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LA302 - Consul Development v DPC Estates - Judgment

CONSUL DEVELOPMENT PTY. LIMITED v D.P.C. ESTATES PTY. LIMITED

(1974-1975) 132 C.L.R. 373

Barwick C.J.

In this matter I have had the advantage of reading the reasons for judgment prepared by my brother Stephen. I agree with his conclusions, both as to the nature and validity of the trial judge's findings of fact and as to the applicable law. I also agree with my brother's analysis of the facts of the case and with the reasons he gives for the conclusions which he expresses. I agree that the appeal should be allowed.

McTiernan J.

These are appeals from two judgments of the Court of Appeal of New South Wales (Hardie and Hutley JJ.A., Jacobs P. dissenting) [1974] 1 N.S.W.L.R. 443, reversing judgments of Hope J. dismissing actions by the present respondent—D.P.C. Estates—against the present appellant—Consul. One R. K. Grey was a defendant to the actions and a respondent to D.P.C. Estates' appeal to the Court of Appeal but he has not appealed to this Court from the orders made against him by the Court of Appeal. Those orders therefore stand.

The hearing before Hope J. took eleven days; the appeal book runs into 638 pages, including judgments occupying nearly l50 pages, and the very bulk of the material presented to us invites an effort to reduce our consideration to critical issues. This can, I think, be most readily done by stating in the first place the law which I regard as applicable and then concentrating attention upon the facts to which that law must be applied without too much regard to matter which seems to me peripheral.

There is a strict equitable principle that a person occupying a position of confidence in relation to another owes that other a duty not to put himself in a position where his interests and his duty conflict and requires that, if he abuses that confidence and in breach of his duty makes a profit for himself' he must account to that other for the profit so made. If after full and frank disclosure of all material facts to the person to whom such a duty as I have described is owed and permission has been given to make a profit for himself out of transactions which would otherwise be in breach of duty he is, of course, absolved from any obligation to account. For authority for this salutary principle I content myself with citing the opinion of Lord Wilberforce in New Zealand Netherlands Society ''Oranje" Incorporated v Kuys [1973] 1 WLR 1126

His Lordship said ([1973] 1 WLR, at p. 1129):

"The obligation not to profit from a position of trust, or, as it is sometimes relevant to put it, not to allow a conflict to arise between duty and interest, is one of strictness. The strength, and indeed the severity, of the rule has recently been emphasised by the House of Lords: Phipps v. Boardman [1967] 2 A.C. 46. It retains its vigour In all jurisdictions where the principles of equity are applied. Naturally it has different applications in different contexts. It applies, in principle, whether the case is one of a trust, express or implied, of partnership, of directorship of a limited company, of principal and agent, or master and servant, but the precise scope of it must be moulded according to the nature of the relationship. As Lord Upjohn said in Phipps v Boardman [1967] 2 A.C., at p. 123: ‘Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.’"

Later, his Lordship added ([1973] 1 WLR at pp.1131-1132):

"... as to disclosure. Their Lordships entirely accept, as a matter of law, that if an arrangement is to stand, whereby a particular transaction, which would otherwise come within a person's fiduciary duty, is to be exempted from it, there must be full and frank disclosure of all material facts."

The next relevant principle is that a person who participates in the fraudulent conduct of a person in a fiduciary position of the character already described holds any property he acquires thereby in trust for the person to whom the fiduciary duty was owed. The classical statement of this principle is that of Lord Selborne L.C. in Barnes v Addy (1874) 9 Ch. App. 244, at p. 251:

"It is equally important to maintain the doctrine of trusts which is established in this Court, and not to strain it by unreasonable construction beyond its due and proper limits. There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them.

Now in this case we have to deal with certain persons who are trustees, and with certain other persons who are not trustees. That is a distinction to be borne in mind throughout the case. Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust."

The extension of responsibility to which the Lord Chancellor there referred is one which has been recognized and acted upon with ho narrow understanding of what constitutes "actually participating in any fraudulent conduct". Two recent cases in which this has been done are Selangor United Rubber Estates Ltd. v Cradock [No. 3] [1968] 1 W.L.R.1555, and Karak Rubber Co. Ltd. v Burden [1972] 1 W.L.R.602.

The basis of the decision of the Court of Appeal in this case - apart from the question of D.P.C. Estates' right to sue - was that Grey vis--vis D.P.C. Estates could not properly adopt a role where his interest conflicted with his duty but that he did so and that Consul induced him to do so by offering substantial rewards. The consequence the Court of Appeal held that Consul is trustee for D.P.C. Estates for properties purchased with the assistance of Grey given in breach of confidence to D.P.C. Estates.

The essence of the matter—although it requires further amplification—is that Grey's duty was to find, gather information about, and report upon properties which D.P.C. Estates could buy, renovate and sell profitably, and that Consul, being aware of this, offered him half of any net profit that should be made upon its buying, renovating and selling certain properties brought to its attention by Grey. This, so it was claimed, was participation by Consul in a breach of fiduciary duty owed to D.P.C. Estates by Grey. It was accordingly claimed that Consul held the properties purchased with Grey's assistance in trust for D.P.C. Estates. Against Grey it was alleged that he held profits received from Consul and from such transactions upon trust for D.P.C. Estates. The Court of Appeal so decided.

The first answer made to this decision by counsel for the appellant was that it had not been shown that Grey owed D.P.C. Estates any duty or, at least, any duty of a fiduciary character. To consider this it is necessary to go into some detail about Grey's position and duties.

A solicitor, J. W. Walton, aware that money was to be made by purchasing run-down properties, renovating them and re-selling them, formed a number of companies. We know of nine companies in existence in 1966: Kurranulla Properties Pty. Ltd., Boothman Investments Pty. Ltd., Denton Sales Pty. Ltd.. Denton Construction Pty. Ltd., Ronmar Sub-Division Pty. Ltd., D.P.C. Estates Pty. Ltd., J.B.H. Investments Pty. Ltd., Lucerne Developments Pty. Ltd. and Ronmar Investments Pty. Ltd. There may have been more, but this is unimportant. The nine with any additions were, as an agreement to be referred to later demonstrates, regarded as associated companies and I think it is quite proper to refer to them as the Walton group. As the learned trial judge found:

"... Walton used the plaintiff and other companies which he controlled for purposes with which he was concerned, without any regard at all to the interests of the companies' shareholders or to the requirements of the Companies Act or of the memorandum and articles of association of any particular company. As It seems to me, he used these companies simply as a convenience to achieve any particular object he wished to achieve".

Whether or not he was regularly appointed, Walton acted as managing director of all the companies in the Walton group. Indeed he was the Caesar. One company, Ronmar Investments Pty. Ltd.—Ronmar—provided management services for the others and in August 1966 it entered into an agreement with Grey whereby he agreed to serve as a working manager of the business of Ronmar and for all "the associated companies". Under this agreement Grey was entitled to an annual salary of $4160 and he undertook to give "his whole time and personal attention to the said business" and to "devote himself exclusively to the said business". The "said business" was, of course, that of the associated companies. Clauses 5 and 6 were as follows:

"5. The Manager shall not either during the continuance of his employment hereunder or thereafter except in the proper course of his duties as such manager divulge to any person whomsoever and shall use his best endeavours to prevent the publication or disclosure of any trade secret or development process or any information concerning the business or finance of the company or of the associated companies or any of their dealings transactions or affairs which may come to his knowledge during or in the course of his employment and shall not be concerned or interested directly or indirectly except as such manager in the business of real estate other than with the consent of the Managing Director nor shall he be personally employed or engaged in any capacity whatsoever in or in connection with any business whatsoever other than the business of the company and the associated companies except with the written consent of the Managing Director.

6. Subject to such orders and directions as may from time to time be given to him by the Managing Director (all which orders and directions the manager shall promptly and faithfully obey observe and comply with) the Manager shall have the general control and management of the said business and of all persons employed in or about the same and shall use all proper means in his power to maintain improve and extend the said business and to protect and further the reputation and interests of the company and associated companies ..."

The salary which Ronmar paid Grey was reimbursed to it by contributions from the associated companies.

Upon the execution of this agreement Grey became and acted as manager of the associated companies including D.P.C. Estates. His employment by D.P.C. Estates was, no doubt, upon terms embodying so much of the agreement with Ronmar as would apply appropriately to one member of the associated companies. He became a de facto director of D.P.C. Estates.

Grey's main duty was to locate properties suitable for re-sale at a profit after renovation, obtain written reports—usually with photographs — from a licensed real estate agent, one Thorne, study Thorne's reports, consider the advisability of making a purchase and, in respect of each property, pass on to Walton Thorne's report and his own recommendation. It appears that Walton would then decide whether or not to go ahead with the transaction, taking into account such considerations as profitability and the availability of finance. If he decided to purchase a property he would nominate one of the Walton group to be the purchaser.

It seems to me that, just as in the agreement, the combined businesses of all the associated companies were regarded as "the business", so, in truth, there was but one business and each associated company played the part in that business which Walton chose from time to time to give it. Grey's duty was always to the Walton group and to each company comprised in it. His immediate responsibility was to Walton as the managing director of all the companies.

I turn now to Consul. It was a company which in 1967 extended its activities to buying, renovating and re-selling properties. Its managing director, when it did so, was Robert Clowes, a young man who was a clerk articled to Walton. It was in Walton's office that Clowes came to know the business of the Walton group and to know Grey. It was found that he had no precise knowledge of the agreement under which Grey worked but that he did know in a general way what Grey's duties were and the part that Thorne played in the business of the Walton group. His Honour the trial judge found ([1974] 1 N.S.W.L.R. at p. 452):

"Clowes was cross-examined extensively as to his beliefs in respect of Grey's obligations, and, although it may be that all his statements cannot be taken at face value, some regard must be had to them. Among other things he said that he believed that Grey had some responsibilities in respect of the property dealing aspect of the businesses of the various companies, although he thought he was particularly concerned with the financial aspects of it. He believed that Grey was under an obligation to act honestly towards any company with those management he was concerned and that Grey should not take advantage of his position to make a profit for himself at the expense of any such company. Clowes said that believing that Grey was a director of the plaintiff, he believed that he had some duties towards the plaintiff, but until some were suggested to him he could not identify any of these duties. When particular matters were put to him, he said that he would imagine that Grey had a duty to act in good faith towards the company, not to put his own interests in conflict with those of the company, and not to betray any trust which had been reposed in him."

Some time before Consul bought any property brought to its attention by Grey, it had reached an understanding with Grey that he should profit in some way from associating himself with Consul. The best evidence of the essence of that arrangement is an acknowledgment in writing given by Consul to Grey on 19th June 1968, some time after the dealings to which it relates had occurred and after Clowes had ceased to be employed by Walton. This document is as follows:

"IT IS HEREBY ACKNOWLEDGED THAT ROBERT KINROSS GREY of 46 Blues Point Road, McMahons Point, Company Director is entitled to half of the profits arising from the income or the sale of the properties referred to in the Schedule hereto.

Dated this 19th day of June, 1968.

FOR AN D ON BEHALF OF
CONSUL DEVELOPMENT PTY.LIMITED
R. Clowes, Managing Director.

THE SCHEDULE

8,10,14,16,18 and 20 Lilyfield Road, Rozelle.
164, 166 and 170 Evans Street, Rozelle.
65 Denison Road, Rozelle.
1 Eastern Street, Rozelle. 26 Club Street, Rozelle."

The properties so listed are the subject of these proceedings. There was also an arrangement between Consul and Grey in relation to a property not included in the schedule. It was a property at Dulwich Hill. The evidence of Clowes in relation to this arrangement is thoroughly unsatisfactory and his Honour made no finding in relation to it beyond this: "The agreement he made with Mr. Grey was oral, and no writing was executed by Mr. Clowes in respect of it until some time after he left Mr. Walton's employ". The writing there referred to can only have been the document of 19th June 1968 already set out which omits reference to the Dulwich Hill property because the purchase of this property did not go on. At the time however Clowes and Grey did open a joint banking account called R. K. Grey No. 3 Account into which Consul alone paid moneys.

I come now to the properties claimed by D.P.C. Estates in the present action.

It is necessary first to examine what Grey did in relation to the properties which the Court of Appeal has decided that Consul holds in trust for D.P.C. Estates.

In the latter part of 1967 Grey learned, from a casual conversation with a solicitor who said he wanted a quick sale for cash, that the Clubb Street property—which is the property claimed in Action 221 of 1970—was for sale. Grey informed Consul of this but he did not inform Walton or anybody connected with the Walton group of companies. Consul purchased the property in November 1967.

It did not appear how Grey found out that the Rozelle properties—the properties claimed in Action No. 730 of 1968—were for sale but before he did so it seems that they had been advertised for sale, that they were upon the books of a number of agents and that a ii For Sale" notice was prominently displayed upon them. Grey did tell Walton about these properties and Thorne inspected and reported upon them. These reports were shown by Grey to Walton. What happened after this is subject to a finding as follows:

"Grey showed the reports to Walton, who said he was very interested because of the price that was being sought and the possibility of a substantial profit if the properties were purchased even at the asking price. He asked Grey to make an offer for them, and said that he told him not to let it (that is, the properties) get away. The amount he told Grey to offer was less than the asking price and, according to Clowes, was $22,500, although in May, 1968, he had said he thought it had been as much as $23,500. Walton did not know whether Grey passed on his offer to the owner, but in any event a short time afterwards Grey told Walton that the properties had been sold.

Clowes learnt of the properties from Grey. He saw the reports that had been made by Thorne but says that he did not read them; and he saw some photographs of the properties which Thorne had taken and given to Grey. He believed that Grey had passed on information about the properties to Walton, and he knew that Walton had told Grey to make an offer and he knew roughly the amount of the offer. It seems reasonably clear that he would 'suppose', to use his expression, that Walton would not be offering his maximum figure at the first offer. Clowes said that when Grey told him about the Rozelle properties he also told him that Walton had made an offer which was greatly under the asking price, that this offer had been rejected by the vendor, and that Walton did not want the properties. He then went out to look at the properties with his mother, and saw auction notices attached to them. Grey told Clowes that the properties were a good buy, and Clowes believed they were and indeed at the time repeated something to this effect to Lyons. He doubted if he would have had Consul purchase them without the benefit of Grey's advice. Clowes decided that Consul would try to purchase the properties and he decided to make, through Grey, an offer for them at a figure of about $27,000 which, to his knowledge, was a figure higher than the offer which had been made on Walton's behalf. He subsequently heard that another interested person had made an offer of $27,000 for the properties and he then increased Consul's offer to $28,500. On Friday 25th August 1967, Consul paid a deposit of $5,700, which was twenty per cent of the purchase price, to the vendor, Perpetual Trustee Co. Limited, and on the following Wednesday 30th August, which was possibly a week after Grey had first told him about the properties, Clowes and Grey went to the office of L. J. Hooker Limited, the agent acting for the vendor, and contracts were signed and exchanged." ([1974] 1 N.S.W.L.R. at p. 453).

Although Walton did not know of the Consul purchases until 1968, he did in October 1967 talk to Clowes about his spending so much time with Grey. He said he asked Clowes whether he had some kind of deal with Grey, but Clowes denied this part of the conversation. So far as I can see, his Honour made no definite finding upon this conflict beyond the following statements:

"I think that there is little doubt that no matter how proper the transactions may have been, Clowes would have good reason not to tell Walton about them, and I am not satisfied that Clowes' failure to tell Walton about them was not founded, in part at least, on the matters he referred to. I must say however that I find the nature of his agreements with Grey and the manner in which they were made, and the circumstances concerning the banking account suspicious; I find it difficult to believe that the bank would not allow a joint account to be opened in the name of Consul and Grey, for joint accounts are common enough. All these circumstances lead me to the view that Clowes and Grey were, for some reason, endeavouring to disguise or hide the fact that they were participating together in the various purchases. This seems to go rather beyond a mere failure to tell Walton about them, and certainly suggests that Clowes and Grey believed that they had every reason to disguise or hide-the nature or existence of the arrangements they had made with each other.

I have no reason to disbelieve that Grey led him (i.e. Clowes) to believe that Walton was not interested in the Piggott Street and Rozelle properties, and his claim that he believed that Walton's companies were in financial difficulties. However, as I have said, the evidence strongly suggests positive attempts on the part of Grey and Clowes to hide transactions from Walton. I have no doubt that Grey realised that the transactions were improper on his part, if only on the ground that they involved him in committing breaches of his agreement with Ronmar Investments Pty. Ltd. In all the circumstances I think that Clowes continued to believe that there may well have been something wrong in relation to the transactions despite what he had been told by Grey and despite his view about the financial position of Walton's companies. I doubt if he could have pointed with any precision to why he held this view, but no doubt in general terms it was simply based upon a feeling that it was wrong for him, an articled clerk of Walton, and Grey, an employee working for Walton's companies, to be arranging behind Walton's back and in his own office to enter into profitable transactions of the same character that Walton entered into. I do not have to resolve, having regard to my findings, whether this constituted notice that the transactions were in breach of some duty on the part of Grey, if that were the fact, but I think that this is an explanation, coupled with the reasons given by Clowes for not telling Walton about the transactions, which I have already described, for the action taken by Clowes with Grey to avoid there being any record of the relationship between them both in connexion with the transactions." ([1974] 1 N.S.W.L.R., at p. 455).

It seems to me that the findings that I have just quoted do not conclude the question whether or not Consul participated in what