• The impact of this case on ATO policy is discussed in Decision Impact Statement: Howard v Commissioner of Taxation (Published 14 August 2014).

HOWARD v FC of T

Court:

MEDIA NEUTRAL CITATION: [2014] HCA 21

FRENCH CJ AND KEANE J.

Introduction

1. In his income tax assessment for the 2005 income year the appellant did not include, as part of his assessable income, his share of an award of equitable compensation under a judgment in proceedings in the Supreme Court of Victoria between parties to a joint venture of which he had been a member. The joint venture involved the proposed purchase, lease to a substantial tenant, and on-sale of the Kingston Links Golf Course. The appellant claimed that the equitable compensation awarded to him was impressed with a constructive trust in favour of a company, Disctronics Ltd ( " Disctronics " ), by reason of his fiduciary office as one of its directors. Two other directors, co-plaintiffs with the appellant, were parties to the joint venture in their personal capacities. The directors had decided, during the development of the joint venture, that they should endeavour to have Disctronics purchase the golf course from the joint venture provided it could do so at an affordable price and, in that event, to rebate to the company any entitlement they might have as a result of their involvement in the joint venture. The appellant also argued that he had assigned the fruits of the cause of action to Disctronics pursuant to an agreement made between the directors and the company when the litigation in the Supreme Court was pending ( " the litigation agreement " ).

2. The respondent, the Commissioner of Taxation of the Commonwealth of Australia, did not accept the appellant ' s contentions and issued an amended assessment on 5 August 2009 on the basis that the appellant ' s award of damages was received by him beneficially and not as a fiduciary. He also imposed a penalty. The appellant succeeded in an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) to a judge of the Federal Court of Australia (Jessup J) ^[1] Howard v Federal Commissioner of Taxation (No 2) (2011) 86 ATR 753 . , who held that the award of equitable compensation was not income in the appellant ' s hands. A Full Court (Middleton, Perram and Dodds-Streeton JJ) of the Federal Court, however, allowed the Commissioner ' s appeal from the decision of the primary judge, save as to penalty ^[2] Howard v Federal Commissioner of Taxation (2012) 206 FCR 329 . . The appellant has appealed to this Court pursuant to a grant of special leave made on 8 November 2013 ^[3] [ 2013 ] HCATrans 269 per Crennan, Kiefel and Bell JJ . .

3. The appellant ' s argument that his fiduciary obligation to Disctronics extended to his involvement in the joint venture had nothing to do with the protective purposes for which such obligations exist in equity. That argument, advanced in his own interest, fell under the shadow of the cautionary observation of Deane J in
Chan v Zacharia ^[4] (1984) 154 CLR 178 at 205; [ 1984 ] HCA 36 quoting Barnes v Addy (1874) LR 9 Ch App 244 at 251 per Lord Selborne LC. :

" There is ' no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them ' " .

4. The appellant ' s obligation to Disctronics, as one of its directors, did not extend beyond taking appropriate steps to give effect to a decision of the directors to try to bring the company in as the ultimate purchaser from the joint venture and, in that event, to rebate to it their entitlements flowing from the joint venture. The company was not and was never intended to be a member of the joint venture. There was no relevant fiduciary obligation preventing the appellant from taking a share of the profits of the joint venture on his own account. The litigation agreement did not alter the character of the award of equitable compensation as income in the hands of the appellant. The appeal should be dismissed with costs.

Factual history

5. The litigious trail which has led to this appeal has its origins in a joint venture arrangement made in July 1999. Three of the joint venturers - the appellant, Donovan (who was based in the United Kingdom) and Quinert - were directors of Disctronics, a company that they used as an investment vehicle. The fourth joint venturer, Bucknall, was a self-employed consultant engaged by Donovan ' s company, Solette Pty Ltd ( " Solette " ), who had put the acquisition, lease and on-sale concept to Donovan, early in 1999. The fifth joint venturer was Edmonds, who had been invited by Donovan to provide advice on the financing of the proposed transaction. The sixth joint venturer, Cahill, a real estate agent, was engaged through Edmonds to make approaches with a view to acquiring a suitable property. A prospective tenant, Spotless Services Australia Limited ( " Spotless " ), had been identified in February 1999 when Bucknall sounded out Stuart Rose of that company. In April 1999, Rose told Bucknall that Spotless might be prepared to pay a rent of $ 900,000 per annum for the tenancy of a public golf course.

6. The original principals of the proposed golf course project were the appellant, Donovan (utilising Solette as a vehicle for property development and investment) and Quinert. Bucknall, Edmonds and Cahill were involved as consultants and advisers. The arrangements with them, however, developed into a joint venture involving all six men on terms ultimately agreed at a teleconference held on 20 July 1999. While the appellant did not participate in that teleconference, he agreed with the minutes of the meeting and thereafter was treated as a participant.

7. The terms of the joint venture arrangement, to the extent that they were recorded in those minutes, involved the realisation of a " day-one " profit by the joint venture. The profit would arise out of the on-sale of the golf course to a third party purchaser who would be attracted by the income stream derived from the lease to Spotless, which could be used to service debt and provide a return on investment. The profit would be the difference between the purchase price paid by the joint venture and that paid by the ultimate purchaser. The profit share was to be split six ways.

8. Immediately following the teleconference of 20 July 1999, Cahill began negotiating on behalf of the joint venture with Kevin Wood of Kingston Property Constructions Pty Ltd, the owner of the Kingston Links Golf Course. On 3 August 1999 a verbal agreement was reached for the sale of the golf course to the joint venture for the sum of $ 8,680,000. In the meantime, Rose had advised Bucknall, by letter dated 29 July 1999, that an annual rental of $ 1,165,000 was achievable, subject to various matters set out in the letter. The letter suggested that a minimum ten year lease was required along with a ten year option.

9. The golf course project initially had not involved Disctronics at all. However, after April 1999, when Spotless ' interest was confirmed, Donovan thought that Disctronics itself could acquire the Kingston Links Golf Course from the joint venture, rather than the joint venture selling the golf course to a third party purchaser. It was his view that, if the equity required of an investor in the golf course lay within the capacity of Disctronics to provide, acquisition by Disctronics might be a more productive investment for it than the insurance bonds which were then the company ' s only Australian investment other than cash. Quinert and the appellant thought that a sensible approach. However, Disctronics could only come in if the equity it had to put up, in addition to debt funding, did not exceed $ 1,500,000. Edmonds and Cahill reacted adversely to the idea, as Disctronics ' involvement would limit the potential " day-one " profit in which they expected to share.

10. Before the joint venture crystallised on 20 July 1999, Edmonds had prepared a memorandum dated 10 July 1999 positing a total outlay by the ultimate purchaser of $ 10,100,000, of which $ 7,700,000 would be debt finance and $ 2,400,000 equity injection. That scenario involved an equity injection by the ultimate purchaser which was higher than the amount contemplated by Disctronics ' directors. It therefore conflicted with Donovan ' s plans for Disctronics ' involvement and sowed the seeds of dissension. As Jessup J observed ^[5] (2011) 86 ATR 753 at 764 [ 21 ] . :

" If the transaction were to be considered as a speculation for 6 individuals, the higher the purchase price, the better. But, if the transaction were to be considered as an investment for Disctronics, the lower the purchase price, the better. "

11. The appellant, Donovan and Quinert met in London on or about 12 July 1999. Donovan told Quinert and the appellant that he wanted to make the golf course project available as an investment opportunity for Disctronics, provided that Disctronics could handle the equity investment that was required. He thought it could afford up to $ 1,500,000, raised mostly by redemption of its insurance bonds. The appellant and Quinert agreed.

12. On 13, 14 and 15 July 1999 the appellant, Donovan and Quinert met as directors of Disctronics, together with a fourth director, David Mackie, who was the United Kingdom based Chief Executive Officer of the Disctronics group. Mackie had no objection to Disctronics ' involvement in the golf course project. It is not in dispute, notwithstanding the absence of any note in the minutes of the meeting of directors, that they agreed that if the equity requirement to acquire the golf course was less than $ 1,500,000 they would seek to have Disctronics become the ultimate purchaser of the golf course. They also agreed that they would rebate their entitlements to Disctronics.

13. Further exchanges occurred between the Disctronics directors and Edmonds leading up to the teleconference of 20 July 1999, at which time (and it was not in dispute before Warren J or in the Federal Court proceedings) the joint venture was established ^[6] Disctronics Ltd v Edmonds [ 2002 ] VSC 454 at [ 131 ] . . As Jessup J noted, Disctronics was not a member of the joint venture ^[7] (2011) 86 ATR 753 at 776 – 777 [ 56 ] referring to [ 2002 ] VSC 454 at [ 132 ] – [ 134 ] per Warren J. . Jessup J summarised the position as at August 1999 ^[8] (2011) 86 ATR 753 at 769 [ 34 ] . :

" By early August … the members of the joint venture which had been formed on 20 July were in possession of the 2 key parameters by reference to which they could plot their future: the price at which Kingston Links was available for purchase, $ 8.68 million, and the annual rental which was likely to be paid by Spotless, $ 1.165 million. "

It was against this background that the inevitable disintegration of what was to be a short-lived joint venture arrangement began.

14. Following a new proposal by Edmonds on 3 August 1999, Donovan said that Disctronics was to be the equity investor. He asked Quinert to tell Edmonds that Disctronics intended to take up its " entitlement " in respect of the golf course project, as by that time it appeared that an equity injection of less than $ 800,000 would be sufficient. There was no such " entitlement " , as the acquisition of the golf course by Disctronics was dependent upon the joint venturers ' agreement. Further exchanges followed but yielded no resolution of the differences between the appellant, Donovan, Quinert and Bucknall on the one hand, and Edmonds and Cahill on the other.

15. On 19 August 1999, Quinert made a formal written offer to the owner of the Kingston Links Golf Course of $ 8,688,000 to purchase the golf course. In that offer he stated that the " equity investor " would be " an unlisted public company group which operates pre-dominantly in the United Kingdom and the United States of America. " This was a reference to Disctronics and associated companies. A wholly owned Australian subsidiary of Disctronics, Corwen Grange Pty Ltd ( " Corwen Grange " ), had been incorporated. Quinert and the appellant were its directors. The offer was made in the name of Corwen Grange.

16. The offer was not accepted. Instead the owner accepted an offer for the purchase of the golf course made by Edmonds and Cahill and a business acquaintance of Cahill ' s, Michael Buxton. The offer was made without the knowledge of the appellant and his associates. Kingston Links Country Club Pty Ltd ( " KLCC " ), which Edmonds, Cahill and Buxton had incorporated on 12 October 1999 and of which they were directors, executed a contract of sale for the purchase of the golf course on 29 October 1999. On 8 December 1999, KLCC entered into a lease with Spotless. A transfer of the land to KLCC was registered on 14 December 1999. Disctronics lodged a caveat on 22 December 2000 over the title to the land on which the golf course stood, asserting the existence of a constructive trust in its favour. On 8 June 2001, KLCC commenced proceedings against Disctronics in the Supreme Court of Victoria for removal of the caveat ( " the caveat proceeding " ).

17. On 15 June 2001 the appellant, Donovan and Quinert executed the litigation agreement with Disctronics, identifying themselves in the agreement as its directors. Disctronics agreed to pay their legal fees and disbursements associated with proceedings they proposed to institute against Edmonds and Cahill, and KLCC and others in the Supreme Court of Victoria and to indemnify them against payment of any orders for costs. Paragraph 4 of the litigation agreement provided:

" In consideration of [ Disctronics ' ] promises set out in paras 1 and 3 hereof the directors, and each of them, assign absolutely unto and to the sole use of [ Disctronics ] , any award of damages (whether on revenue or capital account), costs or interest made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings and the ultimate outcome thereof " .

18. Recital B to the litigation agreement referred back to the meeting of the Disctronics directors in London in July 1999 and stated:

" On or about 14.07. ' 99 in London meetings of [ Disctronics ] , the directors agreed that if the equity requirement to acquire [ Kingston Links Golf Course ] was less than AUD $ 1.5m then the directors would seek to have [ Disctronics ] become the equity participant and purchaser of [ Kingston Links Golf Course ] (the ' Option ' ). The directors further agreed that if [ Disctronics ] exercised its Option then the directors would rebate to [ Disctronics ] any entitlement (whether on revenue or capital account) they may have as a consequence of their participation in the joint venture " .

It was not in dispute on the appeal to this Court that the recital was an accurate statement of the way in which the appellant and his fellow directors sought to involve Disctronics in the golf course project.

Proceedings in the Supreme Court of Victoria

19. On 26 June 2001 the appellant, Donovan, Quinert, Bucknall, Disctronics and Solette ^[9] Originally, Solette was identified as a prospective purchaser of the golf course, although by July 1999 the company was no longer involved in the proposed acquisition. See [ 2002 ] VSC 454 at [ 181 ] . commenced proceedings in the Supreme Court of Victoria against Edmonds, Cahill, KLCC, Buxton, Emanbee Nominees Pty Ltd, MRB Life Pty Ltd and Domain Hill Property Services Pty Ltd ^[10] The offer to purchase the golf course was made in the name of Buxton ’ s company Emanbee Nominees Pty Ltd. Ultimately, MRB Life Pty Ltd was assigned that company ’ s interest in the joint venture agreement between KLCC, Emanbee Nominees Pty Ltd, Buxton, Cahill, Edmonds and others. Cahill negotiated with Wood through Domain Hill Property Services Pty Ltd, which was subsequently de-registered. . The appellant, Donovan, Quinert and Bucknall claimed relief arising out of breaches of fiduciary duties by Edmonds and Cahill owed to them as joint venture participants and equitable compensation in amounts equal to their respective shares of the profit ( " the main proceeding " ). The land on which the golf course stood was ultimately sold by KLCC under a contract of sale dated 17 June 2002.

20. On 23 October 2002, Warren J gave judgment in both the main proceeding and the caveat proceeding ^[11] [ 2002 ] VSC 454 . . In that judgment, as summarised by Jessup J, her Honour found, inter alia ^[12] (2011) 86 ATR 753 at 778 [ 58 ] referring to [ 2002 ] VSC 454 at [ 183 ] . :

• • A joint venture was formed initially between Donovan, the appellant, Quinert and Solette by about early June 1999 and possibly as early as April 1999 ^[13] [ 2002 ] VSC 454 at [ 24 ] ; (2011) 86 ATR 753 at 786 [ 74 ] – [ 75 ] where Jessup J stated that Solette was “ possibly ” included (referred to in (2012) 206 FCR 329 at 334 – 335 [ 11 ] ). See also (2012) 206 FCR 329 at 332 [ 6(b) – (c) ] . .
• • The joint venture, as originally formed, was varied to remove Solette and to consist therefrom of Donovan, the appellant, Quinert, Bucknall, Edmonds and Cahill from 20 July 1999 ^[14] [ 2002 ] VSC 454 at [ 43 ] , [ 46 ] , [ 131 ] , [ 141 ] , [ 165 ] – [ 166 ] , [ 181 ] ; (2011) 86 ATR 753 at 776 – 777 [ 56 ] , 778 – 779 [ 59 ] , 786 [ 76 ] (referred to in (2012) 206 FCR 329 at 334 – 335 [ 11 ] ); (2012) 206 FCR 329 at 332 [ 6(e) ] . .
• • The joint venture was dissolved on 10 August 1999 as a result of actions by Edmonds and Cahill ^[15] [ 2002 ] VSC 454 at [ 59 ] – [ 60 ] , [ 64 ] – [ 65 ] , especially [ 165 ] ; Edmonds v Donovan (2005) 12 VR 513 at 532 [ 43 ] , 538 [ 60 ] , especially 532 [ 45 ] and 536 [ 55 ] per Phillips JA; (2011) 86 ATR 753 at 773 [ 48 ] . .
• • Edmonds and Cahill breached the fiduciary duty they owed to the appellant and other members of the joint venture to act honestly and in good faith by secretly and furtively approaching Wood, Rose and Buxton; by making an offer to Wood for the purchase of the golf course which they knew would exceed the plaintiffs ' offer; and by not telling the plaintiffs of their intentions, especially when the opportunity presented itself ^[16] [ 2002 ] VSC 454 at [ 68 ] , [ 156 ] , [ 159 ] , [ 161 ] – [ 162 ] , [ 166 ] ; (2005) 12 VR 513 at 534 – 535 [ 50 ] – [ 52 ] , 538 [ 61 ] , especially 535 – 536 [ 54 ] . .

The basis upon which Warren J ordered Edmonds, Cahill and KLCC to pay equitable compensation to the appellant and other members of the joint venture was set out in a passage from her judgment quoted by Jessup J ^[17] (2011) 86 ATR 753 at 779 [ 60 ] quoting [ 2002 ] VSC 454 at [ 216 ] . :

" I am satisfied that it will be necessary for an assessment to be made for an amount of equitable compensation to be paid to the plaintiffs, except Disctronics, by Edmonds, Cahill and KLCC after the deduction of outstanding debts, including any adjustments to allow for ANZ [ KLCC ' s lender ] , in an amount equivalent to four-sixths of the value of the golf course and, after the ascertainment of profits, an amount equivalent to four-sixths of the profit derived from the golf course. This component of the compensation is not the taking of an account in the strict sense, rather, an assessment of the opportunity that the plaintiffs lost. These amounts ought be calculated from the date of formal acceptance of the offer by the Kingston Group on 9 September 1999 to the date of final orders. They ought place the plaintiffs, excluding Disctronics, in the position they would have been save for the breaches of fiduciary duty by Edmonds and Cahill. "

21. Jessup J, in the appeal against the Commissioner ' s amended assessment, held that the effect of the determinations made by Warren J was that there was no agreement, as between the individual joint venturers, that Disctronics would be accepted as the purchaser to whom the golf course was on-sold if it elected to be that party ^[18] (2011) 86 ATR 753 at 778 [ 59 ] . . The appellant and his associates could not insist, as against Edmonds and Cahill, that the course be on-sold to Disctronics rather than to some third party who might have been prepared to pay more ^[19] (2011) 86 ATR 753 at 778 [ 59 ] . .

22. Warren J made final orders on 3 December 2002 ^[20] Disctronics Ltd v Edmonds (No 2) [ 2002 ] VSC 534 . . Her Honour found against Disctronics in the caveat proceeding, held that the caveat had been lodged without reasonable cause and granted compensation to KLCC in the amount of $ 100,000 ^[21] [ 2002 ] VSC 534 at [ 47 ] – [ 49 ] . .

Proceedings in the Court of Appeal of Victoria

23. Edmonds, Cahill and KLCC appealed to the Court of Appeal of the Supreme Court of Victoria against the orders for equitable compensation made by Warren J in the main proceeding. The appellant, Donovan, Quinert and Bucknall cross-appealed against Warren J ' s refusal to order an account and against the award of equitable compensation in the main proceeding as being unduly generous to the unsuccessful defendants. Disctronics appealed against the orders for compensation made against it in the caveat proceeding. Judgment in the appeals was delivered on 22 February 2005 ^[22] (2005) 12 VR 513 . . The appeal by Edmonds, Cahill and KLCC was dismissed ^[23] (2005) 12 VR 513 at 516 [ 1 ] per Winneke P, 516 [ 3 ] per Charles JA, 546 [ 85 ] per Phillips JA . . The cross-appeal was allowed but only for the purpose of adjusting Warren J ' s award of compensation ^[24] (2005) 12 VR 513 at 516 [ 1 ] per Winneke P, 516 [ 3 ] per Charles JA, 546 [ 85 ] per Phillips JA. . Disctronics ' appeal against the compensation order in the caveat proceeding was allowed ^[25] (2005) 12 VR 513 at 516 [ 2 ] per Winneke P, 516 [ 3 ] per Charles JA, 552 [ 103 ] per Phillips JA. . Phillips JA, with whom Winneke P and Charles JA agreed, observed in the course of his judgment that Disctronics was not a member of the joint venture established on 20 July ^[26] (2005) 12 VR 513 at 549 – 550 [ 95 ] per Phillips JA (Winneke P at 516 [ 1 ] and Charles JA at 516 [ 3 ] agreeing). . It was not the beneficiary of the fiduciary duties of which Edmonds and Cahill stood in breach. Those duties were owed only as between members of the joint venture. On that basis, Disctronics was not a proper plaintiff for equitable relief against Edmonds, Cahill and KLCC. Further, at the time when the caveat was lodged, Disctronics had no interest of its own, even in equity, in the property itself. It had no claim as a plaintiff to compensation for breach of fiduciary duties. Nevertheless, Phillips JA held that the caveat had not been lodged without reasonable cause ^[27] (2005) 12 VR 513 at 550 [ 96 ] . .

24. Under the judgment of Warren J, as varied by the Court of Appeal, the appellant ' s share of the award of equitable compensation, including interest, was $ 861,853.35. The money was paid to Disctronics by the solicitors for the appellant and the other successful plaintiffs in the Supreme Court proceedings. Disctronics declared the amounts received as assessable income for tax purposes.

Proceedings in the Federal Court

25. In proceedings brought by the appellant under s 14ZZ of the Taxation Administration Act 1953 (Cth), Jessup J held that the appellant had received the award of equitable compensation as a constructive trustee for Disctronics ^[28] (2011) 86 ATR 753 . . That judgment was reversed by the Full Court, which held that, on the evidence accepted by the primary judge, the appellant ' s responsibility was to have Disctronics accepted as an equity participant by the other joint venturers ^[29] (2012) 206 FCR 329 at 336 [ 18 ] . . It was in that circumstance that the appellant agreed to rebate his share of the " day-one " profit to Disctronics ^[30] (2012) 206 FCR 329 at 336 [ 18 ] . . The Full Court said ^[31] (2012) 206 FCR 329 at 336 [ 18 ] . :

" Mr Howard ' s obligation to Disctronics only involved Mr Howard using his reasonable endeavours to have it become purchaser, which obligation he discharged. "

26. The Full Court held that Disctronics was simply a vehicle to be used in the event of certain contingencies occurring ^[32] (2012) 206 FCR 329 at 337 [ 19 ] . . The company ' s only interest would have arisen if and when the equity required for the purchase of the golf course fell below $ 1,500,000. Their Honours said ^[33] (2012) 206 FCR 329 at 337 [ 20 ] . :

" In these circumstances, there could be no conflict of interest in the way contended for by Mr Howard, and no breach of Mr Howard ' s fiduciary duty to Disctronics. Accordingly, the award of damages in question had the character of assessable income in Mr Howard ' s hands, and was not received by him as trustee. "

27. The Full Court correctly rejected an argument that the litigation agreement reflected a pre-existing constructive trust or effected an assignment of the rights to the fruits of the litigation. In that respect their Honours said ^[34] (2012) 206 FCR 329 at 334 [ 9 ] . :

" This was an argument not raised before the primary judge. In any event, it has no substance. The effect of the litigation agreement cannot be to prevent the award of equitable damages from being derived by Mr Howard in his hands beneficially: see
Booth v Commissioner of Taxation (1987) 164 CLR 159 at 167 (per Mason CJ). "

The issues in the appeal

28. The issues in the appeal are:

• • Whether the appellant received the sum of equitable compensation awarded by the Supreme Court as constructive trustee for Disctronics.
• • If not, whether the appellant had assigned the right to receive that amount such that the income was not derived by him beneficially.
• • Whether the appellant incurred liability in respect of the costs of the proceedings in the Supreme Court which should properly have been taken into account in ascertaining the amount of any gain made by the appellant and, alternatively, whether those costs were an outgoing of a revenue nature incurred in gaining the income comprised in the award made by the Supreme Court.

The appellant ' s fiduciary obligation to Disctronics

29. The appellant submitted that, from the time it was decided by the directors to try to involve Disctronics as the end purchaser, it was not open to him to appropriate any benefit arising from the investment or the opportunity to invest in the golf course project. He was, he argued, constructive trustee of any benefit which accrued from the opportunity. That submission rested upon a broadly stated fiduciary obligation. In making it, the appellant had to confront the difficulty that the golf course project was at all relevant times a joint venture between himself and five others, who owed fiduciary duties to each other in relation to the joint venture. It was neither conceived nor pursued by the appellant or the other Disctronics directors in their capacity as directors. Nor was there any apparent conflict between the interest of the appellant as a member of the joint venture, and his fiduciary duties as a director of Disctronics.

30. The respondent submitted that:

• • The appellant acted solely in his own capacity in the joint venture from May 1999 until 13 or 14 July 1999, at which time the appellant, Donovan and Quinert decided to pursue the golf course project as a possible investment opportunity for Disctronics as the ultimate purchaser, subject to the proviso that the equity investment of the company not exceed $ 1,500,000.
• • The appellant ' s fiduciary relationship with Disctronics operated in relation to the golf course project only because of and consistently with the terms of the agreement made between the directors in London in July 1999. He owed a fiduciary duty to try to make the opportunity to acquire the golf course available to Disctronics and to bring about that acquisition.
• • In early August 1999 it became clear that the conditions for Disctronics ' possible involvement as the purchaser from the joint venture could not be met. Edmonds and Cahill would not accept Disctronics as the ultimate purchaser. The acquisition by Disctronics not being possible, the appellant ' s duty to the company in relation to the project was at an end.

31. The relationship of director and company is one of a class of accepted relationships which attract proscriptive fiduciary duties, including a duty " not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. " ^[35] Breen v Williams (1996) 186 CLR 71 at 113 per Gaudron and McHugh JJ, see also at 137 per Gummow J; [ 1996 ] HCA 57 . Those proscriptive duties attach to the powers and discretions exercised by company directors. As fiduciary agents, directors must exercise their powers " honestly in furtherance of the purposes for which they are given " ^[36] Richard Brady Franks Ltd v Price (1937) 58 CLR 112 at 142 per Dixon J, see also at 135 per Latham CJ; [ 1937 ] HCA 42 . and not for their personal benefit or gain or for that of a third party ^[37] R v Byrnes (1995) 183 CLR 501 at 517 per Brennan, Deane, Toohey and Gaudron JJ; [ 1995 ] HCA 1 . .

32. The protective rationale for the proscriptive duties attaching to a fiduciary ' s powers was explained by Mason J in
Hospital Products Ltd v United States Surgical Corporation ^[38] (1984) 156 CLR 41 at 97; [ 1984 ] HCA 64 . , and quoted with approval in
Pilmer v Duke Group Ltd (in liq) ^[39] (2001) 207 CLR 165 at 196 [ 70 ] per McHugh, Gummow, Hayne and Callinan JJ; [ 2001 ] HCA 31 . :

" It is partly because the fiduciary ' s exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed " .

33. Fiduciary duties apply beyond the exercise of powers and discretions flowing from the fiduciary relationship. A fiduciary cannot in his or her personal capacity be the subject of a conflict of interest. The general principle of equity, by reference to the liability to account, was stated by Deane J in
Chan v Zacharia ^[40] (1984) 154 CLR 178 at 199 ; see also Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 at 350; [ 1958 ] HCA 33 . and was echoed in the unanimous judgment of the Court in
Warman International Ltd v Dwyer ^[41] (1995) 182 CLR 544 at 557 per Mason CJ, Brennan, Deane, Dawson and Gaudron JJ; [ 1995 ] HCA 18 . :

" A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position " .

The objective of the rule is " to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage " ^[42] (1995) 182 CLR 544 at 557 – 558 per Mason CJ, Brennan, Deane, Dawson and Gaudron JJ. . The appellant ' s case was based upon the first limb of the principle stated in Warman and later restated in Pilmer ^[43] (2001) 207 CLR 165 at 199 [ 78 ] per McHugh, Gummow, Hayne and Callinan JJ quoting in part Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 103 per Mason J. :

" the fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is ' a conflict or a real or substantial possibility of a conflict ' between personal interests of the fiduciary and those to whom the duty is owed. "

34. Despite their broad judicial formulations fiduciary duties are not infinitely extensible. That point was made in
Chan v Zacharia ^[44] (1984) 154 CLR 178 . , which concerned the content of the fiduciary duties of members of a partnership inter se. The limits of those duties were to be determined by the character of the venture for which the partnership existed, the express agreement of the parties and the course of dealings actually pursued by the firm ^[45] Chan v Zacharia (1984) 154 CLR 178 at 196 per Deane J. . The scope of the fiduciary duty generally in relation to conflicts of interest must accommodate itself to the particulars of the underlying relationship which give rise to the duty so that it is consistent with and conforms to the scope and limits of that relationship. It is to be " moulded according to the nature of the relationship and the facts of the case " ^[46] Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 102 per Mason J referred to in Clay v Clay (2001) 202 CLR 410 at 432 – 433 [ 46 ] per Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ; [ 2001 ] HCA 9 ; United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 11 per Mason, Brennan and Deane JJ (Gibbs CJ generally agreeing at 5), see also at 15 per Dawson J; [ 1985 ] HCA 49 ; Breen v Williams (1996) 186 CLR 71 at 135 per Gummow J. . By way of example, company directors are frequently shareholders. The decisions they take as directors may therefore affect their personal interests. They do not breach their fiduciary obligations merely because in promoting the interests of the company they are also promoting their own ^[47] Hirsche v Sims [ 1894 ] AC 654 at 660 – 661 referred to in Mills v Mills (1938) 60 CLR 150 at 164 – 165 per Latham CJ, 170 per Rich J (Evatt J agreeing at 188), 179 per Starke J; [ 1938 ] HCA 4 ; Ngurli Ltd v McCann (1953) 90 CLR 425 at 440 per Williams ACJ, Fullagar and Kitto JJ; [ 1953 ] HCA 39 . . On the other hand, a decision taken by directors to advantage themselves other than as members of the general body of shareholders would constitute an abuse of fiduciary powers ^[48] Harlowe ’ s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at 493 – 494 per Barwick CJ, McTiernan and Kitto JJ; [ 1968 ] HCA 37 . .

35. Overbroad assertions of fiduciary duties, uninformed by a close consideration of the facts and circumstances of the particular case, are sometimes made for reasons which have nothing to do with the protective rationale of those duties. The plurality in
Maguire v Makaronis referred to ^[49] (1997) 188 CLR 449 at 463 – 464 per Brennan CJ, Gaudron, McHugh and Gummow JJ; [ 1997 ] HCA 23 . :

" attempts to throw a fiduciary mantle over commercial and personal relationships and dealings which might not have been thought previously to contain a fiduciary element. "

The forensic purposes of such attempts may include the availability of advantageous equitable remedies and the avoidance of stringent time limits. The appellant attempted to stretch the fiduciary mantle attaching to his position as director to his membership of the joint venture. He did so in order to defeat a claim that he was liable to pay income tax on the amount of equitable compensation awarded to him in the Supreme Court of Victoria. His purpose had nothing to do with the vindication or protection of Disctronics ' interests.

36. Taking the appellant ' s submissions at face value and disregarding his forensic purpose, it is important to heed the caution given by Deane J in
Chan v Zacharia against excluding " the adjustment of general principles to particular facts and changing circumstances " and thereby converting equity into " an instrument of hardship and injustice in individual cases " ^[50] (1984) 154 CLR 178 at 205 . .

37. If there is no possible conflict between personal interest and fiduciary duty, and if the gain or benefit is not obtained by use or by reason of the fiduciary position, the fiduciary is not liable to account for the gain or benefit. The directors of Disctronics ^[51] The relevant directors being the appellant, Donovan and Quinert, not including Mackie. , acting in their personal capacities, conceived of a profit-making venture in which they would be involved in their personal capacities. Their entry into the joint venture did not involve the use of any knowledge or opportunity derived from their positions as directors. Acting as directors, they decided that the company could be benefited by being brought in as the ultimate purchaser of the golf course. The decision of the directors did not establish any basis, in principle, to impress their personal interests in the joint venture with fiduciary obligations to Disctronics in the event that it did not acquire the golf course. There is no suggestion that that decision involved an exercise of their powers as directors other than in the interests of the company. It was the investment potential of the acquisition from Disctronics ' perspective that led them to propose that it purchase the golf course for a price which was not necessarily as good a price as would have been obtained from an arms-length purchaser. That this was so was evidenced by the adverse reaction of Edmonds and Cahill and their eventual departure from the joint venture. Their interest was, of course, in sharing in the " day-one " profit, which would not be realised if Disctronics were to acquire the golf course and hold it as lessor to Spotless. The other joint venturers could not insist upon this change to the foundation of the relationship between the joint venturers. The directors never regarded the opportunity to garner the " day-one " profit as an opportunity which Disctronics might exploit. The present case is thus radically distinguished from the line of authority of which
Keech v Sandford ^[52] (1726) Sel Cas T King 61 [ 25 ER 223 ] . is the leading case.

38. Once it became clear that Edmonds and Cahill would not agree to Disctronics as the ultimate purchaser, the potential for Disctronics to derive any benefit from the joint venture was at an end. By that time, or at least by the time Edmonds and Cahill had diverted the project to their own use, the appellant ' s duty to pursue any benefit or advantage for Disctronics by procuring its participation in the joint venture project could not further be performed. And the appellant did not obtain any gain or profit before these events occurred. These matters are sufficient to defeat the appellant ' s primary contention. The appellant fails upon the first and principal issue in the appeal.

The litigation agreement

39. The appellant submitted that the litigation agreement confirmed the constructive trust for which he contended in his primary submissions. For the reasons already given, there was no constructive trust of the equitable compensation awarded to the appellant.

40. The appellant argued in the alternative that by the litigation agreement he assigned his right to the amount of the equitable compensation ultimately received in 2005 and not the sum itself. As a matter of construction of the agreement, that argument, which was made for the first time in the Full Court, should not be accepted. Under the terms of the agreement the appellant, Donovan and Quinert assigned " any award of damages (whether on revenue or capital account), costs or interest made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings and the ultimate outcome thereof " . The agreement did not assign the appellant ' s interest in the joint venture nor in the cause of action arising out of the breach of fiduciary duties by Edmonds and Cahill and asserted in the main proceeding in the Supreme Court. It did not involve an assignment of a chose in action.

41. This Court in
Federal Commissioner of Taxation v Everett ^[53] (1980) 143 CLR 440 ; [ 1980 ] HCA 6 . distinguished between an equitable assignment of present property for value, carrying with it a right to future income, and a like assignment of mere future income, dissociated from the proprietary interest with which it is ordinarily associated. The latter takes effect " when the entitlement to that income crystallizes or when it is received, and not before. " ^[54] (1980) 143 CLR 440 at 450 – 451 per Barwick CJ, Stephen, Mason and Wilson JJ. Mason CJ observed in
Booth v Federal Commissioner of Taxation ^[55] (1987) 164 CLR 159 at 167 – 168; [ 1987 ] HCA 61 . :

" [ I ] n some cases it may be impossible to identify a present right to future income divorced from the proprietary right which generates that future income. In such cases an attempted assignment deals with future property or an expectancy and operates to vest the future income in the assignee as and when that future income accrues due, but not before it accrues due. Accordingly, the assignment would not be effective to prevent the income being derived or being deemed to be derived by the assignor. "

As the respondent submitted, that is this case. The appellant ' s submissions with respect to the litigation agreement should be rejected.

The off-set of costs

42. The appellant submitted shortly that if this Court were to otherwise dismiss his appeal, the amount of his assessable income from the judgment of the Supreme Court of Victoria should be reduced by what he contended was his share of the legal costs incurred in prosecuting the Supreme Court proceedings. The legal costs have been recouped from the amount paid to Disctronics in 2005.

43. While the respondent, in the Full Federal Court, accepted that the legal costs incurred by the appellant in recovering the award of equitable compensation would have been a deduction from his income, he submitted that there was no evidence that the appellant had in fact incurred any costs. The legal costs were paid by Disctronics, which had presumably claimed a deduction. The Full Court accepted the respondent ' s contention ^[56] (2012) 206 FCR 329 at 337 [ 23 ] . . The only evidence of expenditure on legal costs was of expenditure by Disctronics ^[57] (2012) 206 FCR 329 at 337 [ 24 ] . . There was no evidence to demonstrate that the appellant had incurred any expense, by way of reimbursing Disctronics or otherwise, or that any such expenditure had occurred in the 2005 income year ^[58] (2012) 206 FCR 329 at 337 [ 24 ] . .

44. The appellant pointed out that the compensation was paid directly to Disctronics and the costs recouped from that payment. Disctronics ' payments were said to have discharged the obligations of the plaintiffs. The respondent argued that the latter submission had not been made out. Disctronics was itself a litigant in the proceedings. The respondent referred to the appellant ' s affidavit of 27 May 2010 in the Federal Court, in which he stated that " [ o ] n a net basis Disctronics thus expended an amount in excess of $ 1.2 million in legal fees and disbursements in relation to the proceedings before the Supreme Court of Victoria and Court of Appeal. " The appellant submitted in reply that if he were lawfully entitled to the equitable compensation he would have been obliged to recoup the costs incurred by Disctronics for his benefit.

45. The appellant ' s submissions should not be accepted. He did not point to any error in what the Full Court had held nor suggest that it had failed to address submissions of the kind which he now puts to this Court. Given that Disctronics was a party in its own right, and given the terms of the litigation agreement, under which, in any event, Disctronics was to bear the relevant legal costs, there is no basis upon which this Court could conclude that the appellant had incurred any liability in relation to them.

Conclusion

46. For the preceding reasons, the appeal should be dismissed with costs.