an award of interest based on commercial rates referable to the cost of money which the defendants would have been required to pay had they not had the benefit of the retained money. The defendants contend for a lesser rate based on the anticipated return to the plaintiff had it invested the money with a bank at the time when the outstanding sums were payable. It is common ground that, consistent with the reasons for judgment, the interest is to be calculated on the amount due from 31 December 1994 until 13 August 2004, and thereafter at a daily rate, that the interest rates during that period were variable but ought be calculated by "averaging" and that the terms of the judgment required yearly rests.

3 The relevant conclusion reached was stated in the reasons for judgment in the following terms at par61, namely:

"The plaintiff claims interest in accordance with the principles stated in Wallersteiner v Moir (No 2) [1975] 1 All ER 849. It seeks a commercial rate for the lending of money comparable to that permitted in cases involving tort and contract as stated by the High Court in Hungerfords v Walker [1989] HCA 8; (1990) 171 CLR 125. It further seeks compound interest in accordance with the principles in State of Tasmania v Shaw (No 2) [2002] TASSC 12, another case involving tort. It claims entitlement because the defendants were able to use the retained moneys for business purposes and debt reduction and that it is irrelevant as to what use the plaintiff would have made of the money. However, this is a case of equitable compensation and absent legislative reform (Supreme Court Civil Procedure Act 1932, s34), any rate of interest must accord with the equitable principles stated in Wallersteiner (supra). In that case, a rate was fixed at 1 per cent over the then minimum lending rate. In Hagen v Waterhouse (1991) 34 NSWLR 308, Kearney J allowed interest in a trust case at a mercantile rate, compounded by yearly rests. He did so in part, citing the statement in Ford and Lee, Principles of the Law of Trusts (1990) 2nd ed, par 1713.2 'to minimise the possibility that any profit can remain in the trustee's hands'. Here the circumstances differ somewhat. The commercial arrangement was that the defendants would deliver the catch to the plaintiff which, in turn, paid on delivery, a percentage calculated in the landed beach price. It would process the catch and sell on to the market, doubtless for profit. But the cost of the purchase of the resource would comprise a component of the unit cost of production and sale. Here the plaintiff is to receive the full value of the catch withheld and its entitlement to a share of the beach price. The issue is made more complex by the differing claims by the plaintiff for declarations, entitlement and damages. If the sum of $275,834 represents entitlement because it represents a return on its original investment in providing capital for the purchase of the original licence, then compound interest at a rate above that fixed by the Reserve Bank would be appropriate. If it represents equitable compensation for an amount equivalent to the unsupplied resource to which it was entitled, then the sum awarded, without interest, represents a fair return since it is free of associated costs. My reasoning requires adoption of the former approach and interest will be awarded. However, this remains a case in equity, not commercial contract, and consistent with Wallersteiner and Hagan (supra), interest will be calculated at yearly rests. The defendants will be deprived of profit, but not punished in an award of damages. Counsel are requested to submit amended calculations in accordance with these reasons for judgment."

4 The plaintiff had advanced money to the defendants in accordance with an agreement made in April 1988. The first defendant had previously held a relevant fishing licence under the Sea Fisheries Regulations 1962, but had surrendered or not renewed it in 1985. In 1988, he was interested in re-entering the industry and needed capital to so do. At that time the plaintiff was the operator of a processing plant and was engaged in a process of expanding its operations, supply and market. Its strategy to increase volume included the advancement of capital to divers through the purchase of quota entitlements and/or loan guarantees for licence purchase. Its advantage was the receiving of supply and the co-operation of an experienced diver. It advanced the sum of $305,000 to the first defendant who thereafter held the licence as a trustee for the plaintiff and the second defendant. In doing so, the plaintiff was acting as an "investor" in the licence held by the first defendant, the attached quota and the industry generally. These proceedings concerned entitlement to 8 units of the Furneaux quota attached to the licence subsequent to the original agreement.

5 The defendants breached the term of the trust. But the breach was neither flagrant nor dishonestly committed. Parliament and the Executive had varied the terms of the licence purchased and provided for a specific and personal basis for the holding of the quota units which are the subject of these proceedings. The first defendant did approach the plaintiff with a view to varying the basis on which he worked and make more flexible the conditions of his hazardous work. The plaintiff was entitled to decline the approach. Doubtless both parties saw economic advantage in their respective approaches, but had reason to conclude that each had openly stated their positions. They had differing views of those respective positions but the failure to reach a new agreement governing the altered position was in part a result of the complexities caused by the legislative and regulatory change not contemplated by the parties. That is not to say that the plaintiff is not entitled to equitable compensation, together with interest, but it provides the context within which the rate of interest should be assessed.

6 The plaintiff operated its business on the basis of 90 day bills provided by its banker. The amount of the bills varied but the evidence showed that for much of the time the account was in credit and recourse to the provision of credit was not required. The rate, or at least the margin, was subject to negotiation and a financially viable corporation could reasonably expect a more advantageous rate than one less secure. That was the basis on which the plaintiff conducted its financial affairs. Details of its internal operations, payment of dividends and its profit margins were not necessary for the determination of these proceedings, so the loss to the company cannot be ascertained, except by reference to its commercial practice. The Court accepts as its basis for determination the evidence given at trial by Mr Byrne, the accountant retained by the defendants.

7 The plaintiff contends that the defendants ought not profit by their breach of trust. However, the parties continued to deal with each other for some time subsequent to the first defendant indicating his position in relation to payment and entitlement. There was nothing devious in the conduct of the defendants other than adherence to a stated position. There was no misappropriation in the sense considered by the Full Court of the Supreme Court of South Australia in Southern Cross Commodities (In Liq) v Ewing (1988) 91 FLR 271.

8 The award of interest in this case was made in accordance with the approach taken by the English Court of Appeal in Wallersteiner v Moir (No 2) [1975] 1 All ER 849. In that case, Lord Denning, with whom Buckley and Scarman LJJ agreed, stated three bases on which an award of interest could be made, in the following terms at 855 - 856:

"The principles on which the courts of equity acted are expounded in a series of cases of which I would take the judgment of Romilly MR in Jones v Foxall [1852] EngR 407; (1852) 15 Beav 388; of Lord Cranworth LC in Attorney-General v Alford (1855) 4 De G M & G 843 at 851; of Lord Hatherley LC in Burdick v Garrick (1870) 5 Ch App 233 at 241, 242; of Sir W M James LJ in Vyse v Foster (1872) LR 8 Ch App 309 at 333. Those judgments show that, in equity, interest is never awarded by way of punishment. Equity awards it whenever money is misused by an executor or a trustee or anyone else in a fiduciary position - who has misapplied the money and made use of it himself for his own benefit. The court presumes -

'that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in trade, and in those cases the Court directs rests to be made [ie compound interest]':

see Burdick v Garrick (1870) LR 5 Ch App at 242 by Lord Hatherley LC. The reason is because a person in a fiduciary position is not allowed to make a profit out of his trust; and, if he does, he is liable to account for that profit or interest in lieu thereof.

In addition, in equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business. It is plain that the company should be compensated for the loss thereby occasioned to it. Mere replacement of the money - years later - is by no means adequate compensation, especially in days of inflation. The company should be compensated by the award of interest. That was done by Sir William Page Wood V-C (afterwards Lord Hatherley) in one of the leading cases on the subject, Atwool v Merryweather (1867) LR 5 Eq 464n at 468, 469. But the question arises: should it be simple interest or compound interest? On general principles I think it should be presumed that the company (had it not been deprived of the money) would have made the most beneficial use open to it, cf Armory v Delamirie (1722) 1 Stra 505[1722] EWHC KB J94; , [1558-1774] All ER Rep 121. It may be that the company would have used it in its own trading operations; or that it would have used it to help its subsidiaries. Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. But, whichever it is, in order to give adequate compensation, the money should be replaced at interest with yearly rests, ie compound interest.

Applying these principles to the present case, I think we should award interest at the rate of 1 per cent per annum above the official bank rate or minimum lending rate in operation from time to time and with yearly rests."

9 While in Australia it can be said that a flexible practice has been adopted (Hagan & Ors v Waterhouse (1991) 34 NSWLR 308) which might include terms most advantageous to a plaintiff (Alexander v Perpetual Trustees (WA) [2004] HCA 7; (2004) 78 ALJR 411), principles of fraud, misrepresentation and breach of fiduciary duties by directors (Duke Group Limited (In Liq) v Pilmer & Ors [1999] SASC 97; (1999) 31 ACSR 213) remain as guides to the discretionary grant of remedy (see generally iWave Pty Ltd v Break O'Day Business Enterprise Board Inc [2004] TASSC 43). Here the conclusion reached in the primary judgment was that the interest should be compounded at yearly rests at a rate of 1 per cent over the "minimum lending rate". The evidence does not establish that the plaintiff was obliged to borrow money in order to meet a shortfall occasioned by the non-payment of its entitlement. Had the plaintiff succeeded in its claim of ownership, the position might be different but its entitlement to remedy was that of equitable compensation on the basis of the return derived from the licence, not an interest in the licence itself. In my opinion, the case comes within the first category stated in Wallersteiner (supra). Interest will be awarded in accordance with the calculations provided by the defendants in the following terms:

10 The daily rate calculated as and from 13 August to the date of judgment 2 September is $64.

11 There will be an award for equitable compensation in the sum of $361,816.

12 Both parties seek orders for costs. The plaintiff succeeded in its claim for equitable compensation, but failed in its claim of equitable ownership and an entitlement to a share of the capital value of an interest in the licence. The defendants failed in their claim of variation of contract by agreement. Resolution of the respective applications requires consideration of differing offers of compromise in the light of the amount of equitable compensation ordered, the rate of interest awarded and the dates of the respective offers, together with the amount due as of those dates.

13 Varying offers of compromise were made by the respective parties between May 2003 and November 2003. Consideration of their terms in the light of the judgment obtained is made complex by the fact that some of the terms sought to address matters outside of the issues raised at trial and to ensure the recognition of future rights. In considering the effect of those respective offers, regard is had to the following:

(1) the plaintiff failed in its action or suit seeking orders or declarations that it was the equitable part owner of the Furneaux units;

(2) the plaintiff failed in its claim for equitable compensation on the basis of one half entitlement, less certain deductions, of the proceeds derived from the Furneaux units;

(3) the plaintiff succeeded in its claim of equitable entitlement to a share of the proceeds derived from those units;

(4) the defendants failed in their claim of variation of contract by way of agreement.

14 In determining the question of costs and the import of the respective offers of compromise, significant regard is had to the amount of the award made and the terms of the declaration pronounced in favour of the plaintiff. To the extent that other competing matters were advanced in the respective offers, it will, for the purposes of this determination, be assumed that had the primary matters of quantum of damages and entitlement to ongoing return been agreed that the remaining matters would have been susceptible to resolution. The complexity of the issues would otherwise make any decision as to costs well nigh impossible.

15 In May 2003, the plaintiff made an offer that it would accept payment of $350,000, together with costs of $45,000 in settlement of its existing claim, provided that the defendants entered into a deed effectively dividing future returns into one half portions, subject to a formula of outgoings or expenses. Neither party contends that the offer ought govern the issue of costs.

16 On 24 October 2003, the defendant offered, (inter alia) the sum of $150,000 plus costs and the future payment of two thirds of the beach price derived from 4 Furneaux units. The terms of the offer would not entitle the defendants to a costs order.

17 On 5 November, the defendants made a fresh offer which included payment of $150,000 plus taxed costs, sell the abalone dive licence upon ceasing "to carry on the business of a commercial dive licence", pay two thirds of the gross beach price of 4 Furneaux units to the defendant and share equally with the plaintiff the return from any "exploratory" licence. Again the offer does not assist the defendants. The terms of the counteroffer by the plaintiff made on 7 November for $500,000, declarations and the making of a fresh deed omitted, not by design, the question of costs; but in any event has no impact on this determination. A further offer by the defendants of $200,000 made on 20 November and set out in more detail by a formal document of 21 November, is likewise of no import.

18 The trial commenced on 25 November 2003. The plaintiff ought have its costs on a party/party basis, including fee on brief and counsel's fee for the first day of trial, up to and including 25 November. On that day, the defendants made an offer of compromise in accordance with the Supreme Court Rules 2000, r281, in the following terms:

"1 The Defendants offer to settle in Supreme Court proceeding No 186 of 1998 on the following terms:

(i) That the Defendants will pay the Plaintiff by cash or bank cheque the sum of $380,000.00 within seven (7) days and there be Judgment for the Plaintiff accordingly.

2 That the Defendants will pay the Plaintiff's costs of and incidental to action No 186 of 1998 as taxed or as agreed and there be Judgment for the Plaintiff accordingly.

3 That the Defendants will enter a deed whereby they unequivocally undertake to:

(i) on ceasing to carry on the business of a commercial abalone diver sell the subject fishing licence (abalone dive) on the open market to a purchaser, ready, willing and able to purchase the licence for a price and on terms (if any) stipulated by the Plaintiff's expert Mr R Rex; and

(ii) for so long as the Firstnamed Defendant continues to take the quota from the eight (8) Furneaux units he shall for each year from and including 2003 pay the Plaintiff two thirds of the gross beach price from four (4) of those eight (8) Furneaux units with the Defendants paying the royalty, diving costs and licence fees referable to those four (4) units for each year the Firstnamed Defendant continues to take quota from the eight (8) Furneaux units;

(iii) share equally with the Plaintiff the net proceeds from the taking of any abalone taken pursuant to any exploratory or 'stunted abalone' licence issued by the State Government that is related to or incidental to all or any of the twenty (20) abalone units, the eight (8) Furneaux units or the fishing licence (abalone dive) which are the subject of action No 186 of 1998:

4 The Defendants will submit to orders in favour of the Plaintiff in the terms of or which achieve the same effect as the deed proposed under paragraph 3 hereof.

5 That each party release the other from any claims, causes of action or demands made against such party by the opposite party in the litigation and further the Plaintiff releases the Defendants from any obligation to pay the Plaintiff any proceeds from the catching of any quota from the eight (8) Furneaux units up to and including the calendar year 2003."

19 The entitlements of the plaintiff, in accordance with the terms of the judgment at the respective dates were:

20 As of 25 November, the defendants had offered to pay an amount of $360,000 plus costs, which exceeded the amount of the entitlement of the plaintiff. The offer to pay two thirds of the return from 4 units was equivalent to the declaration that the plaintiff remains entitled to one third of the proceeds of 8. The terms of par5 raise a different issue. The trial involved determination of entitlement up until 31 December 2002, since the requirement of the defendants to pay a share of the 2003 catch did not arise until 31 December of that year. At trial, neither party contended that the 2003 catch ought be taken into account, and counsel for the defendants stated at trial that they would pay the 2003 entitlement in the terms provided for by any judgment obtained by the plaintiff. The Court accepts that the terms of par5 referred to the litigation which at that time referred to:

The terms of par5 would not have precluded any claim by the plaintiff for a share of the proceeds of the catch for the year 2003. Its size was not then known to the plaintiff and calculation of the benefit undetermined. Had the plaintiff sought clarification of the import of the term and failed to receive a clear response, the outcome might be different. That conclusion is reinforced by the reply of the plaintiff. There was a telephone conversation between counsel for the respective parties, the terms of which are not completely agreed, but it certainly contained reference to the sum of $360,000, costs, beneficial interest and future entitlement of 4 units. The notation by counsel for the plaintiff of "in the future" does not resolve the question of the import of par5. It is likely, however, that if the terms of par5 were the bar to settlement, it would have been raised in that conversation and further negotiations had. The terms of the implied rejection of the offer and the counteroffer make that conclusion more certain. On 27 November, counsel for the plaintiff made a written offer in the following terms:

"The Plaintiff will settle all of its claims in the proceeding as follows, to be made by orders:

2 Order that the Defendants pay the Plaintiffs costs of the proceeding to be taxed

3 Declare that the defendants hold their interest in the Fishing Licence Abalone Dive - entitlement 123, upon trust for the plaintiff as to one half

4 Declare that the first defendant holds his interest, and to the extent necessary, the second defendant holds any interest she may have, in the 8 Furneaux Quota Units, numbers 3456 - 3463 inclusive, upon trust for the Plaintiff as to one half

5 The defendants are restrained from selling, assigning, leasing, licensing, creating any trust or creating any third party interest in the Fishing Licence Abalone Dive or the 8 Furneaux Units, without the written consent of the Plaintiff or further order of the court.

6 That the plaintiff and the defendants enter into a deed of agreement in a form relevantly suitable to their solicitors and which in substance contains provision to this effect

(a) from 1/1/04 and for each subsequent year that the 8 Furneaux units are issued the first defendant must use his best endeavours to catch abalone pursuant to this entitlement and pay to the Plaintiff 50% of the revenue derived after allowance for government royalty and a catching fee of $7 per kilo

(b) the $7 is to be CPI indexed annually from 1 January 05

(c) provisions for transfer to the Plaintiff of 4 units if such units become assignable.

21 The return of the catch due to the plaintiff on the basis of its claim submitted at trial for the year 2003 could have been in the vicinity of $60,000. The offer of $420,000 would have been no more than an acceptance of the defendants' figure as of 31 December 2002, plus the 2003 entitlement. It is more than likely that the offer reflected the 2002 entitlement and future returns as and from that date.

22 The rejection of the offer and the terms of the counteroffer deprive the plaintiff of entitlement to an order of costs as and from 26 November. The plaintiff contended that the offer of compromise did not comply with r280(7) in that it remained open only to 11.30am on 25 November. Two answers might be had to the contention. If the document was contrary to the Supreme Court Rules, it remained a Calderbank offer (National Mutual Life Association of Australasia Limited v Chris Poulson Insurance Agencies Pty Ltd (No 6) [1998] TASSC 113: see generally Quick on Costs, par11.2192) and relevant to the issue of costs. If it was made subject to the Rules, then it may have been open to the plaintiff to insist that it remain open for the period prescribed by the Rules (Heather v Vita Pacific Ltd (1996) 6 Tas R 120). However, the rejection by the plaintiff of the terms of the counteroffer and the failure to later accept its terms, make further consideration of this question unnecessary. For the purpose of this determination the result is identical. The defendants ought not be entitled to solicitor/client costs either because it was a Calderbank offer or its making during trial with a time frame more limited than that provided for by the Rules, permits discretion to order costs on a party/party basis.

23 The terms of the declaration made in accordance with the reasons for judgment are in the form of the draft submitted by counsel.

(1) There be judgment for the plaintiff in the sum of $361,816.

(2) The defendants pay the plaintiff's taxed costs on a party/party basis up to, until and including 25 November 2003.

(3) The plaintiff pay the defendants' costs on a party/party basis as and from 26 November 2003.

"For so long as the first named defendant is entitled to take abalone pursuant to 8 abalone quota units issued to him, generally known as Furneaux units, then the plaintiff is entitled to receive one third of the return, calculated in accordance with the market beach price, for the catch of abalone derived from those 8 Furneaux units."