Jones v Jones (No 2)[2014] QDC 169

DISTRICT COURT OF QUEENSLAND

1. [1]
   When reasons were earlier published, in this matter indicating a determination that judgment would be given for the plaintiff and at the request of the parties, allowance was made for the provision of further written submissions, as to the formal orders to be made as a consequence of those reasons for judgment and as to any incidental issues.

2. [2]
   As it has transpired and save as to consensus in respect of the plaintiff having the benefit of a customary order as to the costs of the proceeding, there are disputes as to what orders should now be made. That was perhaps unexpected and, it means that in the context of an express desire to save costs, these further issues are to be decided in this matter without the benefit of any oral hearing at which the matters in dispute might have been further elucidated or clarified.^[1]

Interest

3. [3]
   The most substantial dispute concerns the basis upon which interest is to be awarded.

4. [4]
   In the reasons for judgment earlier published in this matter and after specific reference to a passage taken from Herrod v Johnson^[2], which noted and discussed the breadth of the power recognised in equity for an award of compound interest, it was determined that there would be such an award, in this case.^[3] The essential reasons then given for that determination were:

“[36] The plaintiff sought the application of such principles and presented a calculation of an appropriate award of compound interest by application of the approach adopted in Thomas v SMP (International) Pty Ltd (No 6)^[4] and in reference to an uplift on the published Reserve Bank cash rates^[5] for the particular period and calculated on yearly rests.

[37] Whilst the award of interest, including the basis upon which the calculation is made, invokes an exercise of discretion, the defendant expressly took no issue with the calculation proposed by the plaintiff. However that claim, as made from 2002, was calculated to accommodate the prospect of the plaintiff succeeding in establishing an unconscionable transaction and that calculation was sought to be applied to a contention of misapplication of the $100,000 paid by the plaintiff to the defendant in September 2002 and in reliance upon the defendant’s benefit by utilisation of those funds for his own commercial benefit, on and from that time.

[38] The premise upon which the plaintiff has succeeded does not provide any substantially different basis for application of the appropriate principles and particularly the singular premise to be devised from the cases referred to, that the basis of the award is compensatory and particularly enlivened where a claimant has been denied the opportunity of the commercial advantages of an entitlement, or the person in breach of the fiduciary obligation has had the personal commercial advantage of that entitlement.

[39] Here the premise is that from 8 September 2008, the plaintiff was denied the benefit of the trust in respect of her life interest in the Sippy Downs property and notwithstanding the sale of this property soon thereafter, the defendant has retained the benefit of the plaintiff’s entitlement to his own advantage. Further and although the defendant sought to place emphasis on his letters of 6 June 2008 and 7 July 2008 and the extent to which offers were made in them to provide financial support to the plaintiff. However and quite apart from the difficulties in discerning any correlation to the value of the plaintiff’s entitlement, no benefit moved to the plaintiff and upon sale of the Sippy Downs property the defendant applied the entire proceeds in his own interest.

[40] In these circumstances it is appropriate for there to be an award of interest on a compound basis and to provide appropriate compensation for the plaintiff and this may, as was otherwise common ground between the parties, be achieved by application of the methodology proposed by the plaintiff to the period from 8 September 2008 to 11 July 2014.”^[6]

5. [5]
   However and as it transpires from the defendant’s written submission, it appears to have been a misunderstanding as to there being common ground as to the methodology, which is still proposed by the plaintiff, for the calculation of that award of interest. It is now inconsequential as to the basis of that misunderstanding and necessary to deal with the competing contentions that have been made.

6. [6]
   The plaintiff continues to assert the appropriateness of adopting the approach taken in Thomas v SMP (International) Pty Ltd (No 6)^[7], by the application of an uplift of 4% to the periodically applicable cash rate target or cash rate, as published by the Reserve Bank of Australia.^[8]

7. [7]
   For the defendant, it was pointed out that on appeal from the decision in Thomas, in Willett v Thomas^[9], the award of compound interest was ultimately not allowed. However that was only because the underlying basis for that award, being a breach of fiduciary duty that was found in the primary judgment, was set aside. Otherwise there is no specific determination, on appeal, as to the methodology that had been adopted in calculating the award of interest and no criticism of the reasoning in Thomas was necessary or expressed.

8. [8]
   However the defendant makes reference to the adoption in the judgment of Macfarlan JA in Willett^[10], of the expression “the chosen rate should reflect the reality of the market place” and the principle that there should “be no element of punishment in the award of interest”.^[11] On these premises it is then submitted that:

“There should be no arbitrary uplift of 4% to the base rate in this matter, as same would amount to punishment, and does not properly reflect the proper exercise of the discretion where no allowance has otherwise been made for benefits obtained by the plaintiff from the defendant during her occupation of 40 Bernheid Crescent.”

9. [9]
   In the first instance what was said by Macfarlan JA in Willett should be noted in context. After noting the methodology adopted by the primary judge and some extracts from his reasoning^[12], Macfarlan JA said:

“109. As to the rate of interest, his Honour adopted Kearney J's view in Hagan v Waterhouse (1991) 34 NSWLR 308 at 393 that in the case of misapplication of monies by a trustee or fiduciary, the chosen rate "should reflect the reality of the marketplace" (Interest Judgment [18]). As a result the primary judge decided to use the rates stated in the Practice Note.”

10. [10]
    It is also instructive to note the essential reasoning of Pembroke J in Thomas^[13]:

“15 Even when it is appropriate to award compound interest, a question arises as to the appropriate rate of interest. Historically, in cases involving breaches of trust and breaches of fiduciary duty, a distinction was drawn between the “trustee” rate and the higher “mercantile” rate. This is exemplified in the judgment of Street J (as he then was) in Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211. The history is traced by Kearney J in Hagan v Waterhouse (supra) at 391-2. In Jacobs’ Law of Trusts in Australia (supra), the authors maintain the distinction, stating that the mercantile rate is applicable where there has been fraud or serious misconduct by the trustee or fiduciary.

16 As there should be no element of punishment in the award of interest, I prefer not to base my decision on any distinction between an innocent breach and one resulting from fraud or serious misconduct. Whether the breach was innocent or not, the question is one of compensation. It is difficult to see why the amount of compensation should depend on the moral quality of the breach. In the passages of the judgments in each of the appellate decisions in Australia and England to which I have referred, the distinction was not mentioned in terms. What was mentioned was the appropriateness of compound interest in circumstances which include the misapplication of monies by a trustee or fiduciary. See Hungerfords (supra) at 148 (Mason CJ and Wilson J); La Pintada (supra) at 116 (Lord Brandon); Westdeutsche (supra) at 692 (Lord Goff); and Wallersteiner v Moir (No 2) (supra) at 388 (Lord Denning MR).

17 A misapplication of monies by a trustee or fiduciary may be inadvertent or dishonest. But in both cases, the breach may give rise to the same level of losses. As I have foreshadowed, the question whether “fraud or serious misconduct” should be a pre-requisite, either for an award of compound interest, or for the use of a “mercantile” rate, is to my mind problematic. However, I need not resolve the question in this case as Mr Willett’s breach of fiduciary duty amounted to serious misconduct.

18 A second issue arises concerning the appropriate rate of interest. Historically, courts adopted a fixed mean rate when awarding interest at the trustee rate or the mercantile rate. But this is not the modern practice. As Kearney J said in Hagan v Waterhouse (supra) at 393, the chosen rate “should reflect the reality of the marketplace as it exists under a regime not in contemplation” at the time of earlier pronouncements when there was greater monetary stability. He thought that the judicial attitude mentioned by Street J in Re Dawson (supra) should no longer continue to apply in today’s context of fluctuating interest rates. He relied particularly on the reasoning in Wallersteiner v Moir (No 2) (supra) where an ambulatory rate was adopted, possibly for the first time. That rate was 1% above the official bank rate from time to time, with yearly rests. Subsequently, in Morgan Equipment Co v Rodgers (1993) 32 NSWLR 467 at 487, Giles J endorsed the reasoning of Kearney J on this issue.

19 I propose to adopt the same approach. The use of a fixed mean rate, and indeed the very distinction between a trustee rate and a mercantile rate, has an antediluvian commercial quality to which I am not attracted. It seems difficult to justify the reasoning that must underpin the distinction. As I have said, the question is one of compensation not punishment. And the appropriate measure of compensation should not, I think, vary according to the nature and quality of the breach – no matter how well intentioned or inadvertent the trustee or fiduciary may have been.”

11. [11]
    Then and after noting what he described as “a commercial and flexible policy” that is reflected in the New South Wales Supreme Court Practice Note 16, which commenced on 1 July 2010, in adopting a rate specified at 4% above the cash rate last published by the Reserve Bank of Australia, Pembroke J explained his adoption of that rate of uplift on the cash rate as follows:

“23 Nonetheless, the formula utilised in the Practice Note provides valuable guidance to me in the exercise of my equitable discretion. The Reserve Bank of Australia cash rate is the interest rate paid by banks in the overnight money market in Australia. It is one of the tools by which the central bank regulates monetary policy. It is currently 4.75%. In 1990 it was 17.5%. In February 2000 it was 5.50%. In recent times it has been as low as 3%. These are all matters of public record and common knowledge. The standard variable rate is a base rate used by lenders. It is the rate to which loans revert after the application of any discounted introductory rate. Information about a lender’s standard variable rate is publicly available. The standard variable rate moves up or down depending on movements in the cash rate and may vary between lenders. But it is always higher than the cash rate. The margin above the cash rate is often approximately 2% but it may be greater. Business overdraft rates on the other hand are generally higher than the standard variable rate and personal overdraft rates are higher still. By contrast, term deposit rates are the rates offered by financial institutions on monies deposited with them. They vary substantially depending on the amount of the deposit and the length of the term, but at any particular point in time, they are less than lending rates.”

12. [12]
    His Honour then expressed his conclusion as follows:

“24 I have taken into account all of these considerations in arriving at my decision. I am satisfied that compound interest provides a just outcome in this case. I have had regard to the guidance provided by the Practice Note in determining the appropriate rates. Yearly rests are reasonable. The parties are agreed on the actual arithmetical calculations. A rate which is 4% above the cash rate is not so high that I should take steps to ameliorate its effect. I do not think that I should award only simple interest. My intention is to give to Mr Thomas and Mr Sullivan the most complete compensation that equitable principle permits.

25 Although in my principal judgment it was not necessary for me to make findings to this effect, Mr Willett was in the habit of saying to Mr Thomas and Mr Sullivan from time to time: “I will get you 10%”. Of course, the purpose of an award of compound interest is not to fulfil a plaintiff’s expectations. But Mr Willett’s statement illustrates the commercial context in which the monies of Mr Thomas and Mr Sullivan were misapplied. Monies invested in a business would ordinarily be expected to be returned on a compounding basis. I have given the benefit of all reasonable doubts to the plaintiffs and have adopted the approach explained by Lord Denning MR in Wallersteiner v Moir (No 2) (supra) at 388F-H. It is appropriate that the plaintiffs should have the return of their misapplied monies on a compounding basis with yearly rests at the rates recommended by the Practice Note. I regard this outcome as within an acceptable commercial range”

13. [13]
    Like the position under the New South Wales Supreme Court Practice Direction referred to, it can be noted that Practice Direction 6/13 of this Court,^[14] also adopts an uplift of 4% on the published cash rates but and unlike the New South Wales practice direction, the application is limited to pre-judgment awards of interest by a Registrar, pursuant to s 58 of the Civil Proceedings Act 2011 and when entering default judgment under UCPR 283^[15]. However that rate is to be applied in respect of the last such published cash rate before each half of a calendar year and on a simple interest calculation basis^[16]. Accordingly, the guidance provided to the exercise of discretion in the exercise of the equitable jurisdiction of this court, is more limited.

14. [14]
    In FCT v Interhealth Energies (No. 2)^[17], Logan J reviewed what he described as the “noteworthy” reasoning of Pembroke J in Thomas [15]-[23] “for its valuable discussion of principle and policy” and noted the essential requirement that an award of interest be compensatory rather than punitive^[18]. In that case and where the award was made in respect of an order for the payment of a capital sum on the basis of the breach of fiduciary duty and an enforceable undertaking given to the Federal Commissioner of Taxation, by a trustee of a superannuation fund, Logan J concluded:

“[22] Ensuring that Mr Wilson is not overcompensated is just as important as ensuring that he is not undercompensated. As a matter of impression and recollection, uncritically adding 4% to prevailing Reserve Bank cash rates in respect of an award of interest at a compound rate might have a tendency to overcompensate in terms of bank term deposit returns available from time to time over and above the prevailing Reserve Bank cash rate since September 2008. In the passage quoted above from Thomas Pembroke J alludes to bankers’ margins over this rate when seeking term deposits. Greater precision on this subject would require more detailed evidence than is to hand in this case. Adopting an interest rate of 7% in the circumstances of this case for the whole of the period discounts somewhat the 4% above cash rate approach and gives at least some recognition to a need not to overcompensate Mr Wilson.”

15. [15]
    Similarly to the position confronting Logan J, the evidence to hand in this case is not greatly more detailed than the reference made to the published cash rates, except that some banking records of the defendant are in evidence and the plaintiff relies on these as evidencing a measure of the advantage or profit to the defendant from his retention of the benefit of the plaintiff’s entitlement after 8 September 2008.

16. [16]
    Those records^[19] are in the form of bank statements for what is described as a “Come N Go A/c No 16-452023”, in the nature of an overdraft facility to a limit of $100,000, utilised by the defendant until it was closed on 31 October 2008^[20].

17. [17]
    Although these records were particularly presented with a view to support the plaintiff’s claims in respect of misapplication of the payment of $100,000 to the defendant in 2002, they are capable of providing some insight in respect of a relevant benefit derived by the defendant from his equitable fraud, in not honouring or recognising his undertaking or obligation in respect of his mother having a life interest in the Sippy Downs Property after 8 September 2008 and his consequent retention of that benefit without appropriate compensation to her. In these circumstances and where equity would recognise that a constructive trust in respect of that equity might arise, the defendant’s failure is in the nature of or indistinguishable from a breach of fiduciary duty.

18. [18]
    It can be noted that those statements record the following rates in respect of the balances overdrawn and commencing on each date:

17/07/08  9.80%

12/09/08  9.52%

20/10/08  8.72%

31/10/08  8.51%

Those rates represent uplifts on the most closely applicable cash rates ranging from 2.51% to 2.72%. that may be compared with the rates applicable to the earlier period evidenced by these records, where the uplifts varied from 1.97% to 2.37%. It may also be noted that a further rate was recorded in these records for any overlimit drawings, which consistently added a margin of an additional 3% to the applicable overdraft rate. However that higher rate is unlikely to be representative of the true cost of any additional financial accommodation that may have been availed by the defendant.

19. [19]
    Exhibit 34 is a copy of bank statements for another account number 14-452003 and styled “Darren Jones Building Account” for the period from 14 June 2002 to 31 March 2003. The $100,000.00 paid to the defendant by the plaintiff was deposited to this account on 10 September 2002, before it was dissipated by payments to the defendant’s ex-wife and otherwise for the benefit of the defendant.^[21] It may be noted that although this account was generally maintained in credit and the statement indicated a zero approved limit, it does also record an applicable debit interest rate of 12.77%.

20. [20]
    Although the defendant’s evidence as to how the proceeds of the sale of the Sippy Downs property were utilized was vague, he did explain that some of it was used to buy a unit for he and his daughter, at Alexandra Headland and which was subsequently sold in 2011^[22]. He did however agree that the settlement occurred on 31 October 2008^[23] and his initial response to the cross-examiner was to question whether there “was the payout [of] $100,000 or something like that on the loan”^[24]. The bank statements in Exhibit 35 evidence that on 31 October 2008 an amount of $99,756.44 was credited to this account as an “account closing settlement” and therefore to clear the overdraft and outstanding interest. At that point, the overdraft rate was 8.51%, which was 2.51% above the relevant cash rate.

21. [21]
    Accordingly and whilst it is not precisely clear as to the financial advantage obtained by the defendant to the expense of the plaintiff, this evidence provides the best indication. The applicable principles in recognition of compensating the plaintiff on the basis of ensuring that the defendant does not retain a profit from his equitable fraud, rather than as any form of punishment of the defendant, are summarised in some detail in Herrod v Johnston^[25]. It may otherwise be noted that there is nothing to suggest that any rate of return that may have been achieved by the plaintiff, if she had earlier access to the capital sum, would have been any greater than the rate applied to the defendant’s overdraft.

22. [22]
    Whilst I note that the approach in FCT v Interhealth Pty Ltd (No 2) was to adopt yearly rests at a single rate of 7%, in order to avoid any tendency to overcompensate by “uncritically adding 4% to prevailing Reserve Bank cash rates” for a period from September 2008 to February 2012, in the present circumstances and where the prevailing cash rates declined (with some variation) from 7% on 3 September 2008 to 2.5% from and after 7 August 2013, I incline to the view that it is preferable to adopt an appropriate margin to add to those prevailing cash rates and in that regard I will allow 2.5%.

23. [23]
    There is no need to make any further allowance for any benefits that may have accrued to the plaintiff in connection with her residence in the Sippy Downs Property from 2002 to 2008. Not only is that situation complicated by the benefits provided to the defendant in terms of the care and accommodation of his daughter but it is unnecessary because the equitable compensation is awarded to the plaintiff as an assessment of the value of the life interest she was denied as and from 8 September 2008 and therefore at a time when she no longer had any such incidental benefit.

24. [24]
    Accordingly there will be an award of $70,337.46, calculated as set out in the attached Schedule, which adopts the methodology of yearly rests and an averaged annual rate of interest, having regard to the prevailing cash rates plus 2.5% and which methodology was not in dispute between the parties. However and for the sake of simplicity and appropriateness, I have taken the yearly rests as at 8 September in each calendar year, except that for the final period to the date of the making of the orders effecting the judgment for the plaintiff, there is a pro-rata calculation.

Formal Orders

25. [25]
    As to the dispute otherwise between the parties as to the formal orders necessary to effect the published reasons for judgment, the more appropriate approach is that of the defendant, in that it is only necessary to make the orders necessary to grant relief to the plaintiff.

26. [26]
    The plaintiff has contended that in addition to an order effecting the relief granted to the plaintiff in the nature of equitable compensation, there should also be orders that:

“2. The Court declares that from 10 September 2002 the defendant held a life interest in a property of which he was the registered owner located at 40 Bernheid Crescent, Sippy Downs in the State of Queensland more particularly described as Lot 45, Survey Plan 118151, County of Canning, Parish of Mooloolah (“the Sippy Downs property”) on constructive trust for the plaintiff;

3. The Court also declares that on 8 July 2008, the defendant in breach of that constructive trust dealt with the Sippy Downs property in a manner inconsistent with the continued existence of the plaintiff’s beneficial life interest therein.”

27. [27]
    However such declarations are not necessary in order to underpin any further order granting relief to the plaintiff and as noted in the earlier published reasons, declarations in respect of any constructive trust in the Sippy Downs property would no longer provide any sufficient or valuable relief for the plaintiff, because of the sale of that property in 2008. Accordingly the relief by way of equitable compensation is made on the reasoning which has been earlier set out and as an alternative to and in lieu of making any such declaration.

Orders

28. [28]
    The orders are that:

1. There be judgment for the plaintiff.

2. The defendant pay the plaintiff equitable compensation being:-

1. (a)
   $164,595.00 for loss of a beneficial life interest in the defendant’s property situated at 40 Bernheid Crescent, Sippy Downs in the State of Queensland more particularly described as Lot 45, Survey Plan 118151, County of Canning, Parish of Mooloolah, on 8 September 2008; and

2. (b)
   $70,337.46 by way of compound interest on that loss calculated on yearly rests at the RBA cash target rate plus 2.5%;

being a total of $234,932.46.

3. The defendant pay the plaintiff’s costs of and incidental to this proceeding, including any reserved costs on the standard basis.