Sino Iron Pty Ltd v Palmer[2014] QSC 287

SUPREME COURT OF QUEENSLAND

[1] JACKSON J: The plaintiffs apply to strike out pars 50 to 56 of the defence.  The application is made under Uniform Civil Procedure Rules 1999 (“UCPR”) r 171.  The ground advanced is that the paragraphs are “doomed to fail”; in the language of the rule, in that they do not disclose a “reasonable… defence”.

[2] The arguments of the parties were succinctly made in writing and orally.  The context is that the trial of the proceeding is set down for 26 November 2014. Thus, the application was heard in a limited available time, with another case following on the same day.  Those arguments had to be, and these reasons must be, brief.

[3] The claim in the proceeding and parts of the statement of claim are summarised in pars 1 to 8 of my reasons for dismissing the defendants’ application to have the proceedings stayed as an abuse of process.[1]  The claim is for equitable relief against strangers to a trust under the first and second limbs of Barnes v Addy,[2] or against a person who procures, assists or participates in a breach of trust.[3]

[4] Paragraphs 50 to 57 of the defence allege:

“50.Prior to the commencement of these proceedings, the plaintiffs committed and have continued to commit numerous breaches of their obligations pursuant to the Facilities Deeds which have had the effect of depriving Mineralogy of the benefit of the Facilities Deeds or the substantial part thereof.

Particulars

The breaches are set out in Mineralogy’s further amended statement of claim in proceedings in the Federal Court of Australia, Western Australia, Proceedings WAD110 of 2013 and also in the following notices:

(1)Notices of termination issued on 22 September 2014 from Mineralogy to the first and second plaintiff under clause 33(c) of the Facilities Deed.

(2)Notices of termination issued on 1 October 2014 from Mineralogy to the first and second plaintiff under clause 33(c) of the Facilities Deed.

51.Prior to the commencement of these proceedings, the plaintiffs have committed numerous breaches of the MRSLAs between each of the plaintiffs and Mineralogy, including refusal to pay substantial royalties payable to Mineralogy pursuant to those agreements.

Particulars

The breaches set out in Mineralogy’s third further amended statement of claim in proceedings in the Supreme Court of Western Australia, CIV1808 of 2013 and also in the following notices:

…

(6)Notices of Termination issued by Mineralogy to the first and second plaintiffs dated 12 September 2014 for failing to remedy the defaults  set out in notices of default dated 12 July 2012; and

(7)Notices of Termination issued by Mineralogy to the first and second plaintiffs dated 18 September 2014 for failing to remedy the defaults set out in notices of default dated 5 April 2013.

52.By the said breaches of the MRSLAs, the plaintiffs have deprived Mineralogy of the benefit or the substantial benefit of the MRSLAs including the benefit of payment of substantial royalties.

53.At all material times, the plaintiffs have intended to deprive Mineralogy of the benefit of the Facilities Deeds and the MRSLAs.

54.At all material times, the plaintiffs have intended by that means to apply illegitimate pressure to Mineralogy to advance the plaintiffs’ commercial interests.

55.The plaintiffs’ claim in these proceedings are dependant upon the existence of rights allegedly conferred on the plaintiffs by the Facilities Deeds.

56.The plaintiffs purpose in commencing and prosecuting these proceedings is to apply illegitimate pressure to the first defendant to advance the plaintiffs’ commercial interests in its dealings in respect of the projects the subject of the MRSLAs and the port which is the subject of the Facilities Deeds.

57.In the premises, the plaintiffs should be refused equitable relief.”

[5] Paragraphs 50 to 56 seek to raise a defence of unclean hands as a discretionary equitable defence.

[6] The Facilities Deeds referred to in pars 50 and 53 are those which contain the provisions set out in par 15 of the statement of claim in the present proceeding.  They were made between the plaintiffs and Mineralogy. The defendants’ respective involvements with payments made from the administrative fund bank account alleged to have been opened under cl 13.1 of the Facilities Deeds are the subject of the claim in the present proceeding. 

[7] The MRSLAs referred to in pars 51, 52 and 53 of the defence are separate contracts made between the plaintiffs and Mineralogy.  The acronym MRSLA stands for Mining Right and Site Lease Agreement.  Paragraph 11(f) of the defence alleges that royalties were payable to Mineralogy by the plaintiffs under the MRSLAs and were paid into the administrative fund bank account.  The MRSLAs do not otherwise figure in the statement of claim or the defence.

[8] The plaintiffs submit that the alleged numerous breaches of their obligations under either the Facilities Deeds or the MRSLAs do not concern any of the issues otherwise raised in the present proceeding.  They concern other disputes between the parties under the relevant contracts.

[9] The plaintiffs submit that conduct of the plaintiffs alleged in pars 50 to 56 (“alleged misconduct”) does not disclose a reasonable ground of defence of unclean hands to their claims because:

(a) the defendants are not parties to either the Facilities Deeds or the MRSLAs;

(b) the plaintiffs’ rights against the defendants are not dependant on or coterminous with the plaintiffs’ rights against Mineralogy;

(c) the questions raised in the other proceedings are not interrelated with the question of the liability of any of the defendants;

(d) the plaintiffs do not rely on any of the alleged misconduct to found their rights in this proceeding;

(e) the alleged misconduct bears no immediate and necessary relationship to the relief sought by the plaintiffs in this proceeding; and

(f)        the defendants delayed in raising unclean hands until the defence was filed; and

(g) the plaintiffs’ application to stay the proceeding as an abuse of process was based on some of the same factual allegations as the defence of unclean hands.

[10] The defendants submit that:

(a) the defendants are not required to allege fraud or misrepresentation by the plaintiffs in relation to the Facilities Deeds to raise a defence of unclean hands;

(b) the defendants are not required to be parties to the Facilities Deeds before the alleged misconduct can constitute unclean hands;

(c) the first defendant is the controlling shareholder of Mineralogy and the second defendant is a wholly owned subsidiary of Mineralogy;

(d) it is not a requirement of a defence of unclean hands that the plaintiffs rely upon the alleged misconduct to establish their equity or cause of action; and

(e) the alleged misconduct has the required immediate and necessary relationship to the relief claimed by the plaintiffs.

[11] In support of their submissions the parties relied on a number of cases, including Dering v Earl of Winchelsea,[4] Kettles and Gas Appliances Ltd v Anthony Hordern & Sons Ltd,[5] FAI Insurances Ltd v Pioneer Concrete Services Ltd,[6] Black Uhlans Inc v NSW Crime Commission & Ors,[7] Carantinos v Magafas,[8] Kation Pty Ltd & Anor v Lamru Pty Ltd,[9] Michael Wilson & Partners Limited v Nicholls & ors[10] and Nu Line Construction Group Pty Ltd v Fowler.[11] I would refer as well to Anaconda Nickel Ltd v Edensor Nominees Pty Ltd & Anor,[12] Moody v Cox and Hatt[13] and Meyers v Casey.[14]

[12] The defendants also relied on Armstrong v Shephard & Short Pty Ltd,[15] Harrigan v Brown,[16] Ocular Sciences Ltd & anor v Aspect Vision Care Ltd & ors,[17] Cadwallader v Bajco Pty Ltd & ors[18] and Deeson Heavy Haulage Pty Ltd v Cox & ors.[19]

[13] In Harrigan, Street J dismissed a claim for an injunction restraining a singer from performing in breach of contract because the plaintiff theatrical agent was also in breach of the contract in failing to give the singer proper accounts. It was held that:

“…if a defendant can show that the plaintiff is not willing to perform the agreement in full on his part or that the plaintiff’s past conduct has broken the agreement to such an extent as to merit serious criticism, then this may furnish a ground for the Court in its discretion withholding an injunction and leaving the plaintiff to pursue his claims at law”.^[20]

[14] In Cadwallader, the plaintiff sought to avoid a resolution of other directors of a company placing it into administration.  The other directors relied on a defence of unclean hands because the plaintiff had given notice to convene a meeting of members to remove them before the company had been placed into administration so as to be able to stop proceedings started against him by the company.  The defence was rejected at trial.  The finding was upheld on appeal.   In passing, Heydon J referred to examples of the application of the defence where a plaintiff fails, in breach of contract, to keep accounts or otherwise breaches a contract, referring to Harrigan.

[15] In Ocular Sciences, the plaintiff conducted an overreaching case claiming injunctions against the use of or publication of alleged confidential information.  Laddie J found that most of the allegations of breach of confidence were not made out, leaving “items of confidential information on which the plaintiffs have succeeded… [that were] from a technical point of view, insubstantial…. [so that] the trivial nature of its claims became apparent”.[21]  It was held that the reckless way in which the claims to confidential information were advanced inevitably increased the size of the proceedings and vastly increased the amount of the evidence, so that the way that the proceedings were conducted was oppressive. As well, the Court concluded that the plaintiffs’ witnesses had lied in evidence that “went to the heart of the issues and the request for an injunction”.  In the result, his Honour declined an injunction as to use of the confidential information found but granted an injunction as to its disclosure by the defendants.

[16] In Deeson, an employer claimed equitable compensation or damages for breach of duty or breach of confidence from former employees and the company they established to compete with the employer after they left their employment.  An employee of the plaintiff had misused a document obtained on disclosure in the proceeding to damage the reputation of the company defendant with a contestable customer. McMeekin J rejected a submission that conduct occurring in the conduct of the litigation could not found a defence of unclean hands,[22] relying on Ocular Sciences, while accepting the requirement of an immediate and necessary relationship to the equity sued for, referring to Harrigan.[23]  His Honour continued:

“Here, if I had been persuaded that the giving out of this information had been part of a plan to destroy a trade rival, and that the bringing of the suit itself formed part of that plan, then I would have held that it would have been appropriate to deny any form of equitable relief. While I hold the view that claims were made here that could not be justified and some that could fairly be described as involving, on any view, fairly trivial complaints, I am not persuaded that the whole exercise was so motivated.”[24]

[17] At this stage of the proceeding, the question is whether pars 50 to 56 are capable of sustaining a defence of unclean hands as a reasonable ground of defence, whether alone or in conjunction with other paragraphs in the pleading. On that question, General Steel Industries Inc v Commissioner for Railways (NSW),[25] where Barwick CJ described the test variously, including that the case is “so obviously untenable that it cannot succeed”, is a well accepted authority.  The question is whether, in that sense, those paragraphs raise a defence that is arguable.

[18] The substance of the defendants’ submission is that the required “immediate and necessary relationship to the equity sued for”[26] is to be found in the conclusion that the present litigation “is part of a wider plan to obtain an illegitimate commercial advantage”.  It was also expressed to be “part of a wider campaign or scheme to attack the commercial interests of the first defendant”.

[19] These submissions are perhaps intended to reflect in a general way the allegations in par 53 that “the plaintiffs have intended to deprive Mineralogy of the benefit of the Facilities Deeds and the MRSLAs” and par 56 that the plaintiffs’ purpose in this proceeding is “to advance the plaintiffs’ commercial interests in its dealings in respect of the projects the subject of the MRSLAs and port which is the subject of the Facilities Deeds”. 

[20] In response to this line of argument, the plaintiffs submit further that the defendants’ contention of improper purpose by the plaintiffs in bringing the present proceeding was resolved against the defendants on their application to stay the proceeding as an abuse of process.  The defendants submit that there is no issue estoppel or abuse of process in the defendants’ reliance on the same or similar facts as part of a defence of unclean hands.

[21] In my view, it is not necessary to resolve all of the relevant contentions as set out above in order to decide the present application.  The starting point is that the equity sued for against the first defendant is his alleged liability as a constructive trustee under the second limb of Barnes v Addy, or for procuring, assisting or participating in breach of trust by Mineralogy, whether by equitable compensation or an account of profits.

[22] The equity sued for against the second defendant is its alleged liability to account as a constructive trustee under the first limb of Barnes v Addy, and relief by way of equitable compensation or an account of profits.

[23] In my view, the allegations of breaches of contract by the plaintiffs in pars 50 and 51 do not, by themselves, raise an arguable defence of unclean hands. They do not, per se, bear the immediate and necessary relationship to the equity sued for.  Breach of contract, not related to the alleged breaches of trust by Mineralogy or the first and second defendants’ involvement in those breaches, does not bear that relationship. I do not accept that Harrigan or Cadwallader is authority that breach of contract by the plaintiffs, per se, raises an arguable defence of unclean hands.

[24] Similarly, in my view, the allegation in par 52 that in the result the plaintiffs have deprived Mineralogy of the benefit or the substantial benefit of the MRSLAs, including the benefit of payment of substantial royalties, does not raise an arguable defence of unclean hands.  I would add that these are, prima facie, illogical legal contentions.  If the plaintiffs are in breach of the MRSLAs, Mineralogy, ex hypothesis, has not received the benefit of performance of the relevant obligations; as a matter of law, either in addition to any right on Mineralogy’s part to have the defendants perform the relevant obligations, or in lieu thereof, Mineralogy will have the benefit of the common law secondary right to damages for breach of contract (subject to any conditions precedent or defences), as well as any accrued right to payment of any royalty due under those contracts. 

[25] It appears that the critical allegations, for present purposes, are those made in pars 53, 54 and 56.

[26] In my view, the “iniquity”[27] or “depravity”[28] alleged to support the defence of unclean hands in this case are the alleged purposes to apply illegitimate pressure.  In other words, the defendants’ contention must be that the immediate and necessary relationship to the equities sued for is made out by the plaintiffs having the purpose to apply illegitimate pressure to the first defendant. 

[27] None of the cases relied upon by the parties is even vaguely similar to the circumstances of the present case.

[28] It may be observed that the allegation in par 53 that the plaintiffs have intended to deprive Mineralogy of the benefit of the Facilities Deed and the MRSLAs is not supported by pleading the facts from which that inference is to be inferred, in contravention of UCPR r 150(2).  The same may be said of the allegation in par 56 that the plaintiffs’ purpose in commencing and prosecuting this proceeding is to apply illegitimate pressure to the first defendant.  But the question argued was not primarily based on non-compliance with r 150(2).  It is primarily based on the legal irrelevance of the facts pleaded, if they do not disclose a reasonable ground of defence.

[29] Another problem is embedded in the use of the adjective “illegitimate” in pars 54 and 56.  There is no fact specifically alleged to constitute the alleged illegitimacy.  But in the context of par 53, it must be that the alleged breaches of contract constitute the illegitimate pressure, because the intention or purpose is to deprive Mineralogy of the benefit of the contracts.

[30] In par 56, it must be that commencing and continuing this proceeding constitutes the “illegitimate” pressure, because the purpose was to advance the plaintiffs’ interests in their dealings in respect of the projects, including the port under the Facilities Deeds.  It is not alleged that it is unlawful for the plaintiffs to advance the plaintiffs’ interests by succeeding in this litigation.

[31] In my view, par 56 does not give rise to an arguable defence of unclean hands.  It is not illegitimate for a beneficiary to make a claim for the restoration of a trust fund (established under a contract), or for associated relief, if it has both the purpose of obtaining that relief and the purpose of advancing its interests in respect of future dealings under the trust or contract.  There is no express allegation that the plaintiffs’ purpose in starting and continuing this proceeding claiming the equities sued for is part of a strategy to deprive Mineralogy of the benefit of the contracts, or that the proceeding is being conducted procedurally so as to oppress the defendants.  By starting the proceeding, the plaintiffs have not arguably done an unlawful act, let alone engaged in an “iniquity” or “depravity”.  Continuing the proceeding in accordance with the rules of court to a successful (or unsuccessful) conclusion is not, by itself, a matter which can constitute a defence of unclean hands.

[32] However, in my view, pars 53 and 54 are more difficult.  If the defendants were able to show that there was a deliberate course of conduct engaged in by the plaintiffs, repudiating the Facilities Deeds, and a related similar deliberate course of conduct repudiating the MRSLAs, both for the actual purpose of destroying Mineralogy and the first defendant, is it arguable that a defence of unclean hands would be raised?

[33] As a matter of first impression, in my view, there is at best only an incidental relationship between the alleged intention and purpose and the equities sued for.  Mineralogy’s alleged misuse of the alleged trust moneys, and the defendants’ alleged involvements in that misuse, do not arise from and do not involve the alleged breaches of contract by the plaintiffs. 

[34] However, the cases relied upon by the defendants show that the requirement of an immediate and necessary relationship to the equities sued for “should not be given a narrow or technical construction”.[29]  And some of the cases mentioned above illustrate a broad approach to the required relationship.  In my view, subject to two questions, there would be an arguable defence of clean hands, if the alleged breaches and intention or purpose are made out.

[35] Those points are that the plaintiffs submit that because the defendants are not parties to the Facilities Deeds and because the relief which may be granted against the defendants differs from the relief that might be granted against Mineralogy for the alleged breaches of trust which form the basis of the claim against the defendants, the alleged misconduct cannot give rise to a defence of unclean hands against the defendants.

[36] Although in Deeson it was assumed that the plaintiff’s iniquity must be directed at the defendants,[30] in Carantinos[31] the NSW Court of Appeal rejected that requirement. I am bound to follow a decision of that Court unless convinced that it is clearly wrong.[32]  It follows, in my view, that I should reject the plaintiffs’ submissions that the alleged misconduct cannot amount to an unclean hands because the defendants are not parties to the MRSLAs or the Facilities Deeds and I should also reject the contention that the several liabilities of the defendants and Mineralogy must defeat an unclean hands defence.

[37] However, in my view, pars 53 and 54 are not adequately pleaded.  It is not enough for the defendants to simply allege the intention or purpose set out in those paragraphs, supported by the facts of the litigation in the other proceedings between the parties.  It is not uncommon for parties in a contractual relationship of, or analogous to, joint venture to end up in litigation over their contractual and equitable rights and obligations.  The litigation may in a practical sense have the appearance of a fight to the commercial death.  That the likely ruin or commercial embarrassment of one party may, in an objective sense, follow from the position taken by the other in the litigation does not, per se, show a position of unclean hands.

[38] Still, because of non-compliance with the general rule of practice that an allegation of fraud must be pleaded specifically and with particularity,[33] and because of the defendants’ particular non-compliance with UCPR 150(2), the bare allegations of intention or purpose in pars 53 and 54 are not enough.  It follows that they should be struck out.  However, the defendants should have leave to replead the subject matter of pars 50 to 56.

[39] As I have struck out par 56 on a different basis, it is not necessary to deal with the plaintiffs’ contention that the subject of par 56 cannot be raised because of my decision upon the defendants’ application for a stay on the ground that the proceeding is an abuse of process.  However, the plaintiffs’ submissions on this point raised parts of the submissions on that application which referred to the other proceedings between the parties. If it matters, I also reject the plaintiffs’ submission that the unclean hands defence is raised too late or precluded because some of the same subject matter was raised on the defendants’ application to stay the proceeding as an abuse of process.  While there are cognate factual matters raised, in my view the defendants should not be precluded from raising the subject matter of pars 50 to 54 of the defence because of the conclusion reached on the evidence on the stay application that “even if the inference were drawn that the plaintiffs seek to use the proceeding to embarrass the defendants, there is no reason to think that the plaintiffs do not also desire to proceed to judgment on the relief claimed”.[34]

[40] The orders should be that pars 50 to 56 of the defence are struck out.  The defendants have leave to replead the subject matter of pars 50 to 56 in an amended defence.