Astley and ORS v Austrust Ltd A13/1997 [1997] HCATrans 416 (11 December 1997)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A13 of 1997

B e t w e e n -

MICHAEL ASTLEY, DEAN CLAYTON, STEPHEN GERLACH, JOHN T. GREGERSON, JOHN H. MELVILLE, JEAN MATYSEK, JERRY McQUADE, ANNE ROBINSON, ROSS L. PROUD, NICHOLAS J.T. SWAN, NIGEL W. WINTER and JOHN C. TUCKER

Applicants

and

AUSTRUST LIMITED

Respondent

Application for special leave to appeal

TOOHEY J

GUMMOW J

KIRBY J

TRANSCRIPT OF PROCEEDINGS

FROM ADELAIDE BY VIDEO LINK TO CANBERRA

ON THURSDAY, 11 DECEMBER 1997, AT 9.52 AM

Copyright in the High Court of Australia

MR D.M.J. BENNETT, QC: May it please the Court, I appear with my learned friend, MR B.F. BEAZLEY, for the applicants. (instructed by Daenke O'Donovan)

MR F.S. McALARY, QC: May it please the Court, I appear with my learned friend, MR G.B. COLYER, for the respondent. (instructed by Griffins)

TOOHEY J: Yes, thank you, Mr Bennett. Mr Bennett, we think we would like to hear from Mr McAlary first, if we may.

MR BENNETT: If the Court pleases.

TOOHEY J: Mr McAlary, could we hear from you as to why this matter is not such as to attract a grant of special leave to appeal?

MR McALARY: Yes, your Honours. The case presented by my friend is not a satisfactory vehicle to examine the issue that he wishes to examine. The reason for that, your Honours, may not have been immediately apparent upon the reading of the transcript, but the factual situation is that, in this case, the damage which the plaintiff sought to recover in the litigation before the trial judge was losses which the plaintiff was obliged to meet, when sued, on personal covenants which he had entered into as trustee. The failure to advise him against those personal covenants was the negligence. But the factual situation of importance is this; that the whole of the loss was the plaintiff's own money. No money came from the beneficiaries.

The plaintiff actually carried out the purchase of a property called "Booka" by raising - your Honour Justice Gummow may remember some part of this, I just remembered - some 1.3 million on two mortgages. Indeed, the whole of the purchase money for Booka was raised on these mortgages. Those mortgages contained the personal covenant of the plaintiff. Now, the loss arose when the mortgagee sued and sought to recover the shortfall on the sale of the property. The only money lost in that matter was the moneys of the plaintiff itself. There was no loss of money by any of the beneficiaries. There was, therefore, no breach of duty to any of the beneficiaries.

Indeed, if I may say so, the result is that - perhaps, your Honours, I might assist you if I was to hand to your Honours, or seek leave to hand to your Honours, some very short material, which I trust will explain the factual situation more clearly. If I could just take your Honours quickly through this. The respondent was asked by a promoter to become a trustee of an existing private trust in lieu of the then current trustee in anticipation of the trust being subsequently converted to a public trust in a subscription by the public for the units. He agreed to undertake that role.

On 6 August, he executed the trust and became the trustee. The effect of the above was that the existing trustee retired, the trust was converted to a public trust and the respondent became trustee. Now, the important part is, perhaps, the next. On 22 August, the respondent, as trustee, settled the purchase from Reeves of a property near Tenterfield, which was fully funded by the following mortgages over the property: an advance by a company called "AMIC" - $813,000 - and a mortgage backed by Reeves in the sum of $499,000, making $1,300,000.

At the time of settlement, there was no subscription by members of the public for units in the trust. A prospectus did not issue until later. Booka was eventually sold by the mortgagees in possession for $500,000. That was insufficient to discharge the mortgage debts. Reeves and AMIC, as mortgagees, sued the respondent on the personal covenants of the trustee and succeeded in obtaining sums by way of verdict in the case of Reeves, and settlement in the case of AMIC for the shortfall and costs.

It was these moneys, plus an amount for legal costs incurred, that the Full Court held were recoverable by the respondent trustees from the applicants' solicitors. If you then jump over the YSF loss, which is much of the same character, I take you to the conclusions. No damages, other than the above, and interest were recovered from the applicants. The beneficiaries under the trust did not lose any of the funds in the above transactions. The funds which were lost came exclusively from the plaintiff's own resources. The damages recovered from the applicants were not the same damage as any claim which the beneficiaries under the trust may have had against the respondent and, further, the action of the respondent in becoming a trustee was not a cause of the loss for which it sued.

Now, your Honour, what we are saying, with respect - and I am dealing just with the question of the reason why this is not an appropriate case - firstly, on the actual factual situation here, the case that my friend wants to raise is a hypothetical case. There is no breach of duty to the beneficiaries because there was no loss sustained by the beneficiaries. Therefore, it is a purely hypothetical matter. The second point which we would say - the effect of that, of course, is that it bears strongly on the claims that this is an important matter in terms of the problems that arise where you have company collapses, and you have professional advisers being sued for negligence in respect of moneys lost by beneficiaries under public trusts.

I would have more difficulty in opposing the grant if there was a loss here and one was then being asked to look at the situation in relation to moneys actually lost by beneficiaries, but here you are not being asked to do that. The other fact, of course, we would say, is that the consequence of my friend being correct in this are quite unsatisfactory, because what - it would confuse the law. The law is quite clear in relation to the position at the moment. It would confuse the law, and it would involve problems of loss transference that really have never been considered or debated.

Let me just take it as if my friend's proposition succeeded. The plaintiff sues and establishes his loss, but he recovers but 50 per cent of it because of his own contributory negligence. The effect of that would be that his recovery would be 50 per cent of the loss. If he is a trustee, the recovery allows the beneficiaries to recoup 50 per cent of the loss. The next step is, if the beneficiary is simply not paid because the plaintiff, himself, has not, within the trust fund, sufficient moneys to pay, the beneficiaries sue the plaintiff to see if they can recoup the 50 per cent that they have not recovered out of the plaintiff's own hide. The plaintiff then proceeds to bleed those provisions of the Trust Act which entitle him to relief.

If he succeeds in relief, the loss transference is moved from the negligent defendant, as to 50 per cent, to the beneficiaries. Moreover, one would not know precisely how the compensation payable to the beneficiary would be assessed. It would not be assessed by reference to common law principles, because the compensation is purely equitable. It arises solely out of fiduciary duty and breach of fiduciary duty. Therefore, we have a situation where you have the damages being assessed by reference to common law principles, and then you have a contributory negligence alleged cut off, but then you have to look at the damages in terms of the principles involved in the payment of compensation and equity. So, you have two sets of contradictory principles involved in relation to the assessment of the same matter of money which flows in a number of areas.

What I am saying, with respect, therefore, is - and I am just dealing solely now with what your Honour raised with me - we would submit that if you look just at the factual situation as it occurred here, there is no basis for saying that there is any breach of duty to beneficiaries. They have not lost one penny of the money we seek to recover from the negligent solicitors, so, the claim that my friend puts is purely a hypothetical claim. That is the first point about it.

The second point is a causal point. The same damage is not involved. We have different damages involved because the - in fact, can I put it this way: in relation to the claim of breach of fiduciary duty, we say, firstly, that does not involve a claim for damages and we have not been guilty of any fault in the common law sense of the word. There has been no damages suffered by the beneficiaries in consequence of anything which the plaintiff did, and the plaintiff, himself, is not a cause of any beneficiary loss. For those reasons, we submit that leave should not be granted.

TOOHEY J: How was the case put below, Mr McAlary, in relation to the measure of damages in the context of contributory negligence?

MR McALARY: I was not at the trial, so I cannot help you there, your Honours, and the trial was long. I did read it, at one stage, but it was very long and very complex. In the Court of Appeal, I sought to recover damages for other matters besides the loss which flowed directly out of the shortfall on the mortgages. In relation to the shortfall on the mortgages, I recovered the shortfall, I recovered some interest, but not the lot, and I recovered some costs, but not the lot. In relation to the YSF matter, that was a situation where pig food was being supplied to a piggery by YSF - Young Stock Feeds, I think they are called - that being supplied to the piggery, and the stock food had not been paid for, the plaintiff was sued, and that recovery was obtained by YSF.

We sued the solicitors on the basis of their failure to advise us to limit our personal liability - made them responsible for that. That was recovered. But those are the only matters that were recovered. Attempts to go any further were denied, as your Honours will see if you look at the judgment of the Full Court, on the damages issue.

KIRBY J: The application of the statute relating to contributory negligence to the claim in contract is - - -

MR McALARY: I argued that, your Honour, but I got nowhere.

KIRBY J: Yes. Now, is that a matter that would be raised by a notice of contention if the matter came here, or has that been abandoned, that point?

MR McALARY: At the moment we have not addressed attention to that. I would probably seek to raise it if I had to come here.

KIRBY J: Is that a matter that has been passed upon by this Court, because it is a controversy that has been around for some time? Is this in the High Court - - -

MR McALARY: No, your Honour. I can answer that fairly firmly no. It was argued at great length in front of Mr Justice Rogers in AWA v Deloitte and in the Court of - - -

KIRBY J: It is quite an important question, is it not, as to whether the statute applies to a claim in contract?

MR McALARY: Yes, it is an important question, your Honour, and, at the moment, the trend of authority runs in favour of an affirmative answer to the proposition. I argued the matter before the Full Court. The Full Court was interested in the argument but, I think, found it too difficult.

KIRBY J: Well, the applicants here have an interesting point to raise; you may have an interesting point to raise in response.

MR McALARY: Yes, but I would prefer not to be involved in - - -

KIRBY J: I am sure you would not, but I am just saying that this has all the hallmarks of an interesting case.

MR McALARY: With respect, your Honour, we would submit it is not an appropriate vehicle, and certainly it is not an appropriate - my friend cannot rely upon that point. I have not raised it, if your Honour looks at my submissions.

KIRBY J: Not yet, but it was argued in the Full Court.

MR McALARY: Yes, it was.

KIRBY J: So, it is open to you to raise it.

MR McALARY: Yes, it was. If your Honour looks at - you will find that it is dealt with - a slight tribute to myself, that I argued it thoroughly; that they do not have to decide it.

KIRBY J: Yes.

MR McALARY: I do not think that I can say anything more on that, your Honour.

TOOHEY J: Thank you, Mr McAlary. Yes, Mr Bennett, I think we had better hear from you now.

MR BENNETT: If the Court pleases. We would submit none of the matters my friend raised really do make it inconvenient.

GUMMOW J: Well, what about the first point?

MR BENNETT: Well, can I say this, your Honour? First, there is no dispute about fact. Everything in my friend's document is correct and he accepts, in his arguments at page 174, that there is no issue of fact that is going to arise. My friend submits that, because there was no loss to the beneficiaries, which may or may not be true, but there was certainly no claim by them, there was no breach of duty. But that, with respect, is a non sequitur. Suppose we had not been negligent, and suppose that there had, therefore, been inserted in the mortgages a clause limiting the liability of the trustee to zero, excluding liability - - -

GUMMOW J: Liability to beneficiaries?

MR BENNETT: No, one could not exclude that.

GUMMOW J: Well, that is - - -

MR BENNETT: Liability to creditors.

GUMMOW J: Yes.

MR BENNETT: The negligence was failing to say you should exclude personal liability in these mortgages.

GUMMOW J: Yes.

MR BENNETT: Now, assume as, I suppose, must be implicit in the judgments, that the mortgagees would have accepted that, what would have happened? The creditor would have sued the beneficiaries for indemnity, because it was a fixed trust. The beneficiaries would, no doubt, have joined the trustee, and the trustee would have been liable. So, the effect of the - - -

GUMMOW J: Unless there was some limitation as between trustee and beneficiary.

MR BENNETT: It is hard to see how there could have been, your Honour, in this sort of case. The findings of fact were that - - -

GUMMOW J: But there was not. There was nothing in any deed that - - -

MR BENNETT: No, there was not, your Honour. The findings of fact in the judgment are - they are at pages 49 and 50 - the negligence was failing to obtain anything resembling a valuation when the assets were obtained. So, there was serious negligence there, putting the word "negligence" in inverted commas for the moment. Certainly there was a failure by the trustee to take care for its own protection, which is the classic definition of "contributory negligence" because of its own risk as to liability.

The Full Court seems to have assumed that if the alleged contributory negligence was a breach of duty to someone else, then it could not be contributory negligence, ignoring the fact that what a breach of duty to someone else may do is expose one to liability. Here, there was a breach of duty to beneficiaries. It could expose the trustee to liability in a number of ways. One of them is what happened, another is, if there had been an exclusion of liability, the beneficiaries would have been sued and it would have come back to the trustee that way.

So, either way there was a failure by the trustee to have regard to its own interests, and all the other points squarely arise. The point about whether a duty to beneficiaries is to be treated as tort within the first part of the definition, the point whether the two parts of the definition are mutually exclusive, the point about whether such a breach is a failure to take care for one's own position, and the very act "you should have advised against" point, which is the point that arises in all the cases involved auditors, where the auditors say, "The company was contributory negligent because it had a dreadful system," and the company says, "But you should have advised us to have a proper system," and it is the very act, that argument, which is discussed at such length in the American authorities, is one of the major controversies in that type of litigation, and it squarely arises here.

So, all of those important issues which arise because of the need to adapt to this 1930s legislation to modern commercial liability arise, and all my friend's argument does is mean that there is the one extra step in part of the argument, in the causation part, and it - - -

GUMMOW J: What is the extra step?

MR BENNETT: The extra step is saying that the negligence was negligence vis-a-vis the beneficiaries and, although the liability ultimately suffered was liability to a creditor, that does not matter because, if it had not been for the negligence, the same liability would have been incurred through the indirect route I have referred to. So, it is a very small extra step, which is not going to take any time, and which only arises in relation to the "but for" aspect of causation. So, it really does not affect the important arguments which arise in the case, and the issue is really as simple as that. I do not know if your Honours wish me to go to the main part of the argument about why the issues are important.

TOOHEY J: Well, just one moment, Mr Bennett.

KIRBY J: Do they go much beyond what you have put in writing?

MR BENNETT: In the additional document, no, your Honour.

KIRBY J: Any new enlightenment since the written text?

MR BENNETT: They really are set out in paragraphs 3 and 4 of the document I gave your Honours yesterday.

TOOHEY J: Mr Bennett, I think that is as far as we need hear from you at this stage.

MR BENNETT: If your Honour pleases.

TOOHEY J: Mr McAlary.

MR McALARY: Your Honour, if I can cover part of what I wanted to say; that, in essence, what I say, with respect, is that the damage which the section directs attention to must be the same damage. The opening words of section 27 of the Wrongs Act refers to a situation:

Where a person suffers damage the result partly of his own fault and partly of the fault of -

others. So, the damage must always be identical. Now, if the damage is not identical, the Wrongs Act cannot apply. Here we say, with respect, that the damage is not identical. The only damage which we sued for was the loss arising on the shortfall of the mortgages. That damage is clear and precise, and assessed at common law. There is, at the moment, no damage shown in relation to the alleged breach of duty, which would be a fiduciary duty, to the trustees and, even if damage were shown, it would be - sorry, you cannot show damage, but even if a compensation situation arose, it would be assessed by reference to different criteria.

Moreover, may I add this, that the consequences of the forgoing is that it cannot be said that we were a cause - when I say "we" I am referring to Austrust - that we were a cause of the loss because - or that we became cause of the loss by executing the mortgage, or being appointed a trustee. May I remind your Honours that in March v Stramare, the former Chief Justice Sir Anthony Mason, at page 516, dealing with whether a factual situation is a cause of a subsequent loss or sine qua non, says in the second paragraph on that page:

Thus, a factor which secures the presence of the plaintiff at the place where and at the time when he or she is injured is not causally connected with the injury, unless the risk of the accident occurring at that time was greater: see Hart and Honore, at p.122. As Windeyer J. observed in Faulkner v Keffalinos:

"But for the first accident, the [plaintiff] might still have been employed by the [defendants], and therefore not where he was when the second accident happened: but lawyers must eschew this kind of `but for' or sine qua non reasoning about cause and consequence."

Now, if you apply that principle here, Austrust became a trustee, and Austrust, subsequently, settled a transaction that the private trust was involved with. By becoming a trustee, Austrust placed itself in a situation, the same type of situation as is referred to by Sir Anthony Mason in March v Stramare. He put himself in a situation where, because Austrust was the trustee, they were the person who could be sued. But that was not a cause of the loss that arose. The loss that arose arose solely out of the failure of the solicitor to advise that liability should be limited. So, I would say, with respect, that there is an initial question of causation which must be decided in my favour, and there are the additional issues that I have pointed to in relation to the issue of the same damage.

When one goes to the other major point in the case, that is, the question of fault, we would wish to say - if I can just turn the page - that the definition of "fault" in the legislation - it is at page 45 of the application book. Now, the definition of "fault" is limited to:

negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to a defence of contributory negligence.

The first point, we say, is that no breach of duty to the beneficiaries would come within the ambit of those phrases. The words are taken from the common law side of the court. Each and every one of them has a precise meaning at common law. In addition, you have the word "tort", you have the word "damages", well known to the common law, and not known in equity, according to the text book by Mr Justice Meagher, your Honour Justice Gummow and Mr Lehane. The opening chapter of that points out that these concepts are simply not known to equity.

TOOHEY J: Mr McAlary, I think your time is up.

MR McALARY: Thank you. If the Court pleases.

TOOHEY J: There will be a grant of special leave to appeal in this matter.

MR BENNETT: If the Court pleases.

KIRBY J: You will not forget the application of the statute, Mr McAlary.

AT 10.19 AM THE MATTER WAS CONCLUDED