Menkens v Wintour[2009] QSC 206

SUPREME COURT OF QUEENSLAND

1. This is a dispute between three men who together carried on a business as financial planners. They did so from September 2001 to October 2005 through the structure of a unit trust.  Throughout that period, each held 10 of the 30 units in the trust and each was a trustee. 

2. On 25 October 2005 the applicants, who are father and son, parted company with the first respondent. Since then the first respondent has conducted his own financial planning business. Many of his clients from the business conducted with the applicants became his clients. The applicants claim that this was through conduct of the first respondent which was in breach of his fiduciary duties as a trustee and involved the wrongful use of confidential information, such as the names, contact details, financial positions and other circumstances of those clients. 

3. The applicants claim an injunction to restrain the first respondent and the second respondent, which is a company through which he conducts his business, from providing services to these clients or soliciting their custom. And they seek an account of profits from the respondents or alternatively “equitable compensation or damages”.

4. These claims are resisted upon the bases that the first respondent did not owe a fiduciary duty as alleged by the applicants, and if he did it was not breached, he did not misuse confidential information, he has not made profits as a result of the matters complained of and the applicants suffered no loss for which they should be compensated, at least to the extent they have claimed.

5. The relationship between the three unitholders was the subject of a written agreement between them entitled the “Unitholders Deed”. The applicants claim that by that deed the first applicant, Mr Menkens Snr, was entitled to remove the first respondent as a trustee and that they were thereby entitled to an option to purchase his units.  On or about 25 October 2005 they purported to exercise that option, by a notice which specified the price to be paid for the units as, in total, one dollar.  The first respondent says that a notice was not served as required by the Deed, so that he remains entitled to the units and to an account of the earnings of the trust since his departure in 2005.  There is also a dispute as to the price to be paid for his units, if the option was duly exercised. 

6. This judgment concerns certain questions which the parties agreed should be determined in advance of the balance of the case. Two of them involve matters pleaded in defence of the claim for breach of fiduciary duty and for an account of profits or equitable compensation for that breach. The applicants say that those matters are irrelevant and the relevant parts of the Defence should be struck out. The other questions concern the effect or otherwise of the notice by which the applicants purported to exercise the option to purchase the first respondent’s units.

The first question

7. Paragraph 9 of the Statement of Claim pleads that the first respondent owed a fiduciary duty as follows:

“9.As a trustee of the Trust the First Respondent was in a fiduciary relationship with the Applicants and owed a fiduciary duty to the Applicants both as trustees of the Trust and in their capacities as unit holders of the Trust:

(a)Not to place himself in circumstances where a conflict or significant possibility of conflict exists between his fiduciary duty and his personal interests.

(b)Not to use or take advantage of his fiduciary position or an opportunity arising from the fiduciary position or knowledge resulting from the fiduciary position to obtain or receive a benefit or gain (Fiduciary Duty).”

8. The first respondent pleads to that in para 10 of his Defence which, in part, is as follows:

“10.As to paragraph 9 of the Statement of Claim, the First Respondent:

(a)admits that he was in a fiduciary relationship with the Applicants, but denies the scope of the duty as alleged on the grounds that:

(i)in substance, as pleaded at paragraphs 4(b) and 8(aa), the First Respondent’s role in the business was that of an employee whose position could be, and was, summarily terminated without notice;

(ii)the First Respondent, prior to his dismissal as trustee, did not receive any distribution of the profits of the business conducted by the Menkens and Associates Unit Trust;

(iii)the First Respondent was only ever remunerated in his capacity as employee of the Menkens Menkens and Wintour Service Company Pty Ltd as follows:

• Year ended 30 June 2002 - $28,128.96;
• Year ended 30 June 2003 - $48,637.00;
• Year ended 30 June 2004 - $41,831.00;
• Year ended 30 June 2005 - $47,007.00;
• Year ended 30 June 2006 - $19,078.85 (to 24 November 2005).”

9. The applicants argue that the matters pleaded in subparagraphs to (a)(ii) and (iii) cannot be relevant and should be struck out. They argue, in effect, that a trustee is a trustee, and his remuneration or otherwise is irrelevant to the nature and scope of his duty. They point out that many trustees act gratuitously and a trustee may receive remuneration only if that is provided for by the trust instrument, a statute or an order of the Court.^[1] 

10. The first respondent says that these two subparagraphs must be read in the context of subparagraph 10(a)(i) and the matters pleaded by him at paragraphs 4(b) and 8(aa) of his Defence. At paragraph 4(b) he pleads that:

“…in substance, the business…was conducted, and/or was intended to be conducted as a quasi-partnership, or under the direction and control of the First Applicant, and that the First Respondent’s position and any fiduciary obligation owed by the First Respondent was in substance that of a salaried employee or salaried partner only, during the term of the Preferential Draw Period as defined in the Unitholders Deed…”

Paragraph 8(aa) effectively repeats that plea.  The basis for this plea is said to be in the terms of the Unitholders Deed by which Mr Menkens Snr was given substantial control of the trust and its business during the so called Preferential Draw Period.  That was defined in the deed to be the period of time over which Mr Menkens Snr was entitled to receive the Preferential Draw, which was defined as “the annual drawings to which [he] shall be entitled to receive for the Preferential Draw Period”.  According to cl 4.6 of the deed, “the exact terms and conditions [of that entitlement] were to be mutually agreed between the parties”, but the annual Preferential Draw was to be not less than $386,000.  Apparently the intention was that Mr Menkens Snr should receive more than his one-third share of the income of the trust until he had been compensated for the value of the goodwill which he had brought to the business at the time when it began to be conducted through the trust.  His precise entitlement in that respect is not to be determined in this judgment.  For present purposes, the parties agree that at least until the first respondent’s departure, the trust was operating in the Preferential Draw Period.  By cl 5.1 of the Deed, it was provided that during that period Mr Menkens Snr would have the right of veto on any decision made by the trustees or the unitholders and that, in effect, his vote would constitute any required majority or special majority of trustees or unitholders.

11. Clause 2 of the Deed provided as follows:

“2.TRUSTEES

2.1Each Trustee shall occupy that position until vacated in accordance with this Deed.

2.2The office shall be vacated on death, permanent disability, a Related Unitholder ceasing to hold units in the Trust, resignation or dismissal under this clause.

2.3In order to resign, a Trustee must give six (6) months written notice to the other Trustees.

2.4A Trustee can be dismissed by:

2.4.1A Special Majority Vote; or

2.4.2A Majority Vote if incapacitated for more than twelve (12) months in any period of twenty-four (24) months.

2.5Notwithstanding the provisions of Clause 2.4 the Parties record and agree that for the whole of the Preferential Draw Period, LIGM [Mr Menkens Snr] shall have the absolute and sole discretion to appoint and remove any and all of the Trustees for any reason whatever and that the absolute voting powers of LIGM as recorded in Clause 5.1 shall similarly apply to this clause.”

12. The first respondent’s case is that although in form he was a trustee, in substance the trust was administered solely by Mr Menkens Snr and to the extent that the first respondent owed a duty of good faith to act in the interest of the business, his duty was no higher than that of an employee. That is the effect of his plea in subparagraph 10(a)(i). Read in context, the pleas in subparagraphs 10(a)(ii) and (iii) are part of that case. They are pleaded as indicia of what he says was the true legal relationship between the parties.

13. There is no present challenge to paragraphs 4(b), 8(aa) or 10(a)(i) of the Defence. The paragraphs which are challenged are simply part of that case. I decline to strike them out.

The second question

14. Paragraph 26 of the Statement of Claim pleads as follows:

“As a consequence of the use by the First Respondent of the Information or Knowledge, a number of the Clients of Menkens & Associates have transferred their business from Menkens & Associates to the Stantium Business [the second respondent’s business] and have elected to appoint the First Respondent as their Authorised Representative (Transfer Clients).”

15. Paragraph 26 of the Defence pleads in response:

“26.As to paragraph 26 of the Statement of claim the Respondents:

a.say that some of Charter’s clients that the First Respondent serviced prior to his termination on 24 October 2005 have, pursuant to clause 4.2 of Annexure A of the Corporate Agreement, requested in writing to transfer their business to the Respondents;

b.for the reasons alleged herein, deny that the said transfer was as a consequence of the use by the First Respondent of the information or knowledge as pleaded;

c.say further that Peter Wintour is the brother of the First Respondent, Evelyn O'Sullivan is the mother-in-law of the First Respondent and Elizabeth Xvereb and Cameron Barry are ex-work colleagues and close personal friends of the First Respondent;

d.say further the particularised clients made an independent decision to follow the First Respondent.

e.say further that, in any event, a number of the Transfer clients would have:

(i)transferred their business from Menkens and Associates to the Stantium Business; or

(ii)transferred their business from Menkens and Associates to other financial advisors; or

(iii)ceased obtaining financial advice.”

By their particulars, the respondents have now confined their case in subparagraph (e) to that in (e)(i), i.e. to an allegation that a number of the clients who left the applicants’ business and went to the respondents’ business would have done so in any event.

16. Paragraph 32 of the Statement of Claim pleads that the revenue of the unit trust is generated by remuneration for financial services provided to clients. Paragraph 33 pleads that the trust has suffered loss or damage by reason of the first respondent’s breach of his fiduciary duty, his breach of his obligation of confidence or the second respondent’s unauthorised use of confidential information.  It pleads a loss of trading profits and a capital loss in the nature of “the value of the fee base derived from the Transfer Clients”.  That last component is calculated by capitalising an amount of annual revenue. 

17. Before going to what is pleaded in response to that, it is necessary to say something about Charter Financial Planning Limited (“Charter”). That was an independent entity which held the requisite licence for the provision of financial services. The business of Menkens & Associates was carried out under the umbrella of that licence and each of the applicants and the first respondent had an agreement with Charter to act as its representative. Strictly speaking then, the clients were clients of Charter. However, this is not presently material. In substance the applicants’ case is that they were effectively clients of the business conducted by the unit trust, and the clients dealt with them directly rather than through Charter.

18. In response to paragraph 33 of the Statement of Claim, the respondents plead as follows:

“31.As to paragraph 33 of the Statement of Claim the Respondents deny the trust has suffered loss and damage as alleged or at all on the grounds that:

bthe transfer of Charter’s clients to the First Respondent was done with the fully informed assent of Charter;

cthe First Respondent had built up a close relationship with the Charter clients that have transferred to him;

dby its letter dated 27 October 2005, the Applicants had taken steps to inform Charter’s clients of the First Respondent’s departure and attempted to retain those clients;

ein any event, a number of the Transfer Clients would have:

(iv)transferred their business from Menkens and Associates to the Stantium Business; or

(v)transferred their business from Menkens and Associates to other financial advisors; or

(vi)ceased obtaining financial advice.”

Again the particulars now effectively confine the case to that in e(iv).

19. The applicants argue that paragraphs 26(e) and 31(e) amount to a case that the applicants would not have been able to make some or all of the profit derived by the respondents from these clients. They say that this could not be relevant to a claim for an account of profits or for equitable compensation. As to an account, they rely on the statement in Warman International Ltd v Dwyer that:

“it is ordinarily immaterial to the fiduciary’s liability to account that the person to whom the fiduciary obligation is owed could not have earned the profit or gain.”^[2]

20. However, the argument does not accurately summarise the respondents’ case. They have not pleaded that the applicants were incapable of profiting from the patronage of these clients. What is pleaded is that “in any event”, i.e. regardless of any wrongdoing, a number of them would have gone to the respondents’ business.

21. The issue here is whether that could be relevant to the claim for an account of profits. In Warman International Ltd v Dwyer, the High Court emphasised that an equitable remedy “must be fashioned to fit the nature of the case and the particular facts”^[3], and said:

“The outcome in cases of this kind will depend upon a number of factors.  They include the nature of the property, the relevant powers and obligations of the fiduciary and the relationship between the profit made and the powers and obligations of the fiduciary.  Thus, according to the rule in Keech v Sandford, a trustee of a tenancy who obtains for himself the renewal of a lease holds the new lease as a constructive trustee, even though the landlord is unwilling to grant it to the trust.  But the rule ‘depends partly on the nature of leasehold property’ and partly on the position which the trustee occupies.  A similar approach will be adopted in a case in which a fiduciary acquires for himself a specific asset which falls within the scope and ambit of his fiduciary responsibilities, even if the asset is acquired by means of the skill and expertise of the fiduciary and would not otherwise have been available to the person to whom the fiduciary duty is owed. 

But a distinction should be drawn between cases in which a specific asset is acquired and cases in which a business is acquired and operated. … The distinction is … relevant in the context of the fiduciary’s liability to account for profits …

In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal’s goodwill over an indefinite period of time.  In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances.  That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal’s property has been exposed.  Then it may be said that the relevant proportion of the increased profits is not the produce or consequence of the plaintiff’s property but the product of the fiduciary’s skill, efforts, property and resources.  This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful party to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.”^[4]

22. The present case does not involve the use of a specific asset but allegedly the acquisition of the goodwill of a business. The respondents’ point appears to be that if the clients went to them because of a breach of duty, the profits which they have earned since should not be paid in full to the applicants, because over time some of those clients would have gone to their business absent any of the conduct of which the applicants complain. In Warman International, the Court took into account the fact that the plaintiff’s agency business was under a contract which was terminable by the principal on three months’ notice, so that the plaintiff’s goodwill which was wrongly taken by the defendants had a value which was limited by that circumstance and there was commensurately a limit on the profits for which the defendants should account.  The Court said:

“In determining the proper basis for an account of profits, it is of first importance in this, as in other cases, to ascertain precisely what it was that was acquired in consequence of the fiduciary’s breach of duty.  And, in some situations, it may also be relevant to ascertain what was lost by the plaintiff.  The starting point in the present case is that Warman’s Bonfiglioli agency business rested on the contract by which Bonfiglioli appointed Warman its exclusive Australian distributor. … The contract was terminable by Bonfiglioli on three months’ notice to Warman …

[I]n light of the fact that the contract was terminable on three months’ notice and that Bonfiglioli was dissatisfied with the Australian arrangements and wished to engage in local assembly, it is reasonable to conclude that, in all likelihood, the Warman distributorship would not have endured for much longer in any event.  That seems to have been the view of the trial judge from the findings he made.  No doubt Dwyer’s disloyal machinations played a part in Bonfiglioli’s disenchantment with Warman.  At the same time, it seems fairly clear that the relationship between Warman and Bonfiglioli was not mutually enthusiastic and that the association was destined to end.”^[5]

23. The Court thought it relevant to assess the likely life of the distributorship which had been appropriated by the defendants in assessing the value of what was lost by the plaintiffs and, in turn, the value of what was obtained by the defendants, and what should be ordered by an account of profits.^[6]  The Court concluded that the appropriate order for an account was one which was restricted to the profits of the defendant’s business for a limited initial period of trading and that the question was what was the appropriate duration of that period.  As to that, the Court said:

“The starting point must be the finding that, were it not for Dwyer’s breach of fiduciary duty, Warman’s Bonfiglioli distributorship would probably have continued for, but only for, a further period of one year.  Clearly, any order against [the defendant] for an account of profits must encompass an account on an appropriate basis for any profits earned by it from the exploitation of the Bonfiglioli agency during that period.”^[7]

After allowing for other advantages to the defendants in consequence of the breach of duty, the court allowed an account of profits for a period of two years.

24. Accordingly, there is a proper basis for considering the prospect that at least some of these clients, in any event, would have taken their business to the respondents at some stage. On a full examination of the facts, it might appear that after a certain amount of time had passed from October 2005, the profits being derived by the respondents through these clients could not be said to be the fruits of any breach of duty (if they ever were). Counsel for the applicants was critical of these paragraphs because they do not specify the time by when these clients would have transferred their business. However, that is a complaint, if valid, about a lack of particulars. The result is that the matters pleaded in paragraphs 26(e) and 31(e) of the Defence are not irrelevant to the claim for an account of profits.

25. The applicants argue that they are irrelevant to the alternative claim for equitable compensation.  It is said that according to the decision of the majority of the Court of Appeal in Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari,^[8] it is no answer to a claim of this kind that the fiduciary could and would have obtained the business of clients without acting in breach of his fiduciary duty.  The same result is said to follow from the decision of the Privy Council in Brickenden v London Loan & Savings Co,^[9] where Lord Thankerton said:

“When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his a constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent’s action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged.  Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant.”^[10]

I will return to those cases.  But first I will first refer to cases which directly support what is pleaded by the respondents. 

26. The relevant authorities were recently discussed by Muir JA in Mantonella Pty Ltd v Thompson,^[11] with whose judgment McMurdo P and Fryberg J substantially agreed.  Muir JA apparently accepted, as the Court of Appeal in New South Wales had in O'Halloran v RT Thomas & Family Pty Ltd^[12] and again in Beach Petroleum NL v Kennedy & Ors,^[13] that the law in Australia corresponds with what was said by Lord Browne-Wilkinson in Target Holdings Ltd v Redferns,^[14] namely:

“Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests:  to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common-sense, can be seen to have been caused by the breach.”

In O'Halloran,^[15] Spigelman CJ, with whom Priestley and Meagher JJA agreed, approved this passage from the same speech:

“If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed. … Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred. … Thus the common law rules of remoteness of damage and causation do not apply.  However, there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable viz. the fact that the loss would not have occurred but for the breach.”^[16]

27. In Mantonella, a solicitor was found to have acted in breach of fiduciary duty by failing to obtain the informed consent of the plaintiff to act also for the other side in the transaction.  But because that probably had had no effect on the client’s decision to proceed with the transaction (for which he had already signed a contract), Muir JA said that there was no loss “which, using hindsight and commonsense [could] be said to have been caused by the breach”.^[17] 

28. In AMP Services Ltd v Manning,^[18] the plaintiffs sought equitable compensation for breaches of fiduciary duty in circumstances, like the present, where the defendant had left their business to go to a competing business to which many clients followed.  Having held that the defendants had breached their duty, Finkelstein J said:

“[64][…] The critical question to determine is in what position would [the plaintiff] have been had [the defendant] not breached her equitable obligation – that is to say, what actual loss was suffered by [the plaintiff] due to the breach?

[65] [The plaintiff] argues (or its argument assumes) that, absent the breach of duty by Ms Manning, it would have retained its clients or could at least have taken steps to convince them to say [sic]. Hence it claims that it is entitled to the full ‘value’ of each lost client.

[66]To accept [the plaintiff’s] argument is to accept the notion that a fiduciary breach effectively ‘stops the clock’ at the time of breach for the purpose of determining what actual loss was suffered by a party and what the party’s ultimate ‘position’ would have been. This line of reasoning was rejected by the House of Lords in Target Holdings Ltd v Redferns (a firm) [1996] 1 AC 421. There, Lord Browne-Wilkinson said (at 439):

‘Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.’

See also Re Dawson [1966] 2 NSWR 211; Canson Enterprises Ltd v Boughton & Co. (1991) 85 DLR (4th) 129; O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262; Southern Real Estate Pty Ltd v Dellow & Arnold (2003) 87 SASR 1. The cases make clear that the court must take advantage of the ‘full benefit of hindsight’ to ensure that ‘the losses made good are only those which, on a common sense view of causation, were caused by the breach’: Canson Enterprises Ltd v Boughton & Co. (1991) 85 DLR (4th) 129, 163.

[67]Here common sense requires me to take note of the fact that each client lost to [the plaintiff] made an independent decision to follow Ms Manning. This was inevitable given the close relationship between Ms Manning and her clients. Indeed, had Ms Manning waited out the notice period before speaking with her clients, I am sure that most would have followed her just as they had followed her from PwC.”

29. To the same effect is the well accepted statement of Street J in Re Dawson (deceased):

“Caffrey v Darby, supra, is consistent with the proposition that if a breach has been committed then the trustee is liable to place the trust estate in the same position as it would have been in if no breach had been committed.  Considerations of causation, foreseeability and remoteness do not readily enter into the matter …

The principles embodied in this approach do not appear to involve any inquiry as to whether the loss was caused by or flowed from the breach.  Rather the inquiry in each case would appear to be whether the loss would have happened if there had been no breach.”^[19]

It may be that the acceptance in this country of the law as stated in Target Holdings results in a more flexible approach to the question of causation than some have attributed to Street J’s judgment.  Nevertheless it remains the position that whilst equitable compensation is not to be assessed according to principles for the recovery of damages at common law, it is necessary to inquire whether the loss would have happened but for the breach.  This appears to make these pleas, that regardless of any breach the clients’ business would have been lost to the applicants, relevant to the claim for equitable compensation.

30. I return then to Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari.  The appellants, who were the defendants, were directors of the respondent company when they caused what was described as its rent roll business to be transferred for no consideration to a company controlled by them.  The respondent claimed equitable compensation and at the trial obtained a judgment for $115,000.  The trial judge assessed compensation in this way.  He found that the plaintiff could have sold the rent roll for $150,000, had there been terms restraining the vendor from competing with the purchaser and providing for a reduction of the price in the event that landlords withdrew their custom within certain times.  He then discounted that figure by 30 per cent to allow for the fact that at the relevant date, the circumstances might not have permitted a sale with all of those terms.  The appellants argued that the discount of 30 per cent was too low.  The plaintiff cross-appealed, arguing that there should have been no discount.  By a majority (Thomas JA and Shepherdson J, Pincus JA dissenting) the appeal was dismissed and the cross-appeal allowed. 

31. The principal judgment was written by Thomas JA. He rejected the argument that little or no compensation should be awarded because the directors could have simply left the former company and set up a competing business without restraint so that the plaintiff was in no worse position than if the defendants had not breached their duties. Thomas JA doubted that the defendants could have so acted, saying that:

“Suffice to say that in the context of the envisaged hypothetical sale his Honour did not err against the appellants in acting on the assumption that the directors could have been restrained from competing in the market which the purchaser entered by reason of its use of the rent roll.”^[20]

On the cross-appeal, Thomas JA concluded that:

“…damages should be assessed on the basis of value to the misappropriating fiduciary rather than value according to an artificial hypothetical exercise as if there had been a sale on the open market with directors behaving in a manner calculated to render the asset valueless.”^[21]

Because the value to the defendants was $150,000, Thomas JA held that that ought to have been the sum awarded.  His Honour then referred to Warman International Ltd v Dwyer, saying that he had given consideration to the question of whether the awarding of equitable compensation on the basis of the value to the asset in the hands of the wrong-doer “would transform the liability of the fiduciary into a vehicle for the unjust enrichment of the plaintiff”.^[22]  But he distinguished the case from Warman International, by Ferrari Investment being a claim for equitable compensation and by the case having been conducted on the footing that what was misappropriated was a specific asset, the so called rent roll, rather than a business. 

32. In Ferrari Investment there was no reference to Target Holdings Ltd or O'Halloran.  Ferrari Investment was decided before Beach Petroleum NL v Kennedy but was not cited in that judgment.  Nor was it cited in the recent decision of Mantonella Pty Ltd v Thompson.  The apparent explanation is that in Ferrari Investment, it was not in question that the “transfer or gift of the rent roll” to the new company was in breach of the fiduciary duties owed to the old company, and that this had caused it the loss of what was conceded to be a specific asset.  Consistently with those other cases, there could have been no question that the loss of that asset would not have happened if there had not been that breach.  The question in Ferrari Investments was how the value of that asset was to be assessed.  Ferrari Investment is not inconsistent with the cases I have discussed and it does not support the applicants’ argument.

33. There remains the argument based upon Brickenden v London Loan & Savings Co.  The case was analysed by the court in Beach Petroleum NL v Kennedy, where it was concluded that it was not authority for the general proposition that, in no case involving breach of fiduciary duty, may a court consider what would have happened if the duty had been performed.  It was held that the reasoning in Brickenden must now be understood in the light of Target Holdings and the cases which have applied it.^[23]  The Court in Beach Petroleum discussed the context of the facts and arguments in which Lord Thankerton’s statement, set out above at [25] was made.  The defendant in Brickenden was a solicitor acting in a proposed mortgage for both the mortgagor and the mortgagee, in circumstances in which he had a personal interest in the transaction going ahead because it would result in the discharge of existing mortgages, under which the solicitor was owed monies, but which he had not disclosed to the new lender.  He argued that there had been a breach of duty by the directors of the new lender which had also played a role in the transaction.  The submission appears to have been that disclosure to the lender would have made no difference, because the lender was under the control of directors, who by breaching their duty, would have caused the transaction to go ahead despite that disclosure.  It was in that context that the Privy Council upheld the judgment of the Supreme Court of Canada, where it was said that the defendant could not “invoke the connivance or dereliction of others as an excuse for his own breach of duty”.^[24]  And it was in that context that Lord Thankerton said that:

“Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant.”

I would respectfully adopt the analysis of the Court of Appeal in Beach Petroleum.  And the recent judgment of the Court of Appeal in this State in Mantonella Pty Ltd, confirms that Brickenden is not authority for the general proposition which is advanced by the applicants here.

34. The outcome is that paragraphs 26(e) and 31(e) of the Defence are relevant, or at least potentially relevant, and they will not be struck out.

The third question

35. I have set out above^[25] cl 2.5 of the Unitholders Deed by which Mr Menkens Snr had the absolute and sole discretion to appoint and remove any trustee for any reason.  The respondents accept that Mr Menkens validly exercised this power in removing the first respondent as a trustee and that this engaged cl 8.14 of the Unit Trust Deed which provided as follows:

“8.14When an individual Trustee ceases to be a Trustee by virtue of dismissal under this Deed or because of the death of a Trustee or when a Director of the Trustee ceases to be a Director in those circumstances:

8.14.1The Related Unitholder of that Trustee is, in this Clause 8.14, called the Seller.

8.14.2The Unitholders, other than the Seller, shall have the option, to be exercised by written notice to the Seller within 2 months of the vacation of the office, in the proportions of their respective Unitholdings, to purchase the Sale Interests (“the Call Option”).

8.14.3The Seller shall have the option, to be exercised by written notice to the other Unitholders within that 2 month period, to cause the other Unitholders, in the proportions of their respective Unitholdings, to purchase the Sale Interests (“the Put Option”).

8.14.4The price of the units comprising the Sale Interests shall be calculated on the basis set out in the previous subclause.

8.14.5Settlement shall take place at the expiration of 30 days following that 2 month period and the purchase price shall be paid at settlement.”

The applicants thereby had an option to purchase the “Sale Interests”, which were effectively defined within cl 8.2 to be, in this case, the First Respondent’s units.

36. The option had to be exercised by written notice to the first respondent “within 2 months of the vacation of office”.  The applicants gave or purported to give notice on 25 October 2005, by a letter of that date from their solicitors to the solicitors for the first respondent.  He admits that the letter was received by his solicitors on or about that date, but he denies that it was a valid exercise of the option for two reasons.  The first is that it was not personally served upon him, which he says was required by the Unitholders Deed.  The second is that the notice specified a price of one dollar for all of his units, which he says was not calculated according to the deed.

37. As to the service point, the first respondent concedes that the notice given to his solicitors was passed on to him without delay. But he relies upon cl 21.1 of the Unitholders Deed which provides:

“21.1The provisions of Section 257 of the Property Law Act 1974 shall apply to any notice or demand authorised or required to be given by any party to any other under this Deed.”

38. The parties agree that the reference to s 257 should be read as s 347 of that Act, it being in the same terms as the previous s 257.  Section 347 provides, in part, as follows:

“347Services of notices

(1)A notice required or authorised by this Act to be served on any person or any notice served on any person under any instrument or agreement that relates to property may be served on that person –

(a)by delivering the notice to the person personally; or

(b)by leaving it for the person at the person’s usual or last known place of abode, or, if the person is in business as a principal, at the person’s usual or last known place of business; or

(c)by posting it to the person by registered mail as a letter addressed to the person at the person’s usual or last known place of abode, or, if the person is in business as a principal, at the person’s usual or last known place of business; or

(d)in the case of a corporation by leaving it or by posting it as a letter addressed in either case to the corporation at its registered office or principal place of business in the State.

…

(4)Despite anything in subsections (1) to (3), the court may in any case make an order directing the manner in which any notice is to be delivered, or dispensing with the delivery of any notice.

…

(6)This section applies unless a contrary method of service of a notice is provided in the instrument or agreement or by this Act.”

39. The first respondent’s argument is that by cl 21.1, the parties have agreed that the only methods of service could be those provided for by s 347.  The applicants argue that cl 21.1 facilitates the giving of notice in one of the ways described in s 347, but the parties have not agreed to exclude any other form of communication by which there has been actual notice given by one to the other.

40. The parties have agreed that the section “shall apply”, so that it is relevant to consider the case law as to the application of the section or its equivalents in other jurisdictions. In Ex Parte Dally-Watkins; Re Wilson,^[26] a case concerning s 170 of the Conveyancing Act 1919 (NSW), Street CJ delivering the judgment of the Full Court said:

“Section 170 is not intended to put a clog on bringing a notice to the attention of the person to whose attention it is intended to be brought.  It is a section designed to extend or widen the sets of circumstances which will amount to a sufficient service, but it is quite clear that it is not intended to be an exclusive description and to prescribe the only ways in which service can be effected.”^[27]

To the same effect is the judgment Young J (as he then was) in Tsaoucis v Gallipoli Memorial Club Ltd (No. 1).^[28]

41. Counsel for the respondents rightly did not contend that the terms of s 347 are materially different so that it should be interpreted differently.  Rather, the argument is that that cl 21.1 should be interpreted as requiring notice in a way which would be facilitated by the section.

42. In my view the applicants’ argument must be preferred. The apparent intention of cl 21.1 is to effectively import the terms of s 347 into the Unitholders Deed, so that it would have a contractual operation corresponding with its statutory operation. By cl 21.1, it was not intended to prescribe the only means by which a notice could be served.  The applicants’ interpretation would serve a commercially sensible purpose; the respondents’ interpretation would not.

43. If cl 21.1 is interpreted as the applicants suggest, it is conceded that the notice was brought to the first respondent’s attention by his solicitors without delay.  I conclude that the notice of exercise of the option was duly served. 

44. The next point is whether the notice was invalid for its specified price of one dollar. That is related to the following question, which involves the interpretation of the provisions of the Unitholders Deed by which units are to be valued upon the exercise of the option, and it is convenient to consider those issues together.

The fourth question

45. In the event of a proposed sale by a unit holder of all or some of its units, the Unitholders Deed, by clauses 8.2 through 8.11, conferred pre-emptive rights upon the other unitholders to purchase them. It is unnecessary to set out those clauses here. They are in the usual terms, requiring the units to be offered first to the unitholders and requiring the offeror to set out the proposed terms and conditions, including the price. Neither side suggests that these provisions were engaged but they may be relevant to the consideration of the applicants’ argument in relation to cl 10.3, which is considered below.

46. Clause 8.12 of the Unitholders Deed provided as follows:

“8.12When an individual trustee of the Trust resigns as trustee, or a Director of the Trustee resigns as a Director, the Related Unitholder shall, within twenty one (21) days of the office becoming vacant, give a Sale Notice if he has not already done so.  If he does not give such a notice within that time, he shall be deemed to have done so on the day following the expiration of that time, and the terms and conditions of sale, including price, shall be as per the immediately following subclause.”

The applicants plead that the first respondent resigned as a trustee, and that cl 8.12 was thereby engaged.  That is untrue, as the respondents plead, because the first respondent did not resign:  he was dismissed by Mr Menkens Snr.  By a “Deed of Removal of Trustee” dated 25 October 2005, Mr Menkens removed the first respondent as a trustee expressly pursuant to cl 2.5 of the Unitholders Deed.  This engaged cl 8.14.  As set out above, cl 8.14.4 required the price of the units which were the subject of the call and put options to be “calculated on the basis set out in the previous subclause”.  That was a reference to cl 8.13 which provided, in part, as follows:

“8.13The terms and conditions of sale, including price, shall be:

8.13.1The price of units in the Trust shall be determined in accordance with the provisions of the Trust Deed and as if the Unitholders had requested the Trustees to make a determination of the value of the units, but subject to the basis of valuation as set out under Clause 10 of this Deed.

47. The Trust Deed provided, by cl 12, that the trustee might at any time and if requested by an ordinary resolution of the unitholders cause a valuation of the property and assets of the fund to be made and the value of the unit would be determined by dividing the value of the trust fund less all liabilities of the trustee in respect of the fund by the number of units “excluding Special Units on issue at the date of valuation”.  But the valuation relevant for the call or put options was to be as set out under cl 10 of the Unitholders Deed, which was as follows:

“10.VALUATION

10.1Unless specific provisions of this Agreement specifically provide to the contrary, the value of each unit, for the purpose of calculating the value of Sale Interests shall be the value determined on the following basis:

10.1.1The value of goodwill of the Business shall be equal to the net profit of the Business (after Trustees’ remuneration, if any) for the preceding Financial Year.

10.1.2The value of plant and equipment shall be its depreciated value under the Income Tax Assessment Act as recorded in the accounts of the Trust.

10.1.3The value of interests under leases of plant and equipment from banks or finance companies or from the Australian Institute of Management – Queensland Division shall be the depreciated value of that plant and equipment under the Income Tax Assessment Act as if the Trustees were the owner of the plant and equipment and had claimed deductions for depreciation in the same manner as they had for plant and equipment owned by it less the payout obligations under the lease as if the lease was paid out at the time of calculation.

10.1.4To the extent that the value of debtors of the Business and of entitlements to payment in respect of recoverable work in progress of the Business (after allowing for creditors of the Business) are or will be reflected in net income of the Trust, that value shall be included from the value of the ordinary units.

10.2The parties shall cause the passing of any required resolution of Unitholders under the Trust Deed to value the units of the Trust and for the Unitholders to be notified of such valuation – such matters to be completed not later than the date being fourteen (14) days before the final date for the exercise of the call option and the put option.

10.3Notwithstanding the provisions of this Clause 10, in the event of any of the Remaining Unitholders wishing to dispose of their respective units at any time during the Preferential Draw Period, then the purchase price pertaining to such units shall be governed and limited to the value of the relevant Units at the date of this Agreement plus an additional amount per annum equal to eight percent (8%) per annum of such value for the period that each remaining unitholder has held or possessed his respective Units in the Trust.”

48. The applicants say that cl 10.3 applies so that they are entitled to purchase the units at their value at the date of the Unitholders Deed, at which point, they say, the units had a nominal value. It is far from clear that when this deed was executed, the units had no value but that is not a matter for present determination. The respondents say that cl 10.1, not cl 10.3, applied and if the call option was duly exercised, the price to be paid is the value of the first respondent’s units as at October 2005. 

49. The question then is one of the interpretation of cl 10.3.  The difficulty for the applicants is that cl 10.3 refers to the event of a unitholder “wishing to dispose” of his units during the Preferential Draw Period.  The first respondent was removed and the call option was exercised within that period.  But he was not a person who wanted to dispose of his units.  For that reason, he argues, cl 10.3 could not apply.  The applicants argue that when read in the context of the Unitholders Deed, the words “wishing to dispose” should be read as if, in their place, there appeared the word “disposing”.

50. Clause 10 had no operation in the case of a unitholder simply wishing to sell his units, because the pre-emptive rights provisions would have applied. In that case, the units would not be valued, because the offeror puts his own price on them which the others may or may not accept. Therefore, on the respondents’ arguments, the only circumstance in which cl 10.3 could apply is where a Remaining Unitholder (defined as a unitholder other than Mr Menkens Snr^[29]) exercised the put option under cl 8.14.3.  The applicants argue that there was no logical basis for the parties to distinguish the price to be paid upon the exercise of the put option from that under the call option.  Clause 10 would also apply in the event of the death of a trustee.  Again the applicants argue that there was no basis for distinguishing that circumstance from the exercise of the put option so far as the price was concerned. 

51. In my opinion there is a logical basis for distinguishing the put option from those other circumstances. In the put option, the unitholder wishes to depart as a co-owner of the business by disposing of his units. In the case of an exercise of the call option he has not elected to dispose of them but is compelled to do so, in circumstances where, within the Preferential Draw Period, he will have been removed by Mr Menkens Snr and without a need for the existence of grounds for removal. Were the applicants’ argument to be accepted, the result could be that he could be deprived of income of the trust for years during the Preferential Draw Period, and yet be compelled to leave without being compensated for the then value of his property. That would have an obvious potential for unfairness and, on an objective view, is unlikely to have been intended. The exercise of the put option is, at least on one view, a different circumstance. If he wished to dispose of his units within the Preferential Draw Period and to transfer them to an unwilling buyer, he would have to accept a price that might not accord with a current value.

52. In my conclusion there is no reason to displace the plain words of cl 10.3.  They apply to the exercise of the put option, which is not what occurred here.  Upon the call option being exercised, the price to be paid was according to a valuation under cl 10.1. 

53. The purported exercise of the option nominated a sale price of one dollar. Originally in these proceedings, the applicants sought to justify this price upon the basis of cl 8.17 of the Unitholders Deed, an argument which they now, correctly in my view, abandon.  It is necessary to set out cl 8.17 in context:

“8.16Where there is a disposal of ordinary units under this clause, then the parties shall cause the disponor and/or the Related Unitholder associated with the disponor to sell to the disponee the Units held by the disponor or his Related Unitholder.

8.17The purchase price per Unit shall be ONE DOLLAR ($1.00).

8.18Settlement of the disposal of the Units shall take place simultaneously with the settlement of the disposal of the ordinary units and the provisions of the immediately following clause shall apply, with all necessary adaptations, to payment in respect of the disposal of the Units.”

The Trust Deed provides for Ordinary Units and Special Units.  As the applicants now accept, the reference to “the Units” in cl 8.16 and 8.18, and the reference to “Unit” in cl 8.17, in each case is to Special Units.  Thus cl 8.17 does not affect the price to be paid upon exercise of the call option.

54. The remaining issue is whether the specification of this price of one dollar made the exercise of the call option ineffective. The Unitholders Deed did not require the exercise of the call option to be accompanied by some statement of the proposed price. That price was to be calculated by a process of valuation under cl 10.1, so that no purpose would have been served by such a price being suggested in the notice of exercise of option.  Thus there was no term of the Unitholders Deed by which a specification of a value of the units, and in this case clearly an incorrect value, would invalidate the exercise of the option.  The question then is whether, objectively viewed, the applicants should be understood as having not intended to exercise the option according to the Unitholders Deed.  The alternative is to characterise their actions as evincing an intention to buy only if the price was one dollar.  The relevant letter was, in part, as follows:

“We enclose a copy of a Deed of Removal of Trustee dated 25 October 2005 under which your client has been removed as trustee, with the result that the continuing trustees are Leo Menkens and Reid Menkens.  They propose, as previously, to discharge their duties in accordance with the law and the relevant Trust Deed and the Unitholders Deed dated 12 December 2001.

Please treat this letter as a notice by Leo Menkens as trustee for the LIG Menkens Discretionary Trust and by Reid Menkens as trustee for the RM Menkens Discretionary Trust to your client as trustee of the RDP Wintour Discretionary Trust of exercise of our clients’ options under Clause 8.14.2 of the Unitholders deed to purchase the units held by your client, in his trustee capacity, in the Menkens & Associates Unit Trust, at the price specified in Clause 8.17 of the Unitholders Deed.

…

As noted, our clients intend to abide by their obligations under the Trust Deed, the Unitholders Deed and at law.”

55. In my view they were intending to exercise their call option and to thereby oblige the first respondent to transfer his units. The surrounding circumstances made it plain that they wished to conduct the business without him. This makes it yet more difficult to see their action as something other than what it was expressed to be: an exercise of the call option.

Orders

56. What I have described as the first and second questions were argued effectively as applications to strike out those parts of the Defence. On those questions the order will be that the application to strike out paragraphs 10(a)(ii), 10(a)(iii), 26(e) and 31(e) of the Fourth Amended Defence and Counterclaim is dismissed.

57. The appropriate relief upon the other questions is a declaration that on or about 25 October 2005, the applicants validly exercised an option to purchase the first respondent’s units in accordance with cl 8.14.2 of the Unitholders Deed between the applicants and the first respondent and that the price payable by the applicants to the respondent for those units is the value of such units determined according to cl 10.1 of that Deed.

58. I will hear the parties as to further orders, including costs.