Youyang Pty Limited v Minter Ellison Morris Fletcher

Youyang Pty Limited v Minter Ellison Morris Fletcher - [2003] HCA 15 - HCA 2003 case summary — Zoe

[30]

Clause 6 of the Subscription Agreement provided for the redemption of the preference shares from the funds held by Registries and yielded at the maturity of the bearer deposit certificate. In the meantime, after the expiry of 12 months from the date of issue of the preference shares, ECCCL was obliged (cl 7.3) to redeem them within 30 days of receipt of a written request by the holder.
On 22 September 1993, Mr Fowler, on behalf of Youyang, arranged for the issue of a bank cheque made payable to Minters in the sum of $500,000. This was in performance of the obligation imposed by cl 2.1 of the Subscription Agreement. Minters received the funds on 24 September. It was admitted on the pleadings that there was thus constituted a trust of which Minters was the trustee.
No consideration was given in submissions to the Court respecting any Victorian legislation which dealt with the administration of the trust accounts of solicitors[1]. However, any additional statutory controls apart, the nature of the trust was clear and in most respects was of a not unusual type. Minters was obliged to hold the $500,000 proceeds of the bank cheque upon trust for, or, as the documentation also put it, to the account of, Youyang, with the power (and duty) to disburse it in accordance with the Subscription Agreement but not otherwise[2]. Any disbursement by Minters otherwise than as authorised by Youyang would be a dealing with Youyang's property which was in breach of trust.
However, as explained above, Minters' client in the ordinary sense of the term was ECCCL, not Youyang. That state of affairs placed Minters in the position of owing (at least) contractual and fiduciary duties to ECCCL and its trust obligations to Youyang. The case has not been presented as one arising from the clash of conflicting fiduciary duties; certainly Minters was not in a position whereby it could not fulfil its obligations to the one party without failing in its obligations to the other[3]. Rather, Youyang relies upon alleged breach of trust in the most direct sense. But in what follows the broader circumstances are to be kept in mind.

[49]

Youyang instituted proceedings in the Equity Division of the Supreme Court of New South Wales seeking restoration of the trust fund. Minters defended the claim on the footing that Youyang had suffered no recoverable loss in consequence of the breach of trust.
With respect to the $256,800 applied by ECCCL to the deposit with DAL, Brownie AJ entered judgment on 23 August 2000 for Youyang in the sum of $414,009 on the basis that this amount would yield $500,000 on 24 September 2003. This was the tenth anniversary of the completion on 24 September 1993, and the stipulated "Redemption Date" in respect of the preference shares. His Honour held that, even if there had been no breaches of trust by Minters, the balance of the investment ($221,558.56) would have been lost as "speculative".
Each party appealed. The Court of Appeal, by majority (Handley JA, Young CJ in Eq), reversed the orders of Brownie AJ. Youyang appeals to this Court against that result, whilst still seeking to vary the orders at trial. Their Honours held that the acceptance of the defective deposit certificate was a breach of trust which nevertheless did not cause any loss of Youyang's funds. The third member of the Court of Appeal (Hodgson JA) would have limited the recovery by Youyang to $221,558 being the moneys disbursed at settlement by Minters to ECCCL itself. The reasons for these conclusions are discussed hereafter.
In this Court, Youyang seeks the restoration and variation of the relief given at trial, so as to replace the sum of $414,009 stipulated by Brownie AJ with $500,000, together with interest pursuant to s 94 of the Supreme Court Act 1970 (NSW) ("the Supreme Court Act") from 24 September 1993 to the date of the order of this Court.
Section 94 empowers an award of interest in proceedings in the Supreme Court for the recovery of any money, including any debt or damages or the value of any goods, but does not authorise the giving of interest upon interest. In some circumstances, a court of equity may require a delinquent trustee or other fiduciary to bear compound interest[4]. However, Youyang relies upon the statute alone and it will not be necessary to consider whether this could have been a case for compound interest.

[50]

Perhaps the most important duty of a trustee is to obey the terms of the trust. On 24 September 1993 there were several breaches by Minters of the trust obligations it had undertaken to Youyang. First, Minters released the trust moneys as to $256,800 for the purchase from DAL of what was not the requisite certificate of deposit. Secondly, the balance of $221,558.56 remaining after an appropriation by Minters of $21,641.44 was paid out of Minters' trust account to ECCCL in breach of the obligation of Minters not do to so unless the payment to DAL had procured the requisite certificate of deposit. The payment to Minters appears to have been in discharge of indebtedness to the firm by ECCCL. It stands in no better light than the larger sum which ECCCL received. The result is that the whole of the $500,000 was dealt with by Minters in breach of its duties as trustee.
The rigour of the rule, as Augustine Birrell QC[5] put it, that it is the duty of a trustee "to adhere to the terms of his trust in all things great and small, important, and seemingly unimportant" was alleviated in England by s 3 of the Judicial Trustees Act 1896 (UK), shortly after Birrell gave his lectures[6]. In Victoria, s 67 of the Trustee Act 1958 (Vic) empowered the Supreme Court to relieve from personal liability trustees who had acted in breach of trust but who had done so "honestly and reasonably" and who "ought fairly to be excused for the breach"[7]. Minters did not attempt to place any reliance upon s 67 or comparable provisions in legislation of any other State. The facts discouraged any such attempt.
The submissions for Minters which were accepted in the Court of Appeal appear to have proceeded on the footing that the relevant breaches of trust occurred at some later time when Youyang's investment with ECCCL was lost. But the critical date (both for the operation of s 94 of the Supreme Court Act and more generally) was 24 September 1993. At that date, the trust was to be performed by the discharge by Minters of its duties with respect to payment from its trust account. Thereafter, there would be no active obligations for Minters to perform.
Whilst the rights of Youyang against Minters crystallised on 24 September 1993, decisions such as that by Street J in Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd[8] indicate that the appropriate remedy, and, in particular, the quantum of pecuniary remedy, falls for determination at a later stage. In Target Holdings Ltd v Redferns[9], Lord Browne-Wilkinson, with reference to Re Dawson and the judgment of McLachlin J in Canson Enterprises Ltd v Boughton & Co[10], said:

[59]

However, a little more should be said of the case put by Youyang. It does not put a case of breach by the trustee of the proscriptive fiduciary obligations not to obtain an unauthorised benefit from the relationship and not to be in a position of conflict. These are identified and explained in Breen v Williams[18] and Pilmer v Duke Group Ltd (In liq)[19].
In particular, the present is not an instance, of which the decisions of the House of Lords and Privy Council respectively in Nocton v Lord Ashburton[20] and Brickenden v London Loan and Savings Co[21] are the most celebrated examples, of a solicitor who has had financial transactions with a client, getting the client to prefer the personal interests of the solicitor. Thus, in Nocton, one transaction involved the solicitor getting the client to release from his mortgage a property over which, by that release, the solicitor obtained further security for a mortgage of his own. In these cases, as Viscount Haldane put it[22], a court of equity may order the solicitor to replace the property improperly acquired from a client or to make compensation if that property has been lost.
The essence of Youyang's complaint is shortly identified. It is the misapplication of the moneys held on trust on terms that, in the events that happened, obliged Minters to hold the moneys absolutely for Youyang and at its direction. To adapt what was said by Fry LJ in Webb v Stenton[23], Minters has made itself "personally liable to pay money to [Youyang] by reason of some breach of trust or default in the performance of [its] duties as trustee". (emphasis added)
This appeal turns upon the significance for the facts of the causal requirement expressed by Fry LJ in the phrase "by reason of". That serves to remind, as Mummery LJ recently put it, that "[t]here is no equitable by‑pass of the need to establish causation" and that "[i]n questions of causation it is important to focus on the relevant equitable duty"[24]. This raises considerations having an affinity to those which determined the outcome in Target Holdings.

[84]

Handley JA reasoned that the breach of trust in making the payment to ECCCL "was consequential on the earlier breach and was not an independent breach in its own right" and did "not enlarge [Youyang's] rights against [Minters]". Young CJ in Eq held that the second breach was "consequential" in the sense that "[t]he act of paying over the balance of the fund to ECCCL caused no further loss" to the loss of $500,000 which "occurred when the bearer certificate was not obtained".
These statements were made on the footing that there was to be no recovery in respect of the first breach, by reason of the subsequent events concerning the Deed Poll. But, as indicated above, that reasoning is to be rejected. That being so, there is no ground to dismiss from consideration the breach respecting the balance of the $500,000. Each component of the $500,000 was paid away in breach of trust and not one cent of the moneys was recouped by Youyang from the "investment" with ECCCL.
Young CJ in Eq also spoke of Youyang as having, apparently by the Deed Poll, "release[d]" its right to compensation in respect of the first breach. It should be noted that in this Court Minters correctly did not seek to maintain a proposition that Youyang at any stage had released any claims it might have against Minters.
Hodgson JA also held that Brownie AJ had erred in finding that a loss had resulted from the first breach of trust. But in respect of the payment to ECCCL his Honour held that, as between Youyang and Minters and as a matter of common sense and experience, the subsequent failure of the investment made with the payment was caused by that breach of trust by Minters.
Something more should be said respecting Hodgson JA's holding as to the first breach. This was that (i) DAL had refused to pay over the money evidenced by the ECCCL certificate without the consent of Youyang, so that, until the Deed Poll was executed and DAL left the scene, Youyang had suffered "no compensable loss from the first breach of trust"; (ii) "the loss of money due to the [D]eed [P]oll" could not be seen as caused by Minters' breach, "unless the entry into the [D]eed [P]oll can itself be regarded as a consequence" of that breach; (iii) it was for Youyang to plead and demonstrate (ii), but it had not done so.
There are several difficulties with step (i) in this reasoning and thus with (ii) and (iii), even if the burden placed upon Youyang by (iii) could otherwise be supported. First, the reference to "no compensable loss" was misleading in this context. The trust moneys were lost when paid out in breach of trust. That is the injuria with which equity is concerned, not the failure of the investment transaction[33]. By analogy with common law terms, the damage was then suffered; subsequent events went to quantification. Secondly, at no time did Youyang have the benefit of the security against the possible insolvency of ECCCL which was to have been provided by the bearer certificate. Thirdly, the stance taken by DAL may have reflected caution lest it be embroiled as a third party accountable to Youyang for breach of trust or duty by, it would appear, ECCCL; but the fact remained that the deposit held by DAL had been made by ECCCL to whom DAL was indebted.
The reasoning of the Court of Appeal cannot stand as an answer to the case put by Youyang.

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