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Remedies Law – preparation guide

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 RESCISSION

 

After running an online clothing store for two months, Miranda decided that it wasn’t for her. She sold it to a young woman named Bonnie, telling her that the business typically made $25,000 per week. Since purchasing the store, Bonnie has struggled to make $10,000 each week, despite working more hours than Miranda ever did and cutting down on external costs as much as possible. Bonnie has spoken to one of Miranda’s former workers and discovered that the typical weekly sales figure had previously actually been around $7,000, and no higher than $9,000. Bonnie has re-read the contract but there is no clause specifying the turnover. The contract contains a term that it is the whole contract and that no oral statements have been relied upon. Bonnie has become distressed and this has led to a lackluster (unconvincing) approach to her management of the online store. There have been no updates to the website in the past fortnight, and this has severely damaged the goodwill in an industry that relies on fast pace and regular change. Advise Bonnie whether she can set the contract aside and get her money back.

 

ISSUE

The question raises the issue of whether Bonnie can set the contract aside and get her money back.

 

PRINCIPLES

Rescission applies to cases in which a party to a contract, upon breach by the other party, elects to treats the contract as no longer binding on him/her: Shevill v Builders Licensing Board (1982).

 

The remedy of rescission operates retrospectively and restores both parties to their original positions: Cheese v Thomas [1994].

 

A party who is entitled to rescind a voidable contract must either elect to affirm the contract or elect to void (rescind) the contract: Immer (No145) Pty Ltd v Uniting Church in Australia Property Trust (1992).

 

 

The remedy of rescission requires three elements to be satisfied:

 

  1. The presence of a vitiating factor in the formation of the contract;
    1. Generally, rescission is based upon vitiating factors; some element which makes it unconscionable for the contract to continue or to be in force. Vitiating factors include:

 

Vitiating Factor

Reference

Effect

Misrepresentation

Covell 5.5

A contract can be voidable for misrepresentation if the representor has made a misrepresentation of fact that induced the representee to enter into the contract.

Common Law

–    Common law has only afforded relief for fraudulent misrepresentation.

–    In order to sustain an action for deceit, there must be proof of fraud and fraud is proved when it is shown that a false representation has been made knowingly or without belief in its truth or reckless (careless whether it is true): Derry v Peek (1889)

Equity

–    In equity, you don’t have to prove that the misrepresentation is fraudulent. All you have to show is that it is false.

–    The leading case is Redgrave v Hurd (1881). In this case, the court set out the requirements for misrepresentation in equity and made it clear that innocent misrepresentation will constitute grounds for recission and there was no necessary for intention to deceive, whereas common law in order to constitute fraud the misrepresentation must be made with the knowledge of falsity and recklessly in whether it is true

Mistake

Covell 5.19

Three categories of mistake:

Common

–    Here, both parties share the same mistake

 

Mutual

–       Here, both parties are mistaken, but their respective mistakes are not the same.

–        

Unilateral

– Here, only one of the parties is mistaken.

Duress

Covell 5.30

A transaction is voidable for duress if it was induced by the application of illegitimate pressure. Duress can be to the person (physical threat or kidnapping or wrongful detention), to goods (where actual or threatened damage is made in regard to the goods of someone) and economic duress (if D threats to breach a contract then that is economic duress)

Undue influence

Covell 5.40

Arises out of a relationship between two persons where one has acquired over another a measure of influence, or ascendancy of which the ascendant person then takes unfair advantage: Roayl Bank of Scotland plc v Etridge (No2) [2002]

Unconscionable dealing

Covell 5.51

Extends to circumstances where a party to a transaction was under a special disability in dealing with another with the consequence that there was an absence of any reasonable degree of equality between then and that the disability was evident to the stronger party to make it unfair that he procure or accept the weaker party’s assent to the impugned transaction: Commercial Bank of Australia Ltd v Amadio (1983)

 

 

  1. An election to rescind the contract; and
    1. The party with the right to rescind must make a choice to elect between rescission and affirmation of the contract. These are mutually exclusive choices: Immer (No145) P/L v Uniting Church in Australia Property Trust (1992)

 

  1. Restituio in integrum, the restoration of both parties to their respective pre-contractual positions
    1. The objective of rescission is to restore the parties to their original position: Brown v Smitt (1924).
    2. However, sometimes it is not possible to place the parties to their position because of change of circumstances. For example:

 

Alati v Kruger (1955)

Facts

  • K purchased business from A
  • Before K bought it he examined accounts and looked at profits and loss and number of customers
  • K did not know that A had cooked the books, A had reconstructed a set of books which were fraudulent
  • Unfortunately, the inevitable happens K relaises that his business is not profitable and lost money heavily
  • K applies to court to have the contract rescinded on the basis of misrepresentation
  • Before the matter came to court, K had to close the business and sell of his stocks and the landlord took possession of premise because K could not keep up with payments

Procedural History

  • At first instance it was held that K was entitled for rescission on the ground of fraudulent misrepresentation
  • A appealed to high Court

 

Outcome

  • It was held that where a contract of sale is rescinded the P must return to D whatever property was acquired as intact as possible
  • When K bought business there was a lease over the shop and there was stock and of course paid for good will and closed business and landlord took possession of the premises
  • The HC said that K cannot return to A what they purchased from them, however, because of A’s behaviour K were entitled to have the contract rescinded
  • So in such a case, rescission will be granted but equity will need to make allowances for any property that no longer exists in an attempt to restore what is called: the status quo ante (position of parties before the transaction) – in this situation, A was aware that K had to close the business however, neither A nor K had taken any steps to try to mitigate the loss but the Court considered that A could have done!
  • Even though K was unable to return A to the status quo anti, rescission was still granted – although the objective of rescission to place parties in status quo anti, sometimes that can be difficult, however, where P is entitled to rescission then a court will make allowances necessary because it would be unconscionable to allow A to profit at the expense of K
  • Had A acted bona fide then the position of A might be different but A acted mala fide!

 

APPLICATION

 

It is arguable that the contract between M and B can be rescinded due to the presence of misrepresentation as a vitiating factor. The facts suggest that M has represented to B that the business typically made $25,000 turnover. However, B has been struggling to make $10,000 each week and later discovers that the weekly sales figure had been around $7,000, and no higher than $9,000.

 

Rescission of contracts procured by fraudulent misrepresentation is available at both the common law and at equity. At common law, In order to sustain an action for deceit, there must be proof of fraud and fraud is proved when it is shown that a false representation has been made knowingly or without belief in its truth or reckless (careless whether it is true): Derry v Peek (1889). The common law position seems to be harsh because there must be proof of fraud. To ameliorate the harshness of common law, misrepresentation at equity does not require proof that the misrepresentation is fraudulent. All that is required is that the representation is false. The leading case on this proposition is Redgrave v Hurd (1881). In this case, the court permitted rescission for innocent misrepresentation on the basis that intent to deceive was not necessary so long as there was equitable fraud. Thus, a person who makes a representation and subsequently realizes that the representation is false cannot have the benefit of it even though it was innocent made: With v O’Flanagan [1936].

 

Rescission at common law for innocent misrepresentation

  • At common law, typically remedies have only been available for misrepresentation that is fraudulent and not innocent. Meaning of fraud: “Fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false” Derry v Peek Lord Herschell.
  • In the absence of common law fraud, there is no remedy of damages for innocent misrepresentation at common law.

Rescission in equity for innocent misrepresentation

  • All misrepresentations that are not fraudulent in the common law sense
  • Fraud in equity does not require an actual intention to cheat Nocton v Lord Ashburton
  • Based upon the equitable concept of fraud, equity exercises an auxiliary jurisdiction to rescind contracts induced by innocent misrepresentation Redgrave v Hurd

 

In this case, it seems as though the false representations were made fraudulently, since the owner of a business would, arguably, know or ought to know what the financial position of their store would be.

  • Right to rescind a contract for fraudulent misrepresentation cannot be excluded by a contractual term S Pearson & Son Ltd v Dublin Corp
  • However, can exclude rescission of contract in equity for any innocent misrepresentation that induced the contract Life Insurance Co of Australia Ltd v Phillips

In this case, although “the contract contains a term that it is the whole contract and that no oral statements have been relied upon” in accordance with the principle laid in S Pearson & Son Ltd v Dublin Corp, this term is not enforceable since the right to rescind a contract for fraudulent misrepresentation cannot be excluded by a contractual term. Therefore, since it can be argued that the misrepresentation was a fraudulent one, the contract cannot exclude the availability for rescission on this basis.

 

It seems on the facts that the representation was a false one since the former workers discovered that the store only made $7000 per week. Furthermore, Bonnie acted upon it while it was a false representation, since the fact never changed before she acted upon it. it is not particularly clear whether the false representation was actually relied upon by Bonnie in coming to the decision to enter into the contract to purchase the store. However, it could be argued that the amount of revenue a store makes would be a huge consideration which any purchaser would normally have and rely on before deciding to purchase the store or not. In this case, therefore, it could be safe to assume that Bonnie relied on this representation. Further, if Melinda actually calculatedly presented Bonnie with the false representation, then it could be inferred that Bonnie was induced to do so by the representation. The facts are unclear on this point, however since Melinda had found out that running the store “wasn’t for her”, this may have urged her to sell the store at all costs regardless of the means.

 

After establishing that M has falsely misrepresented to B that the business turnover was $25,000 and that B has acted on M’s representation, B must elect to rescind the contract. Once B has elected to rescind the contract, rescission will place B and M in the position they were in before the contract: Brown v Smitt (1924).  The present scenario is analogous to Alati v Kruger. In Alati’s case, Kruger purchased business from Alati. Kruger did not know that Alati had cooked the books and had reconstructed a set of books which were fraudulent. Kruger had purchased the business on the belief that the business was profitable. The inevitable happen and Kruger realizes that the business is not profitable and lost money heavily. The High Court held that Kruger was entitled to have the contract rescinded. Even though Kruger was unable to return to Alati to the status quo anti, rescission was still granted.

 

Therefore and in accordance with Kruger’s case, rescission of contract means that M would be ordered to pay B for her moneys lost in the purchase and running of the store and title of the store would go back to M. In this case, rescission of the contract would allow Bonnie and Melinda to be placed in their pre contractual positions.

 

 

CONCLUSION

It is advisable to B that she can set the contract aside and get her money back.

 

 

 

 

 

Sample Answer:

To satisfy the remedy of rescission, the three elements to be satisfied are:

  1. A presence of a vitiating factor in the formation of the contract
  2. An election to rescind the contract and
  3. Restitutio in integrum, the restoration of both parties to their respective pre-contractual positions.

 

  1.      Vitiating factor:
  • At common law, the scenario at hand could be rescinded for fraudulent misrepresentation. In equity, this scenario at hand could be rescinded for fraudulent misrepresentation or unconscionable dealing.
  • Misrepresentation:
  • Contract can be voidable for misrepresentation if the representor has made a misrepresentation of fact that induced the representee to enter into the contract.
  • There must be a representation of fact:
  • Representations or statements of fact may be express or implied
  • They may be inferred from ‘a single word, or… a nod or a wink, or a shake of the head, or a smile’ Walters v Morgan Lord Campbell
  • Mere silence is not actionable at common law W Scott Fell & Co v Lloyd
  • Statements of fact must be distinguished from mere words of puffery Mitchell v Valherie
  • Further, distinction must be made between statements of fact and statements of opinion or belief. Bisset v Wilkinson: Distinction between the two may lie in the knowledge held by the parties.
  • Rescission allowed in fraudulently stated opinions on matters of law, but not if done honestly West London Commercial Bank Ltd v Kitson
  • In this case, it is clear from the fact scenario that there has been a representation of fact given by Miranda to Bonnie since she specifically states that the store “typically makes $25000 per week”. Arguably, however, it could be seen to simply be ‘mere words’ since the fact that she says ‘typically’ appears to seem that there is no assurance in the matter. However, in this case it seems the usage of the words does not point to such an assumption since there is nothing outlandish, on the facts, about the statement. It seems as though Melinda has represented to Bonnie that the store typically makes $25000 per week.

 

  • The representation must be false when acted uponInducement:
    • Question of fact, that is normally judged when the representation was made
    • Where the representation is a continuing representation that has become false to the knowledge of the representor, a duty arises to inform the representee of the changed circumstances before the representation is acted upon With v O’Flanagan.
    • In this case, it seems on the facts that the representation was a false one since the former workers discovered that the store only made $7000 per week. Furthermore, Bonnie acted upon it while it was a false representation, since the fact never changed before she acted upon it.

 

  • Principles restated in Gould v Vaggelas:
  • Notwithstanding that a representation is both false and fraudulent; if the representee does not rely upon it he has no case.
  • If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation.
  • The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true fact and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the misrepresentation.
  • The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract.
  • In this case, it is not particularly clear whether the false representation was actually relied upon by Bonnie in coming to the decision to enter into the contract to purchase the store. However, it could be argued that the amount of revenue a store makes would be a huge consideration which any purchaser would normally have and rely on before deciding to purchase the store or not. In this case, therefore, it could be safe to assume that Bonnie relied on this representation. Further, if Melinda actually calculatedly presented Bonnie with the false representation, then it could be inferred that Bonnie was induced to do so by the representation. The facts are unclear on this point, however since Melinda had found out that running the store “wasn’t for her”, this may have urged her to sell the store at all costs regardless of the means.

 

Rescission at common law for innocent misrepresentation

  • At common law, typically remedies have only been available for misrepresentation that is fraudulent and not innocent. Meaning of fraud: “Fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false” Derry v Peek Lord Herschell.
  • In the absence of common law fraud, there is no remedy of damages for innocent misrepresentation at common law.

Rescission in equity for innocent misrepresentation

  • All misrepresentations that are not fraudulent in the common law sense
  • Fraud in equity does not require an actual intention to cheat Nocton v Lord Ashburton
  • Based upon the equitable concept of fraud, equity exercises an auxiliary jurisdiction to rescind contracts induced by innocent misrepresentation Redgrave v Hurd

In this case, it seems as though the false representations were made fraudulently, since the owner of a business would, arguably, know or ought to know what the financial position of their store would be.

  • Right to rescind a contract for fraudulent misrepresentation cannot be excluded by a contractual term S Pearson & Son Ltd v Dublin Corp
  • However, can exclude rescission of contract in equity for any innocent misrepresentation that induced the contract Life Insurance Co of Australia Ltd v Phillips

 

In this case, although “the contract contains a term that it is the whole contract and that no oral statements have been relied upon” in accordance with the principle laid in S Pearson & Son Ltd v Dublin Corp, this term is not enforceable since the right to rescind a contract for fraudulent misrepresentation cannot be excluded by a contractual term. Therefore, since it can be argued that the misrepresentation was a fraudulent one, the contract cannot exclude the availability for rescission on this basis.

 

  1. Election
  • The innocent party must elect to either affirm or to rescind a voidable contract.
  • An election to affirm a voidable contract extinguishes the right to rescind.
  • Conversely, an election to rescind a voidable contract extinguishes the right to enforce the contract according to its terms, including any accrued right to damages or specific performance.
  • Sargent v ASL Developments Ltd

In this case, Bonnie must elect to rescind the contract.

 

  1. Restitutio In Integrum
  • Under this principle, the rescission of the contract must be able to place the parties back to their pre-contractual positions.
  • Equity merely requires substantial restitution to achieve effective rescission. Alati v Kruger

 

In this case, rescission of the contract would allow Bonnie and Melinda to be placed in their pre contractual positions. Melinda would be ordered to pay Bonnie for her moneys lost in the purchase and running of the store and title of the store would go back to Melinda.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DAMAGES IN TORT

 

At 7.45 am on the 27 August 2010, Toby Tyler, a self-employed accountant, was on his way to work. As he waited at the bus stop on the corner of Cambridge Street and Enmore Road, Enmore, he looked to his left and noticed that a flat-top truck carrying a load of cardboard boxes and travelling at speed, had just run the red light at a nearby intersection.

The truck proceeded towards the bus stop at a speed obviously above the 50 kmph. Then, without slowing down, the truck turned into Cambridge Street at very high speed with tyres squealing. As it did so, a large cardboard carton weighing approximately 3.5 kgs flew off the back and struck Toby on the side of the head. Toby did not have time to take evasive action and was knocked unconscious. The truck did not stop.

The police were called and an ambulance, which took Toby to the RPAH. A quick thinking by-stander had taken the truck’s registration number and this was given to the police, who were able to trace both the truck and its owner, Roy Rogers. Roy was charged with negligent driving and failing to properly secure the load on the tray of the truck.

Meanwhile, on 28 August Toby was discharged from hospital, sent home with a few paracetamol tablets and told to “take things easy for the next few days.”  However, over the next couple of weeks, Toby became increasingly depressed and began to suffer from the following symptoms:

– Severe headaches

– Nausea

– Sleeplessness

– Nightmares

– Feelings of disorientation and panic

– Reluctance to leave the house

– Lethargy

On 20 September 2010, Toby went to see his GP, who referred him to a neurologist. After a series of tests and scans, the neurologist could find no brain injury. Toby went back to his GP who then referred him to a psychologist.

The psychologist diagnosed Post Traumatic Stress Disorder caused by the accident and told Toby that he would be unable to work for a few weeks.

Does Toby have any common law cause of action against Roy? If so, what damages can he claim?

Does Roy have any defence?

ANSWER:

 

 

Toby v Roy Rogers

Toby’s cause of action is in negligence and in order to claim damages, Toby must prove actual damage – that the damage was caused by Roy’s negligence (failure to exercise duty of care to secured load), that his loss is not too remote and there has been no failure to mitigate loss. Roy may argue in his defence that Toby’s psychiatric injury was not foreseeable and that it was too remote.

Issue: Whether Roy’s negligence caused Toby’s injury and whether it gives rise to a cause of action?

Issue: Assessment of damages.

Issue: Defences.

Duty of care – driving

Negligent driving

  1. Cause of action:

The relevant cause of action in this case is negligence and to establish negligence in the immediate case, there must be a duty on the defendant, Roy towards the plaintiff, Toby which was breached by the defendant’s act or omission. Further, it is arguable that a higher standard of care is due by persons driving motor vehicles towards pedestrians. It is evident that Roy has committed such a breach, given that he has been charged with negligent driving. Therefore, the first element is satisfied.

 

S 5D(1) – elements – cause of action.

Duty of care – Donohue v Stevenson.

 

  1. The loss was caused by the tort.

Toby must prove, on the balance of probabilities that the Post Traumatic Stress Disorder (PTSD) and subsequent loss of earnings was caused by Roy’s negligence or in other words, it was a “necessary condition”: s5D Civil Liability Act. In accordance with the ‘common sense’ test of causation, the court commences by asking the question ‘but for the defendant, Roy’s tortious act would the plaintiff, Toby’s loss not have occurred’? It is likely that had Roy not been driving negligently and negligently allowed the cardboard carton to fall off and strike Toby unconscious, Toby would not have suffered PTSD and it is unlikely that the incident would have occurred despite Roy’s negligence: March v Stramare (1991); Chappel v Hart.

On the other hand, Roy may argue that the hospital was negligent in diagnosing Toby and their initial failure to properly treat Toby was the intervening cause of Toby’s depression and subsequent contraction of PTSD, thereby supplanting his prior negligent act so that he is relieved from liability or, in the alternative, that contributory negligence should be considered and…a) or b)

  1. Pursuant to ss5(2) and 35(1)[1] of the Law Reform (Miscellaneous Provisions) Act 1946, it is just and equitable that the loss should be borne equally between the hospital and himself having regard to their respective responsibility for Toby’s loss: Talbot-Butt v Halloway.
  2. Given that there is currently no pending action against the hospital, that, according to the principle in Faulkner v Keffalinos (1970) that the vicissitudes of life should be taken into account and his damages should be reduced to the extent that that the later psychiatric condition caused by the hospital is the cause of Toby’s lost earnings. In light of the uncertainty surrounding the House of Lord’s decision in Baker v Willoughby (1970), it is unclear whether Roy will be successful. In that case a successive injury to P’s leg required its total amputation but Ds liability did not decrease as the first injury was a concurrent cause of P’s loss. However, in Faulkner, Windeyer J refused to follow Baker whose approach is supported by the House of Lord’s decision in Jobling v Associated Diaries (1982) where the later injury was taken into account in the assessment of damages.

 

To determine the veracity of Roy’s defence we would require further information about the surrounding circumstances of Toby’s hospitalisation, including evidence of Toby’s initial condition. In the absence of negligent conduct of the doctor, Roy would not be successful and it is unlikely that, based on considerations of policy, the court would divert responsibility for harm caused by a negligent driver in Roy’s position: Bennett v Minister of Community Welfare (1992). If however negligence is established and Faulkner is followed, damages maybe reduced.

There is also a possible argument that Toby was contributarily negligent as he failed to avoid the incoming car as it drove recklessly around the bend causing Toby injury. However, this is unlikely as the facts state that Toby did not have time to take evasive action.

 

  1. The loss was not too remote:

According to Wagon Mound (No 1), the loss suffered by the P, Toby will be too remote and thus unrecoverable unless it is reasonably foreseeable. This requirement will be satisfied where the risk of injury is a “real risk” that would occur in the mind of a reasonable person and is not “far-fetched”: Wagon Mound (No 2)[2]. Further, it is only necessary to foresee the general kind of damage, and not the extent: Hughes v Lord Advocate.

 

It is obvious that a reasonable person would have realised “real risk” that someone may be struck on the head by heavy objects falling from an unsecured load[3], although it is arguable that psychiatric injury is foreseeable. In Nader v Urban Transit Authority (1985), a boy fell and suffered minor injuries to his head which developed into an unusual psychiatric condition. It was found that the condition was triggered by the parent’s over-protectiveness but the majority of the NSWCA found that the damage was nevertheless foreseeable. Further, as observed by McHugh J in Tame and Annetts (2002), given the undemanding nature of the test, the test of foreseeability is usually satisfied.

 

Therefore, it is reasonably foreseeable that the loss would result from Roy’s negligence.

 

  1. Plaintiff has not breached their duty to mitigate unnecessary loss

Under s136 of the Motor Accidents Compensation Act 1999 (NSW), Toby has a duty to mitigate losses flowing from D’s negligence. However, onus is on the D, Roy to prove that the P, Toby has failed to attempt reasonable mitigation: s136(4); Watts Rake (1960) HC. This would be difficult, as a reasonable person in Toby’s circumstances would have complied with the directions of the hospital and sought a doctor when the symptoms became worse: Glavonjic v Foster (1979). Therefore, on the facts, it does not appear that Roy can discharge the onus of showing that Toby has failed to unreasonably mitigate loss.

 

Delay to seek medical treatment could be seen as a failure to mitigate or contributory negligence: Glavonjic v Foster (1979). At each stage Toby was under some type of medical direction which he complied with.

 

  1. Damages:

The Court will assess damages by reference to the date the cause of action accrues which in this case is 27 August 2010 the date of the incident: Rentokil v Channon (1990).

  • Special damages

Toby will be able to claim special damages which will cover his medical expenses, ambulance and hospital expenses and loss of income up to the date of the decision: Paff v Speed (1961).

  • Additionally, he can claim general damages for future medical expenses: Sharman v Evans (1977), loss of enjoyment of life which is capped by ss16;17 CLA, and loss of earning capacity. Pursuant to the requirements set out by the HC in Medlin v SGIC (1995), Toby is unable to work for a few weeks and this was by reason of the negligence-caused injury. The lump sum will be based on his future earnings as a self employed accountant for the period of weeks which Toby is unable to work, allowing for a (5% discount and) 15% discount for the vicissitudes of life: ss14(2)(b); 13 CLA; Wynn v NSW Insurance Ministerial Corporation (1995).
  • Nominal, aggravated or exemplary circumstances.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DAMAGES IN CONTRACT

 

May is a professional make-up artist and hair stylist, who runs her own business out of her home. May employed Tom’s Plumbing to fix a pipe in her bathroom where she keeps her hair and beauty products. Tom used the wrong type of pipe, which breached an implied term in the contract to use due care and skill. The next day, one of May’s customers decided to help tidy up towards the end of the day. While putting a commercial size hair dryer in the bathroom cupboard, the customer bumped the pipe rather heavily, leaving a large dent in it. Two hours later, the pipe burst. This caused extensive damage to May’s make-up collection and her bathroom. Advise May whether she can recover the loss from Tom in a contract claim in common law. 

 

ISSUE

May employed Tom’s plumbing to fix a pipe in the bathroom of her business. Tom used the wrong pipe which breached an implied term in the contract to use due care and skill. The next day, a customer bumped the pipe heavily, leaving a dent in the pipe. Two hours later, the pipe burst and May is seeking advice as to whether she can recover the loss she has suffered from Tom in a contract claim.

 

RELEVANT LAW AND APPLICATION

When a contract is broken, the usual remedy at common law is compensatory damages. In order for the court to award the plaintiff (May) compensatory damages in contract, it must find that:

  1. The plaintiff has a cause of action in contract- a breach of contract;
  2. The defendant’s breach of contract has in fact injured or caused a loss to the plaintiff- the element of causation;
  3. The loss suffered by the plaintiff is not too remote; and
  4. The plaintiff has not breached his or her ‘duty’ to mitigate unnecessary loss.

Damages in contract are awarded to place the plaintiff in the position it would have been in had the contract been performed:  Robinson v Harman (1848) 154 ER 363.The onus of proving the first three elements rests on the plaintiff (Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 80). However with the last element, the burden is on the defendant to show that the plaintiff has failed to take reasonable steps to avoid unnecessary loss (TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130, 158).

Breach

In May’s context, she would need to prove that Tom used the wrong pipe, this may be done if she has documentation to prove that the wrong pipe was installed or have an expert opinion stating this. If she can prove that the wrong pipe was installed, it may be recognised as a breach of contract, however based on the facts of the case more information will be required to determine whether a breach has occurred.

 

 

Causation

If a breach has been established, the plaintiff then needs to prove that the loss:

  • Was actually suffered and was more than trifling; and
  • Was caused by the Defendant’s wrong.

The test should be determined by reference to the ‘common sense approach’ with the ‘but for’ test being used as the threshold criteria test: March v E & MH Stramare Pty Ltd (1991) 171 CLR 506, 533; Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310.

An illustration of the judiciary’s approach to causation is the recent High Court decision of Adeels Palace Pty Ltd v Moubarak [2009] HCA 48, where an altercation in a restaurant led to an individual leaving the premises and returning with a gun which he used to shoot patrons within the restaurant, including the Plaintiff. The Plaintiff sued the Defendant restaurant on the basis that they were negligent in failing to have a sufficient security system. The High Court rejected the action on the basis that increased security would not have prevented the gunman from entering the restaurant and shooting patrons.

In May’s case she would need to establish that Tom installing the wrong pipe was the cause of the burst that ultimately led to the damage she suffered. Since a customer had knocked the pipe and caused a dent to it, it may be difficult to prove that Tom is solely at fault in this situation since the burst occurred two hours after the pipe being knocked and dent.

It may be alleged that the defendant’s breach is no longer a cause because of an intervening event or a superseding cause other than contributory negligence. Whether an intervening event will break the chain of causation or merely diminish the effect of the defendant’s breach as a cause has been held to be determined by a consideration of whether the event was ‘reasonably foreseeable’ by the defendant.

The issue of intervening events breaking the chain of causation between the defendant’s breach of contract and the plaintiff’s loss was considered in Alexander v Cambridge Credit Corp Ltd. Cambridge Credit argued that its auditors were in breach of contract because of their failure to demand an adjustment to its balance sheet for the end of the 1971 financial year. Had that adjustment been made, a receiver would have been appointed in Sept 1971 to wind up Cambridge Credit. But the receiver was not appointed until Sept 1974, and by then Cambridge Credit’s debts had soared to $145 million. The auditor’s defence was that Cambridge Credit’s plight was brought about by the Federal Govt budgetary measures of 1972-73, so any prior breaches of contract and negligence on their part were no longer causally relevant.

The majority, Mahoney and McHugh JJA, in separate judgments, found that the continuing existence of Cambridge Credit was not of itself a cause of the loss, but their Honours then gave differing opinions on the applicable law.

Mahoney JA, after rejecting ‘but for’ test, reasoned that there was insufficient evidence to establish an actual link between the auditors breach and Cambridge Credit’s losses.

McHugh JA held that in order to establish a causal connection between a breach of contract and the damage suffered, the plaintiff only needs to show that the breach was a cause of the loss; it need not to be the exclusive cause, it need only have ‘causally contributed’ to the loss. The ultimate question is whether, as a matter of common sense, the relevant act or omission was a cause. Causation was not satisfied in this case because the mere ‘existence of a company… cannot be a cause of its trading losses or profits. McHugh JA also held that a later event may be so potent as to overwhelm the original wrong, and in this case the economic change did overwhelm the auditors’ breach.

In March, Mason CJ found that the negligence of a third party will not break the chain of causation where the Defendant’s wrong has generated the risk of injury occurring from the negligence of the third party. In May’s case, having an intervening act being the knock obtained by her customer could be detrimental to get an award of damages as she would need to prove that the second act did not overwhelm the point of Tom putting the wrong pipe in the bathroom and that the burst was the fault of the pipe and not the customer. Where a third party contributes to the Plaintiff’s (May’s customer) loss, whether the chain of causation is broken will depend on the nature and scope of the Defendant’s duty. It could very well be the fact that Tom had installed the wrong pipe, but it could possibly be the case that the wrong pipe still did its job and was not the cause of the pipe bursting.

 

Remoteness

The concept of remoteness is a limitation on the damages award and ensures the Plaintiff is only compensated for damages which are not too remote with respect to the wrong.

The test of remoteness varies according to the cause of action, however in a breach of contract the rule of Hadley v Baxendale (1854) 156 ER 145. The plaintiff required a handcrafted crankshaft to be replaced by the Defendant manufacturer in order to operate a flour mill. The plaintiff engaged the Defendant to deliver the crankshaft within a certain time period. The Defendant failed to deliver the crankshaft within the time specified in the contract. The plaintiff sued for damages associated with loss of business profits.

It was held the test for remoteness in breach of contract involves two limbs:

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, ie according to the usual course of things, from such breach of contract itself, or such as may be reasonably supposed to have been in the contemplation of both parties, at the same time they made the contract, as the probable result of the breach of it.

  1. First limb is where loss arises ‘naturally’ in the usual course of things ‘as the probable result of the breach’. – direct loss (the resulting damage is presumed to have been within the contemplation of the parties. The defendant is prima facie liable for such loss; and the plaintiff does not need to adduce evidence that the defendant was aware of the risk of such damages).
  2. The second limb is where the loss is of an unusual type, sometimes characterised as an ‘indirect’ or ‘special’ loss. Here, the plaintiff must prove that the defendant knew or ought to have known that such loss would be ‘the probable result of the breach’. There is no presumption here, evidence must be adduced showing that the unusual damage or indirect loss was contemplated at the time the contract was made.

The test of remoteness was analysed by the House of Lords in C Czarnikow Ltd v Koufos, Lord Reid concluded that:

The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.

 

The case of Victoria Laundry Ltd v Newman Industries Ltd illustrates how both limbs of the rule in Hadley operate. The defendant engineering company agreed to supply the plaintiff with a boiler by June to assist the plaintiff in its laundry business. In breach of contract the defendant delivered the boiler in November, some 20 weeks late. The plaintiff sued for both loss of normal business profits and loss of a lucrative dyeing contract for the government.

The court of appeal held that the plaintiff was entitled to recover, under the first limb, normal business profits, that is, losses arising ‘naturally’ from the breach. But the claim for the dyeing contract or extra profits was unusual in that it was work not normally undertaken by the laundry, and therefore disallowed. For such a claim to succeed the plaintiff needed to show that the defendant knew of this potential extra loss and knew that such loss was likely to occur.

In May’s case, it would need to be shown that any plumber, not just Tom would have realised that installing the wrong pipe would likely burst and cause damage to the property, and for him to bare the loss.

Mitigation

There are cases where the defendant can argue both that the Plaintiff failed to mitigate his/her losses and that the damage suffered by the Plaintiff was too remote. The plaintiff always bears a legal responsibility or ‘duty’ to avoid unnecessary losses. In Viscount Haldane LC in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd observed that the principle of mitigation imposes on a plaintiff:…the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.

The ‘duty’ of the plaintiff to mitigate loss is of a special type. A breach of the duty is not actionable, it merely reduces the damages payable by the defendant. Based on the facts of the case, more information will need to obtain whether May mitigated her losses to be awarded compensatory damages.

 

 

CONCLUSION

Based on May’s case and whether she can recover the loss she has suffered from Tom in a contract claim, would be difficult to prove as there is not enough facts to prove whether Tom had actually caused the pipe to burst by installing the incorrect pipe and whether this was in breach of their agreement. Based on this, May’s case would have slim chances of succeeding, unless she were able to prove otherwise.

 

 

 

 

 

 

 

Now imagine that, after Tom installed the wrong pipe (as in part (a) of this question) May noticed that the pipe looked a little insecure. She decided to forget about it and thought to herself, ‘I am sure it is fine. Tom is a plumber – he knows what he is doing.’ The next day the pipe connection started leaking and, although May noticed the leak, she did nothing further about it. Three days later the pipe burst and caused extensive damage to May’s make-up collection and her bathroom. Advise May whether she can recover the loss from Tom. 

 

ISSUE

Tom installed an incorrect pipe on May’s premises. May noticed the pipe was insecure and leaked but did nothing about it as she trusted Tom and his expertise. The pipe eventually burst and extensive damage was caused. May wants to know if she can recover the loss from Tom.

 

RELEVANT LAW AND APPLICATION

When a contract is broken, the usual remedy at common law is compensatory damages. In order for the court to award the plaintiff (May) compensatory damages in contract, it must find that:

  1. The plaintiff has a cause of action in contract- a breach of contract;
  2. The defendant’s breach of contract has in fact injured or caused a loss to the plaintiff- the element of causation;
  3. The loss suffered by the plaintiff is not too remote; and
  4. The plaintiff has not breached his or her ‘duty’ to mitigate unnecessary loss.

Damages in contract are awarded to place the plaintiff in the position it would have been in had the contract been performed:  Robinson v Harman (1848) 154 ER 363.The onus of proving the first three elements rests on the plaintiff (Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 80). However with the last element, the burden is on the defendant to show that the plaintiff has failed to take reasonable steps to avoid unnecessary loss (TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130, 158).

Breach

In May’s context, she would need to prove that Tom used the wrong pipe , this may be done if she has documentation to prove that the wrong pipe was installed or have an expert opinion stating this. If she can prove that the wrong pipe was installed. 

Causation

If a breach has been established, the plaintiff then needs to prove that the loss:

  • Was actually suffered and was more than trifling; and
  • Was caused by the Defendant’s wrong.

The test should be determined by reference to the ‘common sense approach’ with the ‘but for’ test being used as the threshold criteria test: March v E & MH Stramare Pty Ltd (1991) 171 CLR 506, 533; Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310.

An illustration of the judiciary’s approach to causation is the recent High Court decision of Adeels Palace Pty Ltd v Moubarak [2009] HCA 48, where an altercation in a restaurant led to an individual leaving the premises and returning with a gun which he used to shoot patrons within the restaurant, including the Plaintiff. The Plaintiff sued the Defendant restaurant on the basis that they were negligent in failing to have a sufficient security system. The High Court rejected the action on the basis that increased security would not have prevented the gunman from entering the restaurant and shooting patrons.

In May’s case she would need to establish that Tom installing the wrong pipe was the cause of the burst that ultimately led to the damage she suffered.

Remoteness

The concept of remoteness is a limitation on the damages award and ensures the Plaintiff is only compensated for damages which are not too remote with respect to the wrong.

The test of remoteness varies according to the cause of action, however in a breach of contract the rule of Hadley v Baxendale (1854) 156 ER 145. The plaintiff required a handcrafted crankshaft to be replaced by the Defendant manufacturer in order to operate a flour mill. The plaintiff engaged the Defendant to deliver the crankshaft within a certain time period. The Defendant failed to deliver the crankshaft within the time specified in the contract. The plaintiff sued for damages associated with loss of business profits.

It was held the test for remoteness in breach of contract involves two limbs:

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, ie according to the usual course of things, from such breach of contract itself, or such as may be reasonably supposed to have been in the contemplation of both parties, at the same time they made the contract, as the probable result of the breach of it.

  1. First limb is where loss arises ‘naturally’ in the usual course of things ‘as the probable result of the breach’. – direct loss (the resulting damage is presumed to have been within the contemplation of the parties. The defendant is prima facie liable for such loss; and the plaintiff does not need to adduce evidence that the defendant was aware of the risk of such damages).
  2. The second limb is where the loss is of an unusual type, sometimes characterised as an ‘indirect’ or ‘special’ loss. Here, the plaintiff must prove that the defendant knew or ought to have known that such loss would be ‘the probable result of the breach’. There is no presumption here, evidence must be adduced showing that the unusual damage or indirect loss was contemplated at the time the contract was made.

The test of remoteness was analysed by the House of Lords in C Czarnikow Ltd v Koufos, Lord Reid concluded that:

The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.

 

In May’s case it is vital that the damages that she is seeking are in proportion to the burst of the pipe, and all that has been damaged was a result of the pipe bursting. Seeing that May’s make-up collection and bathroom were damaged due to the improper pipe and installation, it can be said that the damage is not too remote in the circumstances. Since it is likely that a faulty installed pipe will cause issues, it makes it proper to hold that the loss flowed naturally to the error by Tom.

Mitigation

There are cases where the defendant can argue both that the Plaintiff failed to mitigate his/her losses and that the damage suffered by the Plaintiff was too remote. The plaintiff always bears a legal responsibility or ‘duty’ to avoid unnecessary losses. In Viscount Haldane LC in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd observed that the principle of mitigation imposes on a plaintiff:…the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.

The ‘duty’ of the plaintiff to mitigate loss is of a special type. A breach of the duty is not actionable, it merely reduces the damages payable by the defendant. Based on the facts of the case, more information will need to obtain whether May mitigated her losses to be awarded compensatory damages.

In this circumstance Tom can certainly argue that May did not mitigate her loss, as she did notice the pipe was not secured, and that it was leaking but chose not to do anything about it. Tom may argue that had May notified him of what she encountered, the burst could have been avoided.

 

DEFENCES

The defence of contributory negligence is provided in general by Section 8 and 9 of the Law Reform (Miscellanous Provisions) Act 1965 (NSW). These sections provide that where a plaintiff suffers damages as the result of his/her own failure to take reasonable care and partly of the wrong of the Defendant, the damages recoverable are reduced to such extent as the court considers just and equitable having regard to the Plaintiff’s share is the responsibility for the damages.

If the plaintiff is negligent this may satisfy the court that the chain of causation between the defendants breach of contract and the plaintiff’s loss has been broken. Or, in other words, it may establish that the plaintiff’s loss was not in fact caused by the defendant’s breach.

In Lexmead (Basingstoke) Ltd v Lewis the plaintiff purchased a towing hitch to connect his four-wheel drive to a trailer. After the plaintiff used the towing hitch he noticed that it was broken but still continued to use it. A serious accident occurred when the trailer became detached. The plaintiff claimed damages by arguing that the defendant supplier was in breach of contract because of a design defect in the towing hitch. The house of lords rejected this argument and decided that the plaintiff’s negligence, in continuing to use the towing hitch in the knowledge that it was unsafe, ‘broke the chain’ of causation between the defendant’s breach and the damage suffered.

Therefore, like mitigation, Tom can certainly argue that May contributed to her loss, as she did notice the pipe was not secured, and was leaking but chose not to do anything about it. Tom may argue that had May notified him of what she encountered, the burst could have been avoided.

 

CONCLUSION

Based on whether May can recover damages for the wrong pipe and faulty installation, she will need to prove that the loss occurred directly from Tom’s breach of duty of care. Due to her not mitigating her loss, the court may reduce the amount she can recover from Tom.

 

 

May is a professional make-up artist and hair stylist, who runs her own business out of her home. May employed Tom’s Plumbing to fix a pipe in her bathroom where she keeps her hair and beauty products. Tom used the wrong type of pipe, which breached an implied term in the contract to use due care and skill. The next day the pipe burst. May suffered the following damage:  i. The cupboards under the sink were damaged when the pipe burst. The damage cost $600 to repair.  ii. The make-up and hair-styling products she used in her business were ruined. They were worth $3,500.  iii. May had arranged to do the hair and make-up for a special photo-shoot for Brides and Bridesmaids Magazine. She is now unable to do so as it will take her a week to receive new supplies. The lost profit on this deal amounts to $5,000. 

Advise May whether she can recover these losses from Tom under common law.* In each case explain how your answer might change if May had told Tom to be careful of her make-up and hair products which were vital to the business she conducted from the premises?

 

Follow above steps-

  • Breach
  • Causation
  • Remoteness

Even if the court finds that the damage was caused by the defendant’s breach, it must not be too remote in law. The classic test for remoteness in contract was stated by Baron Alderson in Hadley v Baxendale:

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, ie according to the usual course of things, from such breach of contract itself, or such as may be reasonably supposed to have been in the contemplation of both parties, at the same time they made the contract, as the probable result of the breach of it.

 

Baron Alderson’s test of remoteness entails two limbs.

  1. First limb is where loss arises ‘naturally’ in the usual course of things ‘as the probable result of the breach’. – direct loss (the resulting damage is presumed to have been within the contemplation of the parties. The defendant is prima facie liable for such loss; and the plaintiff does not need to adduce evidence that the defendant was aware of the risk of such damages).
  2. The second limb is where the loss is of an unusual type, sometimes characterised as an ‘indirect’ or ‘special’ loss. Here, the plaintiff must prove that the defendant knew or ought to have known that such loss would be ‘the probable result of the breach’. There is no presumption here, evidence must be adduced showing that the unusual damage or indirect loss was contemplated at the time the contract was made.

 

The test of remoteness was analysed by the House of Lords in C Czarnikow Ltd v Koufos, Lord Reid concluded that:

The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.

 

The case of Victoria Laundry Ltd v Newman Industries Ltd illustrates how both limbs of the rule in Hadley operate. The defendant engineering company agreed to supply the plaintiff with a boiler by June to assist the plaintiff in its laundry business. In breach of contract the defendant delivered the boiler in November, some 20 weeks late. The plaintiff sued for both loss of normal business profits and loss of a lucrative dyeing contract for the government.

 

The court of appeal held that the plaintiff was entitled to recover, under the first limb, normal business profits, that is, losses arising ‘naturally’ from the breach. But the claim for the dyeing contract or extra profits was unusual in that it was work not normally undertaken by the laundry, and therefore disallowed. For such a claim to succeed the plaintiff needed to show that the defendant knew of this potential extra loss and knew that such loss was likely to occur.

 

The second limb of Hadley v Baxendale

This limb is concerned with damage of an unusual type, sometimes characterised as a ‘special’ or ‘indirect’ loss. The innocent party must prove that the guilty party knew, or ought to have known, that that type of damage would be the ‘probable result of the breach’. However, merely to show knowledge on the part of the defendant is insufficient; the defendant must have accepted the risk of the unusual loss. It need not be a term in the contract and an oral undertaking may be sufficient.

 

In Panalpina International Transport Ltd v Densil Underwear Ltd: the plaintiff agreed to arrange for the carriage of the defendant’s goods from London to Nigeria. The defendant made it clear that it was important that the goods arrive in Nigeria in time for the Christmas trade, but there was no provision in the parties’ contract to that effect. The plaintiff delayed in sending the goods and they did not arrive in Nigeria until 21 December. It was held liable for the increased losses arising from the fact that the goods could not be sold at the higher prices prevailing during December.

 

The undertaking to bear the extra loss may be implied. In deciding whether it is implied the court examines the defendant’s actual knowledge up until the time the contract was made. It will also consider the nature of the contract.

 

If May made it clear at the time the contract was formed for Tom to be careful as her products were vital to her business this would fall under the first limb as they were the losses that flowed from the ordinary course of events (damaged cupboards, make-up and hair style products), however the loss of the special photo-shoot for Brides could fall under the second limb as they were indirect losses. Accordingly, May might not be able to recover $5000 as she did not specifically state to Tom that she had an upcoming shoot worth that amount.

  • Mitigation
  • Defences
  • Conclusion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EQUITABLE COMPENSATION & DAMAGES IN EQUITY

 

Madonna Sanders is an elderly woman who has made litigation her lifetime occupation. Consequently, she has a reputation in legal circles for being both neurotic and unpredictable. In May 2010 she contacts her local council requesting the removal of a tree which is situated on the footpath outside her house in Westmead. Madonna’s request is based upon the following:

The tree is a eucalypt and at least 40 years old

– It is “throwing” branches, which is an indication that it is nearing the end of its lifespan

– It is approximately 20 metres tall

– There is evidence of borer activity in the trunk

– It sways and creaks during strong winds

– If it falls, it could damage the roof of her house

– She had a nightmare in which the tree actually fell on her house, crushing her in her bed.

The Council send a tree surgeon to inspect the tree. Her report states (inter alia) that:  The tree is an extremely rare Cootamundra Blue Gum
 It could live a healthy and happy life for another 40 years
 There a no borers: the holes were made by air rifle pellets

– There is no indication that it will blow over in a wind

– If it did fall, it would be more likely to fall toward the road

The Council write to Madonna and inform her that the tree stays! She writes 10 more letters to them, which the Council ignore. In desperation, she comes to see you to ask your advice. Apart from statutory remedies, are there any other remedies available to Madonna vis a vis the Council?

Suggested answer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ANSWER:

 

  1. Injunction to remove the tree based upon;

 

  1. It is just and convenient to grant the injunction;

 

  1. there is no other remedy available; and,

 

  1. all the circumstances of the case have been considered.

The injunction sought is mandatory in that it will require the council to fell the tree in question. However it will be extremely difficult to overcome the report of the tree surgeon. This can only be done by calling expert evidence to counter and rebut any evidence adduced by the tree surgeon. Injunctions in New South Wales are granted pursuant to s 66 Supreme Court Act 1970. However, this does not make an injunction a statutory remedy, only the mechanics of its application and granting or otherwise.

For the injunction to have finality it is not logical that it be an ex-parte, interlocutory application. Such an application would require the client to give an undertaking to pay for any damage suffered by the council should a final injunction not be granted. In the absence of compelling evidence that the tree is in a dangerous condition, there is a very good chance that the injunction will not be granted.

Cardile v LED Builders Pty Ltd[4] held that s 66 Supreme Court Act (s 23 Federal Court of Australia Act 1976 (Cth)) does not give the courts power to grant interlocutory or other injunctions based upon “just and convenient” or “appropriate” except with reference to ‘… the existence of a legal or equitable right which the injunction protects against invasion or threatened invasion, or other unconscientious conduct or exercise of legal or equitable rights’.[5] 

In certain circumstances a mandatory injunction may be available from a court of equity requiring a tree owner to cut down the tree or otherwise abate the nuisance caused by it. Injunctions are only available where damages would not afford an appropriate remedy and in determining this, the court will weigh the extent of the plaintiff’s injury or inconvenience against the effect the injunction would have on the defendant. For instance in Middleton v Humphries[6] it was held that if an action on the case will lie, then the remedy of injunction must be available if the nuisance be a continuing one. This case was cited with approval in McCombe v Read[7] where it was held that the encroachment of the roots of the poplar trees into and under the plaintiff’s land and the abstraction of water from the soil by the roots constituted a continuing nuisance for which the remedy of injunction would lie. Harman J observed:

It could not be right to throw on the plaintiff the burden of watching for further subterranean encroachment. In my judgment, however the plaintiff is not entitled to an unqualified injunction, for he has no remedy unless a nuisance be caused. The injunction will, therefore, be to restrain the defendants from allowing the roots from any tree on their property so to encroach on the plaintiff’s land as to cause a nuisance.[8]

Generally speaking, injunctions are only available once damage has been caused. However, in exceptional circumstances a quia timet injunction may be issued ordering a defendant to avert prospective injury. Such injunctions are issued only if there is a strong probability that the nuisance will in fact arise or that the damage, if it materialises, will be irreparable. Under s68 Supreme Court Act, the court may grant damages in lieu of an injunction for prospective damage. Further, disputes may now be resolved by the plaintiff being paid a full and final amount of compensation, whilst consenting to tolerate the continuing nuisance.

  1. Assuming that Guppy has an unrestricted practising certificate, a pre-requisite to setting up his own practice, he may be liable for an infringement of intellectual property rights or breach of contract. An award of damages is not appropriate because there is no way of assessing damages to Bazza only profit for Guppy. An award of damages is not concerned with profit made by Guppy but with the loss suffered by the innocent party: Colbeam Palmer Ltd v Stock Affiliates Pty Ltd.[9] With respect to an account of profits relating to a breach of a common law right, the rationale of ordering the account is to prevent unjust enrichment: Dart Industries Inc v Décor Corp Pty Ltd.[10]

The account of profits should take into account Guppy’s entitlement to deduct costs directly associated with the income from the breach of the intellectual property rights or the breach of contract. That is to say there are two limbs to this argument, viz;  

  1. Whilst a client/solicitor relationship existed between Guppy and all of the clients of cases of which he had carriage whilst employed by Bazza enjoy client/solicitor privilege, the principal of the firm i.e. Bazza also had access to the information and was subject to the same confidentiality of client/solicitor privilege. The rights to the confidential information, therefore, were vested in the client and the law firm. When Guppy left the firm he had no right to take any of the information with him and use it at all, leave alone to his advantage; and,

 

  1. Any deductions allowed can only pertain to the servicing of the client. In this connection however, the client is charged for all manner of things. The allowable deductions can only relate to matters that have been used to achieve the service, i.e. there must be a nexus between the deduction and the income. Any moneys expended by Guppy in setting up the law firm cannot be deemed to be deductions.

The equitable and common law remedy of tracing is not applicable to Guppy unless it can proved that a client of Guppy’s at the new practice has paid Guppy for work done at Bazza’s practice. 

Bazza may also seek injunctive relief against Guppy to prevent further infringement of intellectual property rights and/or breach of contract if a contract exists.

Notwithstanding the above, a complaint to the Commissioner for Legal Services would be appropriate in the circumstances. 

 

 

RESTITUTION, CONCEPT OF UNJUST ENRICHMENT, QUANTUM MERUIT AND SPECIFIC RESTITUTION

 

In December 2009 Abby Normal purchases a small two bedroom worker’s cottage in Camperdown. The property is in a very poor state of repair, but she moves in and begins to plan her renovations. At the end of January 2010 she contacts six builders who have advertised in the local newspaper. She makes appointments with them all, to visit her and give her a quote for the total renovation. Of the four builders who eventually keep the appointments, three have quoted between $300,000 and $350,000 for the work. The fourth quoted $150,000.  She decides to engage the cheaper builder, Toby Tyler of Fairy Wren Builders, and arranges for him to meet her to discuss the schedule.

On 2 February 2010 Toby turns up on time and he and Abby discuss the schedule of work. When  Abby asks Toby if he has brought along a building contract for her to sign, he produces a grubby scrap of paper on which he has written the following by hand:

Fairy Wren agrees to do all of the work required by Abigail Normal to her house. In return, Abigail Normal will pay Toby Tyler of Fairy Wren $150,000 by bank cheque when the work is finished.

On the back of the sheet he has written a list of the work requested by Abby. Both sign at the bottom of the piece of paper and Toby states that he can start work immediately.

At first, everything goes to plan. Toby starts work at 7am every morning for a week and begins to dismantle the kitchen and bathroom. On 14 February Toby demolishes the back fence which separates Abby’s garden from a small rear laneway. In its place he erects a new, corrugated metal fence 2 metres high with a double gate. Abby did not ask him to do this, nor does she like the corrugated metal. Toby also has various building materials delivered to the house, which are stored in the tiny space between the front of the house and the street and in the house itself. Abby has to climb over lengths of timber to get to her front door.

Gradually, however, Toby begins to turn up later and later in the day. On 23 February he asks Abby for a progress payment of $4,000 so that he can buy more materials and the fittings for the bathroom. On 24 February, Abby gives him a cheque for the amount requested. On 26 February Toby fails to turn up at all. He doesn’t appear the next day, either. Abby tries to ring him on his mobile but it is turned off. No one is answering the Fairy Wren office phone. On 1 March Abby visits the address that Toby had given her and finds that it is an empty house.  She tries to contact Toby by phone everyday for another week.

Finally, in desperation she rings one of the other builders to ask for a quote to finish the renovations. On 20 March she accepts the quotation of $300,000 and signs an itemised and valid building contract. The new builders, Pyramid Builders, complete the renovations on 23 July 2010.  They use all of the materials previously purchased by Toby. Abby pays them $290,000 by bank cheque.

On 26 July 2010 Abby receives a letter from Bazza Murphy, solicitor, on behalf of Fairy Wren Builders, claiming:

  1. Quantum meruit in the sum of $50,000 for the work performed on the house
  2. $6,700 for the materials supplied
  3. An extra $2,500 for the new back fence and gate

Abby comes to see you and asks for your advice.

ANSWER:

Fairy Wren Builders Claim :

1.& 2. Quantum Meruit in the sum of $50,000 for work performed on the house and $6,700 for materials.

At common law it has been established that when a plaintiff performs services for a defendant without entering into an effective contract, the plaintiff may claim the value of the services performed pursuant to this action. “The mere fact that the plaintiff supplied services to the defendant is not sufficient to impose an obligation on the defendant to pay for them” : Steele v Tardiani (1946); Pavey & Matthews Pty Ltd v Paul (1987).

It can be argued that there existed a valid contract between Abby and Fairy Wren, although it was written on a grubby piece of paper – the contract was in writing, consideration had passed and thus it is enforceable pursuant to the fact that it satisfied the writing requirement in the Builders Licensing Act 1971 (NSW). Thus, at this point it appears as though Abby is liable to Toby and Fair Wren and as a result, a claim for quantum meruit is valid as Toby can prove on the facts that he did work for Abby, and that she accepted this work i.e she allowed the renovations to occur without paying him the agreed price of $150,000.

However, given that there did exist a contract between Abby and Toby it could be argued that the contract will have been discharged for breach. Toby is the defaulting party to the contract. Toby entered into an agreement with Abby to renovate her house with payment on completion. Toby didn’t complete the building works and he left the unused materials on her property. Abby tried extensively to contact him with no luck. Thus, in light of the decision in Sumpter v Hedges [1898]; approved in Australia in the decision of Steele v Tardiani (1946) it can be argued that Abby reaped no benefit from the uncomplete building work. Abby had no choice but to finish the house herself and engage a new contractor in doing so using the materials left behind by Toby. Thus, there had been no free acceptance of a benefit by her. It could also be argued that by virtue of the fact that Toby left the renovating work unfinished; any benefit received by Abby was substantially different to what was intended by the contract. The contract stipulated that Toby was obliged to do all the work required by Abby – this he did not do. Therefore, on this basis it can be said that Toby’s claim for Quantum Meruit for the $50,000 and $6,700 for materials supplied will fail.

  1.    $2,500 for new back fence and gate.

The provision of unsolicited services by one party to another does not, impose a liability upon the party who received the services, to pay for them. In relation to the attraction of liability the court will look at the issue of “enrichment” of the receiving party :Ministry of Defence v Ashman [1993]. In relation to the demolition and erection of the fence, it can be argued that Toby acted “officiously” or “on spec”. Abby was not aware of the services she was receiving in relation to the fence. She did not ask for it to be attended to: Ministry of Defence v Ashman [1993]. Toby cannot argue that as a provider he was acting under a mistaken belief as per s64(2A) Trade Practices Act 1974 (CTH) as he wrote a list of all the work to be completed on the back of the hand written contract he drafted. Therefore, it is unlikely he will be able to claim quantum meruit in this regard unless he can show he acted as a result of a causative mistake of fact and he can show that Abby received an “incontrovertible benefit” i.e that Abby had saved a necessary expense or made a financial gain as a result of the services: Craven-Ellis v Canons Ltd [1936].

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCOUNTS OF PROFITS

 

Jenny has recently opened a cookie store which has gained a lot of attention in the media for her famous peanut butter choc chip cookies that have a “special ingredient” in them. While at her solicitor’s office to finalise some paperwork for her business, Jenny left her handbag while she went to the toilet. The solicitor, Mary, a keen baker, saw Jenny’s recipe book sticking out of her bag. Mary found out Jenny’s “special ingredient” and a few weeks later, Mary quit her job as a solicitor and opened up another cookie store down the road from Jenny’s and started selling cookies with Jenny’s “special ingredient” in them. Mary also made peanut butter choc chip cookies but with a twist of hazelnut. Mary also made some adaptions to some of Jenny’s other recipes, however it is obvious that she has used Jenny’s recipe book. Jenny has lost a lot of business since Mary opened her shop.

Advise Jenny as to her remedies. You are to assume that there was a fiduciary relationship between Mary and Jenny.

 

ISSUE

Mary (Jenny’s solicitor) took advantage of Jenny’s recipe book whilst they were in a meeting. A few weeks later, Mary quit her job as a solicitor and opened up a bakery using Jenny’s ideas from the recipe book. Jenny wants to know if she has access to remedies.

 

RELEVANT LAW AND APPLICATION

An account of profits is a restitutionary remedy because it seeks to disgorge the defendant of a profit. The plaintiff need not have suffered any loss, but must elect between an action for damages or account of profits. The difference between the remedies was explained by Windeyer J in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd: … the distinction between an account of profits and damages is that by the former the infringer is required to give up his ill-gotten gains to the party whose rights he has infringed: by the latter he is required to compensate the party wronged for the loss he has suffered. The two computations can obviously yield different results, for a plaintiff’s loss is not to e measured by the defendant’s gain, nor a defendant’s gain by the plaintiff’s loss. Either may be greater, or less, than the other.

A fiduciary is liable to account for a profit that was obtained either:

  • Where there was a conflict or possible conflict between his/her fiduciary duty and personal interest; or
  • By reason of his/her fiduciary position or taking advantage of an opportunity or knowledge derived from the fiduciary position (Warman International Ltd v Dwyer (1995) 182 CLR 544).

In this case, Mary being a fiduciary to Jenny took advantage of the meeting and the opportunity to gain access to Jenny’s recipe book. It could also be said that Mary being a fellow baker, also had a personal interest with her client (jenny) and was in conflict.

Assessment

There are inherent difficulties involved in assessing the Defendant’s property for the purpose of assessing the account of profits to be awarded in the Plaintiff’s favour. A significant problem is initially attributing the profit to the Defendant’s wrong. This may arise by:

  • The nature of the right breached;
  • The necessity of allowing for the Defendant’s contribution to the earning of the profit; and
  • Deciding what it cost the Defendant to earn the profit.

In this case it could be said that Mary established a whole asset by the wrong she committed by opening the bakery at the hands of Jenny’s recipe book.

Whole Asset Approach

This involves where an entire product has been generated by a wrong. In this situation, the plaintiff is entitled to the entire profits of the product. In Dart Industries Inc v The Décor Corporation Pty Ltd (1993) 179 CLR 101, the plaintiff (Dart) held a patent over press-button release seals for lids on kitchen canisters. Décor, in breach of this patent, sold a kitchen canister which included a press-button seal on the lid. The plaintiff sought an account of profits for the profits generated by the product.

It was held that a ‘whole product’ approach was taken to the assessment of the account of profits on the basis that without the press-button lid, the defendant would not have produced kitchen canisters.

The defendant is entitled to a reduction in the account of profits awarded to take into account the direct costs of producing the product. Although this assessment is exceptionally difficult, the court may have regard to accounting practices. The defendant bears the onus of proving the costs attributable to manufacture and sale of the product.

The defendant is entitled to a further reduction in the account of profits awarded to take into account overhead expenses. This is provided that the infringing product was not a “side line” of the defendant’s business in the sense that the making and selling of the product took up unused capacity of the business. Further, a reduction will only be allowed where the making and selling of the product meant that the business forwent the opportunity to manufacture and sell non-infringing products. The defendant is not entitled to a deduction to take into account “opportunity costs”.

It could be said in Jenny’s case that without access to her recipe book, Mary would not have produced another business and asset. Mary would be entitled to a reduction of her direct costs in producing the asset and the overhead expenses encountered.

 

DEFENCES

Mary may argue that an account for profits is not penal in nature, therefore a fiduciary will not be required to account for more than he or she has received from the breach of the duty (Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298, 369-70).

Another defence that Mary could plead but would be unlikely to succeed is that where a fiduciary acted without dishonesty in making a profit, he or she may be granted an equitable allowance from the profit as remuneration for his or her ‘work and skill’ (Boardman v Phipps [1967] 2 AC 46, 104).

 

CONCLUSION

It is likely that Jenny will get an account of profits due to the fiduciary nature and advantage Mary used to gain her profits, however being equitable in nature, the account is still discretionary.

CONSTRUCTIVE TRUSTS

Angus is a 55-year-old divorced solicitor. After his divorce Angus moved in with his widowed father Hamish, aged 80, because he had no other option as his ex-wife had ‘taken him to the cleaners’. So Angus could stay on and look after Hamish as he grew less mobile, yet to maintain Angus’ privacy, they decided that Angus would build an extension to Hamish’s home (which was worth $400,000 at the time) to create separate living areas. The extension cost Angus $100,000. About a year later Hamish took up Latin dancing and met Chloe, a 79-year-old widow. Chloe moved into Hamish’s home a few months later. Tensions arose when Angus called Chloe a ‘gold digger’. When Angus refused to apologise, Hamish told Angus to move out. A few months later, Angus met Ellie, a single woman with two young children, who was recently divorced. Ellie fell madly in love with Angus, told him that he was the best thing that had ever happened to her, that she love and trusted him and that she would do anything to make him happy. Angus then told Ellie about his difficult financial situation and that sometimes it made him feel that life was not worth living. He told her that his biggest dream was to buy a house in the Sunshine coast hinterland and establish a bed and breakfast business. Angus also said to her:  “I’m a solicitor – you can trust me”. The next day Ellie gave Angus $350,000 which she had just received as her inheritance from her mother’s estate. Ellie told Angus that she was giving him the money so that he could follow his dream. Angus used the $350,000 to pay for a grand old ‘Queenslander’ at Maleny (which was registered in his sole name) and commenced trading as a bed and breakfast. Ellie and the children moved to Maleny to be with Angus. For a time they lived happily together as a family, but after a year Angus got sick of constantly having Ellie’s children under his feet. He told her that the living arrangements weren’t working for him so she and the children would have to move out. Angus has come to you for advice. He tells you:

  1. The bed and breakfast business has just won Australia’s best boutique accommodation award. The house and business is now worth $700,000.
  1. Hamish has recently died leaving his home (which is now worth $600,000) to Chloe.
  2. Yesterday Ellie sent him a text message demanding her money back; otherwise she would sue Angus.

Advise Angus in relation to all the issues raised from the perspective of constructive trusts.

 

 

 

 

 

 

 

 

ISSUE

Angus is seeking advice on two issues involving constructive trusts. The first is the bed and breakfast that he set up with the assistance of Ellie giving him $350,000 to which she is demanding back. The second issue is that Angus’ dad (Hamish) has left his home to Chloe and not Angus, worth $600,000.

 

RELEVANT LAW AND APPLICATION

These are imposed irrespective of the intention to create a trust of one or more of the parties involved. Constructive trusts may be imposed in a number of situations if the court holds that it would be unconscionable for one party to hold property free of the beneficial interest of another.

Denis Ong, Trusts Law in Australia (3rd ed, 2007) begins his chapter on “Constructive Trusts” with the following statement:

A constructive trust is a trust judicially imposed upon the owner of property, with respect to either a part or the whole of that property, to the extent that it would be unconscionable, notwithstanding the absense of any relevant express or resulting trust of that property, for that party to enjoy that property beneficially in relation to the person or persons for whose benefit the trust is imposed.

 

Issue 1:

Where parties have entered into a relationship or domestic arrangement with a common intention that property is to be held between them in a particular way, equity may enforce that common intention by the imposition of a constructive trust. For example, where an agreement might not be enforceable as contract for lack of writing. The common intention provides that the non-legal owner of property should have some beneficial interest and would suffer detriment in reliance upon that common intention.

Prior to the introduction of statutory provisions for resolving property disputes on breakdown of domestic relationships: courts used the “common intention constructive trust.”

In Allen v. Snyder [1977] 2 NSWLR 685

Facts: during the course of a de facto relationship, a couple purchased a home financed by the War Homes services Department. The conditions of granting the loan were as follows:

  • Allen (w) was to make declaration that she was  financially dependent on Snyder (m)
  • Title of the house was to be held only by the man

A paid for the furniture.  S made a will in which his interest in the house would pass to A. After the breakdown of the relationship, A claimed an equal beneficial share on basis of “common intention”. Held: The plaintiff failed, because she could only show that the only intention was that she would get an interest if they married (and they did not marry).

A plaintiff seeking the imposition of a constructive trust must prove that the parties had an actual “common intention” either before or after the purchase. The intention must be that the applicant/plaintiff should have a beneficial interest in the property. This intention may be express or implied by conduct (even casual conversation). The court will not impute an intention of what the parties might have contemplated/thought.

The plaintiff must also show that he or she acted to his or her detriment in the reasonable belief that a beneficial interest would be conferred/acquired.

Muschinski v. Dodds(1985) 160 CLR 583

Facts:  Land was held in the names of M and D as tenants in common. They had plans to restore the house and to run an arts and crafts business on the land. M had provided the entire purchase price ($20,000) from the sale of her previous house and D provided his earnings and monies expected from his divorce settlement.

When the relationship broke up, the total financial contributions were:

M = $25,259.45

D = $2549.77

D sought an order for the sale of the land and the division of the net proceeds from the sale into equal shares.

M claimed that she was the absolute beneficial owner and that D’s interest was held on trust for M

Held HC majority: (Gibbs CJ, Mason and Deane JJ) (Brennan and Dawson JJ dissent). A constructive trust was imposed to protect M’s beneficial interest. It was  most appropriate to approach the issue as a “joint endeavour of the parties,” akin to a “joint venture.” “Joint venturers are entitled to proportionate repayment of their capital contributions to [an] abortive joint venture.”

The basis for the action was established on traditional equitable notions of “unconscionable conduct.” On the facts D’s assertion of legal title in the light of M’s contributions was unconscionable. Therefore, equity will impose a constructive trust to adjust the rights and obligations of the parties and to compensate for the disproportion between the parties’ contributions to the purchase price.

Since Angus and Ellie lived together, this can be classified as a de facto relationship, to which a constructive trust could be attached to since there was no specific agreement. Angus cannot also say that because the business is solely in his name, that Ellie has not contributed or has entitlement to it. The fact that Ellie gave the funds to Angus to start up his dream business and she suffered a loss by giving him the funds, could be enough for the court to give a discretion of constructive trust standing. 

Furthermore, the fact that Angus is a solicitor and said to Ellie “I’m a solicitor… you can trust me”, raises the issue of fiduciaries. It can be said that making an unauthorized use of the fiduciary position/ raising or risking a conflict between his fiduciary duty and his self-interest is under a duty to account for that property to the person to whom the fiduciary duty is owed (Regal (Hastings) Ltd v Gulliver (1942) [1967] 2 AC 134).

In Keech v Sandford The trustee of a lease had renewed the lease in his own name where the lessee had refused to renew the lease to the trust. According to King LC ‘[A] trustee must not use his position as trustee to make a gain for himself…[This is a] rule [that] should be strictly pursued, and not in the least relaxed’.

A transaction could also be voidable in equity if it occurs where A receives property from B as a result of fraud, misrepresentation or undue influence of A or any other person.  A is a constructive trustee for B of the property and a declaration to that effect may be made against A in the court of equity.

Since Angus took advantage of the fact that he is a solicitor and used this to enforce a further trust under the circumstances to enhance his interests by establishing his dream business, he could be liable to account for profits.

 

Issue 2:

Angus did renovations to his father’s property by spending $100,000 to extend it. The property is then left to Chloe in Hamish’s will.

The occasion for the intervention of equity arises when the first party performs the agreement by dying without having revoked the will.  The problems involved appear from the facts of Birmingham v Renfrew (1937) 57 CLR 666.

Facts: Mrs Russell inherited considerable property from an uncle. Her husband had no property. They agreed that in their wills Mrs Russell would leave certain gifts to her relatives and the residue of the estate to Mr Russell. He, in turn, agreed that he would leave his property to those relatives, and that he would not change his will or leave the property to someone else.  Their wills were duly executed in those terms. However, after Mrs Russell dies, the husband changed his will, leaving his property to his relatives, including Birmingham, and virtually nothing to his wife’s relatives, as previously agreed.  The husband’s last will was effective and probate was granted.

However, as may be imagined, the deceased wife’s relatives were not happy about this and, represented by Renfrew, commenced proceedings in the SC of Vic claiming specific performance of the agreement between the Russells and other remedies.

Held by the Sc of Vic, that the agreement between the Russells was enforceable. This decision was upheld by the HC and the appeal was dismissed. An agreement between parties to execute mutual wills gives rise to equitable obligations. A testator cannot “be compelled to make and leave unrevoked a testamentary document and if he dies leaving a last will containing provisions inconsistent with the agreement” (per Dixon J) it will still be a valid will. However, the first party to die carries out his or her obligations under the agreement. The Court, therefore, will not permit the surviving party to breach the agreement. The surviving party has an equitable obligation not to revoke his or her will. The survivor becomes constructive trustee of the property and the terms of the trust are those of the will he or she had agreed to execute.

The rule in Barnes v Addy states that a beneficiary has a right to reclaim trust property from a third party who has either received trust property knowing that it was acquired from a trustee in breach of a trust or who knowingly assisted a trustee to commit a breach of trust.

In certain circumstances, beneficiaries will have rights against third parties who have had wrongful dealings with the trustee and/or the trust property.

When a third party intermeddles with trust property and/or assumes the role of trustee contrary to the terms of the trust instrument and/or without a delegated power from the trustee, the third party will be held by the court to be a trustee de son tort: Mara v Browne (1861) 1 Ch 199.

This means ‘a trustee because of their wrongful action’. The conduct necessary to render a third party trustee de son tort was considered in Nolan v Nolan [2004] VSCA 109 (10 June 2004).

The court held that in order to be held an executor de son tort, a person must take possession of the deceased’s property and deal with the property in such a way that they usurp the office of executor before the grant of probate or letters of administration. Further, a trustee de son tort must know that they have no authority to deal with the property, but take on the role and authority of a trustee. Since there was no evidence that the late Mr Nolan had purported to act as either trustee or executor, the appeal was dismissed. Thus, in order to be held an executor or trustee de son tort the putative trustee must know that they are assuming the powers and authority of an executor or trustee.

A person may act in the honest belief that they are, in fact, executor or trustee of the subject estate: Pearce v Pearce (1856) 22 Beav 548; 52 ER 1103. As a trustee de son tort, the intermeddler will hold any trust property in their possession subject to the same duties as a duly appointed trustee.

When a loss has been sustained to the trust as a result of a breach of trust, the beneficiary has a right of action against the trustee personally to require restitution to the trust estate. The right of beneficiaries to claim against the trustee extends to all losses, whether caused directly or indirectly by the trustee’s breach: Elders Executors Trustee and Executors Co Ltd v EG Reeve Pty Ltd (1987) 78 ALR 193. However any of the losses recovered from such an action do not go to the beneficiary personally, but to the trust estate. Further, when a trustee has profited from a breach of trust, the court, at the suit of the beneficiary, will require the trustee to give an account of profits and declare that the profits are held on constructive trust for the beneficiaries.

Under these circumstances, Angus will need to prove that Hamish had an intention to leave him the property and that this was also discussed with Chloe, being the survivor of the two. If this can be done, then Angus has a good chance of enforcing the initial will of having the property left to him and not to Chloe. Another route that Angus can take, is that because Chloe is a third party, Angus will need to prove that Chloe knew of the trust but still took on the property anyway, or that she had a hand in influencing Hamish, due to having a relationship with him, to not give the property to Angus. If Angus can establish this, then the property will be held on constructive trust for him by Chloe.

CONCLUSION

In cases where a trustee commits a breach of trust or fiduciary obligation, he/she is liable to account for any profits that derive from the breach (Scott v Scott (1963) 109 CLR 649).

Angus may be liable to account for profits made from his business being $350,000 if the court gives the discretion to make known of a constructive trust based on the de facto relationship formed between Angus and Ellie and the fact that he used his position as a solicitor to gain a further interest from the relationship.

In cases where property estate and wills are concerned, Angus being a beneficiary to the estate has a right of action against Chloe.







 

 

 

 

SPECIFIC PERFORMANCE

 

Michelle wishes to sell her holiday unit on the Gold Coast, valued at $300,000. Her nephew, James, wishes to purchase the property, but can only raise $250,000. Michelle tells James that she will sell him the Gold Coast holiday home for $250,000 if he renovates her house in Sydney over the next four months. James readily agrees and begins the renovations at Michelle’s Sydney house.

Two months later, a property developer offers Michelle $350,000 for the Gold Coast unit. She accepts, and informs James that she will not be selling the unit to him and that she will enter a contract of sale with the developer next week. Advise James whether he is likely to be able to enforce performance of his contract with Michelle.

Suggested Answer

ISSUE

The question raises the issue of whether James can be able to enforce performance of his contract with Michelle after the latter told James that she is entering into a contract with the developer for the sale of her Gold Coast home.

 

PRINCIPLES

The prerequisites in order for specific performance to be granted are:

  1. An agreement;
    1. In Tanwar Enterprises P/L v Cauchi (2003), the HC refused specific performance where the vendors terminated contracts for the sale of three adjoining parcels of land following the purchaser’s breach of a ‘time is of the essence’ clause.
    2. Therefore, if the contract is uncertain or if no contract has been formed or the contract has been rescinded or terminated, the remedy will not be available: Covell 7.4
    3. Relevance of the doctrine of part performance: the object of the doctrine to enlarge part performance into complete performance: Mooking Gee v Tabos (1963). The doctrine is usually applied to oral contracts which fail to comply with a statutory requirement that they must be in writing or executed in a formal manner. For example, s 54A(1) of the Conveyancing Act 1919 (NSW) provides that no action may be brought upon any contract unless the agreement is in writing and signed by the parties. Therefore, a transaction unenforceable at law or under a statute may be specifically enforced if the equitable doctrine has been satisfied. To satisfy the doctrine: [1] the plaintiff must have taken an action with the performance of their obligations under the agreement; AND [2] their actions must be referable or connected to the agreement and the plaintiff has changed his position as a result of that action: Maddison v Alderson (1883) approved by the HC in McBride v Sandiland (1918).
  2. A breach or threatened breach of the agreement by the defendant;
    1. There must be a breach of a contract or a threatened breach: Turner v Bladin (1951)
  3. Common law damages would be an inadequate remedy for the breach; and
    1. Equity will grant specific performance when damages are inadequate to meet the justice of the case: Waterways Authority of NSW v Coal and Allied (Operations) P/L [2007]
    2. There are a number of types of contracts where common law damages are clearly inadequate to meet the justice of the case. The categories are:

 

Land

Equity has always ordered specific performance of contracts for the sale of land for the obvious reason that damages are inadequate because substitutes cannot be found: McIntosh v Dalwood (No4) (1930)

 

The remedy is available to both the vendor and purchaser: Turner v Bladin (1951)

Goods

General principles is that contracts for the slae of goods are not specifically enforceable because damages at law are a complete remedy: Dougan v Ley (1945)

 

Exception: if the article/good is of unusual beauty, rarity and distinction (an original painting or a vintage aircraft) then damages may be inadequate: Flacke v Gray (1859)

Intellectual Property

Contracts concerning patents, designs, copyright or TM are specifically enforceable if damages are inadequate: Cognet v Gibson (1864)

Goodwill and business assets

A contract for the sale of the goodwill of a business may be specifically enforced if damages will be inadequate: Beswick v Beswick [1968]. For example, in Pasdonnay P/L v SDS Corp Ltd [2005], the merger of mining, oil, gas and construction corporations was found to be specifically enforceable

Personal services and employment

Courts would not order specific performance of contracts for personal service or employment: Maiden v Maiden (1909). This is because such an order would involve the court’s constant supervision and would be difficult to enforce because performance of personal service contracts involve matters of personal opinion.

 

  1. There is no discretionary defence or denial disentitling relief
    1. Even if the above elements are satisfied, the court may refuse specific performance in its discretion: Dowsett v Reid (1912)
    2. The question to ask here: is there a vitiating factor that would prevent enforcement?

 

Vitiating Factors

 

Ready & Willing

The party seeking the remedy should be ready and willing to perform the substance of the contract: Mebmet v Benson (1965). The usual way or proving if the plaintiff is ready and willing is to show that he/she is in breach of contract.

In Benson’s case, the plaintiff agreed to pay $16,000 in instalments plus interest on the unpaid balance over several years in order to purchase a land. The plaintiff paid the first two instalments but then fell into arrears. Specific performance was granted despite the plaintiff’s default because he had not abandoned his obligations under the contract. In contrast, in Chandos Developments P/L v Mulkearns [2008], the plaintiff was denied specific performance of a contract for the sale of land because the purchaser did not pay the deposit in full, it did not pay occupation fee until after proceedings were commenced. That proved to show that the purchaser was not ready and willing.

Mutuality

Court is reluctant to order specific performance unless it is available to both parties: JC Williamson v Luckey (1931).

 

This is an exercise by the court to determine whether granting the remedy at the behest of the plaintiff would, by reason of the plaintiff being unable to be required to carry out his obligations in specie, produce such hardship to the defendant that to compel specific performance would be inequitable: Cannavo v FCD (Holdings) P/L [2000].

 

An example of mutuality is a contract with a minor. Such a contract is void or voidable and thus the minro cannot be asked to specifically perform the contract, nor can the other party: Boyd v Ryan (1947)

Hardship

The court is reluctant to order the remedy if it will cause undue hardship or unfairness to the defendant: Norton v Angus (1926).

 

See 7.39 Covell for a list of hardships suffered.

Unclean Hands

If the plaintiff has unclean hands then the remedy may be refused in the court’s discretion. It must be conduct which has an immediate and necessary relation to the equity suited for: Official Trustee in Bankruptcy v Tooheys Ltd (1993).

Continuing Supervision

Specific performance may be refused if the court is required to continually supervise its order: JC Williamson v Luckey (1913). For example, the court will not order the defendant to carry on an activity, such as running a business over a more or less extended period of time: Co-operative Insurance Society v Argyll Stores (Holding) Ltd [1998].

Futility (pointless)

If Specific performance would be futile it may be refused in the court’s discretion. For example, the court will not order the remedy if the defendant can terminate the contract at will: Heppingstone v Stewart (1910).

Delay, acquiescence and laches

Mere delay will not bar relief unless it amounts to acquiescence or laches, that is, where it would result in the defendant or a third person being prejudiced: Lamshed v Lamshed (1963).

 

For example, in Fitzgerald v Masters, specific performance was granted despite a 26 year delay because laches was absent and because the court was prepared to order that compensation be paid to the defendant for any disadvantage caused by the order.

 

In Lamshed, the remedy was refused after a 6 year delay because the defendant had agreed to sell the property to an innocent third party purchaser.

Impossibility

Performance may be impossible because of illegality (Norton v Angus (1926)) or because the necessary consent of a third person is not forthcoming (Dougan v Ley (1945).

 

 

APPLICATION

 

There is nothing in the facts of the case showing that there is a formal written contract between Michelle (M) and James (J). According to Tanwar’s case, specific performance will be refused where there is no contract formed between the parties. However, a transaction unenforceable at law or under a statute may be specifically enforced if the equitable doctrine of part performance has been established. The object of the doctrine is to enlarge part performance into complete performance: Mooking Gee’s case. On the facts, it is arguable that the two limbs from Maddison’s case have been established. James have taken an action when he started renovating M’s Sydney home after the agreement took place. That action was with the performance of his obligations under the agreement with M. Furthermore, J’s action in renovating M’s Sydney house was referable or connected to the agreement between the two. Therefore, it is arguable that although there is no written formal contract between J and M, the verbal agreement is still enforceable due to the doctrine of part performance.

 

As seen above, we have already established that the agreement between J and M is enforceable. It is arguable that there is also a breach of the agreement by M. This is illustrated in the facts when M received an offer from the developer to pay more for her Gold Coast home. M has accepted the offer and informed J that she will not be selling the unit to J. Common law damages would be an inadequate remedy in such a case. In accordance with McIntosh’s case, equity has always ordered specific performance of contracts for the sale of land for the obvious reason that damages are inadequate because substitutes cannot be found.

 

It is also arguable that there is no discretionary defence disentitling J to grant him specific performance. In fact, J was ready and willing to perform the substance of the agreement.

 

 

CONCLUSION

 

It is advisable to J that he is highly likely to be able to enforce performance of his contract with M.

 

 

 

 

 

 

INJUNCTION + ANTON PILLER + MAREVA OR FREEZING ORDERS

 

QUESTION

Global Software Ltd is a software development company that is working on a revolutionary new operating system that it is planning on unveiling next year. Michael, one of the team leaders involved in the project, was recently dismissed for repeatedly missing work. He is now threatening to leak Global Software’s plans for the new system to its competitors if they do not reinstate his employment. This would be a breach of the confidentiality clause in his employment contract.

Meanwhile, Global Software has just commenced an action for copyright infringement against TechIT Co, who were producing illegal copies of Global Software products. TechIT operates in Australia and Asia and has announced that it is withdrawing from the Australian market and moving its head office to Singapore. Advise Global Software what remedies it might have.

SUGGESTED ANSWER

Issue – injunctions

The present scenario raises the issue of whether GLOBAL SOFTWARE LTD (GLOBAL) can apply for an injunction to restrain or prohibit Michael from leaking GLOBAL’S plans to its competitors.

Principles

The facts suggest that Michael is in possession of confidential information that, if Michael were to leak the confidential information, would be a breach of the confidentiality clause in his employment contract with GLOBAL. There is an employment contract that governs their relationship. Injunctions are granted in both the exclusive and auxiliary jurisdictions of equity. However, for the purpose of this scenario it is arguable that the injunction should be sought in equity’s auxiliary jurisdiction as equity’s exclusive jurisdiction protects purely equitable rights.

To obtain an injunction in equity’s auxiliary jurisdiction, GLOBAL must show:

  1. A cause of action: Curro v Beyond Productions P/L (1993);
    1. The threshold requirement is that GLOBAL must have a recognised cause of action: Associated Newspapers Group plc v Insert Media Ltd [1988]
    2. As Michael is threatening to disclose confidential information to GLOBAL’S competitors, he is clearly disregarding his employment contract. By breaching the employment contract and the confidentiality clause, Michael is likely to commit a legal wrong.
    3. It is arguable that GLOBAL have a cause of action as Michael is threatening to leak the confidential information to GLOBAL’S competitors. In such a situation, GLOBAL may apply for a quia timet injunction to restrain Michael’s threatened or apprehended breach of legal wrongs. This principle has statutory force under section 66(1) of the Supreme Court Act 1970 (NSW) provides that the court may restrain any threatened or apprehended breach of contract.
    4. The fact that GLOBAL have a cause of action, GLOBAL now have standing to seek injunctive relief: Bateman’s Bay Local Aboriginal Land Council v Aboriginal Community Benefit Fund P/L (1998).
  2. That damages would be an inadequate remedy; and
    1. Generally, damages will be inadequate where without injunction the plaintiff will suffer irreparable harm that cannot be remedied by an award of damages: Bendal P/L v Mirvac Project P/L (1991)
    2. The relevance of damages is expressed in the criterion of whether it is just, in all the circumstances, that a plaintiff should be confined to the remedy in damages: Burns Philp Trust Co P/L v Kwikasair Frightlines Ltd [1964] (injunction to restrain the defendants from preventing the plaintiff’s inspection of register pursuant to deed of trust, one term of which conferred a right to inspect where damages was not an adequate remedy for the plaintiffs)
    3. On the facts, it is arguable that damages will be inadequate as a sum could not be identified as to the value of the confidential information. The new operating system could lead to millions of dollars in profit to the company. Considering that GLOBAL has been working on this revolutionary news operating system, it is arguable that leaking the plans project to GLOBAL’S competitors will cause GLOBAL significant and irreparable harm. Therefore, an injunction is likely to be granted on this basis, especially if the confidential information have a peculiar value to GLOBAL: Aaristoc Industries P/L v Wenhman (Builders) P/L [1965].
  3. That the court in its discretion should grant the injunction
    1. Injunctions are discretionary remedies: Cradile v LED Builders P/L (1999)
    2. Here, the court must be satisfied that in its discretion GLOBAL is entitled to the injunction.
    3. There are many matters which affect this exercise, including discretionary defences such as unclean hands, laches, delay and acquiescence. On the facts, it is arguable that these discretionary defences are unlikely to apply in this case. GLOBAL have done nothing to show that they have come to equity with unclean hands or have delayed in bringing the matter before the court.
    4. In contract cases, such as the present scenario, there are also a number of matters which determine the availability of specific performance, such as if the plaintiff is ready and willing, mutuality, hardship, supervision of the court, futility as well as the above discretionary defences.

 

 

 

However, if there is no provision prohibiting the dissemination of confidential information in Michael’s employment contract, Global Software may still be entitled to an injunction due to an equitable duty of confidentiality. If this is established, whether damages would be adequate compensation is irrelevant (Heavener v Loomes). Hence, it is likely a quia timet injunction would be granted under this ground also.

Conclusion

It is arguable that GLOBAL are likely to be granted an injunction to restrain or prohibit Michael from leaking the confidential information to GLOBAL’S competitors.

 

MAREVA OR FREEZING ORDERS

 

Issue – Mareva or freezing order

 

The next question to ask is whether GLOBAL has any remedies against TechIT Co for producing illegal copies of GLOBAL’S products.

 

The facts suggest that TechIT has moved its head office to Singapore. This appears to be an issue of asset protection pending the result of the litigation between GLOBAL and TechIT.

 

Principles

 

In Australia, the jurisdiction to grant Mareva or freezing order is found both in the court’s inherent power to prevent an abuse of process and in statutory provisions such as s 23 of the Supreme Court Act 1970 (NSW) which provides that the court shall have all jurisidiciton which may be necessary for the administration of justice in NSW.

 

The elements for granting a Mareva order are as follows:

 

  1. The plaintiff has a judgment in their favour or a good arguable case: Patterson v BTR Engineering (Aust) Ltd (1989);
    1. Although GLOBAL do not have a judgment in their favour, they still have a very good arguable case being copyright infringement.
  2. A danger that by reason of the defendant absconding or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff will not be able to have any judgment satisfied: Perth Mint v Mickelberg (No2) [1985]
    1. The freezing order operates in personam: Cradile v LED Builders P/L (1999)
    2. Accordingly, a freezing order may extend beyond Australia to assets held by the defendant anywhere in the world: Federal Court Practice Note CM 9 para 8 (1 August 2011).
    3. The facts suggest that TchIT is withdrawing from Australian market and moving its head office to Singapore. There is a real and imminent danger that by reason of TechIT moving to Singapore, GLOBAL will not be able to have the judgment satisfied.
  3. The court’s discretion and the balance of convenience favours the granting of the remedy; and
    1. The court will weigh in the balance the strength of GLOBAL’S case and the risk that TechIT will abscond, dispose or dissipate their assets against other discretionary matters, such as delay, possible defences and lack of full and frank disclosure by GLOBAL: Cradile v LED Builders P/L (1999).
    2. It is arguable that the court is likely to grant a Mareva order to prevent TechIT from disposing of the assets so as to frustrate the process of the court by depriving GLOBAL of the fruits of any judgment obtained in the action.
    3. There is nothing in the facts to prove that GLOBAL has engaged any of the discretionary defences.
  4. The plaintiff has provided undertakings to the court including the usual undertaking as to damages: Frigo v Culhaci [1998]
    1. The granting of a Mareva order is conditional on GLOBAL providing an undertaking as to damages: Cradile v LED Builders P/L (1999)
    2. GLOBAL will usually have to file and serve on TechIT copies of the order and the evidence and written submissions relied on at the hearing: Federal Court Practice Note CM 9

 

Conclusion

It is arguable that the court is likely to grant a Mareva order to restrain TechIT from disposing of the assets which may be required to satisfy GLOBAL’S claim. The order can extend beyond Australia to any place around the world.

 

 

 

ANTON PILLER ORDERS

 

 

David is a bestselling author whose latest novel is due to be released in two months. He recently visited his solicitor’s office to obtain advice regarding his publishing contract. He realised that he was late to another appointment and, in his hurry, forgot to take his briefcase with him. This briefcase contained a copy of his manuscript. David returned the next day to retrieve the briefcase, with the manuscript still inside. However, two weeks later, he discovers that large excerpts and plot spoilers have been leaked on various fan sites. This has substantially decreased the anticipated profits of the book. David believes that his solicitor, Jordan, photocopied the manuscript when he left it in her office and has been posting the spoilers online. David seeks advice as to his remedies.

Suggested Answer

Issue

David is seeking advice on whether any injunction or quasi-injunction remedies would be available in his case.

 

Principles

The facts suggest that David visited Jordan, a solicitor, to obtain advice regarding David’s publishing contract. Solicitor-client relationship is one of the established categories for fiduciary relationships. If, as suggested in the facts, David’s solicitor photocopied and distributed the manuscript by posting it online, a breach of fiduciary duty would likely to occur: Regal (Hastings) Ltd v Gulliver.

 

It is arguable that David can apply for an injunction in equity’s exclusive jurisdiction for the reason that the court is dealing with a purely equitable right, such as in the present case a breach of confidentiality.

 

 

 

In order to obtain an injunction in equity’s exclusive jurisdiction, David must:

  1. Have an equitable cause of action; and
    1. In park v Dawson [1910] it was held that an injunction will lie to restrain a breach of fiduciary obligation
    2. Further in Talbot v General Television Corp P/L [1980] the court held that an injunction will be granted to restrain the unauthorized use of confidential information by the recipient of the information.
    3. On the facts, it is arguable that David has an equitable cause of action on the basis that Jordan, David’s solicitor, has received information and she has misused that information by posting the manuscript online. This is a pure example of breach of fiduciary duty.
  2. Satisfy the court that in its discretion it should grant the injunction
    1. Not only must the court be satisfied that David has an equitable cause of action, it must also be satisfied that in its discretion the injunction should be granted.
    2. The court has to take into account whether discretionary defences are available such as unclean hands, laches, delay and acquiescence or if justice will be best served by granting alternative relief, such as an account of profits.
    3. It is arguable that the discretionary defences are unlikely to apply to the present scenario as nowhere in the facts suggests that David has come to equity with unclean hands or there has been delay.

 

It is also open for David to seek Anton Piller order. An Anton Piller order is a set of orders which, in effect, constitutes an ex parte interlocutory mandatory injunction compelling Jordan to allow David or his representatives to inspect Jordan’s office: Anton Piller KG v Manufacturing Processes Ltd [1976]. An Anton Piller order is an order for compulsory preliminary discovery which arises from the court’s inherent jurisdiction: Ex parte Island Records Ltd [1978].

 

Before an Anton Piller order can be granted David must satisfy the following conditions (Anton Piller KG v Manufacturing Processes Ltd [1976]):

  1. There must be an extremely strong prima facie case;
    1. In Ex parte Island Records Ltd v Global Gaming P/L [2006] it was held that where the plaintiff can establish that he/she will suffer substantial damage by the defendant’s criminal act, proof of this will be sufficient.
    2. On the facts, it is arguable that David has suffered substantial damage due to the fact that large excerpts and plot spoilers have been leaked on various fan sites. This had the effect of decreasing the anticipated profits of the book.
  2. Prove the damage, potential or actual, must be very serious;
    1. Rule 7.43(b) of the Federal Court Rules 2011 provide that the potential or actual loss or damage to the applicant will be serious if the search order is not made.
    2. It is arguable that the damage suffered by David is considered to be serious if the search order is not made. If the search order is not made then there is a likelihood that David will lose all the profits.
  3. Have convincing proof that the defendant possesses incriminating documents and there is a likelihood or real possibility that the defendant will destroy them;
    1. Although the facts do not show any real possibility that Jordan may destroy the manuscript, it is arguable that the photocopied manuscript is in Jordan’s possession and that she has already distributed it to various fan sites. This is a convincing proof that Jordan had used the manuscript prejudicially against David.
  4. Provide various undertakings to the court including an undertaking as to damages; and
    1. To help protect against abuse David will be required to give an undertaking to make available and pay the reasonable costs of an independent lawyer to explain the order and provide advice to Jordan: Tony Blain P/L v Jamison (1993)

 

  1. Convince the court that in its jurisdiction it should grant the order
    1. Rule 7.42 of the Federal Court Rules 2011 provides that the court ‘may make a search order’ if the above conditions are met.
    2. Although the above conditions are met, the court will weigh in the balance equitable matters such as delay, acquiescence and unclean hands. The court also expects David to give a full and frank disclosure of the relevant matters at the ex parte hearing: Dormeuil Freres v Nicolian International (Textiles) Ltd [1989]
    3. It is arguable that the court in its discretion will likely grant the search order as the discretionary defences such as delay and unclean hands are not likely to be relevant in this scenario. However, in giving the order, David will have to give a full and frank disclosure of all relevant matters as required.

 

 

Conclusion

It is advisable that David is likely to have an injunction granted in equity’s exclusive jurisdiction for breach of fiduciary duty. David is also able to apply for a search order to allow David to enter Jordan’s premises and search for the manuscript that is in danger of being destroyed or hidden.

 

 RECTIFICATION + DECLARATION + DELIVERY UP

 

Question 1: The small community of Littleville are currently in a state of panic. The Big Corporation is proposing to build a large factory, which will pollute Littleville’s air, and this seems to be contrary to the Environmental Protection Act. The citizens seek advice as to whether they can get a declaration against The Big Corporation to enforce the public rights under the Act. Advise the citizens of Littleville on their chances of success. 

 

ISSUE

The community of Littleville are seeking advice on whether they can get a declaration against The Big Corporation to enforce their public rights. The Big Corporation is proposing to build a large factory which will pollute Littleville’s air.

 

RELEVANT LAW AND APPLICATION

A declaration is a final order of the court which declares the legal, equitable or statutory rights and obligations of each party to a dispute.

The jurisdiction of declarations originally developed in equity but is now covered by statute in s 75 of the Supreme Court Act 1970 (NSW) and s 163A of Competition and Consumer Act 2010 (Cth).

 

In order to acquire a declaration, the applicant must establish the following:

  1. The court has jurisdiction to make a declaration;
  2. The applicant has standing to seek the declaration; and
  3. There is no discretionary ground for refusing the declaration.

 

Jurisdictional Limits of the Court

The jurisdiction of the court to make declarations is very broad as it extends to making declarations regarding legal, equitable and statutory rights and obligations. Accordingly, the only jurisdictional limit is exclusion by statute (Foster v Jododex Aust Pty Ltd (1972) 127 CLR 421).

Based on the facts of the case there is no limitation set out in the Environmental Protection Act precluding jurisdiction.

Standing

The applicant is required to prove standing to seek a declaration in the sense that he/she has a sufficient interest in the subject matter of the dispute. With respect to public rights, the Attorney General is considered the proper plaintiff to enforce public rights, either as representative of the people or at the relation of a third party.

Discretionary Grounds

A declaration is a discretionary and there are particular factors which will influence a court in exercising its discretion. These factors were developed in Ainsworth v Criminal Justice Commission (1992) 175 CLR 564:

  • The declaration must be directed towards a legal controversy and not to answering purely hypothetical questions;
  • The declaration must not be sought in relation to circumstances which have not occurred and might not happen (Australian Boat Trade Employees’ Federation v Commonwealth (1945) 71 CLR 29); and
  • A declaration will not be made unless it produces foreseeable consequences for the parties (Church of Scientology v Woodward [1980] HCA 38).

In Littleville’s situation, the building of the large factory has yet to happen as it is still in its proposal stages. It can be classified as a hypothetical situation that the air will be polluted as again, it has yet to happen. If the factory proposal does not go ahead according to plan, the pollution will ultimately not occur and the court may not award a declaration.

 

DEFENCES

The equitable defences of hardship, laches and clean hands are immaterial to the granting of a declaration. This is because the court is simply declaring a right, not granting an enforceable remedy (Mayfair Trading Co Pty Ltd v Dreyer (1958) 101 CLR 428).

 

CONCLUSION

Based on discretionary ground it would be likely that the citizens of Littleville will not succeed. The building of the factory has yet to happen and likewise for the consequences of air pollution.

 

 

 

Question 2: Ben is planning on opening a music store in his local shopping centre. He entered into negotiations with the director of PGS Development Pty Ltd, the owner of the shopping centre, to rent his shop premises. They orally agreed that Ben would rent shop 7d, and pay $600 each week in rent. James, the director, tells Ben that he will have his solicitor draw up a written contract to sign. Several days later they both signed the contract not realising that it stated that Ben was renting shop 7b. When reading over the contract, James realised that the rent had been recorded as $800 per week, but failed to draw this mistake to Ben’s attention. Furthermore, the contract provided that any disputes should be referred to the Small Claims Tribunal; however, this tribunal no longer exists. Ben has now notice the mistakes regarding the rent and shop number, and wishes to have them corrected. He has also been told that the Small Claims Tribunal no longer exists, and would like to have disputes referred to an arbitrator instead. Advise Ben.

 

ISSUE

Ben entered negotiations with James the director of PGS Development Pty Ltd, to rent out shop 7d for $600 a week. However the contract that Ben received stated shop 7b at $800 a week and if there were any disputes that it would be dealt with at the Small Claims Tribunal which no longer exists. Ben wants the rent and shop number corrected as well as to have an arbitrator deal with disputes since Small Claims Tribunal no longer exists.

 

RELEVANT LAW AND APPLICATION

Rectification is an equitable remedy which corrects mistakes within written documents (does not include wills or company constitutions) where the document is clear in meaning but fails to reflect either:

  • The proved intention of the settlor (applies to ‘one party documents’ such as deeds, gifts, cheques, voluntary settlement of trusts); or
  • The proved agreement between the parties (applies to ‘two party documents’ such as contracts).

The context in which rectification will be sought will generally concern specific performance in the sense that either:

  1. One party is seeking to enforce the written document and rectification is sought by the other party as a defence; or
  2. One party is seeking to enforce the intended agreement and thus seeks rectification of the written document as a pre-requisite for specific performance.

The starting point in applications for rectification is that the court assumes that a written document reflects the parties’ agreement or settlor’s intention. Accordingly, the plaintiff is required to provide “clear and convincing proof” to the contrary (Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336).

In Ben’s situation the proved agreement is between two parties and he is seeking to enforce an intended agreement and thus seeks rectification of the written document as a pre-requisite for specific performance.

Since both parties to the contract signed without realising they were both signing for shop 7b with a higher rent, this is classified as a common mistake.

In order for an applicant (Ben) to gain an order of rectification in cases of common mistake, the applicant must prove:

  • The existence of a written document;
  • That there was a common mistake as to form or content (Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336) or legal effect (Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329);
  • The parties’ intention as to what the document should have contained was common or concurrent at the time of execution; and
  • That the court’s discretion should be exercised.

 

In Slee v Warke (1952) 86 CLR 271, the defendant leased a hotel to the plaintiff and during negotiations, the parties agreed that the plaintiff would have an option to purchase the hotel within the first year of the lease at a fixed price. The lease was drafted by the defendant as an option to purchase the hotel after the first year. The plaintiff noticed this difference but thought that the defendant had changed his mind. The plaintiff sought specific performance and the defendant sought rectification of the lease.

 

It was held that although the intentions of the parties were concurrent during negotiations that the option would only be exercisable during the first year, at the time of the contract the plaintiff’s intention was in accordance with the written contract that the lease was exercisable after the first year. Accordingly, specific performance was granted and rectification was refused.

In Ben’s circumstance the lease is classified as proof of a written document, and that there was a common mistake as both parties intended to lease 7d at $600 throughout negotiations and at signing, but both did not notice the mistake on the document.

 

Discretionary Considerations

The central discretionary consideration which is to be considered by the court is whether rectification is possible to give effect to the parties’ intention. In the Club Cape Schnak Resort Co Ltd v Cape Country Club Pty Ltd the rectification sought by the applicant did not give effect to the parties’ intention but rather sought the ‘next best thing’ which was not sufficient as the court refused the order for rectification.

In addition, the court will refuse to order rectification where there is:

  • Acquiescence (the circumstances surrounding the applicant’s delay in seeking rectification amount to a waiver of the right to seek relief);
  • Laches (where the other party’s position would be compromised by the applicant’s delay in seeking rectification);
  • Unclean hands or estoppel;
  • After execution of the document, third parties who have for value and without notice of the mistake obtained legal or equitable rights in the property passed under the contract; and
  • Complete performance of the contract or it is not capable of performance as it is void or illegal.

 

In Ben’s situation, none of the above issues seems to have occurred in Ben’s action, as long as Ben can prove that 7d at $600 a week was the true intention of both parties from negotiations up until signing, the elements of a common mistake can be established.

 

Moreover, since the Small Claims Tribunal is no longer in existence and is a mistake on behalf of James as well as the fact that he knew about the rent increase and did not notify Ben, this can be classified as a unilateral mistake. In cases of unilateral mistake only one party is mistaken. The plaintiff is required to prove:

  • The existence of a written document;
  • That there was a unilateral mistake as to form, content or effect that was caused by the other party’s unconscionable conduct. In Taylor v Johnson [1999] NSWCA 217 the principle was developed that unconscionable conduct may be proved where the other party knows of the mistake and fails to correct it;
  • The executed document does not conform with the common intention of the parties prior to the mistake coming to the attention of the non-mistaken party; and
  • That the court’s discretion should be exercised.

 

In order for Ben to succeed in a unilateral claim, the lease agreement can be classified as proof of a written document. James knew about the rent increase but did not notify Ben or correct the amount to $600. James’ unconscionable conduct does not conform to the common intention of the parties prior to the mistake coming to life. On the Small Claims aspect, since James works for a company that leases many stores, one would expect that given the experience in the field that the company would know that the Small Claims Tribunal is no longer in existence. There may be slim chances of rectifying the Small Claims Tribunal part in the contract since it may be difficult to prove that James and the company actually knew it was no longer in existence and still did not correct the error.

 

CONCLUSION

Ben has a good chance of having the document rectified as long as the above elements are met.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiduciary Theory Question

 

The scope of fiduciary obligations:

The essence of fiduciary relationships is a paramount duty imposed on the fiduciary to act in the interest in favour of the principal. In Phipps v Boardman [1967] 2 AC 46, 127, Lord Upjohn said: ‘Once it is established that there is such a relationship, that relationship must be examined to see what duties are thereby imposed upon the agent, to see what is the scope and ambit of the duties charged upon him’.

The context of the fiduciary relationship:

It should be noted that the nature and scope of fiduciary relationships are determined by the circumstances in which they arise, including the terms of any contract, undertaking or agreement between the parties. The scope of the business transacted between the parties is also important in shaping the duties. This can be seen in Birtchnell v The Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384, 408 where Dixon J said:

The subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the partnership exists, and this is so ascertained, not merely from the express agreement of the parties… but also from the course of dealing actually pursued by the firm.

Defining a fiduciary relationship:

The most commonly cited definition was given by Mason J in his dissenting judgment in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 96-7:

The critical feature of [fiduciary relationships] is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.

 

 

 

Relevant factors in identifying a fiduciary relationship:

  • Vulnerability of the principal, which causes reliance on the fiduciary

In Hospital Products v United States Surgical Corp (1984) 156 CLR 41, 142 (Dawson J): there is however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other.

Also Gibbs CJ noted at 70 that a mere inequality of bargaining power  is not sufficient to create a fiduciary relationship.

  • Trust and confidence placed in the fiduciary to protect the principal’s interests

The facts may establish that the relationship between the principal and purported fiduciary involved the principal reposing trust and confidence that the fiduciary would act on their behalf. However this alone is not sufficient to create fiduciary obligations and the relationship of trust and confidence must be one which requires equity’s protection. As Dawson J noted in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 147, ‘In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced. That does not make the relationship a fiduciary one.

  • The fiduciary represents the principals interests

The essence of a fiduciary relationship is the strict obligation of loyalty that the fiduciary owes to the principal. The fiduciary is bound to act in the principals interests. The context pf the relationship (including contractual and other representations) will need to be examined to determine whether the fiduciary has bound them to prefer the interests of the principal rather than their own interests.

Common Categories

Where a relationship falls into one of these established categories, the court will presume a fiduciary relationship exists. It is still necessary to examine the scope of the relationship to determine the scope of the fiduciary duties in the relevant circumstances.

  • Partners in a partnership

Dixon J, in Birtchnell v The Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384, 407-8: The relation between partners is, of course, fiduciary. Indeed, it has been said that a stronger case of fiduciary relationship cannot be conceived than that which exists between partners. “their mutual confidence is the life-blood of the concern. It is because they trust one another that they are partners in the first instance; it is because they continue to trust one another that the business goes on”. The relation is based, in some degree, upon mutual confidence that the partners will engage in some particular kind of activity or transaction for the joint advantage only. In some degree it arises from the very fact that they are associated for such a common end and are agents for one another in its accomplishment.

The scope of the fiduciary obligation is based on the scope of the firms business and the undertakings made by each partner. In Birtchnell it was found that a partner acted in breach of his fiduciary obligations by engaging in property development outside the firm (and without his partners consent) where the firm of real estate agents also engaged in property development from time to time even though it was not a core part of the firms trading.

  • Trustee and beneficiary

The trustee is the fiduciary and the beneficiary is the principal. The trustee owes a duty of care to the beneficiary.

  • Principal and agent

While it is common to find that an agent owes a fiduciary obligations to its principal, the contractual relationship between the parties may specifically exclude such obligations. ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35- investment banking advisory contract in a takeover context excluded fiduciary relationship.

  • Employer and employee

Consul Development Lty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373- the case involved a managing director of a property development company who established a competing business. This may be because senior management are usually in a position of control within the business and therefore have more trust and confidence invested in their position, which creates the overarching obligation of loyalty and good faith.

Everything turns on what the employee is engaged to do and whether they were acting in a private or a representative capacity when they engaged in the conduct.

All employees are obliged under the Corporations Act 2001 (Cth) ss182 and 183 of the refrain from misusing their position or corporate information for a private benefit, which is a statutory echo of the fiduciary obligations imposed on employees.

  • Solicitor and Client

The nature and requirements of that relationship will depend upon what the solicitor actually does for the client. The solicitors fiduciary status is not based simply on their position but comes from what they undertake to do on behalf of their client.

As the HC said in Maguire v Makaronis (1997) 188 CLR 449, 463, ‘The solicitor is classically a fiduciary to the client and as such owes certain duties in each particular case’.

The classic example of fiduciary obligations owed by a solicitor to their client involves a situation where the solicitor acts for two parties on opposite sides of a transaction. This was described by Lord Millett in Prince Jefri Bolkiah v KPMG (A firm) 2 AC 222, 234-5 as:

‘… a fiduciary cannot act at the same time both for and against the same client and his firm is in no better position… his qualifications has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation.’

  • Directors and their company

Directors owe fiduciary duties to the company and not typically to individual shareholders. The company is a separate legal entity and can enforce the fiduciary obligations against individual directors. Directors do not owe fiduciary duties to employees of the company or to the company’s creditors.

  • Business promoters

A person who establishes a new company is classified as a fiduciary of that company. A promoter includes a person who benefits from the promotion of the enterprise even where they are not active participants in the promotion activity- Tracy v Mandalay Pty Ltd (1953) 88 CLR 215. Participants involved in establishing a joint venture may generate fiduciary obligations where there is a mutual trust and confidence for each other’s interests- United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1.

  • Professional advisor

Stockbrokers are typically found to be in a fiduciary relationship with their clients and are thus usually required to disclose any potential conflicts that they may have in transactions involving their clients. Of course, as with any professional advisor, the fiduciary relationship may be limited or even excluded by contract between the parties- ASIC v Citigroup Global Markets Australia Pty Ltd v (no 4 ) (2007) 160 FCR 35.

While a bank is merely in a creditor-debtor relationship with its deposit and loan customers, where it acts as a financial advisor to the customer a fiduciary obligation may develop: Commonwealth Bank of Australia v Smith (1991) 102 ALR 453.

  • Ward and guardian

Not everything that a guardian does for a ward come under fiduciary obligations. The nature of the fiduciary relationship must also be assessed within the context of any relevant statutory provisions which shape the nature of the relationship between the ward and guardian.

It should be noted that the government does not stand in a general fiduciary capacity to its citizens. This could result in a conflict between public policy objectives and the interests of particular citizens- Habib v Commonwealth (No.2) (2009) 175 FCR 350.

 

Duration of fiduciary obligations

Fiduciary obligations will ordinarily continue to operate while the relationship is ongoing. Once the relationship has terminated, the parties will no longer be subject to continuing fiduciary obligations.

It has been held that a partner will continue to stand in a relationship of trust with respect to the other partners during the process of winding up the partnership, so they cannot take advantage of property or opportunities belonging to the partnership merely by winding up the business.

In Chan v Zacharia (1984) 154 CLR 178, 197, Deane J held:

Notwithstanding the dissolution of the partnership, ‘the good faith and honourable conduct due’ from each partner to the other persisted for the purposes of winding up the affairs of the partnership and each partner remained under a fiduciary obligation to co-operate in and act consistently with agreed procedure for the realization, application and distribution of partnership property.

 

Fiduciary duties

The essence of a fiduciary relationship is the obligation imposed on the fiduciary to act in the interests of the principal. The law of fiduciary duties enforces this obligation by imposing an overarching duty of loyalty and good faith on the fiduciary.

Gaudron and McHugh JJ said in Breen v Williams (1996) 186 CLR 71, 108: ‘Duty and self-interest, like God and Mammon, make inconsistent calls on the faithful. Equity solves the problem in a practical way by insisting that fiduciaries give undivided loyalty to the persons whom they serve.

This means that fiduciary duties only set out what the fiduciary must not do, rather than requiring particular conduct.

Leading statement of the conflict and no profit rules was made by Deane J in Chan v Zacharia (1984) 154 CLR 178, 199:

Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain:

  • Which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain, or
  • Which has been obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee.

Equity does not look to the motivations or beliefs held by the fiduciary who acts under a conflict or gains a personal benefit from their position:

The paramount obligation of fiduciaries is one of undivided loyalty to the principal. Equity will not countenance any risk of watering down this obligation.

As Deane J said in Chan v Zacharia (1984) 154 CLR 178, 198, the purpose of the conflict and profit rules is to preclude the fiduciary from being swayed by considerations of personal interest.

Whether the fiduciary acted in good faith or sought to obtain a benefit for the principal is seen as irrelevant- Phipps v Boardman [1967] 2 AC 46.

Regal (Hastings) v Gulliver [1967] 2 AC 134, the court found that the company directors who helped set up a subsidiary company by purchasing half of the shares in the company so that the parent company could use the subsidiary to purchase an asset were still liable to account for the benefit derived from the ultimate sale of the business as they obtained the benefit because of their fiduciary positions as company directors.

The no conflict rule

Bray v Ford [1896] AC 44, 51 (Lord Herchell): It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondents, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than duty, and thus prejudicing those whom he was bound to protect.

The strict terms of this prohibition were criticised by Mason J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 102: the so-called rule that the fiduciary cannot allow a conflict to arise between duty and interest cannot be usefully applied in the absolute terms in which it has been stated… the scope of the fiduciary duty must be moulded according to the nature of the relationship and the facts of the case…

The no profit rule

As Lord Russell said in Regal (Hastings) v Gulliver [1967] 2 AC 134, 143, ‘[the fiduciary] may be liable to account for the profits which they have made, if, while standing in a fiduciary relationship to [the company on whose board of directors the defendants served], they have by reason and in course of that fiduciary relationship to make a profit.’. at 144 Lord Russell went on to say ‘…the liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intended, cannot escape the risk of being called to account’.

Phipps v Boardman [1967] 2 AC 46- One of the beneficiaries successfully sued the solicitor and trustee for breach of fiduciary duty by reason of obtaining a profit in their role as fiduciaries without the fully informed consent of the principal. In the case, one of the joint trustees was senile and could not give consent although the other joint trustees consented.

Cook v Deeks [1916] 1 AC 554, where several directors of a construction company incorporated a competing business and then diverted a successful tender to their new business. The directors were liable for breach of fiduciary duty.

Remedies

A breach of the no conflict or profit rules allows the principal to one of a number of equitable remedies:

  • A fiduciary that breaches their fiduciary duties and thereby obtains a benefit is obliged to account to the principal for that benefit. The court may order that the fiduciary who gained property as a result of a breach of duty holds that property as constructive trustee for the principal.

An account of profits acts to deprive the defendant of the benefit of its wrongdoing. It is not dependent on the plaintiff having sustained any loss, nor is it necessary for the defendant to have acted mala fide. The object of the remedy ‘is not to punish the defendant but to prevent its unjust enrichment’: Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101, 114; Baltic Shipping Co v Dillon (1993) 176 CLR 344, 376. The purpose of the remedy has also been stated ‘to be attributable to the principle that no one should be permitted to gain from his own wrongdoing’: Attorney General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, 262. The award, like all equitable remedies are discretionary and does not flow from a breach as of right: Dalysmith Corporation (Aust) Pty Ltd v Cray Personnel Pty Ltd (No 2) [1997] NSWSC 441.

  • The court does make allowance for the skill and knowledge used by the fiduciary in generating the benefit.

Warman International Ltd v Dwyer (1995) 182 CLR 544: Dwyer’s gains were calculated on a different basis both in temporal and economic terms. The appropriate order was an account of profits for a defined period, having regard to the springboard advantages attributable to the agency business and the services and knowledge of Warman’s employees that had been persuaded to defect. The High Court concluded that the appropriate period for an account of Dwyer’s profits was 2 years. Given that Dwyer’s business was essentially carved out of Warman’s undertaking, Dwyer was ordered to account for the entirety of the net profits for that period, subject to allowances for his expenses, skill, effort and resources. This meant that the profits in the third and fourth years were exempt from any claim. On what basis were the gains that were accountable distinguished from those that were not? At one point the court indicated that this was simply a matter of fairness on the particular facts. Similarly, in the case of a business it was said to be inappropriate and inequitable to compel the errant fiduciary to be accountable for an indefinite period. However, other passages appear to rationalise the decision in terms that are more consistent with causation. It was noted that the fiduciary should not necessarily be accountable for the whole profit where it is attributable to the skill and resources of the fiduciary. Here the emphasis was on the source of the gain: [I]t may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff’s property but the product of the fiduciary’s skill, efforts, property and resources.

  • A fiduciary who has breached may be subject to an order for an injunction to the stop the breach continuing.
  • Where the fiduciary enters into a transaction with the company in breach of their fiduciary duty, the principal may rescind the contract provided that full restitution is possible. The principal may not, however, choose to retain the benefit under the contract while seeking equitable relief to reduce the price as this would involve the court remaking the contract, which it will not do.
  • Equitable compensation may also be available.

Nocton v Lord Ashburton: The House of Lords was prepared to award monetary compensation on the basis of Nocton’s breach of fiduciary obligations. Viscount Haldane LC, at 952, affirmed the longstanding ability of the equity courts to order monetary compensation, and said: Operating in personam as a Court of conscience it could order the defendant, not, indeed, in those days, to pay damages as such, but to make restitution, or to compensate the plaintiff by putting him in as good a position pecunarily as that in which he was before the injury.

 

Defences

  • A fiduciary who wishes to retain a benefit or opportunity derived from a breach of fiduciary duty must obtain the fully informed consent of the principal. A fiduciary who breaches their duties can only retain the benefit by disclosing the breach and obtaining ratification from the principal.

Lord Russell said in Regal (Hastings) v Gulliver [1967] 2 AC 134, 150:

‘…[the directors who benefited from their fiduciary position] could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting. In default of such approval, the liability to account must remain.’

Third party liability

The rule in Barnes v Addy allows for recovery against third parties who knowingly assist or receive benefits derived from a breach of fiduciary duty. The concept of knowledge was discussed in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 by applying 4 principles:

  • Actual knowledge
  • Wilfully shutting one’s eyes to the obvious
  • Wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make.
  • Knowing circumstances that would indicate facts to an honest and reasonable person.

Commercial transactions and fiduciary responsibilities

There are many cases where the courts have expressed hesitation in imposing fiduciary obligations to fill gaps in the contractual framework, particularly where the parties were able to protect themselves but chose not to.

Mason J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 97:

That contractual and fiduciary relationships may coexist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.

 

 

 

 

 

KEY CASES

 

Chan v Zacharia (1984)

Facts: A partnership of two doctors was carried out on leased premises. The Lease was for a  3-year term plus an option to renew for 2 more years (by notice given not later than 3 months before expiry of first term). In the third year of the lease, the partnership terminated and wound up, because one of the partners could not agree to the joint exercise of the option. The remaining doctor took the new lease for his own benefit.

Held by the HC: The lease was an asset of the partnership (see Keech v Sandford). Therefore, the appellant was bound to account in the winding up of the partnership as a constructive trustee for any benefit he received from the new lease. The two doctors were business partners and therefore in a fiduciary relationship.

Deane J. distinguished two aspects of the fiduciary obligation:

(1)           the fiduciary not to get in a situation where his personal interest conflicts with the fiduciary obligation (i.e. avoidance of conflict: substantial possibility of conflict)

(2)           the fiduciary must account for any profit obtained by use of his fiduciary position or knowledge

Hospital Products Ltd v United States Surgical Corp [1983] 2 NSWLR 157

Blackman had an exclusive distributorship arrangement for products manufactured by United States Surgical Corporation (USSC). Blackman’s company, Hospital Products Ltd (HPL), was soon after substituted as the distributor.

HPL, using USSC products as models, began to manufacture products that were essentially identical to those manufactured by USSC > HPL went into competition with USSC.

By a bare majority the High Court held that there was no fiduciary relationship between the parties and that USSC’s right to relief rested in a claim for damages for breach of contract. The majority considered that because the relationship between the parties was a commercial one entered into by equal parties at arm’s length with the intention that both parties would gain a profit, it was inappropriate to find a fiduciary relationship between the parties.

Gibbs CJ ‘On the other hand, the fact that the arrangement between the parties was of a purely commercial kind and that they had dealt at arms length and on an equal footing has consistently been regarded by this court as important, if not decisive, in indicating that no fiduciary duty arose.

United Dominions Corporation Ltd v Brian (1985) 157 CLR 1

Facts: UDC, SPL (Security Projects Ltd) and B were commercial parties in a joint venture “… to acquire, develop, sell real estate.” The agreement was not yet finalised. The land was  owned by SPL, and the finance was to come from UDC funds, secured by a mortgage signed by SPL. The balance of finance was to be  provided by joint venturers

The development realised large profit, which was claimed and retained by UDC on the basis of a provision in the mortgage of SPL (collateralisation clause), to the effect that the mortgage was security for any money that had been advanced to SPL. SPL was also indebted to UDC in respect of other projects. The collateralisation clause, then unbeknown to Brian, charged the joint venture property with the repayment of the money advanced by UDC to SPL from time to time. B was never informed of the existence of the collateralisation clause. B claimed that the clause breached fiduciary obligations owed to B by UDC and SPL.

Held: The High Court found in favour of B on the basis that UDC could not rely on the collateralisation clause when the share of Brian in the profits of the joint venture project were being computed.

RATIONALE: SPL and UDC owed fiduciary duties to B. UDC could not rely on a cross-collateralisation clause to claim surplus of profits, because this would mean that it was looking after its own interests instead of the venture as a whole. The  collateralisation clause was obtained in breach of those fiduciary duties.

Business partners are fiduciaries, but, this does not mean that all joint ventures of commercial parties will be of a fiduciary character. Generally, parties entering into a contract do not thereby acquire fiduciary duties one to the other. In this case, however, each party was under a fiduciary duty to refrain from pursuing/obtaining/retaining any collateral advantage in relation to the proposed project without the knowledge and informed consent of the other participants (Mason, Brennan and Deane JJ).

Boardman v Phipps [1967] 2 AC 46

Facts: In a deceased estate, one of the assets was a parcel of shares in a company. The estate was fully administered and the asset was held by the former executors as trustees. The trustees were Tom Phipps (not the Phipps in the litigation) who was a child of deceased, the widow and an accountant, Fox. Boardman acted as solicitor to the trust. B, acting as solicitor of the trust, acquired information about the viability of a takeover of the company in which the shares were held. Fox, however, was not happy with management of company. Therefore, together with one of the beneficiaries, Boardman tried unsuccessfully to have Phipps elected to the company board.

Fox suggested acquiring more shares to gain control in the company. B advised the beneficiaries of the trust of these plans and no one objected. However, the trustees could not acquire the necessary shares, since court approval was required. B had approval of 2/3 trustees, the 3rd trustee, the widow, was senile. Phipps and B entered into negotiations with directors of the company as “representatives of the Trust. Ultimately, an offer was made for the shares by Phipps and B personally (and not in their capacity as trustees), which was accepted by the company.

The takeover was successful and improved the profitability of the company, which in turn increased the dividends paid on the shares held by the Trust, and therefore, benefitted the beneficiaries.

One of the beneficiaries (John Phipps) under the trust applied to equity for an account of profits made by B and Phipps, on the basis that they had breached their fiduciary duties.

Held by the H of L:  (by a bare majority: Lords Cohen, Hodson and Borth-y-Guest) the House of Lords found in favour of the plaintiff beneficiary.

 The questions were

(a)           Did the beneficiaries under the will have any interest in the shares that Phipps and B acquired with their own money? YES

(b)           Did beneficiaries have any claim against Phipps and B for the resultant profits? YES

Phipps and B acted honestly, but they were fiduciaries. They had placed themselves in a special position (fiduciary) when they negotiated with the company as “representatives of the Trust.”

Equitable principles

(1) Phipps and B owed a fiduciary duty to the beneficiaries. Therefore, they held shares as constructive trustees for the beneficiaries

(2) Phipps and B acted in breach of their fiduciary duties. Therefore, they were accountable for any profits made, minus any money, and the value of the time, skill and effort they put into the enterprise.

RATIONALE: The information acquired by the trustees was Trust property It enabled them to perceive the opportunity for profit. It was irrelevant that the trustees of the Trust were in no position to acquire shares for the Trust There was a conflict between B’s duty and interest.

If a disclosure had been made to, and consent obtained from all the trustees, there would have been no breach. However, consent had not been obtained from the senile widow. Further, informed consent by the beneficiaries was also necessary.

A person who is a “fiduciary” must not get him or herself in a position where his/her duty to the beneficiaries conflicts with a personal interest. A “fiduciary” must not use his/her position as an opportunity for personal profit.

Nocton v Lord Ashburton [1914] AC 932

The defendant solicitor had persuaded his client to release a charge, thus advancing the solicitor’s own subsequent charge on the same property. The action was started in the Chancery Division of the High Court. The statement of claim alleged fraud and claimed damages. At the trial the action was treated as action in the tort of deceit and the claim was dismissed for want of proof of actual dishonesty on the part of the solicitor. The Court of Appeal reversed that decision on the facts. It gave judgment in favour of the client.

Held: Fraud in the Chancery Division should be understood as an allegation of equitable (constructive) fraud, not fraud as understood by the common law (sometimes called express fraud). As to the duties of a solicitor to his client they are: 1. A solicitor stands in a fiduciary relationship with his client. 2. A solicitor who enters into a financial transaction with his client is under a fiduciary duty, when advising his client, to make full disclosure of all relevant facts known to him. 3. Liability for breach of fiduciary duty is not dependent on proof of deceit or negligence. Equity imposes duties in special relationships above and beyond the minimal legal duties to be honest and to be careful. Fiduciary duties rest on the idea of trust and of conduct offensive to conscience. 4. The equitable remedies available for breach of fiduciary duty are ‘more elastic than the sanction of damages attached to common law fraud and negligence.

In a case of fraudulent misrepresentation: ‘No-one is entitled to make a statement which on the face of it conveys a false impression and then excuse himself on the ground that the person to whom he made it had available the means of correction.’ From the beginning the courts of equity have regarded themselves as courts of conscience. When courts of equity referred to something as ‘fraud’ it might have nothing to do with deceit, but may refer to unconscionable conduct.

‘In Chancery, the term ‘fraud’ thus came to be used to describe what fell short of deceit, but imported breach of a duty to which equity had attached its sanction.’

As to constructive fraud and the nature of equity, Viscount Haldane said: ‘A man may misconceive the extent of the obligation which a Court of Equity imposes on him. His fault is that he has violated, however innocently because of his ignorance, an obligation which he must be taken by the Court to have known and his conduct has in that sense always been called fraudulent, even in such a case as technical fraud on a power. It was thus that the expression ‘constructive fraud’ came into existence. The trustee who purchases the trust estate, the solicitor who makes a bargain with his client that cannot stand, have all for several centuries run the risk of the word fraudulent being applied to them. What it really means in this connection is, not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a Court that from the beginning regarded itself as a Court of conscience.’

A Court of Equity has always assumed jurisdiction to scrutinize the action of a solicitor who has had financial transactions with his client: ‘It did not matter that the client would have had a remedy in damages for breach of contract. Courts of Equity had jurisdiction to direct accounts to be taken and in proper cases to order the solicitor to replace property improperly acquired from the client, or to make compensation if he had lost it by acting in breach of a duty which arose out of his confidential relationship to the man who had trusted him.’

Since the Judicature Acts, the Courts had been empowered to give both common law and equitable remedies: ‘This action ought properly to have been treated as one in which the plaintiff had made out a claim for compensation either for loss arising from misrepresentation made in breach of fiduciary duty or for breach of contract to exercise due care and skill.

The proper mode of giving relief might have been to order Mr Nocton to restore to the mortgage security what he had procured to be taken out of it in addition to making good the amount of interest lost by what he did.  A measure of damages may not always be the same as in an action of deceit or for negligence.

 

[1] Concurrent tortfeasors liable proportionately

[2] In Wagon Mound (No 1), the finding of not reasonably foreseeable was on the basis that the D could not have known that oil floating on water could set on fire. However, it is likely that physical impact and Toby’s injury would be a “real risk” that would occur in the mind of reasonable people, and certainly not “far-fetched”: Wagon Mound (No 2)

 

[3] And would have properly fastened the objects to their vehicle to prevent the risk of injury to others, especially given the little difficulty and expense involved in so doing.

[4] (1999) HCA 18; 198 CLR 380; 162 ALR 294; 73 ALJR 657.

[5] Ibid, per Gaudron, McHugh, Gummow and Callinan JJ, 31.

[6] (1913) 47 ILT 160.

[7] [1955] 2 All ER 458, 464.

[8] Ibid.

[9] [1968] HCA 50; (1968) 122 CLR 25, per Windeyer J, 17.

[10] [1993] HCA 54; (1993) 179 CLR 101; (1993) 116 ALR 385; (1993) 67 ALJR 821; (1993) AIPC 91-028,

  Per Mason CJ, Deane, Dawson and Toohey JJ, 5.

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