Solicitors:
Plaintiff: HWL Ebsworth Lawyers
First Defendant: Represented by Third Defendant
Second Defendant: No appearance
Third Defendant: Self represented
Fourth Defendant: No appearance
File Number(s): 2017/00277064
[2]
Judgment
The plaintiff (a corporation) sues four defendants for the recovery of compensation for a loss of $435,600.00 suffered by what is properly characterised as a misappropriation of the company's funds by the second defendant.
Between 20 March 2017 and 6 September 2017 or thereabouts the second defendant was employed by the plaintiff, at a senior level of management, in the role of "General Manager - Health & Safety". This was at a time when the plaintiff was engaged in an urgent review of its health and safety policies and procedures.
As an officer of the plaintiff, the second defendant had limited authority to approve routine operational expenditure, initially, up to a limit of $5,000 for any one transaction (extended, at his request, on 9 June 2017 to $10,000 for any one transaction), not exceeding $50,000 in total.
His authority did not extend to entry into an arrangement with a supplier of goods and services to the plaintiff on terms that he would be paid a secret commission by the supplier. He was obliged by his contract of employment to render faithful and loyal service to the plaintiff as his employer: I Neil and D Chin, The Modern Contract of Employment (Lawbook Co, 2nd ed, 2017), paragraphs [6.150]-[6.156] and [7.46].
In or about 2017 (not later than 12 April 2017) the second defendant invited the first defendant (a company, a principal of which was the third defendant) to provide professional services in the preparation of, and advices upon, health and safety policies and procedures, from time to time, on terms that included an agreement that a substantial part of any remuneration paid by the plaintiff to the first defendant (in principle, 90% but, in practice, as it turned out, a proportion of similar but variable dimensions) would be paid by the first defendant to the second defendant, to be held by the second defendant for himself and the third defendant to fund (as the second defendant proposed to the third defendant) their establishment of a labour hire business at an indefinite future time.
On or about 14 April 2017 the plaintiff's Purchasing Department (on the application of the second defendant) recognised the first defendant as a supplier of services to the plaintiff, thereby opening the way for the second defendant to contract with the first defendant, within the limits of his authority.
This the second defendant purported to do, some 117 times, between 17 April 2017 and 25 August 2017 or thereabouts.
Although the arrangement between the third defendant and the second defendant was, at the outset, one which contemplated that the first defendant would be paid at an hourly rate for work done, it quickly transformed into an arrangement, as between the first defendant and the second defendant, according to which:
1. the second defendant instructed the third defendant what work was to be done by the first defendant, with an allocation of a fixed set of hours for that work, translated into a specified, lump sum amount of remuneration for that work;
2. as instructed by the second defendant, the third defendant caused the first defendant to issue an invoice in those terms at the commencement of a job;
3. almost immediately, the second defendant procured payment of the invoice to the first defendant before any, or any substantial, work was done by the first defendant; and
4. very soon after the receipt of payment of its invoice, the first defendant paid most of the money received from the plaintiff into an account in the name of the second defendant or (as directed by the second defendant) an account in the name of the fourth defendant (the second defendant's girlfriend and close confidante).
Throughout the second defendant's employment with the plaintiff, he was playing a dishonest double game against the plaintiff (on the one hand) and (on the other hand) the first and third defendants.
On the one hand, he told the third defendant, falsely, that the plaintiff's board of directors and its chief executive officer had authorised him to obtain the services of the first defendant on the basis of a pre-payment of invoices for a lump sum itemised in terms of a number of hours for a particular supply.
On the other hand, he told officers of the plaintiff, falsely, that the work referred to in the first defendant's invoices he presented to them for payment by the plaintiff had been completed.
Although it was not appreciated by the plaintiff at the time the second defendant was hired, he was a person with a track record of dishonesty. Between 2004 and 2006 he had been convicted in Queensland of offences of stealing and dishonestly taking property.
Investigations by the plaintiff after discovery of his dishonesty, have revealed emails (one sent on 8 May 2017, another on 12 May 2017) in which he suggested to the fourth defendant that the two of them, jointly, would soon benefit from the plaintiff's payment of invoices addressed to the first defendant. Those emails can be read as implicating the fourth defendant in the second defendant's fraud.
As confirmation of his ongoing relationship with the fourth defendant, on 14 August 2017 the fourth defendant sent an email to a real estate agent falsely stating that she was an employee of the plaintiff.
The accumulated payments by the plaintiff to the first defendant (several times in excess of $50,000) were drawn to the attention of the plaintiff's chief financial officer on 4 August 2017.
On 8 August 2017 he raised concerns with the second defendant regarding engagement of the first defendant on behalf of the plaintiff, and instructed the second defendant to stop raising purchase orders for work to be done by the first defendant until such time as a formal contract had been put in place and approved by the chief executive officer. Despite that direction, the second defendant continued to issue to the first defendant a succession of purchase orders (each ostensibly within his delegation) for total amounts well in excess of the delegation.
Although one might be forgiven upon a cursory review of the evidence for thinking otherwise, the first and third defendants were not, in my assessment, part of the second defendant's fraudulent machinations. The third defendant was professionally qualified to provide the services ordered by the plaintiff through the agency of the second defendant. However, he was naïve. He was also unwisely deferential towards the second defendant (to the point of unquestioning subservience), the second defendant being a person he innocently respected as more experienced than himself, in pursuit of his profession.
One illustration of the third defendant's naiveity is his compliance with the second defendant's directions that some of the moneys received by the first defendant from the plaintiff be paid by the first defendant to the fourth defendant - not a party to any arrangement between the second and third defendants for money to be put aside for a prospective labour hire business.
Another illustration can be found in the casual, dismissive responses of the third defendant to inquiries made of him by the plaintiff's legal counsel on 4 and 5 September 2017. Without any direct allegation of impropriety on the part of the third defendant, the lawyer pressed the third defendant for evidence of the work undertaken by the first defendant for the moneys paid to it by the plaintiff. Preoccupied by building work on which he was then professionally engaged, the third defendant responded sarcastically, telling the lawyer that the plaintiff should make inquiries of its own employee, the second defendant. The third defendant did not recognise, as prudence might suggest, that serious questions were being asked of him, and that they should be taken seriously. His failure to do so heightened the plaintiff's suspicions that he and the first defendant were co-conspirators of the second defendant, culminating in his shock that an ex parte freezing order (made on the application of the plaintiff on 12 September 2017) was served upon him without further notice.
The moneys received by the second and fourth defendants from payments made to the first defendant by the plaintiff appear to have been dissipated.
There is no evidence of any funds set aside for the establishment of a labour hire business as proposed by the second defendant to the third defendant. In retrospect, that promise appears to have been made by the second defendant to the third defendant (without any intention ever to perform it) to induce the third defendant to cause the first defendant to pass on to himself and the fourth defendant funds received from the plaintiff.
The second and fourth defendants were served with notice of these proceedings and, at an early stage, participated in them. However, they did not appear at the final hearing of the proceedings, not even when the hearing was adjourned for a lengthy period (on notice to them) to clarify the case advanced by the plaintiff against them.
In its original form, the plaintiff's statement of claim was predicated upon an assumption that it was the third defendant, on behalf of the first defendant, who had falsely represented to the plaintiff that the first defendant's invoices were for work which had been completed at the time each invoice was rendered. The pleading did not allow for the fact that the first defendant's invoices were in a form proposed by the second defendant (held out as an officer of the plaintiff) and were submitted by him to the plaintiff for payment before (as he well knew but other officers of the plaintiff did not) any or any substantial work had been done by the first defendant. In its original form, the statement of claim cast the first and third defendants as fraudsters without confronting the fact that the plaintiff armed the second defendant with a cloak of office which permitted him to defraud both the plaintiff and the first defendant.
The statement of claim was amended to include allegations to the effect that it was the second defendant who falsely represented to the plaintiff that the first defendant's invoices were for work that had been completed. Those allegations catered for the possibility that the Court might find (as I do) that, mistaken though he was, the third defendant believed that the first defendant, in rendering invoices in the form it did, was complying with contractual terms agreed between it and (via the second defendant) the plaintiff.
The second and fourth defendants elected to file no Defence to the Amended Statement of Claim filed by the plaintiff to clarify that case.
The third defendant did appear before the Court throughout the final hearing, as a director of the first defendant and on his own account.
He gave evidence at the final hearing; submitted to cross examination; cross examined two witnesses called by the plaintiff; and made submissions to the Court, both written and oral.
Although the first and third defendants had legal representation during the early stages of the proceedings (when Defences were filed on their behalf to the plaintiff's Statement of Claim and an affidavit was sworn by the third defendant) they were "self represented", by the third defendant, at the final hearing.
The plaintiff attacked the credit of the third defendant, in the process accusing him of fraud; but, in my assessment, he gave his evidence in a truthful manner, conscious of a need to be frank. He presented as naïve in his dealings with the second defendant rather than as a co-conspirator.
He placed great store in a belief that, by virtue of his dealings with the second defendant as an officer of the plaintiff, he had a contract (or, more correctly, a succession of contracts arising from successive purchase orders) with the plaintiff.
He only ever dealt with the plaintiff through the second defendant -who, I infer, was careful to ensure that that was so. He (the third defendant) relied upon an assumption that he could act upon what the second defendant told him as a senior officer of the plaintiff, and upon the internal probity procedures which he assumed the plaintiff had as a large corporate business. The speed and regularity of the plaintiff's payments of the first defendant's invoices were taken by him as confirmation that the second defendant was duly authorised by the plaintiff to retain the first defendant's services.
The course of dealings between the parties, in which the first defendant submitted invoices to the plaintiff (through the second defendant as a senior officer of the plaintiff), and the plaintiff promptly paid them, can be taken as a holding out by the plaintiff to the first defendant that the second defendant was authorised by the plaintiff to transact business with it.
Accepting that the second defendant was held out by the plaintiff as authorised to do business with the first defendant, a core problem for the first defendant (and, incidentally, the third defendant) is nevertheless that:
1. the second defendant had no actual authority to retain the services of the first defendant upon the terms agreed between the second and third defendants (more particularly, the term as to "profit sharing") or by a succession of purchase orders designed to circumvent monetary limitations on the second defendant's delegation to incur operational expenses.
2. a contention by the first defendant, that it was entitled to rely upon the second defendant (held out by the plaintiff as authorised to transact business with it) having ostensible authority to bind the plaintiff to a purported entry into contracts with it for the supply of services, cannot succeed because it was unreasonable for the first defendant to rely upon any representation by the second defendant that he had authority to enter into contracts which the first defendant ought to have realised were for the personal benefit of the second defendant, and inconsistent with his duty, as an employee of the plaintiff, to serve the interests of the plaintiff: Pourzand v Telstra Corporation Ltd [2014] WASCA 14 at [84] and [131]; Combulk Pty Ltd v TNT Management Pty Ltd (1993) 41 FCR 59 at 66; GE Dal Pont, Law of Agency (Lexis Nexis Butterworths, Australia, 3rd ed, 2014), paragraphs [20.38]-[20.46].
3. the amount of work done by the first defendant (which is to say, by the third defendant as the only person available to do such work) on any and all of the invoices issued to, and paid by, the plaintiff was nominal.
As was conceded by the plaintiff's principal witness in cross examination by the third defendant, the third defendant had no knowledge of the internal administrative arrangements of the plaintiff, or internal limitations on the second defendant's authority.
Nevertheless, the terms upon which he agreed that the first defendant would do business with the second defendant were so unusual, and so transparently contrary to the interests of the plaintiff, as to make it unreasonable for the first defendant to rely upon any express or implied representation of authority without inquiries being made of the plaintiff otherwise than through the second defendant.
Presentation or payment of an invoice for a lump sum calculated by reference to an hourly rate of remuneration and a set number of hours may not, of itself, be beyond common experience. However, pre-payment of such invoices, in ever increasing amounts, in circumstances in which the invoices were silent as to the timeframe within which work had been done, or was to be done, was a cause for further inquiry and, absent inquiry, restraint on dealings.
This was so notwithstanding the third defendant's belief that no more than nominal work was initially required of the first defendant on any invoice because all that was required initially, in essence, was a review of draft documents sent to the third defendant by the second defendant, and returned to the second defendant, pending the provision of further instructions to the first defendant after feedback from within the plaintiff's organisation.
The anticipated further instructions never came, only instructions for the preparation of further invoices and payments of those invoices within a timeframe beyond any reasonable expectation that the invoiced work could be done.
I accept, as the third defendant swore in his evidence, that he did provide documents to the second defendant (via email and a USB stick) in purported performance of contracts with the plaintiff. However, I am not satisfied that any such documentation was the product of substantial work by or on behalf of the first defendant or that it found its way to the plaintiff. Thinking that the first defendant was contracting with the plaintiff, the first and third defendants' only arrangements were, in reality, with the second defendant on his own account.
Despite extensive searches, the plaintiff can locate no documentation of the first defendant in its records. In a practical sense, the third defendant provided documents to the second defendant, not the plaintiff.
The second defendant's failure or refusal to produce any such documentation when called upon by the plaintiff to do so is, in my assessment, consistent with both the nominal character of any work done by the first defendant and the second defendant's double dealing fraud. Production of any of the first defendant's documentation by the second defendant to the plaintiff would have exposed his fraud on the plaintiff.
The timeframe (a period limited to about four months) within which the second defendant defrauded the plaintiff, allegedly in the conduct of business done on an urgent basis, provides some explanation of why it was that the second defendant was able to get away with what he did for as long as he did. The plaintiff's officers let their guard down because of a mistaken reliance on the second defendant to get urgent work done urgently. In common with the third defendant, they did not recognise him as the fraudster he proved to be.
What the second defendant did can properly be characterised as a misappropriation (an unauthorised misapplication or theft) of the plaintiff's property so as to attract the principles identified in Black v S Freedman & Co (1910) 12 CLR 106, considered by the Court of Appeal in Heperu Pty Ltd v Belle (2009) 76 NSWLR 230; Robb Evans of Rob Evans & Associates v European Bank (2004) 61 NSWLR 75 at ]113]-[115] and Sze Tu v Lowe (2014) 89 NSWLR 317.
The plaintiff's moneys were stolen by the second defendant. He is liable to the plaintiff to account for the whole of those moneys (a sum of $435,600.00) together with pre-judgment interest.
An institutional constructive trust attached to the stolen moneys at the time of theft, or their traceable product.
No consideration passed from the first defendant or to the plaintiff for moneys ($435,600) paid to the first defendant by the plaintiff. The stolen moneys retained their character as trust money in the first defendant's hands as a volunteer. The plaintiff is entitled to recover that sum as equitable compensation, together with pre-judgment interest.
Nor did any consideration pass from the third or fourth defendants for such of the stolen moneys as were passed to them by the first defendant. The third defendant received $48,211.40. The fourth defendant received $52,752.40. Those moneys retained their character as trust money in their hands, as volunteers. They are each liable to pay to the plaintiff equitable compensation, together with pre-judgment interest.
The distribution of the plaintiff's moneys stolen by the second defendant, including the amounts received by the third and fourth defendants, is particularised in a schedule to the plaintiff's amended statement of claim. That schedule is, to the extent necessary, incorporated by reference in these reasons. For present purposes, it is sufficient to record the total amounts received by the third and fourth defendants.
In the absence of any fund presently identifiable as trust moneys held by the defendants, jointly or severally, the plaintiff seeks a money judgment against each defendant rather than a proprietary remedy.
Although the amended statement of claim does not expressly plead a cause of action, at law, for moneys had and received by the defendants for the use of the plaintiff, it does plead facts material to such a cause of action which, absent any defence of change of circumstances, could be called in aid as an alternative foundation for a personal, restitutionary remedy.
To the extent that pre-judgment interest is claimed by the plaintiff, it should be calculated:
1. in respect of the second defendant, from 22 August 2017 (the date for which the plaintiff contends in its submissions), the last date upon which misappropriated funds were paid out by the plaintiff; and
2. in respect of the first, third and fourth defendants, from 12 September 2017 (the date upon which, these proceedings having been commenced by summons, those defendants had brought home to them the character of the moneys received by them at the expense of the plaintiff).
Although emails of the second defendant can be read as implicating the fourth defendant in his fraud, a conservative view of the evidence stops short of characterisation of the fourth defendant as a co-conspirator. Her liability for the payment of compensation is grounded upon a finding that she received trust money as a volunteer. It is on that basis that interest on compensation payable by her should run from a date (12 September 2017) which marks the time from which she was unequivocally conscience-bound to restore the plaintiff's stolen moneys to it.
After allowing the parties an opportunity to calculate an award of pre-judgment interest under section 100 of the Civil Procedure Act 2005 NSW, I propose to enter judgments in favour of the plaintiff to the following effect:
1. Judgment against the first defendant for the sum of $435,600, together with interest calculated from 12 September 2017.
2. Judgment against the second defendant in the sum of $435,600, together with interest calculated from 22 August 2017.
3. Judgment against the third defendant in the sum of $48,211.40, together with interest calculated from 12 September 2017.
4. Judgment against the fourth defendant in the sum of $52,752.40, together with interest calculated from 12 September 2017.
On the cross claim of the first and third defendants, I propose also to enter a judgment that they be indemnified by the second defendant. The second defendant fraudulently represented to them that he was duly authorised by the plaintiff to do business with them. Having relied on his representations, they are entitled to be indemnified by him for the restitution they are bound to make in favour of the plaintiff.
Prima facie, costs follow the event, with costs to be assessed on the ordinary basis. Subject to allowing the parties an opportunity to make submissions as to costs, I propose, subject to one qualification, to make: (a) an order that the defendants pay the plaintiff's costs of the principal proceedings; and (b) an order that the second defendant pay the costs of the first and third defendants on their cross claim, such costs to include any costs payable by them to the plaintiff.
The qualification on these proposed orders is that, prima facie, the first and third defendants should not be required to pay or bear any part of the plaintiff's costs of or incidental to the plaintiff's amendment of its statement of claim on 20 March 2019 (to clarify its case against the second and fourth defendants) or the proceedings after 7 February 2019 (when the proceedings were adjourned to permit the plaintiff to recast its claims against the second and fourth defendants).
At the time the Court's final orders are made, consideration may need to be given to the continuing operation, or modification, of freezing orders currently operative against the defendants.
[3]
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Decision last updated: 19 May 2020