Author: whiggs

Posted on

Accounting for profits

Accounting for profits

  1. More recently in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 92 ALJR 918; [2018] HCA 43 Kiefel CJ, Keane and Edelman JJ said (at [6]-[7]) (citations omitted):

In Consul Development Pty Ltd v DPC Estates Pty Ltd, in a passage accepted as authoritative by both sides in the present case, Gibbs J said that:

a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation.

So described, the liability to account and to disgorge benefits encompasses “any benefit” received by the knowing participant in a breach of fiduciary duty “as a result of” that participation. The benefit of a business connection is such a benefit. Foresters’ submission fails to come to grips at all with the fact that the benefit that Foresters stood to gain, and in fact acquired, from its participation in the various acts of disloyalty by Woff and Corby was not sporadic deposits from retail customers; it was the business connections of Lifeplan and FPM.

  1. Their Honours also said (at [13]-[16]) (citations omitted):

Quantification

Once it has been determined that a benefit or advantage has been caused by the acts of knowing assistance, there remains the question of quantification of the benefit to be disgorged. While it is true that equity will not require an errant fiduciary or a participant in a breach of fiduciary duty to account for an advantage which the breach of fiduciary duty has not caused or to which it has not sufficiently contributed, where causation is sufficiently established the onus is upon the errant fiduciary or participant to show that he or she should not account for the full value of the advantage. That onus is not discharged by mere conjecture or supposition giving the benefit of the doubt to a proven wrongdoer. The requirement of proof conforms with the obligation of a party charged with a breach of fiduciary duty to show why the full value of an advantage obtained in a situation of conflict of duty should not be disgorged.

There are two ways in which the wrongdoer might discharge that onus and reduce the extent of the liability to disgorge profits. The first way, which can involve notorious difficulties in attribution of costs, is by proving his or her entitlement to an allowance for costs incurred, and labour and skill employed. No issue of an allowance arises, or was relied upon, in this appeal because it was accepted that the expenses included in the discounted cash flow included an amount for the work and effort of Woff and Corby.

The second way, which was the focus of this appeal, is by demonstrating that the benefit or advantage is beyond the scope of the liability for which the wrongdoer should account for profits. A wrongdoer might prove that some profit or benefit is beyond the scope of liability for which he or she should account if the profit or benefit has no reasonable connection with the wrongdoing. For example, in Frank Music Corporation v Metro-Goldwyn-Mayer Inc, the Ninth Circuit Court of Appeals accepted that a copyright infringement by MGM Grand Hotel Inc in a performance at the MGM Grand Hotel entitled the plaintiffs to the profits directly from the performance. It also entitled the plaintiffs to a proportion of indirect profits, including from the consequential increase in hotel room bookings which were held to have a “sufficient nexus” with the performance. But the direct profit from the performance to be disgorged was limited to 9% because the copyright infringement comprised only the substantial part of Act IV in a 10-act performance. Nor did it entitle the plaintiffs to any profits made by the liable parent company, Metro-Goldwyn-Mayer Inc, as a result of “the advertising value” of the hotel.

No precise test has been prescribed for determining when it will be inequitable to account for a benefit on the basis that it has no reasonable connection with wrongdoing. Nor is there any need for such a test. All of the circumstances must be considered, including the nature of the conduct. It is pertinent here that the profits were from deliberate and dishonest conduct, and were those desired to be achieved.

Posted on

Legal principles: Mingling trust funds and onus

Mingling trust funds and onus (from [2018] NSWSC 1987)

  1. The fiduciary obligations arising if a trustee mingles or mixes trust funds with non-trust funds were explained in Cook v Addison(1869) LR 7 Eq 466 (at 470):

It is a well-established doctrine in this court, that if a trustee or agent mixes and confuses the property which he holds in a fiduciary character with his own property, so as that they cannot be separated with perfect accuracy, he is liable for the whole.

  1. This was applied by Ungoed-Thomas J in Re Tilley’s Will Trusts; Burgin v Croad [1967] Ch 1179 who said (at 1183) (citations omitted):

The words in that passage “so as that they cannot be separated with perfect accuracy” are an essential part of the Vice-Chancellor’s proposition, and indeed of the principle of Lupton v White. If a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so they belong to the trust.

  1. In Foskett v McKeown [2001] 1 AC 102; [2000] UKHL 29 Millett LJ said (at 133) (citations omitted):

The rule in equity is to the same effect, as Sir William Page Wood V-C observed in Frith v Cartland: “if a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own”.

  1. Australian courts have accepted these principles: Brady v Stapleton (1952) 88 CLR 322 at 336-9; [1952] HCA 62 (Dixon CJ and Fullagar J) and Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 109-10; [1984] HCA 64 (Mason J).
  2. In Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135 Campbell JA (with Meagher and Barrett JJA agreeing) said (at [95]):

Because Mr Chincotta paid various sums of money not derived from Heperu into the Westpac accounts, Allsop P held at [112] that the funds in that account were a mixture of trust funds and personal funds of the effective defaulting fiduciary, Mr Chincotta. Trust money that passes through a mixed fund can be traced into an asset that is still in existence when a court considers the matter. This arises through application of the principle that a defaulting trustee who withdraws from a mixed fund and dissipates the withdrawal is presumed to have dissipated his own money. Thus, it was open to Heperu to trace the trust funds from the mixed fund into any asset that had been purchased from the mixed fund: Scott v Scott (1963) 109 CLR 649 at 664. Further, if a withdrawal from the mixed fund was used to discharge a mortgage over real estate, tracing into that real estate could be effected by reason of Heperu being subrogated to the proprietary right of the mortgagee whose mortgage was paid out: Boscawen v Bajwa [1996] 1 WLR 328 at 340-1; Heperu v Belle at [135].

Posted on

Novel duty of care

An interesting decision of the NSW Court of Appeal on the topic of recognition of a novel duty or care.

Ibrahimi v Commonwealth of Australia [2018] NSWCA 321

The Court of Appeal has dismissed an appeal from Mr Ibrahimi, representing a class of persons, against the Commonwealth of Australia concerning an alleged breach of duty of care owed to the plaintiffs during the shipwrecking of the boat on which they were travelling, SIEV 221, off the coast of Christmas Island in December 2010.

The Court (Payne JA, Meagher JA and Simpson AJA agreeing) (consistent with the primary finding at first instance) held that any alleged duty could not arise under the established categories of duty. Rather, any duty would have to arise as a novel duty of care, in which case the application of the salient features test is the correct approach.

On the facts of he case, there was no relevant reliance by the group members on the Commonwealth which would give rise to the relevant vulnerability, nor did the Commonwealth have control over the risk to the the group members in the relevant sense. In addition, there is no expectation placed on public authorities, of which the Commonwealth was one, of general reliance: that an entity will properly perform its public or private function.

It is important to note that this particular case dealt with potential harms flowing from omissions by a public authority, not from positive acts by such public authority. These aspects operate to mitigate against imposing a duty of care of a novel kind.

Finally, a $2 coin to the primary judge, on a difficult legal issue and emotionally charged issue, who was correct to reject case brought by Mr Ibrahimi.

Posted on

How to construe an insurance policy

From: Muriniti; Newell v Lawcover Insurance Pty Ltd (No 2) [2018] NSWCA 311 beginning at [39]

Legal principles

The principles governing the construction of insurance policies are well established and were not in dispute. In McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65, Gleeson CJ stated, at [22]:

“A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.” (footnotes omitted)

This statement was cited with approval by the High Court in Wilkie v Gordian Runoff (2005) 221 CLR 522; [2005] HCA 17 at [15], the Court adding, at [16]:

“In construing the policy, as with other instruments, preference is given to a construction supplying a congruent operation to the various components of the whole.” (footnote omitted)

In Zhang v ROC Services (NSW) Pty Ltd; National Transport Insurance by its manager NTI Ltd v Zhang (2016) 93 NSWLR 561; [2016] NSWCA 370 Leeming JA observed, at [86]:

“Where there is more than one available legal meaning, a court looks at the text, context and purpose, with a view to determining which potential meaning best accords with those considerations. Sometimes, text, context and purpose all point in the same direction, and all support the same conclusion as to the legal meaning of the contractual provision; that was the case in Victoria v Tatts Group Ltd (2016) 328 ALR 564; [2016] HCA 5 at [51] and [75]. Sometimes, as here, text, context and purpose point in different directions. But it remains necessary to assess the potentially available legal meanings against those matters.”

Leeming JA found the observations of Mance LJ in Gan Insurance Co v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047; [2001] 2 All ER (Comm) 299 of assistance where there is a constructional choice as to the proper meaning of a contract or a term of a contract. In Gan Insurance Co v Tai Ping Insurance Co Ltd (No 2), the concern was with a clause which had at least two possible meanings. Mance LJ stated, at [16]:

“… In these circumstances, it is especially important to undertake the exercise on which the judge declined to embark, that is to consider the implications of each interpretation. In my opinion, a court when construing any document should always have an eye to the consequences of a particular construction, even if they often only serve as a check on an obvious meaning or a restraint upon adoption of a conceivable but unbusinesslike meaning.”

This passage was unanimously approved by the United Kingdom Supreme Court in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900; [2011] UKSC 50; at [26]. See also the observations to the same effect in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36 per Gibbs J at 109, upon which the primary judge relied:

“It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another.”

Posted on

What is an indenture?

We’ve already examined the historical distinction between a deed poll and an deed inter-parties. But here is another!

Whereas a deed poll, made by one party only, had a shaved or “polled” edge, an indenture, which was a deed to which two or more persons are parties and which evidenced some act, bargain, contract, conveyance, covenant or agreement between them other than the mere consent to join in expressing the same active intention (i.e. the joint and several guarantors example above), was a deed with serrated or indented (hence the term “indenture”) edges so that each party had a similar deed with the two parts being supposed to fit together as a sort of a tally.

Oh, one more thing, so as not to confuse. In the United States they call what we call a ‘trust deed’, an indenture.

 

Posted on

Deed poll vs deed inter-parties?

 

The difference between a deed poll and a deed inter partes is absolutely crucial because of the difference as to who may enforce the deed in question.

It is clear that any person named or sufficiently indicated in a deed poll may sue to enforce any obligation undertaken in that deed poll in his favour despite the fact that he is, by definition, not a party to the deed poll and has not executed the deed poll.

By contrast however a person cannot sue on a covenant made in his favour which is contained in a deed inter partes unless he is a party (and named as a party) to the relevant deed. Even if a third party executes a deed inter partes he cannot sue on it unless he is named as a party to the deed. The only way in which a person who is not a party to a deed inter partes can enforce a covenant in his favour contained in that deed is to come within one of the exceptions to the Doctrine of Privity e.g. he would be able to enforce the covenant if he was able to show that there was a completely constituted trust of the covenant in his favour.

Consequently it is vital where you are preparing a deed poll which is to be enforceable by third parties that you do not use language which suggests that there is more than one party to the deed and that it is a deed inter partes. For example avoid phrases such as “this deed is made between”. Conversely, if you are preparing a deed inter parties, make sure that any person who you wish to be able to enforce the deed is named as a party (unless one of the named parties is to be a trustee of the benefit of the deed for a third party beneficiary).

The other historical distinction was between a deed poll and an indenture. Whereas a deed poll, made by one party only, had a shaved or “polled” edge, an indenture, which was a deed to which two or more persons are parties and which evidenced some act, bargain, contract, conveyance, covenant or agreement between them other than the mere consent to join in expressing the same active intention (i.e. the joint and several guarantors example above), was a deed with serrated or indented (hence the term “indenture”) edges so that each party had a similar deed with the two parts being supposed to fit together as a sort of a tally.

The practice of indenting originated in early times when deeds were short; often a deed between parties would be written out two or more times (according to the number of parties) on a single sheet of parchment which was then divided by cutting it with an irregular edge so that each part could be fitted into the other to demonstrate its authenticity.

At first this rule was very strict and a deed executed before 1845 was not an indenture unless it was actually indented, even though it was stated to be an indenture. However in 1845 legislation in the UK was passed providing that a deed between parties has the effect of an indenture even though the parchment on which it is written was not actually indented.

Consequently for all practical purposes the term “indenture” is now a thing of the past and the only real important differentiation nowadays is between deed polls and deeds inter partes.

Posted on

What is a deed inter-parties or indenture?

A deed inter-parties is a deed which expressly states that it is made between two or more named persons.

The difference between a deed poll and a deed inter partes is absolutely crucial because of the difference as to who may enforce the deed in question. It is clear that any person named or sufficiently indicated in a deed poll may sue to enforce any obligation undertaken in that deed poll in his favour despite the fact that he is, by definition, not a party to the deed poll and has not executed the deed poll.

By contrast however a person cannot sue on a covenant made in his favour which is contained in a deed inter partes unless he is a party (and named as a party) to the relevant deed. Even if a third party executes a deed inter partes he cannot sue on it unless he is named as a party to the deed. The only way in which a person who is not a party to a deed inter partes can enforce a covenant in his favour contained in that deed is to come within one of the exceptions to the Doctrine of Privity e.g. he would be able to enforce the covenant if he was able to show that there was a completely constituted trust of the covenant in his favour.

Consequently it is vital where you are preparing a deed poll which is to be enforceable by third parties that you do not use language which suggests that there is more than one party to the deed and that it is a deed inter partes. For example avoid phrases such as “this deed is made between”. Conversely, if you are preparing a deed inter parties, make sure that any person who you wish to be able to enforce the deed is named as a party (unless one of the named parties is to be a trustee of the benefit of the deed for a third party beneficiary).

The other historical distinction was between a deed poll and an indenture. Whereas a deed poll, made by one party only, had a shaved or “polled” edge, an indenture, which was a deed to which two or more persons are parties and which evidenced some act, bargain, contract, conveyance, covenant or agreement between them other than the mere consent to join in expressing the same active intention (i.e. the joint and several guarantors example above), was a deed with serrated or indented (hence the term “indenture”) edges so that each party had a similar deed with the two parts being supposed to fit together as a sort of a tally.

The practice of indenting originated in early times when deeds were short; often a deed between parties would be written out two or more times (according to the number of parties) on a single sheet of parchment which was then divided by cutting it with an irregular edge so that each part could be fitted into the other to demonstrate its authenticity.

At first this rule was very strict and a deed executed before 1845 was not an indenture unless it was actually indented, even though it was stated to be an indenture. However in 1845 legislation in the UK was passed providing that a deed between parties has the effect of an indenture even though the parchment on which it is written was not actually indented.

Consequently for all practical purposes the term “indenture” is now a thing of the past and the only real important differentiation nowadays is between deed polls and deeds inter partes.

Posted on

What is a Deed Poll?

It is a basic rule of Australian contract law that, save for limited exceptions, a contract cannot confer rights or impose obligations arising under it on any person except the parties to the contract. This basic rule is known as the “Doctrine of Privity” and there are several different aspects of the doctrine namely:

  1. a person cannot enforce rights under a contract to which he is not a party;
  2. a person who is not party to a contract cannot have contractual liabilities imposed on him by that contract; and
  3. contractual remedies are designed to compensate parties to the contract, not third parties

Deed polls constitute one of the limited exceptions to the basic doctrine of privity under Australian law; they are flexible and, provided they are used carefully, can be of great assistance in capital markets and other finance type transactions.

Lets start with a little bit of history. A deed poll is a deed made by and expressing the active intention of one party only, or two or more persons who join together in expressing a common active intention of them all e.g. a deed poll by two or more guarantors whose liability is joint and several.

The name deed poll comes from the fact that historically the parchment required for such deeds had been shaved even or “polled” at the top. This was historically in contrast to an indenture (see below). The most important fact to note in relation to deed polls is that they are the act of one party only (or two or more persons acting together i.e. the joint and several guarantors example above); in essence they are one sided unilateral instruments to which there is only one party not a two sided (bilateral) instrument like a contract.

A deed poll must be distinguished from a deed inter partes and an indenture.

See next Blog deed inter-parties.

Posted on

Doctrine of Privity

The basic Doctrine of Privity is that only parties to a contract may enforce that contact and that a third person who is not a party to the contract may not, unless he can take advantage of one of the limited exceptions to the doctrine, enforce a contact to which he is not a party even if that contract is made for his benefit. For example, if A promises B that A will pay $100 to C if C performs a piece of work, C, having performed the relevant piece of work, cannot sue A for the $100. (Interestingly, in this example, B could also not compel A to pay the $100 to C as B has supplied no consideration for A’s promise unless the facts are such that B agreed to procure performance by C.

It is generally agreed that the modern doctrine of privity was established in 1861 in Tweddle v. Atkinson. In that case the fathers of a groom and bride, in pursuance of an oral contract made between the fathers before their children’s marriage, agreed together in writing to pay the groom, in one case £200 and in the other case £100, adding that the groom should have full power to sue them in any court of law for those sums. The bride’s father failed to pay and the groom, who was not a party to the contract between the fathers, sued the bride’s father for the payment promised by the bride’s father under the contract. The groom’s claim was dismissed on the basis that no stranger to a contract could take advantage of that contract even though made for his benefit.

The Doctrine of Privity was approved by the House of Lords in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. in 1915 where Lord Haldane said:

“In the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam”.

This, however, cut little ice with Lord Denning who made several attempts in the 1950’s to allow rights of suit by third party beneficiaries; despite this, however, the House of Lords reaffirmed the general Doctrine of Privity in Midland Silicones Ltd. v. Scruttons Ltd. (Lord Denning dissenting) in 1962.

WARNING: The Doctrine of Privity is an area of the law where concepts of equity or fairness have little or no standing whatsoever. If A promises B that if B (or C) will do something A will pay a cash sum to C there is no equity in the rule that says that C cannot enforce this promise; but that is currently the law so if you wish to confer an enforceable benefit on a stranger to a contract you must make use of one of the exceptions to the Doctrine of Privity and not simply rely on vague concepts of equity/clean hands and all that.