- sale of a specific loan by a lender such as a syndicated loan.
- reasons:
- to realise capital or take advantage of new lending opportunities;
- change the dynamics of its loan portfolio ie diversifying its portfolio;
- reduce its capital requirements (ie banks have to maintain a certain percentage of capital to cover for its existing loan obligations);
- may wish to crystalise a loss on the loan where the borrower runs into difficulties (ie a distressed debt where there is an active market).
- to insulate payments on the issued debentures from the claims of entities, including the transferor/originator of the assets, that are either unrated or have credit ratings lower than the desired credit rating on the debentures
- transfer of property such as a portfolio of receivables eg. residential loans, credit card debt, aircraft leases and other types of receivables to be used to generate cash flow in a securitisation transaction (such as by the issue of debentures).
- reasons:
- to legally isolate the underlying assets from the insolvency of the transferor/originator of those assets, enabling purchasers of the debentures to consider the creditworthiness of the underlying assets independent of the creditworthiness of the transferor/originator.
- to insulate payments on the issued debentures from the claims of entities, including the transferor/originator of the assets, that are either unrated or have credit ratings lower than the desired credit rating on the debentures.
- reasons:
Engineer who studied fluid mechanics and thermodynamics expert enough !
Hatziandoniou v Ruddy [2015] NSWCA 234
Accident – Truck versus motorbike
Issue whether contact between truck and bike occurred in truck lane or motorbike lane, which would determine liability of truck or motorbike.
AT trial evidence of engineer rejected as not expert evidence; overruled on appeal.
Expert evidence not admitted
- Given that the central question in the trial was the location of the point of impact, and that that could be explicated by reference to the fluid discharge, solicitors acting for the appellant retained an expert, Mr William Bailey, to provide a report. Mr Bailey is a mechanical and biomedical engineer. He appended to his report a detailed curriculum vitae. At the commencement of his report he set out those aspects of his specialist knowledge and experience specifically relevant to his investigation of this accident. Included in that list was:
“conduct and interpretation of crash tests and other physical testing of vehicles and components which is applicable to the assessment of vehicles/component damage, especially regarding pre-impact vehicle manoeuvres, crash causation and injury mechanisms”.
- He then provided a summary of his conclusions. Those relevant are:
“7. The most compelling physical evidence of the crash was a trail of fluid from the motorcycle that commenced after the impact and ran along the roadway in the southbound lane (ie the plaintiff’s correct lane of travel) and approximately 0.5 m from the centreline and essentially parallel with it.
8. Because:
– The bike was not deflected at an acute angle from the side of the truck after initial contact but continued along a path parallel with the side for several metres
– When fluid from a downward directed pipe located on the offside of the radiator began to be deposited on the roadway, the bike was travelling approximately parallel with the centreline and approx 0.5 metre within the southbound lane.
– Coolant under pressure would commence flowing almost immediately after the hose was disconnected.
– Engagement of the rotating wheel nuts on the truck had forcefully contacted metal parts on the offside of the bike including the radiator and the engine at a location consistent with the hose being disconnected on impact.
it is concluded that the motorcycle was probably on its correct side of the roadway when the impact with the offside front wheel occurred.”
- The remainder of Mr Bailey’s report was an explanation of his reasons for reaching these conclusions. Under a heading “Nature and distribution of debris post impact, including fluid discharge from the bike” appears the following:
“a) The debris recorded on the roadway is the fluid discharge from the dislodged hose and radiator pipe on the offside [of] the motorcycle. Using permanent features of the site that were visible in police photographs it was earlier determined that the fluid trail commenced approx 8 metres south of the line where the seal changed on the roadway. The fluid trail was located in the southbound lane approximately 0.5 metres from the centreline. The fluid trail is obscured by absorbent material added by road authorities and the lateral location may be a little closer or further than 0.5 metres.
b) Because:
� Coolant is maintained under pressure of approx 10psi and the pressure will cause it egress [sic] at any break in the system (eg disconnected hose)
– The outlet pipe is located below mid height within the header tank, so coolant will flow by gravity
– The engine was running and the water pump will continue to pump coolant from the engine to the radiator even after coolant can no longer be drawn into the engine from the radiator.
– The coolant was hot and would have minimal viscosity (ie resistance to flow)
discharge from at least the downturned pipe end and probably the hose end, would begin immediately upon disconnection.
The pipe is located approx 0.6 metres above the roadway when the bike is upright and it was probable the deposit on the roadway began shortly after the hose was disconnected.
c) The fluid trail on the roadway appears to continue along a path approximately parallel with the roadway, indicating that the bike was travelling approximately parallel with the roadway when fluid began to be deposited.
d) Scape [sic] visible approximately half way along the truck indicates the bike was travelling approximately parallel with the truck for at least several metres.” (Blue 423-4)
Mr Bailey restated his conclusion that the motorcycle was probably on its correct side of the roadway when the impact with the truck occurred.
- At the trial, objection was taken to the admissibility of Mr Bailey’s report. The basis of the objection lay in Mr Bailey’s qualifications. A voir dire was conducted. In his evidence in chief Mr Bailey was asked if he had studied “anything in relation to fluid dynamics”. He replied:
“Yes, it was a requirement that all engineers taking a BE in mechanical or industrial completed courses in fluid mechanics and also in thermodynamics which were relevant to this particular report.”
- When asked how central to his study the science of physics was, he replied:
“In a sense mechanical engineering is the application of physics to the real world. It’s at the core of mechanical engineering. Taking physics in its broadest context.”
- In cross-examination, the following questions were asked and answers given:
“Q. … Have you any training or expertise or experience in dealing with the flow of liquids from a motorcycle engine?
A. Only in so far as it’s analogous to flows from other types of engines but not – I haven’t done any studies of flow from motorcycle engines but I note a close correlation with cooling systems that are used in motor vehicles generally.
Q. The difference of course between motor vehicles and motorbikes is that on a motor bike the engine is much more exposed to the outside air or the wind passing past a bike. Would you agree with that?
A. Yet, it is, to a degree.
Q. Have you inspected or tested the flow of liquids from a motorcycle at all?
A. Not from a motorcycle, no.
Q. Have you carried out any testing on a motorcycle to confirm the way in which liquids would escape from a motorcycle?
A. Not from a motorcycle.
Q. That’s fairly central to your opinion here, is the escaping of the liquids from a motorcycle and where they would end up on the ground, isn’t it?
A. That’s correct. But I made those opinions based on the close correlation between that type of a pressure vessel and pressure vessels with which I am very familiar in motor vehicles generally.”
He rejected a proposition that there was a difference between pressure vessels in a motorcycle and pressure vessels in a motor car. He was again asked if he had done any testing to see how liquids are affected by the movement of a motorcycle through air. He acknowledged that he had not.
- Immediately following the voir dire, the trial judge delivered a judgment in which he excluded part of Mr Bailey’s report. He made reference to the decision of the High Court in Dasreef Pty Ltd v Hawchar [2011] HCA 21; 243 CLR 588 and said:
“In this case Mr Bailey has training, study and experience as an engineer. Part of that training and study obviously has something to do with hydraulics but he has never ever in his evidence tested the flow of liquid from a motorcycle engine, interpreted or tested the flow of liquids or done any testing which would enable him to express the opinions which he stated in para 8 of his report.
There is, therefore, in my opinion, no basis upon which I could conclude that the opinion which he has given in relation to pt 8 [sic] is based on his specialised knowledge, training, study or experience. Accordingly, part of Mr Bailey’s report is not admissible. Paragraph 8 is rejected, on p 4.”
- Counsel for the respondent then successfully objected also to paragraph 7 of the report, and objected to some other pages, which included that part of the report which discussed the nature and distribution of debris post impact, including fluid discharge from the motorbike.
- His Honour said:
“Any evidence that relates to a determination made on the basis of the spillage or expulsion of coolant is rejected.”
That was the extent to which the excluded aspects of the report were specified.
- The trial then proceeded with witnesses as to damages, and evidence given by the respondent.
The rejection of the expert’s report
- The starting point in considering the admissibility of Mr Bailey’s report is the identification of the fact in issue in the proceedings to which his evidence was said to be relevant: Evidence Act 1995 (NSW), s 55. In this case, that fact is easily identifiable: it is the location on The Putty Road of the point where the two vehicles collided. The evidence derived from eyewitnesses was unsatisfactory; at the very least, a greater degree of confidence as to that location could be obtained from supplementary evidence. The appellant sought to obtain that supplementary evidence through the opinion of Mr Bailey. Mr Bailey approached that fact by examining the location and source of the liquid on the road. He reached the conclusions set out above.
- Section 76 of the Evidence Act renders inadmissible evidence of an opinion to prove the existence of a fact in issue. That prohibition is subject to the exception contained in s 79(1), which provides:
“(1) If a person has specialised knowledge based on the person’s training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.”
- For evidence to be admissible under s 79 it must satisfy two criteria: (i) the proposed witness must be shown to have “specialised knowledge based on the person’s training, study or experience”; and (ii) the opinion expressed must be wholly or substantially based on that training, study or experience: Dasreef at [32].
- The primary judge appears to have rejected the evidence of Mr Bailey as failing to satisfy both criteria: he acknowledged that Mr Bailey had training, study and experience as an engineer, but discounted his evidence of having completed courses in fluid mechanics and thermodynamics, and of the close correlation between pressure vessels on motorcycles and those in motor vehicles generally, with which Mr Bailey was very familiar. Indeed, his reference to Mr Bailey’s training having “had something to do with hydraulics” could be seen as inappropriately dismissive and certainly as failing to consider Mr Bailey’s unchallenged evidence as to that part of his training and experience.
- The finding that there was no basis upon which to conclude that Mr Bailey’s report was based on his specialised knowledge, training or experience is unsustainable on both counts. His qualifications included the conduct and interpretation of crash tests, and other physical testing of vehicles and components applicable to the assessment of damage.
- The primary judge adopted the submission of counsel for the respondent that, since Mr Bailey had not “tested the flow of liquid from a motorcycle engine”, he was not qualified to express the opinions that he had.
- This was an unduly narrow approach to the question of the qualifications of Mr Bailey to express his opinion as to the mechanism by which the fluid came to be where it was on the road. Mr Bailey had training in fluid dynamics, and expertise in cooling systems in motor vehicles; that expertise was sufficient to support an opinion about the operations of a breached cooling system in a motorcycle. One of the benefits of expertise is that it enables the person who has the relevant “training, study or experience” to extrapolate from the general to the particular. Mr Bailey had the requisite specialised training to enable him to draw conclusions about the particular circumstances of this collision. (Those conclusions would, of course, be subject to cross-examination, and to any contrary evidence adduced on behalf of the respondent.)
- It follows from the above that Mr Bailey’s evidence was wrongly excluded. The only possible consequence of that conclusion is that the verdict and judgment must be set aside and a new trial ordered. There must be a new trial because, on the exclusion of Mr Bailey’s evidence, he was not cross-examined, and counsel for the respondent forbore to tender the report obtained on behalf of the respondent. It will be necessary for the competing expert evidence to be properly evaluated in a new trial.
- Although, associated with this ground of appeal was a complaint that, having excluded parts only of the report, the primary judge failed to consider that which remained, the Court was not directed to any other relevant conclusion or opinion.
- The conclusion that Mr Bailey’s opinion evidence was wrongly excluded makes it unnecessary to resolve the other issues raised in the appeal concerning liability.
Legal Principles of an appeal in the nature of ‘rehearing’
An appeal is in nature a rehearing.
A court may in certain circumstances receive fresh evidence on the hearing of such an appeal, but no application was made to lead fresh evidence in this appeal. The nature of such an appeal was examined by the High Court in Fox v Percy (2003) 214 CLR 118, where, in a frequently quoted passage, the plurality (Gleeson CJ, Gummow and Kirby JJ) said at [22]–[23] and [25]:
The nature of the “rehearing” provided in these and like provisions has been described in many cases… The “rehearing” does not involve a completely fresh hearing by the appellate court of all the evidence. That court proceeds on the basis of the record and any fresh evidence that, exceptionally, it admits. No such fresh evidence was admitted in the present appeal.
The foregoing procedure shapes the requirements, and limitations, of such an appeal. On the one hand, the appellate court is obliged to “give the judgement which in its opinion ought to have been given in the first instance”. On the other, it must, of necessity, observe the “natural limitations” that exist in the case of any appellate court proceeding wholly or substantially on the record. These limitations include the disadvantage that the appellate court has when compared with the trial judge in respect of the evaluation of witnesses’ credibility and of the “feeling” of a case which an appellate court, reading the transcript, cannot always fully share. Furthermore, the appellate court does not typically get taken to, or read, all of the evidence taken at the trial. Commonly, the trial judge therefore has advantages that derive from the obligation at trial to receive and consider the entirety of the evidence and the opportunity, normally over a longer interval, to reflect upon that evidence and to draw conclusions from it, viewed as a whole.…
Within the constraints marked out by the nature of the appellate process, the appellate court is obliged to conduct a real review of the trial and, in cases where the trial was conducted before a judge sitting alone, of that judge’s reasons. Appellate courts are not excused from the task of “weighing conflicting evidence and drawing [their] own inferences and conclusions, though [they] should always bear in mind that [they have] neither seen nor heard the witnesses and should make due allowance in this respect”.
[Citations omitted]
The plurality then quoted from the decision of the majority in Warren v Coombes (1979) 142 CLR 531 at 551:
[I]n general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge. In deciding what is the proper inference to be drawn, the appellate court will give respect and weight to the conclusion of the trial judge but, once having reached its own conclusion, will not shrink from giving effect to it.
In the case of Abalos v Australian Postal Commission (1990) 171 CLR 167 McHugh J, with whom Mason CJ, Deane, Dawson and Gaudron JJ agreed, said concerning the nature of such an appeal at 178:
In S.S. Hontestroom v S.S. Sagaporack [1927] A.C. 37 at p. 47, Lord Sumner pointed out that:
“not to have seen the witnesses puts appellate judges in a permanent position of disadvantage as against the trial judge, and, unless it can be shown that he has failed to use or has palpably misused his advantage, the higher Court ought not to take the responsibility of reversing conclusions so arrived at, merely on the result of their own comparisons and criticisms of the witnesses and of their own views of the probabilities of the case. The course of the trial and the whole substance of the judgment must be looked at, and the matter does not depend on the question whether a witness has been cross examined to credit or has been pronounced by the judge in terms to be unworthy of it. If his estimate of the man forms any substantial part of his reasons for his judgment the trial judge’s conclusions offact should, as I understand the decisions, be left alone.”
Consequently, where a trial judge has made a finding of fact contrary to the evidence of the witness but has made no reference to that evidence, an appellate court cannot act on that evidence to reverse the finding unless it is satisfied “that any advantage enjoyed by the trial judge by reason of having seen and heard the witnesses, could not be sufficient to explain or justify the trial judge’s conclusion”: Watt or Thomas v Thomas [1947] A.C. 484, at p. 488.
In cases where views have been conducted. Section 54 of the Evidence Act 2011 (ACT) provides that a court may draw any reasonable inference from what it sees, hears or otherwise notices during a view. In which case a primary judge may have an advantage compared to the court hearing the appeal.
In Pledge v Roads and Traffic Authority (2004) 205 ALR 56, Callinan and Heydon JJ, with whom McHugh ACJ, Kirby and Hayne JJ agreed, said, concerning the equivalent provision in the Evidence Act 1995 (Cth) at [49]:
Even before the enactment of the Evidence Act, appeal courts customarily accorded significance to a demonstration or view at first instance.
[ELLIOT JAMES LAWRENCE STONE v THE OWNERS – UNITS PLAN 1214 & ORS
[2014] ACTCA 14 (19 May 2014)]
Legal Principles Governing Unconscionability
In the recent decision of Aboody v Ryan [2012] NSWCA 395 the Court of Appeal, comprising Bathurst CJ, Allsop P and Campbell JA, considered in some detail the governing general principles in respect of relief against unconscionable dealings. Allsop P (with whom Bathurst CJ and Campbell JA agreed) said (at [62]) that these principles were to be found in the well known cases of Blomley v Ryan (1956) 99 CLR 362, Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, Louth v Diprose (1992) 175 CLR 621 and Bridgewater v Leahy (1998) 194 CLR 457. The facts of particular cases have unsurprisingly been important catalysts in the development of principle in this area.
The President endorsed the expression of principle in these High Court cases but cautioned against introducing rigidity by focusing on subsequent single instances of the application of the principle. His Honour said (at [63]):
[63] … there is an underlying general principle, the applications or exemplifications of which are impossible to describe fully. Thus, one should always be careful not to dwell over-technically or textually on individual expressions of general principle of normative values rooted in the remedying of injustice. It is general principle, not a precisely expressed rule, that operates. The principle is wide, and the danger in further textual definition (as opposed to exemplification or illumination) is that inaccuracy or undue restriction may be brought about… Equity’s norms and values can be expressed as by Mason J in Amadio at 461-462, or by Deane J in Amadio at 474-475, or by Dawson J in Amadio at 489…
In Blomley v Ryan Kitto J said (at 415 and 428-429):
It applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands.
…
The essence of the ground we have to consider is unconscientiousness on the part of the party seeking to enforce the contract; and unconscientiousness is not made out in this case unless it appears, first, that at the time of entering into the contract the defendant was in such a debilitated condition that there was not what Sir John Stuart called “… a reasonable degree of equality between the contracting parties”; Longmate v Ledger … and secondly, that the defendant’s condition was sufficiently evident to those who were acting for the plaintiff at the time to make it prima facie unfair for them to take his assent to the sale.
…
The fact that the defendant’s condition was the result of his own self-indulgence could make no difference, for, as is shown by Cooke v Clayworth … the principle applied is not one which extends sympathetic benevolence to a victim of undeserved misfortune; it is one which denies to those who act unconscientiously the fruits of their wrongdoing.
Fullagar J said (at 405):
The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other.
In Commercial Bank of Australia Ltd v Amadio Mason J said (at 461 and 462):
… relief on the ground of “unconscionable conduct” is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage…
…
…the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position.
…
Relief on the ground of unconscionable conduct will be granted when unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary, just as it will be granted when such advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest.
It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct.
…
…the situations mentioned [by Fullagar and Kitto JJ in Blomley v Ryan] are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition or circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word “disadvantage” by the adjective “special” in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.
Deane J said (at 474 and 475):
Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so. The adverse circumstances which may constitute a special disability for the purposes of the principles relating to relief against unconscionable dealing may take a wide variety of forms and are not susceptible to being comprehensively catalogued… [T]he common characteristic of such adverse circumstances “seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other”.
In Louth v Diprose Deane J said (at 637):
… the jurisdiction of courts of equity to relieve against unconscionable dealing extends generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party to the transaction with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that special disability was sufficiently evident to the other party to make it prima facie unfair or “unconscionable” that that other party procure, accept or retain the benefit of, the disadvantaged party’s assent to the impugned transaction in the circumstances in which he or she procured or accepted it.
Crucially, taking advantage of an inequality of bargaining power, without more, will not generally be regarded as unconscionable: ACCC v CG Berbatis (2003) 214 CLR 51, 62-65 (per Gleeson CJ):
Unconscientious exploitation of another’s inability, or diminished ability, to conserve his own interests is not to be confused with taking advantage of a superior bargaining position. There may be cases where both elements are involved, but, in such cases, it is the first, not the second, element that is of legal consequence. It is neither the purpose nor the effect of section 51AA to treat people generally, when they deal with others in a stronger position, as though they were all expectant heirs in the nineteenth century, dealing with a usurer.
In Tanwar Enterprises Pty Ltd v Cauchi and Others (2003) 217 CLR 315 Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ observed at 324:
The terms “unconscientious” and “unconscionable” are, as was emphasised in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd, used across a broad range of the equity jurisdiction. They describe in their various applications the formation and instruction of conscience by reference to well developed principles. Thus, it may be said that breaches of trust and abuses of fiduciary position manifest unconscientious conduct; but whether a particular case amounts to a breach of trust or abuse of fiduciary duty is determined by reference to well developed principles, both specific and flexible in character. It is to those principles that the court has first regard rather than entering into the case at the higher level of abstraction involved in notions of unconscientious conduct in some loose sense where all principles are at large.
The Court also observed at 325:
…to speak of “unconscionable conduct” may, wrongly, suggest that sufficient foundation for the existence of the necessary “equity” to interfere in relationships established by, for example, the law of contract, is supplied by an element of hardship or unfairness in the terms of the transaction in question, or in the manner of its performance.
More recently, in Director of Consumer Affairs Victoria v Scully (2013) 303 ALR 168, the Victorian Court of Appeal noted at 182, per Santamaria JA (with whom Neave and Osborn JJA agreed):
[46] Seventh, s 8 of the Act applies to conduct “in trade or commerce, in connection with the supply or possible supply of goods or services”. That context is itself largely governed by existing legal principle. One is mindful of what Spigelman CJ said in the extract from World Best Holdings: “If it (the concept
of unconscionability) were to be applied as if it were equivalent to what was ‘fair’ or ‘just’, it could transform commercial relationships … The principle of ‘unconscionability’ would not be a doctrine of occasional application, when the circumstances are highly unethical, it would be transformed into the first and easiest port of call when any dispute about a retail lease arises.” The law of
contract and that of property, and the principles that constitute them, are the very things which make trade and commerce possible. Without these legal principles, and the existence of institutions such as the courts that are constrained to apply them, the strong would prevail and the weak would go to the wall. It cannot have been the legislature’s intention to interfere with arm’s length commercial transactions by reference to loose notions of unreasonableness and unfairness. The contention favoured by the appellant that conduct may be found to be unconscionable within s 8(1) of the Act if it can be found to be irreconcilable with what was right and reasonable overlooks the force of the observation of Deane J in Muschinski v Dodds that judges in equity, whose jurisdiction was discretionary, had long since abandoned recourse to undefined notions of justice and what was fair. The legislature is presumed not to alter basic common law doctrines and not to interfere with proprietary rights.
[footnotes omitted]
Where unconscionability under sections 51AA or 51AC of the Trade Practices Act is pleaded. As s 51AA(1) does not apply to conduct that is prohibited by s 51AC, it is necessary to consider the application of s 51AC.
Section 51AC(3) lists, non-exhaustively, factors to be taken into account. A number of cases confirm the view that this section is not to be read down to apply only to conduct that would traditionally be regarded as unconscionable according to equitable principles.
These factors, despite what is noted above in ACCC v CG Barbatis, do include the relative strengths of the bargaining positions of the parties. The legislation also includes as factors whether conditions were imposed that were not reasonably necessary for the protection of the legitimate interests of the supplier and the extent to which the parties acted in good faith.
In Australian Competition and Consumer Commission v Lux Pty Ltd [2004] FCA 926, Nicholson J said (at [98]):
[98] The word unconscionable is not a term of art It is not limited to traditional equitable or common law notions of unconscionability: Australian Competition & Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 at [31]. It bears its ordinary meaning of ‘showing no regard for conscience, irreconcilable with what is right or reasonable’: Australian Competition & Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 at [44]; Hurley at [19]-[20]; Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262. What is required is ‘serious misconduct or something clearly unfair or unreasonable’: Hurley at [19]-[20]. It will be relevant whether advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgement as to what is in his or her best interests: Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461.
In Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389, Allsop P considered the meaning of “unconscionable” as used in consumer protection legislation and commented (at [291] and [293]):
[291] Aspects of the content of the word “unconscionable” include the following: the conduct must demonstrate a high level of moral obloquy on the part of the person said to have acted unconscionably: Attorney General (NSW) v World Best Holdings Ltd [2005] NSWCA 261; 63 NSWLR 557 at 583 [121]; the conduct must be irreconcilable with what is right or reasonable: Australian Securities and Investments Commission v National Exchange Pty Ltd [2005] FCAFC 226; 148 FCR 132 at 140 [30]; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] FCA 62; 117 FCR 301 at 316-317 [44]; Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262; factors similar to those that are relevant to the CRA are relevant: Spina v Permanent Custodians Ltd [2009] NSWCA 206 at [124]; the concept of unconscionable in this context is wider than the general law and the provisions are intended to build on and not be constrained by cases at general law and equity: National Exchange at 140 [30]; the statutory provisions focus on the conduct of the person said to have acted unconscionably: National Exchange at 143 [44]. It is neither possible nor desirable to provide a comprehensive definition. The range of conduct is wide and can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct. A finding requires an examination of all the circumstances.
…
[293] … Spigelman CJ in World Best Holdings at 583 [121] referred to a “high level” of moral obloquy. Whether that is too stringent and whether “significant” or “real” may be preferable need not be decided. What is required is some degree of moral tainting in the transaction of a kind that permits the opprobrium of unconscionability to characterise the conduct of the party.
Section 51AA, it relevantly provides:
A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.
In ACCC v Samton Holdings Pty Ltd (2002) 117 FCR 301, the Court considered whether commercial vulnerability constituted a special disadvantage within the meaning of the unwritten law. The Court held at 321-323:
[57] The ACCC expressly conceded in its submissions, and properly so, that mere refusal to permit an option to be exercised out of time would not be likely to be the subject of a valid complaint at law or in equity in the absence of other conduct. It was said that the other conduct, notably the extraction of a large premium in the circumstances of this case rendered the conduct unconscionable.
The concession demonstrates the difficulty of the ACCC’s position. If it would not have been unconscionable for the respondents to refuse to grant a new lease and simply commence to operate a like business from the same premises themselves, how could it be unconscionable for them to agree to grant a new lease on conditions including payment of a lump sum for the assignment of lease rights from the first respondent, Samton Holdings?
[58] The failure to exercise the option within time and the position in which Mr Ranaldi found himself as a result was not attributable to the respondents. The rights which it was necessary for him to secure were lost as a result of his own inaction. He had been told before settlement of the requirement to exercise the option by the previous tenants, the Farruggios, and by the business broker, Dalziell, of ABPS Real Estate and Business Brokers. As his Honour found, during the relevant period, he had legal advice from a solicitor. The respondents acted in a way that many fair-minded people would condemn. That does not make their conduct unconscionable. The Ranaldis’ position of special disadvantage as found by his Honour, and that of Executive Bloodstock, arose out of unequal bargaining power. The respondents had the rights which they needed to acquire in order that Executive Bloodstock could operate the business and they had to acquire those rights from the respondents. The respondents were under no legal or equitable obligation to make them available.
[…]
[64] At the time they were negotiating for the grant of the second lease, the Ranaldis and Executive Bloodstock were at a serious disadvantage. They had very little bargaining power. As a practical matter, they were not in a position to make any decision other than to pay the price demanded by the respondents. It may be accepted that the categories of special disadvantage are open and may extend to what French J, at first instance in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2000] FCA 1893, called “situational disadvantage” as well as the constitutional disadvantages engendered by such disabilities as illiteracy or lack of education, illness or infirmity. It is not necessary for present purposes to explore the limits of those categories. On the findings of fact made by his Honour it is difficult to see how it would be correct to characterise the case as one of “special disadvantage” in the relevant sense. The disadvantage under which the Ranaldis and Executive Bloodstock laboured had arisen from a combination of considered commercial judgment (the decision to borrow heavily in order to purchase the business) and Mr Ranaldi’s oversight in neglecting to exercise the option in good time. These factors did not impair the Ranaldis’ ability to make a decision about the best course of action in the circumstances. At least in the case of an experienced business person there must, in our opinion, be something more than commercial vulnerability (however extreme) to elevate disadvantage into special disadvantage.
[65] Characterisation of disadvantage as “special” involves the recognition that it would be unconscionable knowingly to deal with the person so affected without regard to his or her disability, be it constitutional, in the sense of inherent, or situational, in the sense of arising from a particular set of circumstances. In effect this may require some special conduct or care which is not necessary in the absence of such disadvantage. If, for example, the disability relates to language, illiteracy or lack of education, conscientious dealing may ensure the bargaining deficit is compensated for by the provision of special assistance such as independent advice which will either enable a proper understanding of the transaction or overcome the disadvantage arising from want of a proper understanding.
In Kakavas v Crown Melbourne Limited [2013] HCA 25, the High Court considered a claim under s 51AA of the Trade Practices Act 1974 (Cth) that a casino had incited the appellant, a known problem gambler, to gamble at its casino by incentives such as rebates on losses and the offer of transport on their corporate jet. The Court in a unanimous decision emphasised the importance of the factual matrix in assessing claims of unconscionability, noting at [14] that “the decisions of this Court, in which claims for relief from unconscionable conduct have been litigated, illustrate the necessity for close consideration of the facts of each case in order to determine whether a claim to relief has been established”.
Section 51AAB provides that section 51AA does not apply to conduct engaged in in relation to financial services. The relevant provisions, which mirror the Trade Practices Act 1974, are found in the Australian Securities and Investment Commission Act 2001. In particular, section 12CA imports the prohibition on unconscionable conduct within the meaning of the unwritten law of the States and Territories.
Why is Home Building insurance important?
The Home Building Act 1989 provides that a person must not do residential building work unless certain insurance is obtained to protect the owner (not the builder) against the risk of loss resulting from non-completion or the risk of being unable to recover compensation for a breach of a statutory warranty or have the contractor rectify such a breach.
The statutory warranties are set out in Part 2C of the Home Building Act, which provides:
18B Warranties as to residential building work
The following warranties by the holder of a licence, or a person required to hold a licence before entering into a contract, are implied in every contract to do residential building work:
(a) a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract,
(b) a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new,
(c) a warranty that the work will be done in accordance with, and will comply with, this or any other law,
(d) a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time,
(e) a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling,
(f) a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known to the holder of the licence or person required to hold a licence, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the holder or person, the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder’s or person’s skill and judgment.
18C Warranties as to work by others
A person who is the immediate successor in title to an owner-builder, a holder of a licence, a former holder or a developer who has done residential building work on land is entitled to the benefit of the statutory warranties as if the owner-builder, holder, former holder or developer were required to hold a licence and had done the work under a contract with that successor in title to do the work.
18D Extension of statutory warranties
A person who is a successor in title to a person entitled to the benefit of a statutory warranty under this Act is entitled to the same rights as the person’s predecessor in title in respect of the statutory warranty, except for work and materials in respect of which the person’s predecessor has enforced the warranty.
18E Duration of warranties
Proceedings for a breach of a statutory warranty must be commenced within 7 years after:
(a) the completion of the work to which it relates, or
(b) if the work is not completed:
(i) the date for completion of the work specified or determined in accordance with the contract, or
(ii) if there is no such date, the date of the contract.
18F Defence
In proceedings for a breach of a statutory warranty, it is a defence for the defendant to prove that the deficiencies of which the plaintiff complains arise from instructions given by the person for whom the work was done contrary to the advice in writing of the defendant or person who did the work.
18G Warranties may not be excluded
A provision of an agreement or other instrument that purports to restrict or remove the rights of a person in respect of any statutory warranty is void.
The scheme of insurance is contained in Part 6 of the Home Building Act 1989. In the Second Reading Speech given in relation to Part 6, the Minister for Fair Trading referred to the introduction of private home building insurance, in contrast to the government-operated system that was previously in place, as a fundamental reform that would benefit consumers. The Minister said (Hansard, Legislative Assembly, 30 October 1996, 5540 at 5541):
The system we have had in New South Wales has lacked the incentives to encourage competent and efficient contractors and has treated all licence holders in the same way. There have been no rewards for the good builder, nor any incentives for others to lift their game. The same insurance premium is charged, irrespective of the risks which different builders pose or the quality of work they provide. Good builders have not been rewarded by lower premiums. Until recently all builders and contractors had gold licences. That raised the expectations of consumers and created a false sense of security. It was only after a problem arose that many consumers learnt, to their surprise, that there were no silver or bronze licences. As one consumer remarked to me, “If this is the work of a gold licence holder, God help the others.”
Privately run insurance has the potential and the means to change all of this. Bad builders will be able to be excluded. They will not get insurance and therefore will not work in the residential building industry. Good builders will be rewarded with lower premiums. Private sector insurers will be able to manage the risks far better than a government scheme. The Government will, however, continue to play a key role by setting the minimum conditions of the insurance scheme and by closely monitoring its operation. The conditions set by the Government for the private scheme will also give New South Wales home owners significantly improved cover compared to those which operated in the past…
[added emphasis]
The following provisions of the Home Building Act 1989 (NSW) in Part 6 are relevant.
92 Contract work must be insured
(1) A person must not do residential building work under a contract unless:
(a) a contract of insurance that complies with this Act is in force in relation to that work in the name of the person who contracted to do the work, and
(b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.
Maximum penalty: 200 penalty units.
(2) Except as provided by section 94 (1A), a person must not demand or receive a payment under a contract for residential building work (whether as a deposit or other payment and whether or not work under the contract has commenced) from any other party to the contract unless:
(a) a contract of insurance that complies with this Act is in force in relation to that work in the name of the person who contracted to do the work, and
(b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.
Maximum penalty: 200 penalty units.
(3) This section does not apply if the contract price does not exceed $5,000 or (if the contract price is not known) the reasonable market cost of the labour and materials involved does not exceed $5,000.
(4) If the same parties enter into two or more contracts to carry out work in stages, the contract price for the purposes of subsection (3) is taken to be the sum of the contract prices under
each of the contracts.
(5) The regulations may prescribe another amount for the purposes of subsection (3) and an amount so prescribed is to apply in the place of the amount referred to in that subsection.
(6) To avoid doubt, this section extends to residential building work that is also owner-builder work.
99 Requirements for insurance for residential building work
(1) A contract of insurance in relation to residential building work required by section 92 must insure:
(a) a person on whose behalf the work is being done against the risk of loss resulting from non-completion of the work because of the insolvency, death or disappearance of the contractor, and
(b) a person on whose behalf the work is being done and the person’s successors in title against the risk of being unable, because of the insolvency, death or disappearance of the contractor:
(i) to recover compensation from the contractor for a breach of a statutory warranty in respect of the work, or
(ii) to have the contractor rectify any such breach.
(2) Subsection (1) does not require the following to be insured:
(a) a developer on whose behalf residential building work is being done,
(b) any other person belonging to a class of persons prescribed by the regulations for the purposes of this section.
102 General requirements for insurance
(1) This section applies to all contracts of insurance required to be entered into by or under this Part.
(2) The insurance must be of a kind approved by the Minister and be provided by an insurer approved by the Minister.
(3) The contract of insurance must provide for cover of not less than $200,000 in relation to each dwelling to which the insurance relates, or such other amount as may be prescribed by the regulations.
(4) Any limitations on liability under the contract of insurance must comply with any requirements of the regulations.
(5) The contract of insurance must comply with any other requirements of the regulations.
(6) A contract of insurance may provide that the insurer is not liable for such amount (not exceeding $500) of each claim as is specified in the contract.
(7) The regulations may make provision for or with respect to requiring the retention, at a place prescribed by the regulations, of copies of contracts of insurance required to be entered into by or under this Part.
In Tudor Developments Pty Ltd v Makeig [2008] NSWCA 263, Basten JA (with whom Beazley JA agreed) at [17] affirmed that the purpose of section 92 was “to ensure that purchasers of residential properties enjoy a degree of protection against inadequate construction work in cases where the developer is insolvent or no longer in the business when defects become apparent and is therefore not able to undertake rectification work or compensate the owner for the loss incurred as a result of the defective building work”.
In Vero Insurance v The Owners of Strata Plan 69352 [2011] NSWCA 138; (2011) 81 NSWLR 227, the Court was concerned with insurance policies issued in respect of 201 units and a claim by the owners corporation regarding defective building work to common property. Sackville AJA (Allsop P and Basten JA agreeing) held at 241-242 that:
The statutory scheme, in my view, clearly contemplates that an owners corporation in a residential strata scheme is entitled, in its own right, to make a claim on the statutory home insurance policy in respect of the risks identified in s 99(1) of the HB Act. In particular, the scheme contemplates that an owners corporation will be entitled to make a claim in respect of loss arising from the breach of a statutory warranty in respect of defective work on the common property. The owners corporation’s entitlement flows both from s 227(2) of the SSM Act and, more simply, from its status as the registered proprietor of the common property and as the successor in title to the person on whose behalf the residential building work was carried out.
…
The effect of s 99(1)(b) of the HB Act is that the contract of insurance issued by the Insurer had to insure the Owners Corporation, as Meriton’s successor in title to the common property, against the specified risks. The statutory requirement was not conditional upon the Insurer issuing a certificate of insurance to the Owners Corporation. Nor was it in any way dependent on the terms of any certificate issued by the Insurer in respect of lots in the strata scheme.
Legal Principles Governing Contempt of Court
The principles are fully set out in Commonwealth Bank of Australia v Salvato (No.4) [2013] NSWSC 321.
Below is a summary of those principles.
The first principle is that the charge of contempt must be proved beyond reasonable doubt: Witham v Holloway [1995] HCA 3; (1995) 183 CLR 525 at 529 per Brennan, Deane, Toohey and Gaudron JJ.
Secondly, a contempt of court can be constituted by the breach of an order of the Court: Trade Practices Commission v C. G. Smith Pty Ltd (1978) 30 FLR 368 at 375; Spindler v Balog (1959) 76 WN (NSW) 391; Circuit Finance Australia v Sobbi [2010] NSWSC 789 at [10].
Thirdly, a person cannot be found guilty of a contempt of court for breach of an order, where the terms of the order are ambiguous: Australian Consolidated Press Ltd v Morgan [1965] HCA 21; (1965) 112 CLR 483 at 515-6 per Owen J. The ambiguity must be such that it cannot be said what it was that required compliance: Pang v Bydand Holdings Pty Ltd [2011] NSWCA 69 at [56]-[57] per Beazley JA.
Fourthly, where the contempt of court consists of a failure to comply with an order of the Court, it must be demonstrated that the contempt was wilful, and not merely casual, accidental or unintentional: Australasian Meat Industry Employees Union v Mudginberri Station Pty Ltd [1986] HCA 46; (1986) 161 CLR 98. However, it is not necessary for an applicant to prove that the contemnor intended to breach an order of the Court: see Anderson v Hassett [2007] NSWSC 1310; Mudginberri at 111; Matthews v Australian Securities Investment Commission [2009] NSWCA 155 at [16] per Tobias JA.
As Brereton J said in Anderson at [6]:
“The statement in Mudginberri (at 113) that a deliberate commission or omission which is in breach of an injunctive order or an undertaking will constitute such wilful disobedience unless it be casual, accidental or unintentional, does not require proof of a specific intent, but permits an alleged contemnor to show by way of exculpation that the default was ‘casual, accidental or unintentional’ … “
Finally, it is not necessary for an applicant to prove that the contemnor was aware that his or her conduct constituted a breach of the Court’s order: Microsoft Corporation v Marks (No.1) (1996) 69 FCR 117 at 143 per Lindgren J; Metcash Trading Ltd v Bunn (No.5) [2009] FCA 16 at [9] per Finn J.
Legal Principles Governing striking out Frivolous and Vexatious claims under rule 13.4 UCPR
Whether you are defending or prosecuting on a motion brought under rule 13.4 UCPR it goes without saying that in order to succeed you need to be aware of the caselaw applicable to such a claim. The rule basically allows a party to seek summary dismissal of an unmertitorious claim. The rule is designed to protect a defendant.
By understanding the boundaries set by the cases you can determine, in advance, whether to bring on such a motion under r 13.4 or the scope as plaintiff to dismiss such a motion.
As you will see the cases set a very high bar.
What is Rule 13.4?
Rule 13.4 of the Uniform Civil Procedure Rules (UCP Rules) empowers the Court, in its discretion, to order that proceedings be dismissed where the proceedings are frivolous or vexatious; or no reasonable cause of action is disclosed; or the proceedings are an abuse of the process of the Court.
Rule 13.4 provides as follows:
13.4 Frivolous and vexatious proceedings
(cf SCR Part 13, rule 5; DCR Part 11A, rule 3; LCR Part 10A, rule 3)
(1) If in any proceedings it appears to the court that in relation to the proceedings generally or in relation to any claim for relief in the proceedings:
(a) the proceedings are frivolous or vexatious, or
(b) no reasonable cause of action is disclosed, or
(c) the proceedings are an abuse of the process of the court,
the court may order that the proceedings be dismissed generally or in relation to that claim.
(2) The court may receive evidence on the hearing of an application for an order under subrule (1).
The Legal Principles to Be Applied
In Augment Communications Pty Limited (In Liquidation) v Sedgwick & Ors [2008] NSWDC 251 at [72] Levy DCJ held that the test for determining whether an action ought to be terminated summarily and not be permitted to proceed to a hearing on the merits is to be found in the judgment of Barwick CJ in General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 approving the passage within the dissenting remarks of Dixon J as he then was in Dey v Victorian Railways Commissioner [1949] HCA 1; (1949) 78 CLR 62.
In Dey, at page 91, Dixon J reviewed the authorities and expressed the test in the following terms:
“A case must be very clear indeed to justify the summary intervention of the court to prevent a plaintiff submitting his case for determination in the appointed manner by the court with or without a jury. The fact that a transaction is intricate may not disentitle the court to examine a cause of action alleged to grow out of it for the purpose of seeing whether the proceeding amounts to an abuse of process or is vexatious. But once it appears that there is a real question to be determined whether of fact or law and that the rights of the parties depend upon it, then it is not competent for the court to dismiss the action as frivolous and vexatious and an abuse of process.”
In General Steel, at pages 129 to 130, Barwick CJ confirmed that the jurisdiction to summarily terminate an action is to be sparingly employed and is not to be used except in clear cases. He described the test thus:
“It is sufficient for me to say that these cases uniformly adhere to the view that the plaintiff ought not to be denied access to the customary tribunal which deals with actions of the kind he brings, unless his lack of a cause of action – if that be the ground on which the court is invited, as in this case, to exercise its powers of summary dismissal – is clearly demonstrated. The test to be applied has been variously expressed; “so obviously untenable that it cannot possibly succeed”; “manifestly groundless”; “so manifestly faulty that it does not admit of argument”; “discloses a case which the Court is satisfied cannot succeed”; “under no possibility can there be a good cause of action”; “be manifest that to allow them” (the pleadings) “to stand would involve useless expense”.
At times the test has been put as high as saying that the case must be so plain and obvious that the court can say at once that the statement of claim, even if proved, cannot succeed; or “so manifest on the view of the pleadings, merely reading through them, that it is a case that does not admit of reasonable argument”; “so to speak apparent at a glance”.
As I have said, some of these expressions occur in cases in which the inherent jurisdiction was invoked and others in cases founded on statutory rules of court but although the material available to the court in either type of case may be different the need for exceptional caution in exercising the power whether it be inherent or under statutory rules is the same.”
In AAMI v NRMA Insurance Ltd [2002] 124 FLR 518 Conti J referred to the General Steel test as restated in Webster v Lampard [1993] HCA 57; (1993) 177 CLR 598 to require a finding that the action ought not be permitted to go to trial in the ordinary way because it was apparent that it must fail. In Webster Mason CJ, Deanne and Dawson JJ said at 602-603:
“The power to order summary judgment must be exercised with ‘exceptional caution’ and ‘should never be exercised unless it is clear that there is no real question to be tried’. Nowhere is that need for exceptional caution more important than in a case where the ultimate outcome turns upon the resolution of some disputed issue or issues of fact.”
The High Court, in Burton v The President of the Shire of Bairnsdale [1908] HCA 57; (1908) 7 CLR 76, referred to the discretion in the following way:
“The rule is that every plaintiff is entitled to have his action tried unless it can be shown obviously that the action is frivolous or vexatious, or otherwise an abuse of the process of the Court. A litigant is entitled to use, not to abuse, the process of the Court… So, there is power to strike out a pleading on the ground that it discloses no reasonable cause of action or of defence; and in any such case, or in the case of the action being shown by pleadings to be frivolous or vexatious, the Court may order the action to be stayed or dismissed, or judgment to be entered. This rule applies to a wider area of cases than the general power; and yet it has been held not to apply except in plain or obvious cases; and if there is a point of law that requires any serious discussion, it should be set down for argument: Hubbuck v Wilkinson. The pleading must be ‘obviously frivolous or vexatious, or obviously unsustainable,’ if it is to be struck out (per Lindley LJ in Attorney General of the Duchy of Lancaster v London and North Western Railway Co). The pleading must be ‘so clearly frivolous that to put it forward would be an abuse of the process of the Court’: Young v Holloway.” (Per Higgins J at 98, 99, 100)
In Cox v Journeaux [1935] HCA 48; (1935) 52 CLR 713, the principles relating to a strike out of this kind were once more discussed. Sir Owen Dixon, who dealt with the notice of motion then before the Court, said:
“The inherent jurisdiction of the Court to stay an action as vexatious can be exercised only when the action is clearly without foundation and when to allow it to proceed would impose a hardship upon the defendants which may be avoided without risk of injustice to the plaintiff. The principle, in general paramount, that a claim honestly made by a suitor for judicial relief must be investigated and decided in the manner appointed, must be observed. A litigant is entitled to submit for determination according to the due course of procedure a claim which he believes he can establish, although its foundation may in fact be slender. It is only when to permit it to proceed would amount to an abuse of jurisdiction, or would clearly inflict unnecessary injustice upon the opposite party that it should be stopped. But the Court is not concluded by the manner in which the litigant formulates his case in his pleadings. It may consider the undisputed facts. Further, it is not limited to cases where there is no dispute of fact….
In the present case I am satisfied that the Court should exercise its power to stop the action summarily. The plaintiff’s case is clearly hopeless. It is true that some examination of the facts is necessary before this appears.” (Per Dixon J at 720)
The Court of Appeal in England has expressed the view that in order for the inherent jurisdiction to be invoked successfully it must be “impossible for the party concerned to succeed on his claim”: Charles Forte Investments Ltd v Amanda [1964] 1 Ch 240 at 250-251.
In Shalhoub Holdings Pty Ltd and Ors v Cba [2006] NSWSC 607 at [34] Rothman J noted that the Supreme Court had dealt with the principles and application of them on a number of occasions, the three best known examples of which are: Brimson v Rocla Concrete Pipes Ltd [1982] 2 NSWLR 937; Peter Kent Development Propriety Ltd v ANZ Banking Group Ltd (unreported, NSWSC, Hunt J, 6 May 1980); Pountney v Dang (unreported, NSWSC, Barr J, 22 August 1997).
In Brimson, Cross J referred to: Bayne v Baillieu [1908] HCA 39; (1908) 6 CLR 382 at 387; Dey v Commissioner of Railways; and General Steel Industries v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125. His Honour said:
“Where the court is asked to reject the plaintiff’s case, either under its statutory rules or its inherent jurisdiction, the fundamental principle is that prima facie a plaintiff is entitled to have his case come to trial; and applications to deprive him of that right will succeed only in the clearest of cases. True, the court will not look merely at the suggested weakness of the plaintiff’s case… but… at the suggested strength of the defendant’s case; and, true, forensic argument and subsequent judicial reflection are not necessarily inconsistent with a firm conclusion that the cause of action should not be allowed to proceed. But fatal defects in the plaintiff’s case must be very clear before the court will intervene in this fashion.” (at 944)
The principle is that the defendant must show that there is no possibility that there could be a good cause of action consistent with the pleadings and the facts. These same principles and this same approach were adopted in the other two judgments; Hunt J in Peter Kent Development, supra, described the power here discussed as “much wider” than the power to strike out pleadings. His Honour went on to say:
“Both Rules reflect the inherent jurisdiction of the Court to deal with the abuse of its process… Under that inherent jurisdiction – although now more properly under Part 13 Rule 5 [now UCP Rules Rule 13.4] – there is power to stay an action which, although properly pleaded, is bound to fail. Such an action may be called either vexatious or an abuse of process.
One such case would be where the legislature has provided an absolute defence…
Another such case would be where a second action was brought seeking to litigate an identical issue to that already decided against the plaintiff…
Such cases are very rare; the genus of which they are but species is aptly named an abuse of the Court’s process, for relief will not be given in such cases unless the claim or defence being dismissed or struck out under such power amounts to an improper use of the machinery of the Court.”
Trusts – the ‘three certainties’ of a Trust
No trust will be valid unless there exist the “three certainties” of words, subject-matter and object. The requirement is generally taken to date from 1840, in the statement of principle by Lord Langdale MR in Knight v Knight [1840] EngR 862 ; (1840) 3 Beav 148 at 172-173 [49 ER 58 at 68] (See, earlier, the judgment of Lord Eldon LC in Wright v Atkyns (1823) Turn & R 143 at 157 [1823] EngR 470; [37 ER 1051 at 1056]).
You need to understand the “three certainties” because you need them for a trust to be a valid trust – whether the trust established by the trust instrument is validly constituted by the trust instrument and will create in favour of the beneficiary a beneficial interest in the assets over which a trust is declared.
For an express trust to be valid, it must satisfy ‘the three certainties’: (You also want to see Kauter v Hilton (1953) 90 CLR 86, 97 (Dixon CJ, Williams and Fullagar JJ) and Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited (in liquidation) (2000) 202 CLR 588, 604 [29] (Gaudron, McHugh, Gummow and Hayne JJ).
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certainty of intention to create a trust, rather than, for example, the intention to make an absolute gift of the property or the expression of a mere hope that the property will be used in a particular way;
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certainty of subject matter, where the trust property is defined and identified; and
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certainty of object, such that the trust is in favour of definite beneficiaries or a recognised (usually charitable) purpose so that there is someone who can enforce the trust.
To put this more succinctly, in their joint judgment in Kauter v Hilton (1953) 90 CLR 86 at 97., Dixon CJ, Williams and Fullagar JJ identified:
the established rule that in order to constitute a trust the intention to do so must be clear and that it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries.
If any one or more of the “three certainties” is not present then you do not have a valid trust. This will result in a structure or financing transaction which is uncertain as the arrangement will then need to be characterised as something else.
If it is not a trust then what is it?
We’ll look into this question next……….
Legal Nature of a Share in a Company?
In Sydney Futures Exchange Ltd v Australian Stock Exchange (1995) 56 FCR 236; (1995) 128 ALR 417; (1995) 16 ACSR 148 Lockhart J, at 255-256 of 56 FCR, 166-167 of 16 ACSR analysed the nature of a share in a company as follows:
“A share is a right to a specified amount of the share capital of a company, carrying with it rights and liabilities when the company is a going concern and in the course of its winding up. A share is a chose in action entitling its holder to the rights and subjecting him to the liabilities provided by the memorandum and articles of association and by legislation. In Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 Farwell J described the nature of a share in these terms (at 288):
“A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders interest in accordance with s 16 of the Companies Act 1862 (UK). The contract contained in the articles of association is one of the original incidents of the share. A share … is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount.”
This passage was approved by Lord Russell of Killowen in Inland Revenue Commissioners v Crossman [1937] AC 26 at 66.
The rights attaching to a share include the right to participate in dividends whilst the company is a going concern and the right to participate in the distribution of assets available for the shareholders upon a winding up. They also include the right to receive capital in excess of the company’s wants which the company resolves to distribute upon a reduction of capital: Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 per Williams J at 156.
In Colonial Bank v Whinney (1885) 30 Ch D 261 Fry LJ said (at 286-287):
“What, then is the character of a share in a company? Is it in its nature a chose in possession, or a chose in action? Such a share is, in my opinion, the right to receive certain benefits from a corporation, and to do certain acts as a member of that corporation; and if those benefits be withheld or those acts be obstructed, the only remedy of the owner of the share is by action. Of the share itself, in my view, there can be no occupation or enjoyment; though of the fruits arising from it there may be occupation, enjoyment and manual possession. Such a share appears to me to be closely akin to a debt which is one of the most familiar of choses in action; no action is required to obtain the right to the money in the case of the debt, or the right to the dividends or other accruing benefits in the case of the share; but an action is the only means of obtaining the money itself or the other benefits in specie, the right to which is called in one case a debt and in the other case a share. In the case alike of the debt and of the share, the owner of it has, to use the language of Blackstone, a bear [semble bare] right without any occupation or enjoyment.
A debt, no doubt differs from a share in one respect, that it confers generally a more limited right to the share, and once paid it is at an end, but this distinction appears to me immaterial for the purpose now in hand.”
Although Fry LJ was in dissent in the Court of Appeal, the judgment of the majority was reversed by the House of Lords and reported as Colonial Bank v Whinney (1886) 11 App Cas 426.
Under the Corporations Law a share is personal property and is transferable or transmissible as provided by the articles, and, subject to the articles, is capable of devolution by will or by operation of law: section 105(1).
Thus, shares in a company are personal property; but they are choses in action, not choses in possession. Personal property may of course be partly in possession and partly in action, for example, promissory notes and bills of exchange. The note or bill itself is a chose in possession, but the debt secured by it is a chose in action.
In White v Shortall [2006] NSWSC 1379 Campbell J agreed with the following passage from Halsbury’s Laws of England (4th ed, 1981), Vol 35, in para 1205:
“For general purposes, however, the expression `chose in action’ is now used in order to distinguish those chattel interests which, unlike choses in possession, are incapable of transfer by delivery of the subject matter in the manner described subsequently [ie par 1253 et seq].”
The statutory provision that now states the nature of a share is section 1070A Corporations Act 2001 which provides:
“(1) A share… :
(a) is personal property; and
(b) is transferable or transmissible as provided by:
(i) the company’s … constitution; or
(ii) the operating rules of a prescribed CS facility if they are applicable; and
(c) is capable of devolution by will or by operation of law.
(2) Paragraph (1)(c) has effect subject to:
(a) in the case of a company:
(i) the company’s constitution (if any); and
(ii) any replaceable rules that apply to the company; and
(iii) the operating rules of a prescribed CS facility if they apply to the share or interest; and
(b) …
(3) Subject to subsection (1):
(a) the laws applicable to ownership of, and dealing with, personal property apply to a share … as they apply to other property; and
(b) equitable interests in respect of a share, interest of a member in a company or other interest of a person in a registered scheme may be created, dealt with and enforced as in the case of other personal property.”
What is an Omnibus Account?
What are some of the key issues relating to securities held by an account provider on behalf of several investors in a single account?
The single account in this case is called an “omnibus account”.
In practice, client assets are typically held through an omnibus account in the name of the custodian or its nominee, rather than in individual accounts for each underlying client.
“Omnibus” accounts
An “omnibus” account is an account opened in the name of an account provider, the securities credited to which belong to several clients of the account provider. Typically the account provider will be obliged to maintain accounts on his own books recording the interests of these clients in respect of the securities credited to the account in the account-provider’s name. Omnibus accounts may contain a mixture of the account provider’s own and clients’ assets. This type of account is not permitted in some countries such as Lithuania, Finland, to name but a few.
“Nominee” accounts
A “nominee” account is typically distinguished from an omnibus account by two features.
- While a nominee may open an account for the purpose of holding several clients’ securities, this is not necessarily so. Often a nominee acts for a single client, for example an omnibus account provider (who acts for many clients). Single-client nominee accounts are common when a global account provider, being foreign, is not permitted by the membership rules applicable to the local CSD to participate directly in the CS.
- A nominee’s duties and discretions will usually be much narrower than those of other account providers. An omnibus account provider will commonly be granted discretionary powers by its client, whereas a nominee is likely to be permitted only to do such acts as are strictly necessary to maintain the client’s holding of securities.
Providers of both nominee and omnibus accounts are likely to know (although it is not always mandatory under the applicable legal system for them to know) that their account-holder is acting as nominee or holding a pool of securities for many investors.
Legal reasons for omnibus accounts
In practice, a combination of tradition and operational and legal reasons rather than ease of settlement of transfers are likely to dictate the use of omnibus accounts. Practice has become entrenched, so that where omnibus accounts are common, the law has tended to support their existence. The following legal factors may be relevant in particular countries:
- In countries where local investors are obliged to hold their securities directly in the CSD/issuer the need for omnibus accounts only arises in respect of foreign investors who already use a global account provider to hold their securities.
- In countries where the person who is registered at CSD/issuer level is regarded as the owner of the securities, to the exclusion (in most circumstances) of other claimants, there may be obstacles to recognition of custodial arrangements. The operational set-up is likely to have been created historically in a way which does not envisage that a CSD participant would need multiple accounts. In order to operate a separate account for each investor, the account provider would have to persuade the higher-tier intermediary to operate multiple accounts for the account provider, and pay (or charge investors for) the additional fees associated with many accounts. Instead, it may be simpler to establish an omnibus account.
- Even in countries where omnibus accounts are common (where direct holdings are not compulsory and indirect holdings are standard practice), there may be operational influences on account structures. A higher-tier intermediary may be unwilling to agree to a single-investor-per-account holding pattern, for example because the higher-tier intermediary is constrained by systems limitations on scaling up to the degree implied by each of its account provider clients having multiple accounts. Another factor is the need to have separate identifiers for each account. Where an omnibus account is used, the task of allocating securities received to buyers is carried out by the account provider. A settlement system may (but may not) be able to supply the account provider with identifiers to facilitate the allocation of securities received to the sub-accounts maintained by the account provider for its clients. Where a stock exchange operates a straight-through processing system linked into the relevant CSD, the choice of account structure may be affected by the amount of detail that the various systems can support.
In any of these cases, the technical and operational systems will have grown up domestically in a manner which suits the local legal arrangements, and may be difficult to adapt wholesale. Rather, individual market participants have developed ad-hoc arrangements to cope with local market expectations.
Advantages of omnibus accounts
The following advantages of using omnibus accounts can be stated:
- Cost. Only one account is needed for many investors. This should reduce fees associated with (a) maintaining the account and (b) transfers, where credit and debit entries offset and the settlement processing technique permits internalised (or net) settlement.
- Voting and corporate actions. Provided that an account provider can gather in the voting instructions for the collectively held securities (and contrary voting is permitted – see below) the volume of voting instructions required to be processed by the issuer will be significantly reduced. Likewise, for other corporate actions, the account provider will be responsible for processing the instructions and entitlements for all the investors under its account, thereby reducing the burden on the issuer.
- Internalised settlement. Investors could “settle” across the books of an account provider instead of using the CSD. If each investor’s holding is held in a separate account with an upper-tier intermediary, “internalised settlement” is impossible, since an account provider acting as lower-tier intermediary needs to process a transfer from a selling investor client to a buying investor client by means of external instructions to the upper-tier intermediary. By contrast, if an omnibus account is used, and the ordinary processing algorithms permit, an account provider would not need to issue any external instructions to settle such a transfer. Internalised settlement could reduce the cost of transfers and improve service levels (eg by offering “transfer finality” at an earlier moment than if settlement occurs at a higher tier intermediary).
- Reduced burden for issuers. Issuers do not need to deal directly with large numbers of investors where they are required legally only to recognise the persons who hold directly from them. This shifts the burden of dealing directly with investors to the account providers. Account providers may be freer to negotiate the level of service provided to their account holders, whereas issuers will generally be required to treat all holders alike.
Disadvantages of omnibus accounts
The following disadvantages may arise with regard to the use of omnibus accounts:
- Effect of permanent shortfalls. Assuming it cannot be made good by the account provider, a permanent shortfall on an omnibus account is bound to cause loss to some investors; the question arises how the loss should be borne. The answer to this question may range from “all investors lose any claim to anything held by the account provider”9through to “rateable loss-sharing”. More complex solutions are theoretically possible, including forensic accounting to identify precisely “whose” securities were lost10. This is a highly practical question, as the insolvency of an account provider is likely to be strongly correlated with accounting deficiencies and the existence of shortfalls. In some countries a clear and simple statutory solution is provided.
- Forced borrowing. Shortfalls are likely to arise routinely and without malpractice by the account provider, as a result of operational error (which could be error on the part of some other person). Provided that the account provider (a) is required by regulatory rules to conduct reconciliations and to take action to remove imbalances, and (b) is not insolvent, the difficulties of permanent shortfalls (discussed above) should not arise.
- However, while a temporary imbalance remains, the consequence of a shortfall may be that the investors entitled to what remains will to some degree be making securities loans to any investor who wishes to dispose of the whole of its holding. Lending may be beyond the capacity of some investors and would in many cases require the consent of the lender. Regulatory rules typically require account providers to explain to investors that their securities may be utilized to satisfy other investors’ instructions.
- Distance between issuer and investor. Where an omnibus account is used, the structure necessarily implies that securities are held indirectly. The issuer knows that the registered holder is not the investor, but not who the investors are. Corporate communications are made more difficult. Some countries have established rules which empower issuers to stay in touch with investors where an omnibus account is used. Distance between issuers and investors also engenders delay: by the time an investor at the end of a chain of intermediaries receives notice of a vote or other corporate action, it may be very close to the last practical moment for action or even too late.
- Corporate actions. If securities are consolidated or rights issues relate to holdings of specific numbers of securities (eg a 2-for-5 issue) the account provider will typically receive replacement or additional assets which do not divide perfectly among the investors in precisely the ratio in which the investors held the original securities. Some rounding and cash-settlement of differences is necessary, which may affect investors differentially. The outcome for many investors is likely to be different13 (though not necessarily worse) from that if their securities were held in accounts segregated at the higher-tier intermediary. Investors typically confer discretion on account providers to handle this kind of situation.
- Conflicting votes. Where an account provider holds securities for many investors, some may wish to vote in favour of a particular matter and others may wish to vote against. In theory there may be a risk in theory that the relevant legal system does not permit a single investor to vote contrarily: part of his vote for, and part against.
- No title. If the relevant legal system does not recognise the omnibus account as a valid
form of co-ownership, there is in theory a risk that the investor has no property rights at all if the account provider pools his securities with those of other investors.15 - The disadvantages listed above are likely to be more acute where the legal or regulatory system has not developed a clear code to cater for omnibus accounts. These difficulties may be aggravated in a cross-border context where the legal solutions chosen in different countries are different, or where one of the countries involved does not “recognise” omnibus accounts.