Sheahan & Ors v Crossman & Ors [2017] HCATrans 75 (7 April 2017)

Last Updated: 13 April 2017

[2017] HCATrans 075

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S229 of 2016

B e t w e e n -

JOHN SHEAHAN

First Applicant

IAN LOCK

Second Applicant

VALOFO PTY LTD (IN LIQUIDATION) ACN 003 366 934

Third Applicant

and

PHILLIP MICHAEL CROSSMAN

First Respondent

SENIORS PROVIDENT PTY LIMITED ACN 097 928 286

Second Respondent

METRO FINANCE PTY LIMITED ACN 140 583 802

Third Respondent

METRO FINANCE (NZ) PTY LIMITED

Fourth Respondent

PILT NOMINEES PTY LTD ACN 129 837 976

Fifth Respondent

ROSS SELLER

Sixth Respondent

PETER LONDISH

Seventh Respondent

Application for special leave to appeal

BELL J
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT BRISBANE ON FRIDAY, 7 APRIL 2017, AT 11.05 AM

Copyright in the High Court of Australia

____________________

MR A.J. SULLIVAN, QC: May it please the Court, I appear with my learned friend, MR D.R. SULAN, for the applicants. (instructed by Clayton Utz Lawyers)

MR A.S. BELL, SC: May it please the Court, I appear with my learned friend, MR D.F.C. THOMAS, for the first to fourth respondents. (instructed by Corrs Chambers Westgarth)

BELL J: Yes, Mr Sullivan. Perhaps I should note – I understand that it is not expected that there will be an appearance for the fifth respondent or the seventh respondent. Neither has filed a notice of appearance or a submitting appearance. Is that the position?

MR SULLIVAN: That is our understanding, your Honour, as well. They did not take any part in the appeal below.

BELL J: Yes, very well. Thank you, Mr Sullivan.

MR SULLIVAN: Your Honours, at the heart of this application there is, in our respectful submission, an important question and that important question is this: should an accessory of a defaulting trustee who receives trust property from that trustee knowing that such receipt is in breach of trust be able to rely upon a release given to it by the defaulting trustee in proceedings brought against the accessory by a new trustee to restore the trust?

The Court of Appeal, by application of principles of attribution of knowledge, together with its application of construction principles, found that the accessory to the breach of trust – the Barnes v Addy first limb person - was able to rely upon such a release.

In our respectful submission, and, of course, this is partly what we need to persuade your Honours about, that was in error but the application raises legal issues, we say, of general importance, first of all, as to the existence and of the content of the so-called fraud exception to the principles of attribution which is a matter which is, of course, never considered fully in the context of a recent decision of the Supreme Court of the United Kingdom which discussed the matter.

The second point of interest is this, whether the actual intention of the releasor is relevant to the construction of the release and if so does that actual intention include the knowledge of the director of the corporate trustee acting in breach of trust and that involves a consideration of what was said by this Court in Grant v John Grant and in the light of subsequent developments in the laws of construction.

The third issue is whether the requirements for the release of equitable rights require proof by a person in the position of a respondent that there was a fixed deliberate and unbiased determination by the releasor in giving the release or is it simply necessary to show that a deed was entered into.

BELL J: Looking at the first issue, the attribution of knowledge, it is put against you that there is just not the factual foundation here for that interesting issue to be explored having regard to the unanimous view of the Court of Appeal concerning the construction of clause 3.2(a) of the main deed.

MR SULLIVAN: Yes, your Honour, and may we deal with that immediately? That is what raises what we call the John Grant point. Your Honours, the Court of Appeal, rightly, referred to John Grant and indicated that it was applying the principles set out in John Grant and your Honours will see that particularly if one goes to paragraph 240 of the judgment of the Court of Appeal at page 194 of the application book.

But, in our respectful submission, intrinsic in an application of the John Grant principles is the necessity to take into account the actual intention of the releasor. Therefore, the question of knowledge arises. Your Honours, may we hand up to your Honours copies of John Grant – and I know your Honours will be well familiar with its - - -

BELL J: Yes.

MR SULLIVAN: Your Honours will be familiar – and I will not take you to passages where, in the plurality of the Chief Justice Sir Owen Dixon, Justices Fullagar, Kitto and Taylor, their Honours make the uncontroversial ruling as to the law of this country that it is in the question of release as is what is in the contemplation of the parties at the time that a lease is granted which is in the ambit. But they went on to say significantly this, at the bottom of page 129 of the joint judgment and over the top of page 130:

From the authorities which have already been cited it will be seen that equity proceeded upon the principle that a releasee must not use the general words of a release as a means of escaping the fulfilment of obligations falling outside the true purpose of the transaction –

and we emphasise these words:

as ascertained from the nature of the instrument and the surrounding circumstances including the state of knowledge of the respective parties concerning the existence, character and extent of the liability in question –

and then we emphasise the last words:

and the actual intention of the releasor.

So, it does, in our respectful submission, make clear that in the special case of releases, in ascertaining the true purpose of the release for the purpose of determining its scope and content, quite – as may be an exception or a caveat to the normal objective theory of interpretation of a contract which we have had more discussion over in many decisions of this Court recently – that, according to the authority of this Court, which has not been challenged as far as we are aware, the actual intention of the releasor is a factor one has to take into account.

KEANE J: There are two things running here. One is that it is a principle of construction.

MR SULLIVAN: Yes, your Honour.

KEANE J: The second is that this is not a case of a defendant raising a claim, or a defendant seeking to defend by a general release a plaintiff’s claim for equitable relief.

MR SULLIVAN: With respect, it is. The defendant is seeking to defend the claim of the applicants for general relief by reliance upon the general - - -

KEANE J: But the claim is just a claim to recover money.

MR SULLIVAN: No. The claim is one for equitable compensation, your Honour, based on the first limb of Barnes v Addy so it was a purely equitable claim.

KEANE J: I see, I see. Then there is still the second problem which is that we are always talking about – we are inevitably talking about a question of construction. Here, as the Court of Appeal concluded, the words of clause 3.2(a) could not be clearer.

MR SULLIVAN: No. But, in our respectful submission, your Honour, those clear words have to be looked at and their clarity examined in the light of the equitable principles enshrined in Grant v John Grant and in the light of - including the fact that you have to take into account the proper actual intention of the releasor. Although, the court appeared to refer to John Grant and referred to the surrounding circumstances, it clearly – if it did take into account the intention, actual intention of the releaser, it took into account the intention of the wrongful trustee or the wrongdoing trustee which we say was an error.

What one has to take into account then is to divorce that knowledge from the releasor and say what would have been the actual intention of a trustee intending to act in accordance with its duty and its lawful obligations. The question one determines as a matter of construction, we say, is that equity puts it this way.

When you have a clause which provides for a release in certain circumstances in the future you would not construe that clause as providing for a release from a claim involving a claim for restoration by reason of a default in duty by the trustee to which the person against whom the claim is made is an accessory. As a matter of construction, whatever the words are of the clause, in our respectful submission, the way it would be construed, consistently with Grant v John Grant is in one of three ways.

First, as was put below, the release was only intended to be given by the trustee in its personal capacity as opposed to on behalf of the trust. Secondly, or alternatively, it was not to be, given that the payment in the future was not inevitably going to be in breach of trust – it could or could not have been paid out of trust assets but you would construe the release to not cover a claim for restoration of trust property arising from a wrongful future act of the trustee or, thirdly, as also was argued below, by confining the release to its subject matter being the Crossman proceedings which did not involve any claim for money whatsoever, rather than extending its ambit to include payments under what was called the contempt settlement deed.

We say that those are – it is just like the principle your Honours will be well familiar with that courts will construe provisions in a contract which may otherwise be clear so as to ensure someone does not profit by his or its own wrong, but you would not – what is called the prevention principle, as your Honours will be familiar with.

In our respectful submission, this is an equitable application of the same principle. The error of the court, with great respect, was not to approach the construction exercise in that way but to rely on the literal words without that overlay of equitable principle. In doing so, they have overlooked the fact of the attribution of knowledge principles and their limits in respect of the so-called fraud exception.

BELL J: All of this in a context in which the Court of Appeal saw the parties as having entered into the contempt settlement deed and the main settlement deed as part of the one transaction, as it were, and the significance in that context of the fact that the entry into the main settlement deed was not put as a breach of trust - - -

MR SULLIVAN: It was not put as a breach of trust but there was indeed a finding by the Court of Appeal that in entering into that document the trustee was not a pure – there is a clear position of conflict and that is in paragraph 145 of the judgment.

BELL J: But the point that is being made by the court at paragraph 145, as I understand it, is when one looks at the position in relation to the main settlement deed, not viewing it in isolation from the contempt settlement deed, it is not without significance that there was no challenge that the entry into the main settlement deed was in breach of trust and the court went on to make a finding that the main settlement deed – it found that the contention put on behalf of your client that it was of no benefit to the beneficiaries of the trust was not made good.

MR SULLIVAN: It certainly did, your Honour, but it did not in its reasoning nor could it have done properly in its reasoning suggest that the construction of the release of the main settlement deed was, or could be, informed by the fact that the main settlement deed had not been chosen to be the vehicle of an application for setting aside. The arguments we are putting now are based on a construction argument, not based on the setting aside.

We cannot reverse the forensic decision which was made about the not seeking to set aside the main settlement deed. Indeed, the Court of Appeal found that was fatal effectively to our prospects in doing that and, in our respectful submission, in so doing overlooked the fact – the obligation, in our respectful submission, to seek the need to still construe the release in the settlement deed in accordance with the equitable principles we have identified.

Once one does that the situation that has arrived, in our respectful submission, is this. The attribution of knowledge point arises in respect of each of the three bases upon which the Court of Appeal found its decision. It arises in respect of clause 3.2(a) where we started, your Honour, because on the authority of John Grant, actual intention is relevant. It arises on 3.2(b) because there is an express statement about what is in the knowledge of the parties and it arises on the so-called Baltarna consent point because the imputation of knowledge was directly relevant as to whether or not the beneficiary had given its informed consent which was put as an alternative ground for overturning us.

So we respectfully submit that it is quite clear that that point is of crucial significance on each of the three points and it is also quite clear, as put below, that the court – as we have said in our written submissions – decided the fraud exception on an extremely narrow basis. They decided it upon the basis that it was limited or confined to fraud per se.

There may be a debate as to whether they are talking about fraud at common law or fraud in equity, but it is certainly determinative on the basis of fraud, whereas we say that the exception is much broader than that, and we say that that is clear from a number of the Australian authorities at intermediate appellate level which we have referred your Honours to but, more particularly, it is informed by the very recent decision of the United Kingdom Supreme Court in the Bilta Case to which we have given your Honours a reference where it seems that quite plainly it extends to conduct short of fraud and, in particular, extends to a situation where – and

there was a claim in respect of knowing receipt within the first limb of Barnes v Addy.

BELL J: The other point that is made clear in the judgments in that case is the intensely factual nature of the inquiry, and that might be where you have some difficulties here.

MR SULLIVAN: In our respectful submission, not in this particular case. There is a clear finding of conflict by the trustee.

BELL J: Yes.

MR SULLIVAN: A clear finding that the payment was in breach and a clear finding not challenged that the accessory knew of it, and not challenged on appeal. In our respectful submission, they are all the factual findings your Honours need to have to determine whether that combination of facts would be sufficient to come within the concept of wrongdoing which would justify non-attribution, if you like, of knowledge by parties in the position of the defaulting trustee and the respondents.

So, in our respectful submission, although the underlying facts of this case are complex, your Honours, the facts relevant to these particular legal issues are not. Your Honours, subject to anything else you have to say, we otherwise rely on our written submissions.

BELL J: Yes, thank you, Mr Sullivan. Yes, Mr Bell.

MR BELL: Thank you, your Honours. The passage from Grant v John Grant relied on by my learned friend, Mr Sullivan, does not assist him. He uses it as a means, or an attempted means, of introducing intention into a consideration of clause 3.2(a), as your Honour Justice Bell pointed out, but that passage does not give him the assistance he says because when one looks at it – if your Honours go to the foot of 129 and over to 130, the focus is on the releasee not using:

the general words of a release as a means of escaping the fulfilment of obligations falling outside the true purpose of the transaction as ascertained from -

So the reference to actual intention is only a reference in the context of the ascertainment of the true purpose of the transaction. It is not to say one can introduce subjective or actual intention at large into the construction exercise. That would have been heterodox. That would have been contrary to the objective theory of contract which this Court has always recognised.

Mr Sullivan’s submission really is to the effect that, well, in equity one can have regard to the subjective intention when construing a contract – in this case, a release. That is not what this passage says. This passage says one may have regard to actual intention together with other matters in ascertaining the true purpose of the transaction. It does not say one may have regard to actual intention more generally in terms of the construction of the clause.

When one looks at what the true purpose of this transaction was, as the Court of Appeal said and as your Honour the presiding Judge said, the true purpose is reflected in the pellucidly clear and broad words used, words which were not only a release but there was an accompanying clause, as the Court of Appeal noted, of a covenant not to sue, which was allied, it is not there in clause 3.2 but it was, as is often the case, explicitly spelt out in another clause.

So the intention of the transaction is principally reflected in its words and nothing in the facts which my friend would seek to rely on will detract from that. Undoubtedly, the purpose of the party who actually got the benefit of this release because, as the Court of Appeal was astute to point out, there were benefits secured by this release, including, one, the vacation effect of a costs order that had been made in Mr Crossman’s favour; secondly, the saving of the incurring of future costs in circumstances where the underlying trust question about whether a beneficiary of a discretionary trust downstream had a sufficient interest was going to be a question to be raised in the original proceedings.

So with the greatest respect to my learned friend, he cannot just take that sole reference to actual intention, say that means intention is there at large, that means knowledge is relevant to 3.2(a). Now, that is one problem for his argument and one answer to his argument, but there are a number of other difficulties. Take the so-called Baltarna Trust consent point which the members of the Court of Appeal, Justice Ward and Justice Payne, both writing about - - -

BELL J: This was Justice Payne’s point which, I think, then Justice Ward agreed with.

MR BELL: Yes. There are two points. Not only did their Honours say consent was pleaded and raised by my clients, but you have concurrent findings, including by the trial judge, that the attribution – or the non-attribution of Mr Seller’s knowledge to Baltarna would only apply in limited circumstances, which were not this case.

But one also has the point raised by Justice Payne which, in addition to the attribution point – and if I can take your Honours to it – it is really paragraphs – application book 241, paragraphs 406, 407 and 409, where his Honour made the point that there was no answer raised on the pleadings at all in relation to Baltarna’s consent.

There was no attempt – just as there was no attempt to set aside the main proceedings deed - there was no attempt to respond to our plea that the sole beneficiary of the Baltarna Trust consented. There was no attempt to plead that that consent was somehow vitiated by Baltarna itself being in breach of its trust obligations to its beneficiaries. That issue was not either raised in the pleadings or explored. So that was - as his Honour Justice Payne pointed out and Justice Ward, I think, in turn agreed with that aspect of his Honour’s reasoning – another problem.

But the third difficulty for my friend is this – and really why it makes this case an unsuitable vehicle – that apart from the issues of the construction of the release and the Baltarna consent point, their Honours also held – or Justice Ward held with the other two members of the Court agreeing with her – that there were other grounds raised by my client which would have been upheld were it formally necessary to do so.

BELL J: The failure to make some adjustment.

MR BELL: The failure to recognise that any order for compensation should be conditional on equity being done in return. That was the first point. The second point was the delay point. Her Honour found there was undoubtedly delay and unexplained delay in the bringing of the proceedings. So this is in her Honour’s judgment from application book 232 and following. At 237, her Honour was focusing on the twin aspects of “unreasonable delay and prejudice”. One sees that at paragraph 386. Her finding as to delay is at paragraph 387:

In the present case, there was a long delay and there was no explanation for that delay.

Then, at 388, where her Honour dealt with the prejudice point:

However, I have difficulty in accepting that the New Trustees’ delay in bringing the proceedings did not leave the appellants in a position in which it was unjust or unreasonable to leave them. It was accepted by the primary judge that by the time the New Trustees did bring their claim for equitable compensation the chose in action that had been given up by Mr Crossman was no longer of any practical worth. Had substantial restitution been practicable, then I would have concluded that the defence of laches was not made out, since I agree that there was no acquiescence –

et cetera. But, over the page:

As it is, I have difficulty with the conclusion the primary judge reached.

That was because of the passage of time. Mr Crossman had given up the chose in action. He had given up the right to have new trustees appointed at the time of the settlement. He had given up the costs order – the companies were now insolvent. But the right to have new trustees appointed because, as the court pointed out, one of the main valuable assets of the trust, one of the five service stations was still owned at that time. It was subsequently sold. So, your Honours, this is not a propitious vehicle for the grant of special leave. If it please the Court.

BELL J: Mr Sullivan?

MR SULLIVAN: Very briefly, in response to those three. My learned friend has attempted to distinguish John Grant by saying that the passage only relates to “purpose” is, with respect, erroneous because the objective theory of contract informs us now that one has to take into account purpose as a means construing the contract. So it is part of the construction process and this Court is saying - - -

KEANE J: But that is the purpose objectively ascertained, the purpose of the transaction.

MR SULLIVAN: Yes.

KEANE J: The purpose of this transaction is, as Dr Bell said, pellucidly clear.

MR SULLIVAN: But, your Honour, if that is the case, then what is the content of the words in Grant v John Grant when it says you have to take into account the actual purpose of the actual trustee. It means in our respectful submission, in that particular context the court is carving out an exception. That is our submission in the matter and we say that is a matter - if we are wrong about that, in our respectful submission that is a matter the Court should look at as a matter of special leave importance itself.

The second matter my learned friend raised was that on the informed consent point, Baltarna was not a party. It did not have to be, your Honours. There did not have to be a plea against it. An informed consent of a beneficiary point is a defence raised to a breach of trust or fiduciary duty. The defence is raised by the respondent. The onus is upon the respondent to prove all the circumstances it knows about to show that its breach of trust can be exonerated by reason of fully informed consent. In

those circumstances it is for the defendant, the respondent, not us to raise the point as to why there should be an attribution of knowledge, not vice versa.

The third point my learned friend relies upon is that it is an inappropriate vehicle because there were other matters upon which Justice Ward indicated she would decide it, but the point of the matter is, your Honour, her Honour was talking specifically about the relief sought of rescission and your Honours will see that from paragraph 374 of the judgment. If we are correct in our submissions, the question of rescission is irrelevant because it is a question of construction with the document being on foot.

The second point is this, your Honours. In equity where you have a wrongdoing trustee and an accessory entering into a settlement of legal proceedings which extinguishes those proceedings in return for a sum of money being paid, in our respectful submission equity would not take into account the fact that the parties could not be restored to their previous positions because the lack of ability to restore them is the direct consequence of their own wrongful conduct. The giving up of the rights was part of the scheme by which the Barnes v Addy payment was made.

So, in our respectful submission, Justice Basten was right to decide not to answer the question on that basis. The special circumstances here would not justify such an approach. Thank you.

BELL J: In our view, there are insufficient prospects that an appeal to this Court would enjoy success. Special leave is refused with costs.

MR SULLIVAN: If the Court pleases.

BELL J: Would you adjourn the Court to 10.15 am on Tuesday, 2 May in Canberra.

AT 11.36 AM THE MATTER WAS CONCLUDED