Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373 (26 February 1975)

HIGH COURT OF AUSTRALIA

CONSUL DEVELOPMENT PTY. LTD. v. D.P.C. ESTATES PTY. LTD. [1975] HCA 8; (1975) 132 CLR 373

Trusts and Trustees

High Court of Australia

Barwick C.J.(1), McTiernan(2), Menzies, Gibbs(3) and Stephen(4) JJ.

(THE RIGHT HONOURABLE MR. JUSTICE MENZIES died before judgment was delivered in this case.)

CATCHWORDS

Trusts and Trustees - Constructive trust - Fiduciary duty - Breach - Officer of company - Manager of property development company informs another developer of availability of suitable properties for development - Agreement to share profits or bear losses - Whether properties acquired by second developer held on constructive trust for first - Knowledge - Whether constructive notice knowledge.

HEARING

Sydney, 1974, August 6,7;

Melbourne, 1975, February 26. 26:2:1975

APPEAL from the Supreme Court of New South Wales.

DECISION

1975, February 26.

The following written judgments were delivered:-

BARWICK C.J. In this matter I have had the advantage of reading the reasons both as to the nature and validity of the trial judge's findings of fact and as to the applicable law. I also agree with my brother's analysis of the facts of the case and with the reasons he gives for the conclusions which he expresses. (at p377)

2. I agree that the appeal should be allowed. (at p377)

McTIERNAN J. These are appeals from two judgments of the Court of Appeal of New South Wales (Hardie and Hutley JJ.A., Jacobs P. dissenting) (1974) 1 NSWLR 443 reversing judgments of Hope J. dismissing actions by the present respondent - D.P.C. Estates - against the present appellant - Consul. One R.K. Grey was a defendant to the actions and a respondent to D.p.C. Estates' appeal to the Court of Appeal but he has not appealed to this Court from the orders made against him by the Court of Appeal. Those orders therefore stand. (at p377)

2. The hearing before Hope J. took eleven days; the appeal book runs into 638 pages, including judgments occupying nearly 150 pages, and the very bulk of the material presented to us invites an effort to reduce our consideration to critical issues. This can, I think, be most readily done by stating in the first place the law which I regard as applicable and then concentrating attention upon the facts to which that law must be applied without too much regard to matter which seems to me peripheral. (at p377)

3. There is a strict equitable principle that a person occupying a position of confidence in relation to another owes that other a duty not to put himself in a position where his interests and his duty conflict and requires that, if he abuses that confidence and in breach of his duty makes a profit for himself, he must account to that other for the profit so made. If after full and frank disclosure of all material facts to the person to whom such a duty as I have described is owed and permission has been given to make a profit for himself out of transactions which would otherwise be in breach of duty he is, of course, absolved from any obligation to account. For authority for this salutary principle I content myself with citing the opinion of Lord Wilberforce in New Zealand Netherlands Society "Oranje" Incorporated v. Kuys (1973) 1 WLR 1126 . (at p377)

4. His Lordship said (1973) 1 WLR, at p 1129 :

"The obligation not to profit from a position of trust, or, as it

is sometimes relevant to put it, not to allow a conflict to arise

between duty and interest, is one of strictness. The strength, and

indeed the severity, of the rule has recently been emphasised by

the House of Lords: Phipps v. Boardman [1966] UKHL 2; (1967) 2 AC 46 . It retains its

vigour in all jurisdictions where the principles of equity are

applied. Naturally it has different applications in different

contexts. It applies, in principle, whether the case is one of a trust,

express or implied, of partnership, of directorship of a limited

company, of principal and agent, or master and servant, but the

precise scope of it must be moulded according to the nature of

the relationship. As Lord Upjohn said in Phipps v. Boardman

(1967) 2 AC, at p 123 : 'Rules of equity

have to be applied to such a great diversity

of circumstances that they can be stated only in the most

general terms and applied with particular attention to the exact

circumstances of each case'."

Later, his Lordship added (1973) 1 WLR, at pp 1131-1132 :

" . . . as to disclosure. Their Lordships entirely accept, as a

matter of law, that if an arrangement is to stand, whereby a

particular transaction, which would otherwise come within a

person's fiduciary duty, is to be exempted from it, there must be

full and frank disclosure of all material facts." (at p378)

5. The next relevant principle is that a person who participates in the fraudulent conduct of a person in a fiduciary position of the character already described holds any property he acquires thereby in trust for the person to whom the fiduciary duty was owed. The classical statement of this principle is that of Lord Selborne L.C. in Barnes v. Addy (1874) 9 Ch App 244, at p 251 :

"It is equally important to maintain the doctrine of trusts

which is established in this Court, and not to strain it by

unreasonable construction beyond its due and proper limits.

There would be no better mode of undermining the sound

doctrines of equity than to make unreasonable and inequitable

applications of them.

Now in this case we have to deal with certain persons who are

trustees, and with certain other persons who are not trustees.

That is a distinction to be borne in mind throughout the case.

Those who create a trust clothe the trustee with a legal power

and control over the trust property, imposing on him a

corresponding responsibility. That responsibility may no doubt be

extended in equity to others who are not properly trustees, if

they are found either making themselves trustees de son tort, or

actually participating in any fraudulent conduct of the trustee to

the injury of the cestui que trust."

The extension of responsibility to which the Lord Chancellor there referred is one which has been recognized and acted upon with no narrow understanding of what constitutes "actually participating in any fraudulent conduct". Two recent cases in which this has been done are Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 and Karak Rubber Co. Ltd. v. Burden (1972) 1 WLR 602 . (at p378)

6. The basis of the decision of the Court of Appeal in this case - apart from the question of D.P.C. Estates' right to sue - was that Grey vis-a-vis D.P.C. Estates could not properly adopt a role where his interest conflicted with his duty but that he did so and that Consul induced him to do so by offering substantial rewards. In consequence the Court of Appeal held that Consul is trustee for D.P.C. Estates for properties purchased with the assistance of Grey given in breach of confidence to D.P.C. Estates. (at p379)

7. The essence of the matter - although it requires further amplification - is that Grey's duty was to find, gather information about, and report upon properties which D.P.C. Estates could buy, renovate and sell profitably, and that Consul, being aware of this, offered him half of any net profit that should be made upon its buying, renovating and selling certain properties brought to its attention by Grey. This, so it was claimed, was participation by Consul in a breach of fiduciary duty owed to D.P.C. Estates by Grey. It was accordingly claimed that Consul held the properties purchased with Grey's assistance in trust for D.P.C. Estates. Against Grey it was alleged that he held profits received from Consul and from such transactions upon trust for D.P.C. Estates. The Court of Appeal so decided. (at p379)

8. The first answer made to this decision by counsel for the appellant was that it had not been shown that Grey owed D.P.C. Estates any duty or, at least, any duty of a fiduciary character. To consider this it is necessary to go into some detail about Grey's position and duties. (at p379)

9. A solicitor, J.W. Walton, aware that money was to be made by purchasing run-down properties, renovating them and re-selling them, formed a number of companies. We know of nine companies in existence in 1966: Kurranulla Properties Pty. Ltd., Boothman Investments Pty. Ltd., Denton Sales Pty. Ltd., Denton Constructions Pty. Ltd., Ronmar Sub-Division Pty. Ltd., D.P.C. Estates Pty. Ltd., J.B.H. Investments Pty. Ltd., Lucerne Developments Pty. Ltd. and Ronmar Investments Pty. Ltd. There may have been more, but this is unimportant. The nine with any additions were, as an agreement to be referred to later demonstrates, regarded as associated companies and I think it is quite proper to refer to them as the Walton group. As the learned trial judge found:

" . . . Walton used the plaintiff and other companies which he

controlled for purposes with which he was concerned, without

any regard at all to the interests of the companies' shareholders

or to the requirements of the Companies Act or of the

memorandum and articles of association of any particular company.

As it seems to me, he used these companies simply as a

convenience to achieve any particular object he wished to achieve".

Whether or not he was regularly appointed, Walton acted as managing director of all the companies in the Walton group. Indeed he was the Caesar. One company, Ronmar Investments Pty. Ltd. - Ronmar - provided management services for the others and in August 1966 it entered into an agreement with Grey whereby he agreed to serve as a working manager of the business of Ronmar and for all "the associated companies". Under this agreement Grey was entitled to an annual salary of $4160 and he undertook to give "his whole time and personal attention to the said business" and to "devote himself exclusively to the said business". The "said business" was, of course, that of the associated companies. Clauses 5 and 6 were as follows:

"5. The Manager shall not either during the continuance of

his employment hereunder or thereafter except in the proper

course of his duties as such manager divulge to any person

whomsoever and shall use his best endeavours to prevent the

publication or disclosure of any trade secret or development

process or any information concerning the business or finance

of the company or of the associated companies or any of their

dealings transactions or affairs which may come to his

knowledge during or in the course of his employment and shall

not be concerned or interested directly or indirectly except as

such manager in the business of real estate other than with the

consent of the Managing Director nor shall he be personally

employed or engaged in any capacity whatsoever in or in

connection with any business whatsoever other than the business of

the company and the associated companies except with the

written consent of the Managing Director.

6. Subject to such orders and directions as may from time to

time be given to him by the Managing Director (all which orders

and directions the manager shall promptly and faithfully obey

observe and comply with) the Manager shall have the general

control and management of the said business and of all persons

employed in or about the same and shall use all proper means in

his power to maintain improve and extend the said business and

to protect and further the reputation and interests of the

company and associated companies . . . " (at p380)

10. The salary which Ronmar paid Grey was reimbursed to it by contributions from the associated companies. (at p380)

11. Upon the execution of this agreement Grey became and acted as manager of the associated companies including D.P.C. Estates. His employment by D.P.C. Estates was, no doubt, upon terms embodying so much of the agreement with Ronmar as would apply appropriately to one member of the associated companies. He became a de facto director of D.P.C. Estates. (at p380)

12. Grey's main duty was to locate properties suitable for re-sale at a profit after renovation, obtain written reports - usually with photographs - from a licensed real estate agent, one Thorne, study Thorne's reports, consider the advisability of making a purchase and, in respect of each property, pass on to Walton Thorne's report and his own recommendation. It appears that Walton would then decide whether or not to go ahead with the transaction, taking into account such considerations as profitability and the availability of finance. If he decided to purchase a property he would nominate one of the Walton group to be the purchaser. (at p381)

13. It seems to me that, just as in the agreement, the combined businesses of all the associated companies were regarded as "the business", so, in truth, there was but one business and each associated company played the part in that business which Walton chose from time to time to give it. Grey's duty was always to the Walton group and to each company comprised in it. His immediate responsibility was to Walton as the managing director of all the companies. (at p381)

14. I turn now to Consul. It was a company which in 1967 extended its activities to buying, renovating and re-selling properties. Its managing director, when it did so, was Robert Clowes, a young man who was a clerk articled to Walton. It was in Walton's office that Clowes came to know the business of the Walton group and to know Grey. It was found that he had no precise knowledge of the agreement under which Grey worked but that he did know in a general way what Grey's duties were and the part that Thorne played in the business of the Walton group. His Honour the trial judge found (1974) 1 NSWLR, at p 452 :

"Clowes was cross-examined extensively as to his beliefs in

respect of Grey's obligations, and, although it may be that all

his statements cannot be taken at face value, some regard must

be had to them. Among other things he said that he believed

that Grey had some responsibilities in respect of the property

dealing aspect of the businesses of the various companies,

although he thought he was particularly concerned with the

financial aspects of it. He believed that Grey was under an

obligation to act honestly towards any company with whose

management he was concerned and that Grey should not take

advantage of his position to make a profit for himself at the

expense of any such company. Clowes said that believing that

Grey was a director of the plaintiff, he believed that he had some

duties towards the plaintiff, but until some were suggested to

him he could not identify any of these duties. When particular

matters were put to him, he said that he would imagine that

Grey had a duty to act in good faith towards the company, not

to put his own interests in conflict with those of the company,

and not to betray any trust which had been reposed in him." (at p381)

15. Some time before Consul bought any property brought to its attention by Grey, it had reached an understanding with Grey that he should profit in some way from associating himself with Consul. The best evidence of the essence of that arrangement is an acknowledgment in writing given by Consul to Grey on 19th June 1968, some time after the dealings to which it relates had occurred and after Clowes had ceased to be employed by Walton. This document is as follows:

"IT IS HEREBY ACKNOWLEDGED THAT ROBERT KINROSS

GREY of 46 Blues Point Road, McMahons Point, Company

Director is entitled to half of the profits arising from the income

or the sale of the properties referred to in the Schedule hereto.

Dated this 19th day of June, 1968.

FOR AND ON BEHALF OF

CONSUL DEVELOPMENT PTY.

LIMITED

R. Clowes,

Managing Director.

THE SCHEDULE.

8, 10, 14, 16, 18 and 20 Lilyfield Road, Rozelle.

164, 166 and 170 Evans Street, Rozelle.

65 Denison Road, Rozelle.

1 Eastern Street, Rozelle.

26 Clubb Street, Rozelle."

The properties so listed are the subject of these proceedings. There was also an arrangement between Consul and Grey in relation to a property not included in the schedule. It was a property at Dulwich Hill. The evidence of Clowes in relation to this arrangement is thoroughly unsatisfactory and his Honour made no finding in relation to it beyond this: "The agreement he made with Mr. Grey was oral, and no writing was executed by Mr. Clowes in respect of it until some time after he left Mr. Walton's employ". The writing there referred to can only have been the document of 19th June 1968 already set out which omits reference to the Dulwich Hill property because the purchase of this property did not go on. At the time however Clowes and Grey did open a joint banking account called R. K. Grey No. 3 Account into which Consul alone paid moneys. (at p382)

16. I come now to the properties claimed by D.P.C. Estates in the present action. (at p382)

17. It is necessary first to examine what Grey did in relation to the properties which the Court of Appeal has decided that Consul holds in trust for D.P.C. Estates. (at p382)

18. In the latter part of 1967 Grey learned, from a casual conversation with a solicitor who said he wanted a quick sale for cash, that the Clubb Street property - which is the property claimed in Action 221 of 1970 - was for sale. Grey informed Consul of this but he did not inform Walton or anybody connected with the Walton group of companies. Consul purchased the property in November 1967. (at p382)

19. It did not appear how Grey found out that the Rozelle properties - the properties claimed in Action No. 730 of 1968 - were for sale but before he did so it seems that they had been advertised for sale, that they were upon the books of a number of agents and that a "For Sale" notice was prominently displayed upon them. Grey did tell Walton about these properties and Thorne inspected and reported upon them. These reports were shown by Grey to Walton. What happened after this is subject to a finding as follows:

"Grey showed the reports to Walton, who said he was very

interested because of the price that was being sought and the

possibility of a substantial profit if the properties were

purchased even at the asking price. He asked Grey to make an

offer for them, and said that he told him not to let it (that is, the

properties) get away. The amount he told Grey to offer was less

than the asking price and, according to Clowes, was $22,500,

although in May, 1968, he had said he thought it had been as

much as $23,500. Walton did not know whether Grey passed on

his offer to the owner, but in any event a short time afterwards

Grey told Walton that the properties had been sold.

Clowes learnt of the properties from Grey. He saw the reports

that had been made by Thorne but says that he did not read

them; and he saw some photographs of the properties which

Thorne had taken and given to Grey. He believed that Grey had

passed on information about the properties to Walton, and he

knew that Walton had told Grey to make an offer and he knew

roughly the amount of the offer. It seems reasonably clear that

he would 'suppose', to use his expression, that Walton would not

be offering his maximum figure at the first offer. Clowes said

that when Grey told him about the Rozelle properties he also

told him that Walton had made an offer which was greatly

under the asking price, that this offer had been rejected by the

vendor, and that Walton did not want the properties. He then

went out to look at the properties with his mother, and saw

auction notices attached to them. Grey told Clowes that the

properties were a good buy, and Clowes believed they were and

indeed at the time repeated something to this effect to Lyons.

He doubted if he would have had Consul purchase them without

the benefit of Grey's advice. Clowes decided that Consul would

try to purchase the properties and he decided to make, through

Grey, an offer for them at a figure of about $27,000 which, to his

knowledge, was a figure higher than the offer which had been

made on Walton's behalf. He subsequently heard that another

interested person had made an offer of $27,000 for the

properties and he then increased Consul's offer to $28,500. On Friday

25th August 1967, Consul paid a deposit of $5,700, which was

twenty per cent of the purchase price, to the vendor, Perpetual

Trustee Co. Limited, and on the following Wednesday 30th

August, which was possibly a week after Grey had first told him

about the properties, Clowes and Grey went to the office of L.J.

Hooker Limited, the agent acting for the vendor, and contracts

were signed and exchanged." (1974) 1 NSWLR, at p 453 (at p383)

20. Although Walton did not know of the Consul purchases until 1968, he did in October 1967 talk to Clowes about his spending so much time with Grey. He said he asked Clowes whether he had some kind of deal with Grey, but Clowes denied this part of the conversation. So far as I can see, his Honour made no definite finding upon this conflict beyond the following statements:

"I think that there is little doubt that no matter how proper

the transactions may have been, Clowes would have good

reason not to tell Walton about them, and I am not satisfied that

Clowes' failure to tell Walton about them was not founded, in

part at least, on the matters he referred to. I must say however

that I find the nature of his agreements with Grey and the

manner in which they were made, and the circumstances

concerning the banking account suspicious; I find it difficult to

believe that the bank would not allow a joint account to be

opened in the name of Consul and Grey, for joint accounts are

common enough. All these circumstances lead me to the view

that Clowes and Grey were, for some reason, endeavouring to

disguise or hide the fact that they were participating together in

the various purchases. This seems to go rather beyond a mere

failure to tell Walton about them, and certainly suggests that

Clowes and Grey believed that they had every reason to disguise

or hide the nature or existence of the arrangements they had

made with each other.

I have no reason to disbelieve that Grey led him (i.e. Clowes)

to believe that Walton was not interested in the Piggott Street

and Rozelle properties, and his claim that he believed that

Walton's companies were in financial difficulties. However, as I

have said, the evidence strongly suggests positive attempts on

the part of Grey and Clowes to hide transactions from Walton. I

have no doubt that Grey realised that the transactions were

improper on his part, if only on the ground that they involved

him in committing breaches of his agreement with Ronmar

Investments Pty. Ltd. In all the circumstances I think that

Clowes continued to believe that there may well have been

something wrong in relation to the transactions despite what he

had been told by Grey and despite his view about the financial

position of Walton's companies. I doubt if he could have

pointed with any precision to why he held this view, but no

doubt in general terms it was simply based upon a feeling that it

was wrong for him, an articled clerk of Walton, and Grey, an

employee working for Walton's companies, to be arranging

behind Walton's back and in his own office to enter into

profitable transactions of the same character that Walton

entered into. I do not have to resolve, having regard to my

findings, whether this constituted notice that the transactions

were in breach of some duty on the part of Grey, if that were the

fact, but I think that this is an explanation, coupled with the

reasons given by Clowes for not telling Walton about the

transactions, which I have already described, for the action taken by

Clowes with Grey to avoid there being any record of the

relationship between them both in connexion with the

transactions." (1974) 1 NSWLR, at p 455 (at p384)

21. It seems to me that the findings that I have just quoted do not conclude the question whether or not Consul participated in what his Honour found to have been, to his own knowledge, improper transactions on the part of Grey. (at p385)

22. It is in these circumstances that the Court of Appeal - differing as it did from his Honour about the right of D.P.C. Estates to maintain an action against Grey and Consul - did have to decide whether or not Consul participated in a breach by Grey of his fiduciary obligations in relation to the Clubb Street and Rozelle properties. I agree entirely with the finding that Consul did so. In my opinion the acknowledgment of 19th June 1968 is of overwhelming importance. It acknowledged what had been arranged between Grey and Consul before Consul bought the properties in question. Those arrangements - if there were more than one - provided the strongest inducement to Grey to prefer Consul to the Walton group - an inducement which may have led him to lie to Clowes about what he had actually told Walton. It was the duty of Grey to tell Walton fully and frankly of the deals he was making with Consul and if he wanted a share of profits to get Walton's permission to make profits out of any such transactions. He did not do so. It was in breach of Grey's duty to show Clowes the reports that he, on behalf of the Walton group, had obtained from Thorne, and Clowes could not have failed to realize that. Clowes' exculpatory statement that he paid no attention to Thorne's reports is a matter of no relevance whatever upon the question whether or not he knew that Grey was acting improperly in showing them to him. I am not merely suspicious of the propriety of the deals between Grey and Consul; I am satisfied that they were improper, and however little Clowes knew of Grey's duty to the Walton group, he knew that Grey was acting improperly. I consider that his Honour found that there were positive attempts on the part of Grey and Clowes to hide what was going on from Walton and there is no need to refer to the evidence that amply supports that finding. I am satisfied that this concealment and what occurred when the R. K. Grey No. 3 Account was opened was part of the understanding between Clowes and Grey. Here again there was participation by Clowes in Grey's improper conduct. At the very least Grey did not disclose to Walton what he was doing and Clowes both knew of this and himself kept hidden from Walton his dealings with Grey. (at p385)

23. What then follows? (at p385)

24. It is no part of the function of the Court of Appeal to depart from findings of fact made by a judge of first instance especially when questions of credit are involved unless it is satisfied that notwithstanding advantages of seeing and hearing the witnesses the judge at first instance was wrong. In the Court of Appeal of the Supreme Court, his Honour the President, in dissenting as he did, thought that to decide that Grey had been guilty of a breach of a fiduciary duty and that Clowes had participated in this, would involve a rejection of findings made by the learned judge of first instance. With great respect, I have come to a different conclusion. As Hope J. said explicitly, his decision that D.P.C. Estates was not a plaintiff who had a cause of action against the defendants, made it unnecessary for him to decide whether or not Consul did participate in Grey's breach of duty. It did become necessary for the Court of Appeal to resolve this question, and it did so. In my opinion, in making the critical finding, as Mr. Jeffrey contended, the majority did no more than fill a gap left by Hope J. Some finding had to be made in the Court of Appeal for the resolution of the case. I consider that the Court of Appeal was entitled to do what was done and that the majority decided correctly. The actual findings made by Hope J. provided, in a large measure, the foundation for the conclusion which the majority reached. (at p386)

25. Their findings led the majority to the conclusion that Consul ought not to retain the benefits it gained by joining with Grey to take advantage of breaches of his fiduciary duty. I accept this conclusion and, in doing so, I do not think that I am going beyond what Lord Selborne L.C. said in Barnes v. Addy (1874) 9 Ch App 244 but, were it necessary to do so, I would readily accept whatever extension of the doctrine that may be implicit in the decisions of Ungoed-Thomas J. in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 and Brightman J. in Karak Rubber Co. Ltd. v. Burden (1972) 1 WLR 602 . In my opinion the arm of equity is not to be foreshortened to make it incapable of dealing with underhand transactions entered into by persons in a fiduciary capacity with the encouragement of those who stand to gain from such conduct. In their historic task of preventing the retention of gains made through disloyalty courts of equity have, I think, concentrated upon a careful supervision of dealings by an agent who prefers his interest to his duty. It is, I think, sufficient to warrant equitable relief against a third person that he has undermined the loyalty of an agent with a fiduciary obligation. This is what I think Consul did here by making the deals with Grey which led to the acknowledgment of 19th June 1968. (at p386)

26. It remains to consider, however, whether D.P.C. Estates was itself entitled to the relief which was claimed in the two suits. The basis upon which they were framed was that D.P.C. Estates could itself sue because Walton would in fact have nominated it as the purchaser of the properties in question had he decided upon the purchase of those properties. I do not consider this, of itself, - if it were so - would warrant an order that Consul held the properties for D.P.C. Estates. If D.P.C. Estates obtained rights against Grey and Consul, those rights came into existence when Consul with Grey's assistance bought the properties in question. It seems to me, however, for reasons already given, that Grey did owe a duty of a fiduciary character of D.P.C. Estates itself as a member of the Walton group of companies and upon breach of this duty and in the absence of objection to the suits as framed, orders could properly be made on the basis that Consul, by participating in the fraudulent conduct of Grey, had obtained benefit at the expense of D.P.C. Estates, among others, and was accountable to it. The Court of Appeal, relying upon Rule 180 of the Equity Rules, made elaborate orders in favour of D.P.C. Estates saving the rights of the companies in the Walton group other than Ronmar so that in these suits any such company, although not a party, could intervene to assert rights against D.P.C. Estates. I do not consider that this was a case appropriate for the application of that rule but I think the appropriate order would have been simply to declare that Consul is trustee for D.P.C. Estates of the properties in question. Such an order would not preclude any other company from asserting rights against D.P.C. Estates in respect of the properties by appropriate proceedings against D.P.C. Estates. I do not think that the possibility, that D.P.C. Estates itself may be under some obligation to some other company or companies in respect of the properties in question because they too were affected adversely by the fraud of Grey, in which Consul participated, precludes a court of equity from granting to it, as one company suffering from that fraud, the declarations sought against Grey and Consul in the absence of objection to the constitution of the suits by reason of lack of parties. Upon this aspect of the case the Court of Appeal was unanimous. With the alteration necessary to give effect to the conclusion that simple declarations of trust can be made, I would affirm the decision of the Court of Appeal. (at p387)

GIBBS J. These two appeals which have been heard together are from orders of the Court of Appeal of New South Wales (1974) 1 NSWLR 443 which allowed appeals from judgments of Hope J. dismissing two suits brought by the present respondent D.P.C. Estates Pty. Ltd. ("D.P.C.") against Robert Kinross Grey and Consul Development Pty. Ltd. ("Consul"). The Court of Appeal unanimously allowed the appeal against the judgment in favour of Grey and ordered Grey to account to D.P.C. for the amounts, if any, received by Grey from Consul in respect of the purchases of certain properties known as the Rozelle properties and the Clubb Street property respectively. By a majority the appeal against the judgment in favour of Consul was also allowed and an order was made whose effect, stated shortly, was that saving the rights of seven other named companies it was declared that Consul held the said properties on trust for D.P.C. subject to a lien in favour of Consul for the amount of its expenditure on the properties less any income received from them. Grey has not appealed from the orders made against him; these appeals are brought by Consul. (at p388)

2. The facts of the case were very fully stated by Hope J. and, although some of his findings of fact have been challenged, it is unnecessary to repeat in full detail all the evidence which he considered in making his findings. During the years 1966-1967 Jack Westlake Walton, a solicitor, controlled a number of companies which he had established for purposes of his own. Some of those companies, including D.P.C., carried on the business of buying dilapidated properties, renovating or reconditioning them, and selling them with vacant possession. Another of the companies, Ronmar Investments Pty. Limited ("Ronmar"), was used as a service or managing company; amongst other things, it employed and paid the staff of most of the companies in the group, but it did not deal in real estate. Walton showed a fine disregard for the requirements of the Companies Act and the articles of association of the various companies, whose management was replete with irregularities. In May 1966 Grey was engaged by Walton as manager of his companies and, although he was never formally appointed by D.P.C. to be its manager, he thereafter carried on much of the business of the companies, including D.P.C. On 22nd August 1966 he entered into a written agreement with Ronmar to serve that company as working manager of the business of that and eight other companies (including D.P.C.). By this agreement Grey undertook that he would not divulge "any information concerning the business or finance of the company or of the associated companies or any of their dealings transactions or affairs which may come to his knowledge during or in the course of his employment" and that he would not "be concerned or interested directly or indirectly except as such manager in the business of real estate other than with the consent of the Managing Director". On 20th December 1966 D.P.C. purported to appoint Grey to be one of the directors; Grey assumed to hold this position until he resigned from it in December 1967. Hope J. held that this purported appointment was invalid by reason of irregularities in the conduct of the company's affairs and this finding has not been challenged. One of Grey's duties was to find properties that might be suitable for purchase. He did this by reading advertisements in the newspapers, by keeping his eyes open for "for sale" notices and also by seeking information from estate agents, solicitors, and other persons whom he knew. Once he had found a property that appeared to warrant consideration he would arrange for a Mr. Thorne to inspect and report upon it (at Ronmar's expense) and would submit Thorne's report with his own recommendation to Walton who would decide whether any and if so what offer should be made for its purchase. If an offer was made and accepted Walton would decide (usually at about the time when the contract was being prepared) which of the companies would make the purchase. During the years 1966 and 1967, of sixteen purchases made by Walton's companies, ten were made by D.P.C., and if Walton had caused the Rozelle properties and the Clubb Street property to be bought in 1967 it is probable that the purchases would have been made in the name of that company. (at p389)

3. In March 1964 one Robert Clowes entered into articles of clerkship with Walton and remained his articled clerk until December 1967, when he left Walton's employment for reasons unconnected with the present dispute. The father of Robert Clowes had invested in some companies of which Walton was a director, and his mother, also, had lent substantial sums of money on mortgage to the Walton group. The father was a director of Consul, a company which had been incorporated in 1959 and whose shareholders were principally members of the Clowes family; on 5th July 1965, after the death of his father, Clowes became managing director of that company. (at p389)

4. Grey occupied rooms on the same floor as Walton's office and Clowes saw him often and became friendly with him. Clowes became aware that the business of the companies, including D.P.C., included the purchase of properties and that Grey played some part in the management of the companies and in advising Walton in relation to the purchases that they made. He knew that Grey obtained reports from Thorne and submitted them to Walton to be used in deciding whether to buy particular properties. He believed that Grey was a director of D.P.C., and believed Grey owed it certain duties, although he had no knowledge of the exact nature of Grey's obligations. Early in 1967 he had been told by another solicitor, who had apparently seen a copy of the written agreement made with Ronmar, that Grey was forbidden by the agreement to deal in real estate. At the trial Clowes had forgotten this conversation but Hope J. attached no significance to his failure to remember it, because the conversation had been only a casual one, and had taken place at a time when the matter discussed was of no particular importance to Clowes. (at p389)

5. In July 1967 Grey, who had shown Walton a report from Thorne in relation to a property at Piggott Street, Dulwich Hill, was instructed by Walton to make an offer for the property. However Grey recommended it to Clowes as a good investment and told Walton that it had been sold to someone else. Clowes believed that Walton had made an offer for the property and that Walton had instructed Grey to ask the owner to serve notices to quit on the tenants. However Grey told Clowes that Walton could not afford to buy the property, and also that the owner was unwilling to meet Walton's request to serve notices to quit. In fact Walton's companies were short of money and Clowes knew this because at that time some of those companies were heavily in arrears with payments of the moneys due to Mrs. Clowes under the mortgages. Clowes made inquiries from Walton's accountants who confirmed that the companies were having difficulty in raising finance. He decided that Consul would buy the property and agreed orally with Grey that Grey would receive half the profits and bear half the losses on the purchase and would find finance and help in the management of the property. With Grey he opened a joint bank account, called "R.K. Grey No. 3 Account", and the proper inference from the evidence appears to be that this was done with a view to disguising Consul's interest in the transaction. On 9th August 1967 Consul entered into a contract for the purchase of the property but the contract was not completed - Consul determined it in November 1967 because of the failure of the vendor to answer a requisition. Clowes agreed that he deliberately withheld from Walton information concerning the purchase; he thought that Walton would disapprove of the transaction and also thought that if he heard of the proposed purchase he would want to join in the transaction with Consul in place of Grey. (at p390)

6. Some time in or about August 1967 Grey told Walton that the Rozelle properties were for sale. It is not clear how Grey had learnt of the properties but they had been on the market for some time and the fact that they were for sale was a matter of public knowledge. Walton asked Grey to have the properties inspected and Grey obtained reports from Thorne and submitted them to Walton. When Walton saw the reports he instructed Grey to make an offer for the properties, saying that he thought they were very cheap and that Grey should not let them get away. It is unlikely that Grey did make an offer; instead he told Walton that the properties had been sold and brought the properties to Clowes' attention, telling him that they were a good buy. Clowes was shown Thorne's reports (which he said he did not read) and was told the amount of Walton's offer which he believed (rightly) would have been increased if necessary. He decided to make a higher offer on behalf of Consul and was eventually successful; on 30th August 1967 an agreement was signed for the sale of the properties to Consul for a price of $28,500. The purchase was completed in October 1967 and the "R.K. Grey No. 3 Account" was thereafter used for receipts and outgoings in respect of the properties. At some time - it is not clear when - Clowes and Grey made an agreement that Consul and Grey should have the same rights and obligations in respect of these properties as had been agreed upon in respect of the Piggott Street property. The only written record of this agreement (and of a similar agreement made in respect of the Clubb Street property) was an acknowledgment signed by Clowes on 19th June 1968; it did not refer to Grey's obligations, but acknowledged his entitlement to "half of the profits arising from the income or sale" of the properties in question. (at p391)

7. Clowes said in evidence - and Hope J. accepted - that Grey, in telling him about the Rozelle properties, said that Walton's offer had not been accepted and that Walton did not want the properties. Clowes did not inform Walton of the intended purchase and clearly did not want Walton to find out about it. (at p391)

8. Grey learnt of the Clubb Street property in the course of a casual conversation with a solicitor in a hotel. He did not tell Walton about it but told Clowes and within a week or ten days Consul had agreed to buy the property for $1,900; the contract was dated 15th September 1967 and the purchase was completed in November. Grey did not tell Clowes that Walton had been told about the property but was not interested in purchasing it; nothing was said as to whether Walton was interested. Before the purchase Clowes and Grey again agreed that Grey should have a one-half interest in the property on the same terms as applied to the Rozelle properties. (at p391)

9. Walton did not become aware of the purchase of the Rozelle properties until January 1968 and it was only later in that year, after the first of these suits had been commenced, that he learnt of the purchase of the Clubb Street property. There is no evidence that the properties have been resold, or that any profit has in fact been made from them. (at p391)

10. There can be no doubt, and the learned trial judge found, that Clowes and Grey made a deliberate endeavour to disguise or hide the fact that they were participating together in the various purchases and that this indicated a consciousness on the part of both that there may have been some impropriety in these transactions. However the learned trial judge accepted Clowes' evidence that Grey had led him to believe that Walton was not interested in the Rozelle properties and that Walton was in financial difficulties. He found that the explanation for Clowes' belief that there may have been something wrong in relation to the transactions was that he felt that it was working for Walton's companies, to be arranging behind Walton's back and in his own office to enter into profitable transactions of the same character that Walton entered into. (at p391)

11. To one who has merely read the transcript of the evidence, and has not had the advantage of being present at the trial, some of these findings may appear unduly charitable to Clowes, and there is no doubt that some of the evidence to which I have referred, as well as other evidence, going only to credit, that I do not think it necessary to mention, seems to reflect adversely on his credibility. But the judge considered the evidence very fully; he formed a favourable opinion of Clowes as a witness and was not prepared to disbelieve him on the important questions of fact just mentioned. The principles that guide an appellate court in deciding upon appeals involving questions of fact were fully discussed in Paterson v. Paterson [1953] HCA 74; (1953) 89 CLR 212, at pp 218-224 . I need not restate them, since for present purposes it is enough to say that although a finding which depends upon the judge's assessment of the credibility of a witness is not altogether immune from interference, such a finding will only be disturbed if the court of appeal, after taking fully into account the advantages enjoyed by the judge of trial, is satisfied that he has fallen into error. In the present case the finding that Clowes believed that Walton was in financial difficulties was inescapable, and it was but a short step to the further finding that Clowes also believed that Walton could not afford to buy the properties and therefore was not interested in them. There was no positive evidence that Grey had told Clowes the truth, or that Clowes otherwise knew or believed that Walton had been misled by Grey. In these circumstances the finding that Clowes believed that Walton was not interested in the Rozelle properties, resting as it does largely on the opinion formed by Hope J. as to the credibility of Clowes, cannot be disturbed. (at p392)

12. The majority of the Court of Appeal held that Grey was in a fiduciary relation to all the companies in the Walton group, that he violated his duty as a fiduciary and that Consul (through the agency of Clowes) participated in that violation of duty and was a constructive trustee of the properties purchased, although entitled to a lien for the amount of its net outlays. Grey's obligations are not directly in issue on this appeal, but it is necessary to consider them, since it is upon the alleged participation by Consul in breaches of duty committed by Grey that Consul's liability is said to rest. The principle of equity applicable to a person in Grey's position was recently restated by Lord Wilberforce in New Zealand Netherlands Society "Oranje" Incorporated v. Kuys (1973) 1 WLR at pp 1129-1130 , as follows:

"The obligation not to profit from a position of trust, or, as it

is sometimes relevant to put it, not to allow a conflict to arise

between duty and interest, is one of strictness. The strength, and

indeed the severity, of the rule has recently been emphasised by

the House of Lords: Phipps v. Boardman [1966] UKHL 2; (1967) 2 AC 46 . It retains its

vigour in all jurisdictions where the principles of equity are

applied. Naturally it has different applications in different

contexts. It applies, in principle, whether the case is one of a trust,

express or implied, of partnership, of directorship of a limited

company, of principal and agent, or master and servant, but the

precise scope of it must be moulded according to the nature of

the relationship. As Lord Upjohn said in Phipps v. Boardman

(1967) 2 AC, at p 123: 'Rules of equity have to be applied

to such a great diversity

of circumstances that they can be stated only in the most

general terms and applied with particular attention to the exact

circumstances of each case'."

Sometimes - indeed often - it is said that the person occupying a fiduciary position is liable to account for profits which he has gained by the use of his position or of property or knowledge possessed by virtue of the position. Thus in Phipps v. Boardman, Lord Hodson said (1967) 2 AC, at p 105 :

"The proposition of law involved in this case is that no person

standing in a fiduciary position, when a demand is made upon

him by the person to whom he stands in the fiduciary

relationship to account for profits acquired by him by reason of his

fiduciary position and by reason of the opportunity and the

knowledge, or either, resulting from it, is entitled to defeat the

claim upon any ground save that he made profits with the

knowledge and assent of the other person."

It is doubtful whether it can rightly be concluded in the present case that Grey made a profit - or, rather, stands to make a profit - by the use of his position in relation to the Walton companies. That position gave him no special opportunity to acquire the properties and he did not discover them by the use of any confidential information; although it is true that he had access to the information contained in Thorne's reports relating to the Rozelle properties, it was not established that there was anything in those reports that was of any benefit either to Grey or to Clowes. However the rule that a person in a fiduciary position is not entitled to make a profit without the knowledge and assent of the person to whom the fiduciary duty is owed is not limited to cases where the profit arises from the use of the fiduciary position or of the opportunity or knowledge gained from it. The basis of the rule is that a person in a fiduciary position may not place himself in a situation where his duty and his interest conflict. In Aberdeen Railway Co. v. Blaikie Brothers (1854) 1 Macq 461, at p 471 , Lord Cranworth L.C. stated the principle so far as it applies to directors in the following wide words:

"A corporate body can only act by agents, and it is of course

the duty of those agents so to act as best to promote the interests

of the corporation whose affairs they are conducting. Such

agents have duties to discharge of a fiduciary nature towards

their principal. And it is a rule of universal application, that no

one, having such duties to discharge, shall be allowed to enter

into engagements in which he has, or can have, a personal

interest conflicting, or which possibly may conflict, with the

interests of those whom he is bound to protect."

In Phipps v. Boardman (1967) 2 AC, at p 124 , Lord Upjohn suggested that in this passage the phrase "possibly may conflict" requires consideration, but with that qualification Lord Cranworth's statement retains its authority. The principle which it expresses was applied in In re Thomson, Thomson v. Allen (1930) 1 Ch 203 , to forbid a trustee of a will from carrying on a business which would compete with that of the testator. The case of an agent employed to buy a particular property comes within a similar principle; an agent so employed cannot buy the property for himself: Lees v. Nuttall (1829) 1 Russ & M 53 ; affirmed (1834) 2 My & K 819 (39 ER 21, 1157) ; Dunne v. English (1874) LR 18 Eq 524 ; and Regier v. Campbell-Stuart (1939) 1 Ch 766 . In such cases the trustee or agent has not necessarily gained a benefit by the use of his position, but he has made a benefit by entering into a transaction in conflict with his fiduciary duty. Where the rule applies, the liability of the person in a fiduciary position does not depend on the fact that the person to whom the duty is owed has suffered injury or loss. In Birtchnell v. Equity Trustees, Executors & Agency Co. Ltd. [1929] HCA 24; (1929) 42 CLR 384, at pp 408-409 , Dixon J. said:

"Moreover, in considering such a matter it is important to

remember that, in the language of James L.J., 'the general

principle that . . . no agent in the course of his agency, in the

matter

of his agency, can be allowed to make any profit without the

knowledge and consent of his principal . . . is an inflexible rule,

and must be applied inexorably by the Court, which is not

entitled . . . to receive evidence, or suggestion, or argument as to

whether the principal did or did not suffer any injury in fact by

reason of the dealing of the agent; for the safety of mankind

requires that no agent shall be able to put his principal to the

danger of such an inquiry as that' (Parker v. McKenna (1874) LR 10 Ch

App 96,

at pp 124-125).

Further, and this, perhaps, is a necessary corollary, the partner

is responsible to his firm for profits, although his firm could not

itself have gained them."

The law in that passage is stated with regard to agents but it applies generally to persons in a fiduciary position: Regal (Hastings) Ltd. v. Gulliver (1967) 2 AC, esp at pp 144-145 ; Phipps v. Boardman [1966] UKHL 2; (1967) 2 AC 46 . (at p394)

13. It is well settled that a director stands in a fiduciary position in relation to his company and in my judgment a person who though irregularly appointed assumes the position of director and on behalf of the company performs the tasks of finding, investigating and reporting upon properties suitable for purchase by the company owes a fiduciary duty to the company with which his private interests cannot be allowed to conflict. I consider, therefore, that it was a breach of the duty which was owed by Grey to D.P.C. to buy for himself properties suitable for purchase by that company and which the company might have wished to purchase. It was immaterial that had the properties been purchased on behalf of one of Walton's companies the purchase might have been made by a company other than D.P.C. and it was equally immaterial (if it were the case) that no company in the group could have afforded to make the purchase, for the liability of Grey did not depend on the fact that D.P.C. had been deprived of a profit or had suffered an injury. (at p395)

14. The question whether the remedy which the person to whom the duty is owed may obtain against the person who has violated the duty is proprietary or personal may sometimes be one of some difficulty. In some cases the fiduciary has been declared a trustee of the property which he has gained by his breach; in others he has been called upon to account for his profits and sometimes the distinction between the two remedies has not, it appears, been kept clearly in mind. However, no difficulty arose in this respect so far as Grey was concerned. He did not get the Rozelle properties or the Clubb Street property into his own hands; they were acquired by Consul, and Grey's only right was to share in profits when made. The appropriate order in his case was to account for the profits when he received them. (at p395)

15. It is now possible to consider the case against Consul. Clowes owed no fiduciary duty to D.P.C. and any fiduciary duty which he may have owed to his employer Walton was not broken by his taking part in the purchase of the properties: his employment did not extend to finding properties for purchase and no conflict between his interest and his duty to Walton was involved if he acquired a property for himself. A fortiori Consul had no fiduciary duty to D.P.C. or Walton or any of the Walton companies. The principle upon which it is now sought to make Consul liable is that stated by Lord Selborne L.C. in Barnes v. Addy (1874) 9 Ch App 244, at pp 251-252 :

"Those who create a trust clothe the trustee with a legal

power and control over the trust property, imposing on him a

corresponding responsibility. That responsibility may no doubt

be extended in equity to others who are not properly trustees, if

they are found either making themselves trustees de son tort, or

actually participating in any fraudulent conduct of the trustee to

the injury of the cestui que trust. But, on the other hand,

strangers are not to be made constructive trustees merely

because they act as the agents of trustees in transactions within

their legal powers, transactions, perhaps of which a Court of

Equity may disapprove, unless those agents receive and become

chargeable with some part of the trust property, or unless they

assist with knowledge in a dishonest and fraudulent design on

the part of the trustees."

Although in this passage Lord Selborne speaks of dishonesty and fraud it is clear that the principle extends to the case "where a person received trust property and dealt with it in a manner inconsistent with trusts of which he was cognizant": Soar v. Ashwell (1893) 2 QB 390, at pp 396-397 ; Lee v. Sankey (1872) LR 15 Eq 204, at p 211 ; and in In re Blundell; Blundell v. Blundell (1888) 40 Ch D 370, at p 381 . All these authorities, however, are dealing with trustees and trust property in the strict sense and the question is whether the principle applies to impose liability on strangers who knowingly participate in a breach of fiduciary duty committed by a person who is not a trustee or is at most a constructive trustee. In Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 , Ungoed-Thomas J. held that directors of a company should be regarded as holding on trust any moneys of the company under their control and that agents of the directors who received moneys of the company in circumstances that showed that they assisted "with knowledge in a dishonest and fraudulent design" on the part of the directors were liable as constructive trustees. He held that what is "dishonest and fraudulent" for this purpose has to be judged according to "the plain principles of a court of equity" (1968) 1 WLR, at pp 1580-1582 . After an exhaustive discussion of the question what knowledge is required to satisfy the test stated in Barnes v. Addy (1874) 9 Ch App 244 , he expressed his conclusions on that matter as follows (1968) 1 WLR, at p 1590 :

"The knowledge required to hold a stranger liable as

constructive trustee in a dishonest and fraudulent design, is

knowledge of circumstances which would indicate to an honest,

reasonable man that such a design was being committed or

would put him on inquiry, which the stranger failed to make,

whether it was being committed. Acts in the circumstances

normal in the honest conduct of affairs do not indicate such a

misapplication, though compatible with it. And answers to

inquiries are prima facie to be presumed to be honest . . . "

This decision was followed by Brightman J. in Karak Rubber Co. Ltd. v. Burden (1972) 1 WLR 602 . (at p396)

16. The decision in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 that the rule in Barnes v. Addy (1874) 9 Ch App 244 applies to agents of company directors who have received money of the company does not go quite far enough to resolve the present case, since Consul did not receive any property of D.P.C. However, in my judgment, the principle under discussion extends to the case where a stranger has knowingly participated in a breach of fiduciary duty committed by a person who is not a trustee even though nothing that might properly be regarded as trust property - even property stamped with a constructive trust - has been received. The strict rule of equity that forbids a person in a fiduciary position to profit from his position appears to be designed to deter persons holding such a position from being swayed by interest rather than by duty (see Bray v. Ford (1896) AC 44, at p 51 ); it is "a rule to protect directors, trustees, and others against the fallibility of human nature": Costa Rica Railway Co. Ltd. v. Forwood (1901) 1 Ch 746, at p 761 . If the maintenance of a very high standard of conduct on the part of fiduciaries is the purpose of the rule it would seem equally necessary to deter other persons from knowingly assisting those in a fiduciary position to violate their duty. If, on the other hand, the rule is to be explained simply because it would be contrary to equitable principles to allow a person to retain a benefit that he had gained from a breach of his fiduciary duty, it would appear equally inequitable that one who knowingly took part in the breach should retain a benefit that resulted therefrom. I therefore conclude, on principle, that a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation. This conclusion is supported by Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 , Karak Rubber Co. Ltd. v. Burden (1972) 1 WLR 602 , and the earlier similar case of Gray v. Lewis (1869) LR 8 Eq 526 (reversed on other grounds: (1873) LR 8 Ch App 1035 ), although it represents a slight extension of those cases, since in all of them the defendants had obtained possession of what was regarded as trust property. A case which in some respects seems to me to be even closer to the present is Cook v. Deeks (1916) 1 AC 554 . In that case directors of the Toronto Company, while ostensibly acting for that company, obtained for themselves a contract which they should have obtained for the company. It was held that the defendant directors could not retain the benefit of the contract for themselves, but must be regarded as holding it on behalf of the company (1916) 1 AC, at p 563 , and they were ordered to account for the profits which they had made out of the transactions. However the directors had formed a second company, the Dominion Construction Company, which had taken over the contract. The Judicial Committee said (1916) 1 AC, at p 565 , that they had in the course of their judgment referred to the claim as one against the directors, and went on: "But it was not, and it could not be, disputed that the Dominion Construction Company acquired the rights of these defendants with full knowledge of all the facts, and the account must be directed in form as an account in favour of the Toronto Company against all the other defendants". Although their Lordships spoke of the directors holding the contract on behalf of the Toronto Company, this was not a case of the misuse by trustees of trust property, but one in which persons in a fiduciary position obtained for themselves something which they ought to have got for the company, and no order declaring any of the defendants to be constructive trustees was ever made. (at p398)

17. I respectfully agree with what was said in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 as to the meaning of "dishonest and fraudulent" for the purposes of the rule. This expression is to be understood by reference to equitable principles and, as I have already indicated, in my judgment it includes a breach of trust or of fiduciary duty. On behalf of Consul, it was submitted that the further conclusion reached in the Selangor Case, that to render a stranger liable for breach of fiduciary duty it is not necessary to show that he has had actual knowledge that what was done was in breach of the duty, was erroneous. On this point the Selangor Case was said to be inconsistent with the later decision of the Court of Appeal in Carl Zeiss Stiftung v. Herbert Smith (No. 2) (1969) 2 Ch 276 . That decision depended on the view that knowledge of a claim made against the client of a solicitor by the other party was not sufficient to amount to notice to the solicitor of a trust or of misapplication of moneys; or as Sachs L.J. said (1969) 2 Ch, at p 296 : "no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properly assess." The case was in my opinion distinguishable from the Selangor Case (1968) 1 WLR 1555 and did not finally decide the question now under consideration. It may be that it is going too far to say that a stranger will be liable if the circumstances would have put an honest and reasonable man on inquiry, when the stranger's failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognizing an impropriety that would have been apparent to an ordinary man. However, for reasons that will appear, it is unnecessary for me to express any concluded view on these questions and I assume for the purposes of this case, but without finally deciding, that the formulation of principle on this point in the Selangor Case was correct. (at p398)

18. It then becomes necessary to apply the principles which I have been discussing to the circumstances of the present case. As I have said, Grey committed a breach of the fiduciary duty that he owed to D.P.C., amongst others. Consul assisted him to commit that breach of duty by buying the properties and arranging to give him a share of the profits resulting from the purchase. The crucial question in the case is whether Consul assisted in that breach of duty "with knowledge", so as to render Consul liable. Whatever knowledge Clowes had must be imputed to Consul. Clowes was aware that Grey stood in a fiduciary position and was of course aware of the arrangements entitling Grey to share in the profits. The fact that Clowes endeavoured to hide the transactions from Walton clearly shows that Clowes knew that Walton (and therefore D.P.C.) did not have full knowledge of the transactions and had not assented to them. If it has been proved that Clowes knew, or that an honest and reasonable man with knowledge of the facts known to Clowes would have thought, that Grey was acting in breach of his fiduciary duty in arranging for Consul to buy the properties and to share in the profits, enough will have been established (on the assumption made above) to render Consul accountable to D.P.C. In those circumstances it would not matter that D.P.C. might not have been able to buy the properties, and that in fact D.P.C. might have suffered no loss. However, according to findings which cannot be disturbed, Clowes believed that the Walton companies were in financial difficulties and were not interested in buying the Rozelle properties. The question then is whether Grey would have been acting in breach of his duty in buying those properties, or in arranging for someone else to buy them and to share the profits with him, once he had been informed that the Walton companies were not interested in them. It has not been proved that Grey's position with the Walton companies gave him the opportunity to buy the properties or that he availed himself of any information of a confidential kind in deciding to recommend the purchases to Consul. Did the fact that he was employed to find properties for purchase by the Walton companies mean that he would have been acting in breach of his duty if he had participated in the purchase of a property once those companies had (uninfluenced by him) decided not to buy it? Could a conflict between interest and duty be involved in such a purchase? The answer to questions of this kind may of course vary in the different circumstances of particular cases. In the circumstances of the present case, I have concluded that Grey would not have been in breach of his fiduciary duty to any of the Walton companies in buying a property which Walton had decided not to buy, assuming that the decision made by the Walton companies had not been induced by Grey, but had been forced upon them by their financial straits, and also that in making his decision to buy Grey was not acting on information gained from his position with the companies. If Walton had decided not to buy the property, in these circumstances, it seems to me that Grey was entitled to buy it for himself. He might have been lacking in candour, and perhaps in moral sensibility, in acting behind Walton's back, but once Walton had decided not to buy the property there was no possibility that if Grey considered buying it he would be faced with a conflict between interest and duty - the property would have been removed from the ambit of his duties. It follows that on the facts which Clowes believed to exist, Grey was not acting in breach of his fiduciary duty in participating in the purchase of the properties. Therefore Clowes did not knowingly participate in Grey's breach; he neither actually knew, nor had reason to believe, that Grey was violating his duty, and in the circumstances an honest and reasonable man would not have thought it necessary to inquire further. On behalf of D.P.C. it was argued that the arrangements made for Grey to share in the profits of the properties were tantamount to bribes, and that Clowes must have known that Grey was acting improperly in accepting them. In my opinion this argument cannot be accepted. Assuming Clowes' honest belief that the Walton companies were not interested in the properties, there was nothing calculated to divert Grey from his duty in arranging to share with him the profits and losses involved in the purchase. Although the acknowledgment of 19th June 1968 referred only to a sharing of profits, the evidence of Clowes, which Hope J. apparently accepted, was that separate arrangements were made during the course of each transaction, and that pursuant to these arrangements Grey became subject to obligations as well as entitled to rights. That circumstance weakens the argument that the arrangements partook in any way of the nature of a bribe, but the vital matter on this aspect of the case is that it was not shown that Clowes was endeavouring to persuade Grey to act in any way contrary to his duty. Finally therefore I have reached the conclusion that in relation to the Rozelle properties there has been a failure to establish that Consul (through Clowes) had knowledge - using that term in the wide sense accepted in the Selangor Case (1968) 1 WLR 1555 - that Grey was committing any breach of his fiduciary obligations. (at p400)

19. In relation to the Clubb Street property there is a further complication. Grey did not expressly inform Clowes that Walton had said that he was not interested in this property. If this had been an isolated transaction, this fact would have been of great importance. As things were, however, there had been two earlier transactions, closely connected both in their nature and in point of time. Grey had told Clowes, and Clowes believed, that the properties at Dulwich Hill and Rozelle were not of interest to Walton because of his difficulties with finance. Clowes knew that in truth Walton was in considerable financial difficulties. The learned trial judge did not expressly find that Clowes assumed that Walton had disclaimed any interest in the Clubb Street property also. He said that in respect of this property Clowes did not have "any particular reason for believing that Mr. Grey was not committing a breach of the duty he believed Mr. Grey owed the companies, unless it be the fact that Mr. Grey told him he heard about the property from a solicitor, or unless he was relying upon his general belief that Mr. Walton's companies were not interested in buying properties because of their financial position". Although this passage is, with respect somewhat obliquely phrased, it is I think clear that the judge intended to find that Clowes had the general belief to which he referred. Further, the explanation given by the judge for the belief of Clowes that there was something wrong in relation to the transactions was intended to exclude the suggestion that Clowes thought that Grey had acted in breach of his fiduciary duty. I think that consistently with these findings it must be concluded that Clowes believed that in the case of this property, as in the case of the other properties, the Walton companies were not interested in making a purchase. It is true that the purchase price of the Clubb Street property was comparatively small, but Walton's financial difficulties were by no means trivial, and it was not unreasonable to believe that the companies could not afford to buy the property. In this case also it has not been established that Clowes knew or should have known that Grey was in breach of his duty, nor has it been established that an honest and reasonable man in the position of Clowes would have felt bound to make further inquiries to confirm the assumption that the Walton companies could not afford to buy the Clubb Street property and were not interested in it. Had Clowes inquired from Grey, there can be no doubt that Grey would have confirmed him in his belief, but assuming his own honesty and his belief in Grey's honesty, and having regard to what had occurred in relation to the two former transactions, he was not bound to inquire. (at p401)

20. For these reasons I consider that the members of the Court of Appeal who constituted the majority were wrong in holding that Consul held the properties in question as a constructive trustee. Furthermore, I consider that Consul was under no duty to account to D.P.C. in respect of those properties. (at p401)

21. I would allow Consul's appeals. (at p401)

STEPHEN J. This is an appeal from the Court of Appeal Division of the New South Wales Supreme Court which, by majority, has allowed an appeal from the decree of the Equity Division, Hope J. (at p401)

2. Two separate suits are involved, they were heard together and may, for present purposes, be regarded as one. The facts before his Honour were very detailed in character and I will confine myself to those essential to an understanding of the issues raised on this appeal. (at p402)

3. During the 1960's a solicitor named Walton was actively engaged in dealing in real estate by the medium of a number of companies which may conveniently be described collectively as the Walton Group. Their principal business was the acquisition of dilapidated properties in Sydney, usually subject to tenancies, their renovation and their resale after vacant possession had been obtained. The plaintiff, respondent on this appeal, was one of such companies. One company of the Group did not deal in land but instead acted as the service or management company of the Group, providing, for reward, secretarial, management and other services for the remaining companies; in 1966 it engaged one Grey as working manager of its business and of that of other companies in the Group. Grey's main task was in the acquisition and subsequent disposal of properties by companies in the Group. During 1967 he also acted as a director of certain companies in the Group, although there seems to have been a defect in his appointment. He would learn, from various sources, some of them freely available to the general public, of properties which were for sale, obtain written reports on them from another employee and submit those reports to Walton, accompanied with his own advice concerning the desirability of their acquisition. Walton acted as managing director of all companies in the Group, although there was again some defect in his appointment; he would personally decide whether such a property was to be purchased and, if so, which company in the Group was to become the purchaser. During 1967 the only company in the Group in whose name purchases of house properties were currently being made was the plaintiff, D.P.C. Estates Pty. Ltd. (D.P.C.). (at p402)

4. Walton at the same time conducted a legal practice in Sydney, largely concerned with the by-products of his real estate activities - conveyancing, landlord and tenant litigation and the like. He had had as his articled clerk since 1964 one Robert Clowes; in 1967 Clowes was also independently interested in real estate dealings in his capacity as managing director of the defendant, Consul Development Pty. Ltd. (Consul), an investment company of the Clowes family. (at p402)

5. Clowes had become articled to Walton in the following circumstances: his father had for some time been a friend of Walton, who acted as solicitor for Consul; his parents had lost large sums in the collapse, in 1961, of a company with which Walton was closely associated and Walton had since been endeavouring, through the Group's real estate dealings, to amass funds with which to make good the losses of those who had suffered in the failure of that company. Clowes' father, who died in 1965, controlled Consul and thought it expedient to assist Walton in this project, he had accordingly procured the making of large advances to companies in the Group which were secured by mortgages in favour of Mrs. Clowes and of Consul. It was in these circumstances that Walton had, at the request of Clowes' father, taken Robert Clowes as his articled clerk. Following his father's death Clowes was thus both Walton's articled clerk and managing director of Walton's client and creditor, Consul. (at p403)

6. Clowes had, over the years of his service under articles, become conversant with the affairs of the Walton Group of companies, being much engaged in the legal aspects of their business; he came to know Grey very well. (at p403)

7. Then, in mid-1967, Consul found itself with moneys to invest and Clowes decided that it should for the first time enter a field of property investment very similar to that in which the Walton Group operated. Grey, to whom Clowes had confided his decision, thereupon told Clowes of a property at Dulwich Hill which was for sale and the purchase of which he recommended. Walton, said Grey, had been interested in purchasing the property but the Group could not afford to buy it. Clowes made his own inquiries about the financial position of the Walton Group, asking two accountants employed by the Group who confirmed that the Group was suffering from a shortage of money, its companies were having difficulty in raising finance. Clowes then inspected the Dulwich Hill property and decided that Consul should buy it with a view to resale; he agreed with Grey that Grey should have half the profits and bear half of any losses involved in the transaction, Grey agreeing to assist in procuring finance for the purchase. However nothing came of the matter, the purchase fell through for reasons not presently relevant. Throughout this and subsequent transactions involving Grey, Clowes deliberately withheld from Walton any knowledge of Consul's proposed purchases. (at p403)

8. That the Group was in financial difficulties was no surprise to Clowes; relations between the Clowes family and Walton were then deteriorating because companies in the Group which owed Consul some $20,000 and Mrs. Clowes over $60,000 secured by mortgages of real estate, were making default under these mortgages. Clowes was, of course, aware of this and it must have provided emphatic confirmation of what Grey and the accountants told him about the Group's financial straits. (at p403)

9. Soon afterwards, in August 1967, Grey told Walton of a group of properties at Rozelle which had been on the public market for a considerable time; reports were obtained and considered and, despite financial difficulties, Walton instructed Grey to make an offer to purchase them, the price to be offered being, as Grey would know, a lesser sum than the maximum Walton was prepared to pay. Walton specifically told Grey not to let the purchase fall through. However Grey later reported to Walton that the properties had been sold to a third party. What in fact had happened was that Grey had told Clowes of these properties, recommending them and saying that a grossly inadequate offer for them by Walton had been rejected and that Walton now did not want the properties. He showed him photographs of them and a report prepared for Walton's information, which report Clowes may not have read. Thereupon Clowes, through Grey, offered a considerably higher price than Walton had offered and, after negotiation, Consul bought them in August 1967 at a still higher price; Grey, it was agreed, should again share half of any profits or losses revealed on their resale. (at p404)

10. Finally, in September 1967, Grey told Clowes of a further Rozelle property, in Clubb Street, of which he had learned from a chance acquaintance who wished to sell it urgently at a low price. Clowes decided that Consul should buy it and it did so; this property was never reported by Grey to Walton nor did Grey suggest to Clowes that Walton had ever heard of it. Again it was agreed that Grey should share with Consul in profits and losses. (at p404)

11. Soon afterwards relations between Walton and Mrs. Clowes and, for that matter, Consul reached breaking point and Walton terminated Clowes' articles of clerkship because of the conflict of interest represented by Clowes' association with Consul, which by then was threatening action by reason of default under mortgages given by companies in the Group. Only some time later did Walton learn of Clowes' transactions involving Grey and the purchases of the Rozelle properties by Consul, after which D.P.C. instituted the present proceedings against Grey and Consul, seeking as against Consul declarations that the properties which it had purchased were held upon trust for D.P.C. and injunctions restraining Consul from dealing in them; as against both defendants an account of profits was also sought. Grey did not defend the suits and there is no appeal by him against the declarations and orders made against him by the Court of Appeal Division. (at p404)

12. In justification of its role as plaintiff in these proceedings D.P.C. asserts that it was the company in the Group which Walton would have nominated as purchaser of the properties had not Grey's dishonesty denied to the Group the opportunity of purchasing them. (at p404)

13. The learned primary judge dismissed D.P.C.'s suits, concluding that, whatever breach of fiduciary duty Grey might be guilty of, that duty was not owed to D.P.C., which could accordingly obtain no relief either against Grey or against Consul. In allowing the appeal the majority in the Court of Appeal Division held that D.P.C. had locus standi to bring the suits and found Consul to be a constructive trustee for D.P.C. of the properties in question; D.P.C. was also afforded the relief it claimed against Grey. (at p405)

14. This present appeal by Consul therefore involves two distinct questions, whether D.P.C. had standing to sue and the rather broader question whether in any event, on the facts as found, any case can be made out for equitable relief as against Consul. It was upon this latter question that the learned President of the Court of Appeal Division dissented and it is to it that I first direct my attention. (at p405)

15. Precise identification of the findings of fact of the learned primary judge concerning Clowes' knowledge of Grey's true role in these transactions and of Grey's disregard of his duty to members of the Walton Group is central to this latter question. Notwithstanding his disposal of the suits upon another ground, his Honour undertook a most detailed examination of the evidence on this aspect; he was conscious, as he said, that on the issue of whether Consul had notice at relevant times that the transactions were in breach of Grey's fiduciary obligations, Clowes' evidence and its acceptability was critical. His Honour clearly found it no easy task to arrive at his ultimate conclusion about the state of Clowes' knowledge but, despite much debate before us as to the precise nature of that conclusion, I am satisfied that his Honour did find that Clowes was not aware that what Grey was doing involved any breach of Grey's duty to others. (at p405)

16. His Honour assumed in the plaintiff's favour that Grey's duties with the Walton Group placed him in a fiduciary relationship. His findings as to Clowes' familiarity with Grey's duties and with the operations of the Walton Group were such that to establish the liability of Consul, at the suit of an appropriate plaintiff, to account as a constructive trustee, it only remained to show that Clowes was aware that Grey was acting in breach of his duty. But this Clowes stoutly denied and while not accepting Clowes' evidence on all matters his Honour did state that he had formed a favourable opinion of him as a witness. (at p405)

17. His Honour recounted Clowes' explanation of his relations with Grey and of the reasons Clowes gave for believing that Grey was not acting improperly. These consisted, in essence, of Clowes' acceptance of Grey's statement that, due to want of financial resources, Walton's group of companies were at the time unable effectively to enter the real estate market. His Honour found "no reason to disbelieve that Grey led him (Clowes) to believe that Walton was not interested in the Dulwich Hill and Rozelle properties, and his (Clowes') claim that he believed that Walton's companies were in financial difficulties" (1974) 1 NSWLR, at pp 455, 467 . Clowes had ample grounds for accepting Grey's statements as true; he had obtained independent confirmation from Walton's accounts office that the Group was unable at the time to finance further property purchases, he was told "We haven't got any money", and his own mother and the company of which he was managing director, Consul, were in the course of experiencing, as mortgagees of properties owned by the Group, the unhappy effects of the Group's financial troubles, which were such that Hope J. said of them "to say that Walton's companies were suffering from liquidity problems would be to understate the position . . . particularly in 1967, they were suffering considerable financial stringency". His Honour concluded that, standing by themselves, he saw no reason to reject these reasons given by Clowes. (at p406)

18. They did not, however, stand by themselves; there were three distinct matters which the plaintiff had urged as discrediting Clowes as a witness of truth. Two of them his Honour disposed of in Clowes' favour, the one by preferring Clowes' evidence to that of the plaintiff's witness Partridge, whose evidence he entirely rejected; the other by not accepting certain evidence of Walton about a conversation he had with Clowes. The third matter occasioned his Honour considerably greater difficulty; it consisted of Clowes' admitted active and elaborate concealment from Walton of the entire course of Consul's transactions with Grey. This his Honour regarded, very naturally, as cause for suspicion; it was not, he thought, wholly to be explained by circumstances of which Clowes gave evidence, the history of the financial and other relations between Walton and the Clowes family and his fear that Walton, were he to learn of the transactions, would resent Consul investing otherwise than in companies of the Group and would wish to participate in the transactions in place of Grey. His Honour said that he had little doubt that no matter how proper the transactions may have been Clowes would have had good reason not to tell Walton about them; but there was, he thought, a further reason for Clowes' policy of concealment, it consisted of a feeling on Clowes' part that "it was wrong for him, an articled clerk of Walton, and Grey, an employee working for Walton's companies, to be arranging behind Walton's back and in his own office to enter into profitable transactions of the same character that Walton entered into" (1974) 1 NSWLR, at pp 455, 467 . (at p406)

19. Since his Honour had concluded that the plaintiff D.P.C. had in any event no locus standi it was unnecessary for him to determine, and he did not determine, whether this feeling on the part of Clowes constituted notice to Clowes, and hence to Consul, of the breach by Grey of some duty owed to members of the Walton Group. However he concluded this portion of his reasons for judgment by saying that the course of concealment adopted by Clowes was to be explained by this feeling on Clowes' part, coupled with the other reasons for concealment given by Clowes, themselves of an innocent character. (at p407)

20. Thus the learned trial judge performed in full the task which he set himself both of examining in detail the body of evidence bearing upon Clowes' knowledge of Grey's breach of duty and of stating his findings on the point. Because of their importance I shall restate them in summary form: first, that the reasons Clowes gave for believing that Grey was not acting improperly, standing on their own, should not be rejected. But they did not stand alone and the second finding is that an accompanying circumstance, Clowes' calculated concealment of the transactions from Walton, raised a suspicion that this very concealment was proof of Clowes' knowledge of Grey's breach of duty. The third finding was that Clowes concealed the transactions for a variety of reasons, some being quite innocent and of themselves such that "Clowes would have had good reason not to tell Walton" of the transactions. The further reason, of a somewhat different character, was Clowes' feeling, expressed in his Honour's words which I have already quoted, that it was somehow wrong for an articled clerk and his master's employee to combine together, behind the master's back, in business ventures similar to those undertaken by the master solicitor. (at p407)

21. This further reason is, then, the only evidence from which the plaintiff could hope to show that Clowes had actual knowledge of Grey's breach of duty. To my mind it shows no such thing; the sense of wrongdoing which his Honour attributed to Clowes is quite unrelated to an awareness that Grey's scheme involved breach of fiduciary duty; if, therefore, Clowes' policy of concealing Consul's transactions from Walton is no evidence of guilty knowledge nothing else emerges from his Honour's findings which suggests, still less establishes, that Clowes knew that Grey was acting in breach of fiduciary duty to Walton or his companies. In this case the existence of a belief in Clowes' mind as to a single fact makes the difference between an honest and a guilty mind. That fact was that the Walton Group, because of lack of funds, was unable to pay the necessary price for, and hence did not wish to buy, the properties which Grey told him of. If Clowes believed that, as, I think, must be concluded, then his actions throughout were consistent with ignorance of Grey's fraud although no doubt inconsistent with any nice appreciation of what was proper in the conduct of an articled clerk; his concealment of the transactions from Walton is then seen to be explained by other, innocent circumstances. (at p407)

22. The plaintiff not only failed to establish actual knowledge as against Clowes; Clowes' reasons, as found by the learned trial judge, for failing to make inquiries from Walton and for adopting the quite contrary course of concealment also establish that he did not wilfully shut his eyes to the truth for fear lest he should learn of Grey's dishonesty; his failure to inquire from Walton was due to quite other reasons. (at p408)

23. Absent, then, both actual knowledge and calculated abstention from enquiry, Consul will only be liable as a constructive trustee if recourse may be had to the doctrine of constructive notice and if, by that means, Clowes, and through him Consul, may nevertheless be treated as if they had that knowledge of Grey's breach of fiduciary duty which they in fact lacked. (at p408)

24. That proof of knowledge is essential is not in doubt; Consul has not intermeddled with any trust property so as to make itself a trustee de son tort and without proof of knowledge no remedy will lie against it for participation in the dishonest scheme of the fiduciary, Grey. The applicable principle is that enunciated by Lord Selborne in Barnes v. Addy (1874) 9 Ch App 244 . Strangers to a trust may have extended to them the responsibility imposed by equity upon trustees if they make themselves trustees de son tort or are "actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust" (1874) 9 Ch App, at p 251 . But strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers unless they "receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees" (1874) 9 Ch App, at pp 251-252 . (at p408)

25. It is said, however, that when Lord Selborne spoke of knowledge this must be taken to include constructive knowledge. Neither his Lordship's language in Barnes v. Addy (1874) 9 Ch App 244 nor other authorities, apart from two recent decisions of Chancery judges, appear to me to support that view. Lord Selborne contemplated that a necessary ingredient of this liability as constructive trustee was the existence of "fraud and dishonesty" on the part of the stranger, "of knowledge or suspicion on his part of an improper or dishonest design in the transaction" (1874) 9 Ch App, at p 252 . It was for evidence of this that he examined the facts before him, concluding that the third party "never knew nor suspected any dishonest purpose, or believed that any actual fraud would result from what was done; and if that be a true interpretation of the facts, I certainly, for one, am unable to hold him responsible" (1874) 9 Ch App, at p 254 . (at p408)

26. In In re Blundell; Blundell v. Blundell (1888) 40 Ch D 370, at p 381 , Stirling J. stated his understanding of "the general doctrine with reference to constructive trustees of that kind", that is where "strangers, who are not themselves trustees, but are liable in certain cases to be made to account as if they were trustees". That general doctrine was, he said, that

"a stranger to the trust receiving money from the trustee

which he knows to be part of the trust estate is not liable as a

constructive trustee unless there are facts brought home to him

which shew that to his knowledge the money is being applied in

a manner which is inconsistent with the trust; or (in other

words) unless it be made out that he is party either to a fraud, or

to a breach of trust on the part of the trustee".

In Soar v. Ashwell (1893) 2 QB 390 , Lord Esher M.R. speaks of the doctrine in Barnes v. Addy (1874) 9 Ch App 244 as making a stranger liable as a trustee if he has "knowingly assisted a nominated trustee in a fraudulent and dishonest disposition of the trust property" (1893) 2 QB, at pp 394-395 , and Bowen L.J. described a constructive trustee as a stranger who becomes "bound in good faith and in conscience by the trust in consequence of his conduct and behaviour", as does a stranger who "participates in the fraud of a trustee" (1893) 2 QB, at p 396 . Kay L.J. spoke of the constructive trustee as a stranger who "knowingly assists the actual trustee in a fraudulent and dishonest disposition of the trust property" (1893) 2 QB, at p 405 . (at p409)

27. In Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) (1969) 2 Ch 276 , the Court was again, as in the earlier cases to which I have referred, concerned with a solicitor, a stranger to the trust but employed as the agent of the trustee, who had received trust moneys but had not so acted as to constitute himself a trustee de son tort. Danckwerts L.J. regarded a passage in Halsbury's Laws of England, 3rd ed., vol. 38, par. 1450, founded upon Barnes v. Addy (1874) 9 Ch App 244 , as correctly stating the law when it requires a stranger, before he may become a constructive trustee, knowingly to have assisted in a trustee's dishonest and fraudulent act. Sachs L.J., after remarking (1969) 2 Ch, at p 296 that until the judgment of Ungoed-Thomas J. in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) (1968) 1 WLR 1555 there was no modern judicial decision examining what exactly is needed in the way of knowledge or notice to fix a stranger with trusteeship of assets although he has not intermeddled with them so as to become trustee de son tort, proceeded to state his conclusion that a stranger, aware only of a doubtful equity, of "a disputed claim the validity of which he cannot properly assess", did not thereby become a constructive trustee. His Lordship was careful to state that this proposition owed nothing to the fact that the defendants received the moneys in question as agents or as solicitors but was applicable to any ordinary stranger receiving trust moneys. He concluded (1969) 2 Ch, at p 298 that for a stranger to a trust to be made liable as constructive trustee an element of dishonesty or of consciously acting improperly must be present as opposed to an innocent, albeit negligent, failure to make proper inquiry; there must be both knowledge of the trust and of the breach of trust, or a wilful shutting of the eyes to the obvious. Edmund Davies L.J. took a like view, insisting upon the need for there to be established a " 'want of probity', a feature which recurs through and seems to connect all those cases drawn to the court's attention where a constructive trust has been held to exist" (1969) 2 Ch, at pp 300-301 . His Lordship concluded that the authorities showed that nothing short of want of probity would do, not even gross negligence sufficing, in its absence, to render a stranger liable as constructive trustee. Want of probity was, he thought, the hallmark of constructive trusts, however created. (at p410)

28. This would suffice to conclude the matter in favour of the appellant were it not for the recourse which was had to constructive notice in the Selangor Case (1968) 1 WLR 1555 and in the later decision of Brightman J. in Karak Rubber Co. Ltd. v. Burden (1972) 1 WLR 602 . In the Court of Appeal Division only Jacobs P., in his dissenting judgment, found it necessary, because of the view he took concerning absence of actual knowledge, to deal with these cases; he said of them that:

"if it was determined in those cases that Lord Selborne

generally was referring, not to actual knowledge of fraud and

guilty design, but also to constructive knowledge, then I

respectfully disagree and I respectfully think that such a view does

not

accord with the decision of the Court of Appeal in the Carl

Zeiss Stiftung Case. The point of the difference between the

person receiving trust property and the person who is made

liable, even though he is not actually a recipient of trust

property, is that in the first place knowledge, actual or constructive,

of the trust is sufficient, but in the second place something more

is required, and that something more appears to me to be the

actual knowledge of the fraudulent or dishonest design, so that

the person concerned can truly be described as a participant in

that fraudulent dishonest activity". (1974) 1 NSWLR, at p 459 (at

p410)

29. It is not clear to me why there should exist this distinction between the case where trust property is received and dealt with by the defendant and where it is not; perhaps its origin lies in equitable doctrines of tracing, perhaps in equity's concern for the protection of equitable estates and interests in property which comes into the hands of purchasers for value. Maitland has traced the gradual extension of the protection which equity has afforded these, culminating in its development of the doctrine of constructive notice - Maitland's Equity, 2nd ed. (1949) pp. 117-121. Certainly neither in Selangor (1968) 1 WLR 1555 nor in Karak (1972) 1 WLR 602 is the distinction expressly adverted to but it is noteworthy that in both cases the defendants had dealt with trust property. (at p411)

30. In Selangor (1968) 1 WLR 1555 Ungoed-Thomas J. was at pains to satisfy himself that one defendant, Contanglo, had actually received moneys of the plaintiff, or that which "sufficiently represented those moneys", before feeling able to regard those moneys as "the proper subject for such a claim in equity to replace them as is made by the plaintiff" (1968) 1 WLR, at p 1616 , that claim being based upon constructive trust. In the case of another defendant, District Bank Ltd., there was no doubt that it had dealt with the plaintiff's money and his Honour stated this fact as one of the necessary elements in its liability in equity to the plaintiff (1968) 1 WLR, at p 1633 . Again in Karak Brightman J. declared it to be fundamental to what he described as "the Barnes v. Addy (1874) 9 Ch App 244 formula as interpreted in the Selangor Case" (1972) 1 WLR, at p 638 (that is, the liability as constructive trustee of one who assists with knowledge in a dishonest and fraudulent design on the part of the trustee (1972) 1 WLR, at p 634 ) that the defendant stranger should have knowingly assisted a trustee in a fraudulent and dishonest "disposition of the trust property". The concern with the existence of trust property and with the defendant's part in its disposition which these two cases display casts little light upon the difficulty of reconciling them with the decision of the Court of Appeal in Carl Zeiss (1969) 2 Ch 276 . Brightman J. regarded that decision as not inconsistent with the views of Ungoed-Thomas J. in Selangor but I share the doubt on this score implicit in the note in the Law Quarterly Review, vol. 85, p. 170. It does however serve to distinguish them from the present case, and this in the manner suggested by Jacobs P. (at p411)

31. Before leaving these two cases, which contain statements of principle certainly not expressed as confining constructive notice to cases in which the defendant has received trust property but which instead speak of it as sufficing to establish knowledge, where knowledge is necessary "to hold a stranger liable as constructive trustee in a dishonest and fraudulent design" (Selangor (1968) 1 WLR, at p 1590 ), the authorities upon which they rest call for some comment. In Selangor the precedent cases which led Ungoed-Thomas J. to his conclusion concerning constructive notice were examined at length (1968) 1 WLR, at pp 1581, et seq . Two features emerge, they are all cases in which trust property passed through the defendant's hands and in all of them in which the plaintiff succeeded it did so because the defendant was held to have had actual knowledge of facts constituting the relevant fraud or breach of trust; thus constructive notice arose out of the defendant's failure to recognize fraud when he saw it, not from a failure to pursue inquiries. Even Mayor etc. of Berwick-upon-Tweed v. Murray [1857] EngR 333; (1857) 7 De GM & G 497 (44 ER 194) was, I think, such a case: see especially (1857) 7 De GM & G, at p 519 (44 ER at p 203) . (at p412)

32. Some of the authorities cited in Selangor appeared, as his Lordship acknowledged, to be opposed to the broad view of constructive notice which he ultimately adopted. In one of these, Backhouse v. Charlton (1878) 8 Ch D 444, at p 449 , Malins V.C. spoke of "express notice" as a necessary prerequisite of liability and I would, with respect, doubt whether that case is to be explained (see Selangor (1968) 1 WLR, at p 1589 ) by reference to what Sir Richard Malins had earlier said in Gray v. Lewis (1869) LR 8 Eq 526 . In that case, while referring to a transaction as "of so unusual and extraordinary a character" as in any event to call for inquiry and investigation, his Honour in fact found that directors and officers of the defendant Bank had actual knowledge of fraud. In Karak (1972) 1 WLR, at p 637 Brightman J. relied, in substance, upon the authorities which had been examined in Selangor. (at p412)

33. In my view the state of the authorities as they existed before Selangor did not go so far, at least in cases where the defendant had neither received nor dealt in property impressed with any trust, as to apply to them that species of constructive notice which serves to expose a party to liability because of negligence in failing to make inquiry. If a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust the case may well be different, as it clearly will be if the defendant has consciously refrained from enquiry for fear lest he learn of fraud. But to go further is, I think, to disregard equity's concern for the state of conscience of the defendant. (at p412)

34. The most common operation of the doctrine of constructive notice is in dealings in real property where for centuries investigation of title has been the usual concern of business

"in dealing with real property, as in other matters of business,

regard is had to the usual course of business; and a purchaser

who wilfully departs from it in order to avoid acquiring a

knowledge of his vendor's title is not allowed to derive any

advantage from his wilful ignorance of defects which would

have come to his knowledge if he had transacted his business in

the ordinary way"

(Bailey v. Barnes, per Lindley L.J. (1894) 1 Ch, at p 35 ). In such a case negligence in making inquiries may constitute constructive notice. Perhaps too, in the transaction of banking business a usual course has evolved so that the same may be said of bankers. (at p412)

35. But the courts have been markedly reluctant to extend the application of the doctrine of constructive notice. In Milne v. James [1910] HCA 55; (1910) 13 CLR 168 , Griffith C.J. said that it was now settled that the doctrine ought not to be extended and both Barton and O'Connor JJ. in separate judgments quoted in full the observations of Lord Esher M.R. in English and Scottish Mercantile Investment Co. v. Brunton (1892) 2 QB 700, at p 708 , in the course of which he said, speaking of the doctrine of constructive notice:

"Of late years, after the doctrine had been invented and put

into form, the Chancery Judges saw that it was being carried

much farther than had been intended, and they declined to carry

it further. In a series of cases Lords Cottenham, Lyndhurst, and

Cranworth, Lord Justice Turner, and the late Master of the

Rolls, Sir George Jessel, have said that the doctrine ought not to

be extended one bit farther; all the Judges seem to have agreed

upon that. In Allen v. Seckham (1878) 11 Ch D 790 , I pointed out that

the

doctrine is a dangerous one. It is contrary to the truth. It is wholly

founded on the assumption that a man does not know the facts;

and yet it is said that constructively he does know them."

Joseph v. Lyons (1884) 15 QBD 280 provides an instance in which both Cotton L.J. and Lindley L.J. refused to apply to a pledge of chattels the doctrine of constructive notice, a doctrine which each regarded as having already been pushed too far. Lindley L.J., in Manchester Trust v. Furness (1895) 2 QB 539, at p 545 , vigorously attacked the attempted extension of constructive notice to commercial transactions, regarding it as appropriately confined to dealings with land and estates; like views were subsequently expressed by the Court of Appeal in Greer v. Downs Supply Co. (1927) 2 KB 28 . (at p413)

36. In my view the law, as it now stands, did not require Clowes to make any further inquiry once he believed that the Walton Group was not in the market for the properties here in question. He had been told this by Grey and his own knowledge of the Group's financial situation, confirmed by his inquiries, supported the apparent truth of Grey's statement. In that situation a reasonable, honest man would not, in my view, have had knowledge of circumstances telling of breach of fiduciary duty by Grey. This being the furthest extent to which any possible doctrine of constructive notice may go in such a case it follows that the doctrine, even if applicable, cannot impute to Consul the knowledge necessary to render it liable to the plaintiff. (at p413)

37. Accordingly in my view the remedy of constructive trusteeship is not available as against Consul even if D.P.C. were found to have proper standing to sue. I would therefore allow this appeal and I find it unnecessary to determine D.P.C.'s entitlement to sue. (at p414)

38. There are two remaining matters to which I should refer. It is inherent in what I have said that I do not regard Consul as having received any property impressed with a trust. It did obtain the advantage of having had brought to its attention the fact that willing vendors existed who were prepared to sell on terms thought to be advantageous but this knowledge, the essence of which was wholly in the public domain, was not property capable of being owned by anyone; it was freely available to all who might seek it and to much of it the vendors had given such publicity as their means permitted. (at p414)

39. I have treated Clowes as no more than a participant in Grey's dishonesty. It was said on behalf of the respondent that even if Clowes had no actual knowledge of that dishonesty nevertheless his conduct amounted to more than mere participation; he actively encouraged Grey's dishonesty by his offer to share with Grey in the anticipated profits from these land dealings thus inducing Grey to depart from his duty to the Walton Group; the analogy of a bribe was referred to. Even were this so I doubt whether, in the absence of knowledge by Clowes, the plaintiff would be entitled to equitable relief; however in my view the facts as found by Hope J. lend no support to this submission but, on the contrary, point in the opposite direction. Clowes did not agree prospectively to share all anticipated profits with Grey; instead three distinct oral agreements were made, one in respect of each of the transactions and Hope J. found that two of these were made after Grey first brought the properties to Clowes' attention, as to the third it seems a proper inference from his Honour's account of events that it too was made after that property was first recommended by Grey to Clowes. Again there is no evidence that Clowes took the initiative in approaching Grey to obtain his assistance, on the contrary, it seems that it was Grey who on each occasion initiated the proposal. Moreover what might be thought to be agreements containing terms suspiciously generous to Grey turn out on examination to impose upon him substantial obligations; each oral agreement was in the same terms and included an obligation on Grey's part to share any losses, to find finance for the purchase, to help in the management of the property and to pay half of any outgoings to the extent that they might exceed income. The large purchase of properties at Rozelle was the only one involving any substantial outlay and it emerges from the cross-examination of Clowes that Grey did in fact arrange finance for the purchase of these properties, he and his wife becoming personal guarantors in respect of the three mortgages by means of which that finance was procured. (at p414)

40. No doubt the making of the first agreement set the pattern for the others, so that Grey could thereafter with some confidence look forward in the two subsequent cases to the conclusion of an arrangement satisfactory to him, but this cannot of itself affect the quality of Clowes' conduct. To regard the agreements as in any way savouring of bribes does not, in my view, accord with the facts as found. It is true that some six months after Clowes ceased to be Walton's articled clerk, very soon after the institution of the first suit, Consul acknowledged in writing Grey's entitlement to half the profits from the income or sale of the purchased properties and that this acknowledgment made no reference to Grey's obligations under the agreements. The learned trial judge heard Clowes' evidence under cross-examination concerning this acknowledgement, how it came into existence and why it took the form it did; its form as an acknowledgment is consistent with Clowes' evidence and in view of his Honour's findings concerning the making of the oral agreements and their terms he must have accepted Clowes' evidence that this acknowledgment did no more than set out the result of some of the financial consequences of one aspect only of the agreements and did not purport to record the whole of the terms of the agreements. (at p415)

41. Further facts throw additional light upon the respective roles of Grey and Clowes. Clowes was at the time an articled clerk of twenty-one years of age whereas Grey was an older man experienced in real property transactions both as an employee and in dealings on his own account who, as Clowes knew, had on at least one earlier occasion openly purchased in his own name an investment property from a company in the Walton Group. Moreover it appears from Walton's evidence that Grey, quite independently of Clowes and Consul, was engaged in other quite extensive property transactions on his own account to the detriment of the Walton Group. He was also said by Walton to have defrauded the Group by means of other dishonest transactions to which Grey's brother, a builder, was also a party. His Honour no doubt had these facts in mind when he made the findings he did. All this suggests that Grey's role was that of the initiator of the scheme and that there was no question of Clowes, by offers of financial advantage, inducing Grey to betray the duty he owed to the Walton Group. (at p415)

42. I would allow this appeal. (at p415)

ORDER

Appeals allowed with costs.

Order that so much of the orders of the Supreme Court of New South Wales (Court of Appeal Division) as allowed the appeals of the respondent against the dismissal of the suits against the appellant and made declarations and orders affecting the appellant be set aside and in lieu thereof order that the said appeals of the respondent against the said dismissal be dismissed with costs.