BETWEEN : WRIGHT PROSPECTING PTY LIMITED (ACN 69 008 676 417)

HANCOCK PROSPECTING PTY LIMITED (ACN 69 008 676 417)

Practice and procedure - Application for leave to amend statement of claim - Amendment sought to allege breach of express trust - Amendment sought to make claim founded on fraud - Turns on own facts

1 MURRAY J: This was the latest of a number of applications by the parties to amend the pleadings in this matter. The application was made by the plaintiff for leave to amend the statement of claim, effectively to add two new causes of action, although claims related to those already pleaded. The application was made and heard over a two-day period in the course of the trial at a point where the closure of the plaintiff's case was imminent and its evidence had been adduced. Following the argument I considered the matter for a short period before substantially dismissing the substantive application. I undertook to give reasons at a later time and these are those reasons. I took that course so as not to further disrupt the trial process.

2 In addition to the main grounds of application, the application sought leave to add pars 9A, 9B and 9C which, together with two schedules to be added, Sch 1 and 2, were directed to particularly identify the temporary reserves and exploration licences by numbers which changed from time to time, which together are alleged to constitute the interest of the plaintiff and defendant as partners, described as Rhodes Ridge, which is the subject matter of this litigation. It was sought to add par 26A to the prayer for relief. By that clause, a declaration was sought that the Rhodes Ridge interest of the partnership included the specified temporary reserves and exploration licences in respect of which the plaintiff seeks substantive relief.

3 In my view, these amendments were unnecessary because the issue about the matters to which I have referred above was already clear on the pleadings. But this part of the application was uncontroversial and I granted leave to make the amendments described above.

4 Otherwise, the application for leave was strongly opposed and the first matter of debate was an application to add paragraphs to the pleading to allege that the Rhodes Ridge interest of the defendant, within the meaning of the statement of claim and as better particularised in the amendments referred to above, was held by it on an express trust for the plaintiff upon the terms of the 1984 agreement: the proposed paragraph 11C.

5 The springing event for the rights claimed by the plaintiff would remain the exercise of what is described as an option conferred on each partner by cl 4 of the 1984 agreement to require the transfer to each of them of the interests identified under the agreement as being held for their benefit under cl 1 and the schedules to the agreement.

6 Paragraphs 20 and 21 of the statement of claim were proposed to be amended. Paragraph 20 would be put in a form to allege that upon the exercise of the option, under the terms of the express trust or the fiduciary obligation of plaintiff and defendant, or simply by the contract upon the exercise of the option, the parties as partners were required to do everything, including executing documents and seeking the consent of the Minister and joint venture partner, which might be necessary so as to enable the plaintiff to have the benefit of the transfer of the interests identified with it under the agreement.

7 Paragraph 21 would be amended to make the allegation that the partners presently hold on trust for the plaintiff and are required to transfer to the plaintiff, subject to obtaining any necessary consents, the Rhodes Ridge interest identified elsewhere in the pleading. I should say that the current par 21 alleges that upon the exercise of the option and prior to the transfer of the Rhodes Ridge interest identified by the agreement with the plaintiff, the partners hold that interest in trust for the plaintiff and are required to transfer it to the plaintiff.

8 I noticed that at [6] of my judgment in Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd (3) [2007] WASC 118, with which judgment these reasons should be read, where I described the paragraph as the assertion of a trust. That judgment was delivered on 30 May 2007, again during the course of the trial. A related earlier judgment, delivered on 27 March 2007, is Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd (1) [2007] WASC 78. In that judgment I gave a summary of the particular cause of action under discussion at [19] and [20]. I referred to the trust pleaded in par 21 of the statement of claim as an implied or resulting trust, and it remains the case that that pleading may be relied upon if the cause of action can be made out, in aid of the grant of the remedies sought, particularly orders in the nature of specific performance of the obligation asserted to arise out of cl 4.

9 Finally in relation to this aspect of the proposed amendments, it was proposed to amend par 22G, which would firstly repeat the contention that the parties entered into the 1984 agreement on the common assumption or belief that the option provided in cl 4 of the agreement conferred upon each party the right to call for the transfer of their respective interests. To that would be added the contention that the 1984 agreement was intended to result in the parties holding their legal and equitable rights in the interests of the other "subject to the terms of the 1984 Agreement on express trust" for the other party.

10 In Wright v Hancock (1), at [13] - [18], I reviewed some of the relevant authorities and endeavoured to state summarily the general principles which apply to an application to amend the pleading in this way. I need not, for present purposes, restate that material. Nor need I develop the statement of principle any more particularly than there appears. The first and primary question is whether the plaintiff may have an arguable claim to succeed upon a breach of an express trust arising under the 1984 agreement in respect of the claimed property described in the pleading as the Rhodes Ridge interest, upon the purported exercise of the option conferred by cl 4 of the agreement.

11 The plaintiff and defendant have been carrying on business as partners for many years under the name of "Hancock & Wright". Originally, and again for a considerable period of time, they did so without the benefit of any partnership deed or other written agreement. Ultimately the partnership arrangement was formalised by an agreement dated 2 March 1978, executed on behalf of the plaintiff by Mr Peter Wright and on behalf of the defendant by Mr Lang Hancock. Both men are now dead. The 1978 agreement treated the partnership assets in a conventional way, leaving the nature of the interest of each partner in those assets to be governed by the Partnership Act 1895 (WA), s 30, and the general law: see generally Connell v Bond Corporation Pty Ltd (1992) 8 WAR 352.

12 That partnership agreement was varied by an agreement made on 24 May 1983. Presently material are the provisions of cl 2. That clause, after dealing conventionally with the partnership property generally and making it clear that this was an equal partnership, added the provision that the various mineral tenements, patents, permits and licences, whether held by the plaintiff or the defendant or any subsidiary of them under any mining Act in Australia at the date of agreement "are held in trust for and comprise assets of the Partnership".

13 A number of matters should be noted. In the first place, I think it is unnecessary for present purposes to arrive at a concluded view of the effect of the provision in relation to the interests of the partners individually in mining tenements declared to be partnership property. But if the clause does indeed create an express trust, it is not a trust over partnership property generally, but over particular described types of assets. Nor, it seems, would it apply to after acquired property, even of the kind particularly described in cl 2, but only to property so held as at 24 May 1983. I see no reason to resile from the view I expressed in Wright v Hancock (3) at [2], where I described the 1983 agreement, and cl 2 in particular, as being, in relation to this litigation, "of historical interest only".

14 I think it is clear that if it truly creates an express trust, it would apply to the legal title of a tenement held at that time by either partner or its subsidiary. That property would be held in trust for the partners jointly. If a beneficial interest was created it would be one held jointly by the partners as such. The plaintiff does not now sue and did not seek by the proposed amendments to sue, for breach of that provision as an express trust. Reliance is sought to be placed on the 1984 agreement in that regard.

15 In Wright v Hancock (3), at [29] - [30], I accepted the view expressed by the Full Court in Clay v Clay [1999] WASCA 8; (1999) 20 WAR 427, at [91], and the High Court in Clay v Clay [2001] HCA 9; (2001) 202 CLR 410, at [31] - [35], that an express trust must be one expressly declared in writing or orally, as opposed to a trust arising from the acts of the parties or operation of law. It is trite to observe that whether the words relied upon create an express trust will depend upon a clear intention to create the trust being expressed over defined property in favour of reasonably ascertainable beneficiaries. If those matters are established, it will not be an impediment to the declaration of a trust that it is said to arise out of the performance of a contract. That is a common basis for the declaration of a trust, whether arising expressly, or by implication as is presently pleaded in par 21 of the statement of claim: Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588, 603 [26] - [28] and 605 [34] - [35].

16 The question then for me was whether, as the proposed pleading would have it, it was fairly arguable that under the 1984 agreement operating as a variation of the 1983 agreement, upon the exercise of the "option" conferred by cl 4, the legal interest of the partnership in property identified with each partner under cl 1(a) and (b) and the Schedules to the agreement, was intended and expressly declared to be held in trust for the partner with whom the specific interest or property under consideration was identified.

17 The way the pleading was proposed to be framed advances the proposition that reference to the 1984 agreement would make it fairly arguable that upon the exercise of the option by the plaintiff an express trust arose in respect of the interests identified with the plaintiff, the trustees being the partners, importing an obligation to do whatever was necessary by way of the execution of documents and obtaining relevant consents, to cause the trust to be terminated by achieving the transfer of the relevant interest to the plaintiff. It is argued, as I understand it, that that should be taken to be the express effect of the 1984 agreement by way of variation of the trust declared by the 1983 agreement.

18 Simply put, I can see no such arguable case. I can see nothing in the wording used in the 1984 agreement which expresses that intention. Certainly there is nothing expressly to do so, whatever may be the implication of law by way of an implied or constructive trust. Nor does it seem to me to be necessary to so interpret the language of the 1984 agreement as to give rise to an express trust because without such a trust the contract is rendered ineffective.

19 The defendant raised arguments against the amendment to add a claim for breach of an express trust, which firstly concerned the question whether such a trust could be held to arise on the back, so to speak, of an unenforceable provision, if that was the Court's conclusion with respect to the 1984 agreement, and cl 4 in particular. It also raised arguments concerning matters of limitation and sought to debate what has become known as the rule in Morgan v Banning (1999) 20 WAR 474. Given the conclusion that I have expressed above, I consider it to be both unnecessary and undesirable, at this stage, to consider these matters as they were debated by counsel. They will arise in due course, I have no doubt, in the closing submissions which the parties will make.

20 I turn then to the other substantial matter which was raised by the plaintiff and in respect of which I refused leave to amend the statement of claim. I commence by recalling that in Wright v Hancock (3), among other matters raised, there was an application by the plaintiff to amend the reply to assert that what I then called its unconscionability claim was founded upon an allegation of fraud or fraudulent breach of trust to which the defendant was a party. The relevance of so pleading was to answer a limitation defence by raising an exception to the operation of the Limitation Act 1935 (WA), s 47(1).

21 It was necessary that I discuss the concept of fraud in this context and that I review relevant authorities, as I did in [42] - [56]. At [56] I expressed my conclusion in that case in the following terms:

"There would need to be an allegation of some knowledge of the wrongness of the failure to act, in this case the failure to comply with the notice of the exercise of the option. For that to constitute fraud, in my opinion, involves more than the proposition that in the circumstances pleaded by the plaintiff it would be unconscionable for the defendant to retain the benefit of its interest in Rhodes Ridge. There needs to be some moral turpitude, some knowledge of wrongness, at least objectively. No such allegation is involved in the case pleaded by the plaintiff. It is not, in my opinion, fairly arguable that the plaintiff's claim against the defendant is one founded upon fraud or a fraudulent breach of trust. Leave to plead the proposed cl 25A.2.3 of the reply should be refused."

22 Against that background the current application was to amend the statement of claim so as to allege fraud in addition to the currently pleaded unconscionability case. I endeavour to summarise this head of claim by saying that in its essence it is concerned with the proposition that it is unconscionable for the defendant to assert that the 1984 agreement, relevantly cl 4, is unenforceable and illegal, whether that be right or not, in circumstances where the parties entered into the agreement upon the common assumption and belief that it was valid and effectual, and conducted themselves on that basis. Paragraph 22I particularises a great many acts, transactions and events which are said to be of that character occurring during the life of Mr Hancock, who then substantially represented the defendant. Paragraph 22J alleges that after Mr Hancock's death, on 27 March 1992, the defendant denied that the plaintiff was entitled to exercise the option, asserting that it was illegal and unenforceable. It is pleaded that the defendant, on the other hand, asserted that by virtue of a later agreement made in 1989, it was entitled to a 50 per cent interest in the Rhodes Ridge interest and tenements. In the circumstances alleged in par 22K, it is pleaded in par 22L that the defendant's conduct is in breach of its duty as a partner to act truly and justly to the plaintiff and constitutes unconscionable conduct.

23 The amendments sought were firstly to par 22K by adding, in subpar (f), the assertion that the matters alleged against the defendant in par 22J had as their object and purpose the repudiation of the common assumption and belief upon which the 1984 agreement was said to be made, and the denial to the plaintiff of the defendant's 25 per cent interest in the Rhodes Ridge tenements which were to go to the plaintiff on the exercise of the option under the 1984 agreement.

24 By par 22L(c), it was proposed to plead that the allegations made in par 22K(f) caused the defendant's conduct and denial of the plaintiff's entitlement to be not only a breach of its duty as a partner and not only unconscionable conduct but, "dishonest; in that the conduct alleged has the objective purpose of enabling HPPL to keep the benefits in subpar 22K(f)(vii), when that purpose objectively is morally improper conduct by a fiduciary and trustee, and HPPL, with knowledge of the facts that constitute that impropriety, has deliberately engaged in that conduct". There followed in a proposed par 22L(d) an assertion that in that event there had been a fraudulent breach of trust which would operate as an exception to s 47 of the Limitation Act 1935 (WA).

25 To put it shortly, the dishonesty or moral turpitude alleged to constitute the fraud was said to arise out of the conduct of the defendant intended to deny the plaintiff the benefit of the 1984 agreement when, with the plaintiff's cooperation, the defendant had received such a benefit, upon the asserted ground that the 1984 agreement was illegal and unenforceable. No allegation was sought to be made (nor could it be) that the defendant's conduct and motivation was a sham, an assertion of illegality made well knowing that it was unsustainable. The dishonestly said to constitute the fraud was the denial of the benefits of the 1984 agreement to the plaintiff while the defendant sought to keep the benefits which it had derived as pleaded, when the parties together assumed and conducted themselves on the basis that the 1984 agreement was valid and effectual.

26 These reasons are, of course, not concerned with the question of unconscionability and the availability of that plea in the circumstances of the case, but with the question whether the proposed pleading raised a fairly arguable case of fraud involving dishonesty in the relevant sense. There is no need to revisit the cases which I have previously discussed. The view to which I have come is that the proposed pleadings did not raise a case of fraud where none was previously pleaded. Indeed, all they did was to assert that fraud existed where I had held it to be not fairly arguable that that was the case.

27 I cannot see how it can be asserted to be fraud involving dishonesty, at least in the sense of moral turpitude, for a party to insist, contrary to its conduct previously at a time when its guiding mind and will was a different person, that it is incapacitated from giving effect to a partly performed contract because it genuinely believes it to be unenforceable. The fact that such a party well appreciates that in the result it will have derived a benefit from the contract which it now seeks to deny the other contracting party does not seem to me to be enough to constitute fraud, having regard to the authorities to which I have referred.

28 For the plaintiff, reliance was placed particularly on Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604. The facts should be noted because they are quite different to those alleged in this case. The Bahrs became the registered proprietors of a lot in Cervantes. To raise finance for the erection of commercial premises on the land, they entered into an agreement with Nicolay to sell the land to him and lease it back for three years. After that period, it was agreed under cl 6 of the contract, they could repurchase the land at an agreed price. While Nicolay was the registered proprietor of the land he entered into a contract to sell it to the Thompsons under an agreement which specifically acknowledged and accepted the binding force of cl 6 of the former agreement between the Bahrs and Nicolay. Pursuant to the terms of the first agreement, the Bahrs, in due course, elected to buy the land back and in seeking to exercise this power they sent a deposit as agreed. The Thompsons refused to sell them the land, but it was held that they were bound to do so and specific performance was granted against them.

29 The case really turned on the question whether there had been fraud which would constitute the exception to indefeasibility of registered title under s 68 and s 134 of the Transfer of Land Act 1893 (WA). There had, of course, been no fraud when the Thompsons took the transfer and obtained registration. There was no suggestion that they had not honestly undertaken to be bound by the obligation assumed by Nicolay to retransfer the land to the Bahrs if they should seek to repurchase it. But that undertaking, honestly given, had been repudiated for the purpose of destroying the entitlement of the Bahrs, the preservation of which was a foundation or assumption underlying the transfer to the Thompsons.

30 At 615, Mason CJ and Dawson J described that repudiation as dishonest and fraudulent, there being no impediment to the retransfer of the land according to the obligation which the Thompsons had accepted and subject to which they held the land as registered proprietor. At 654 - 655, Brennan J held that the fraud lay in the repudiation of the undertaking by the Thompsons that their registration as proprietor of the land should be subject to the interest of the Bahrs to obtain a retransfer, with which interest, Brennan J said, the Thompsons had burdened their title.

31 In my view, the dishonesty involved in the Thompsons' conduct was abundantly clear and there was no impediment to them honouring the obligation they had recognised. There was therefore no impediment to the court so ordering. That seems to me to be a qualitatively different situation from that which, by amendment to the statement of claim, the plaintiff would plead in this case. Here it would in effect be alleged, if leave were granted to make the amendments, that although the 1984 agreement was invalid and/or, for any reason pleaded by way of defence, unenforceable as against the defendant, it is not only unconscionable for the defendant to deny the plaintiff the benefit of the agreement in respect of the Rhodes Ridge interest, but dishonest and morally wrong because the defence is raised in circumstances where the 1984 agreement has been in part performed, substantially for the benefit, so it is alleged, of the defendant. That would seem to me to involve a significant extension of legal principle in a way not supported by the authorities to which I was referred, and in particular not supported by the High Court's decision of Bahr v Nicolay. It was for those reasons that I refused leave to amend the statement of claim in the manner sought above.

32 It will be observed that it has not been necessary for me to canvass discretionary considerations. I adverted to such considerations in Wright v Hancock (3) at [67] - [68], particularly with respect to the proposed allegation of fraud. I would, if necessary, have taken the same view of this application, although not in respect of the proposal to amend the statement of claim to allege an express trust.

33 The application was supported merely by an affidavit of a solicitor for the plaintiff, who deposed that the purpose of the application was to remedy perceived deficiencies in the plaintiff's pleading as a result of my judgment in Wright v Hancock (3). Of course, that was an application to amend the reply and put in that way there appears to be no cogent reason for the delay. Further, the outline of submissions for the plaintiff observes that the application to amend to allege fraud was made because "the availability of the fraud point was overlooked until the debate on limitations in March 2007". That is a reference to the application made to amend the defence to plead limitation of action, which resulted in my judgment in Wright v Hancock (1). As can be seen, the application was effectively delayed until after the plaintiff's witnesses as to the facts had given their evidence and been cross-examined. However, in the final analysis, as I say, the fate of the application did not turn on discretionary factors.