United Dominions Corporation Ltd v Brian Pty Ltd

(1985) 157 CLR 1
60 ALR 741

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(Decision by: Gibbs CJ)

Between: United Dominions Corporation Ltd
And: Brian Pty Ltd

Court:

Judges:
Gibbs CJMason J
Brennan J
Deane J
Dawson J

Hearing date: 13 November 1984
Judgment date: 1 August 1985

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Decision by:
Gibbs CJ

I have had the advantage of reading the reasons for judgment prepared by Mason, Brennan and Deane JJ. and am in general agreement with them.

2. The critical question in the present case was whether the appellant, United Dominions Corporation Limited ("UDC"), stood in a fiduciary relationship to the first respondent, Brian Pty. Limited ("Brian") on 24 October 1973, the date on which the second respondent, Security Projects Limited ("SPL"), gave to UDC a mortgage which contained the "collateralisation clause" - a clause by which the land was charged "with all amounts from time to time advanced by the Mortgagee to the Mortgagor on any account whatsoever or otherwise owing by the Mortgagor to the Mortgagee and whether advanced to the Mortgagor solely or jointly with any other person and whether for money lent or paid on account of the Mortgagor or for any sum or sums a liability to pay which may have been incurred by the Mortgagee on behalf of the Mortgagor and whether present future or contingent ... ". The effect of the clause was to charge the land with indebtedness incurred by SPL in transactions with which Brian had nothing whatever to do.

3. The agreement between SPL, UDC, Brian and others, when executed on 23 July 1974, described the parties as engaging in a "joint venture", but that term was used in the not uncommon sense of a partnership for one particular transaction, and the agreement was plainly a partnership agreement.

4. In Lindley on Partnership, 15th ed. (1984), at p.480, it is said that the "obligation to perfect fairness and good faith" is not confined to persons who actually are partners, but "extends to persons negotiating for a partnership, but between whom no partnership as yet exists ... ". This statement, which also appeared in earlier editions, is criticized in Higgins and Fletcher, The Law of Partnership in Australia and New Zealand, 4th ed. (1981), at p.50, on the ground that it is not supported by the authorities cited. The decision of Lord Lyndhurst L.C. in Fawcett v. Whitehouse (1829) 1 Russ & M. 132 (39 ER 51) is clear authority for the proposition that a person who is negotiating for himself and his future partners as an agent for the intended partnership, and who clandestinely receives an advantage for himself, must account for that advantage to the partnership when it is formed. Hichens v. Congreve (1828) 1 Russ & M. 150 (39 ER 58) is a similar case. Other authorities, cited by Lindley, concerned promoters of companies, but there is an analogy between the position of company promoters and that of persons who invite others to join in a partnership. The principle was stated generally in Directors, etc. of Central Railway Co. of Venezuela v. Kisch (1867) LR 2 HL 99, at p 113:

"It cannot be too frequently or too strongly impressed upon those who, having projected any undertaking, are desirous of obtaining the co-operation of persons who have no other information on the subject than that which they choose to convey, that the utmost candour and honesty ought to characterize their published statements."

There is a passage in Bell v. Lever Brothers, Ld. [1932] AC 161 which, although not cited by Lindley, appears to support his proposition; Lord Atkin said, at p 227:

"Ordinarily the failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract. The principle of caveat emptor applies outside contracts of sale. There are certain contracts expressed by the law to be contracts of the utmost good faith, where material facts must be disclosed; if not, the contract is voidable. Apart from special fiduciary relationships, contracts for partnership and contracts of insurance are the leading instances. In such cases the duty does not arise out of contract; the duty of a person proposing an insurance arises before a contract is made, so of an intending partner."

I do not understand this passage to mean that the only remedy for a failure by an intending partner to disclose a material fact is rescission. The passage does suggest that an intending partner, like a partner, owes a duty of the utmost good faith.

5. It is clear enough that SPL, which was acting on behalf of Brian and others in executing the mortgage, stood in a fiduciary relationship to Brian. For the purpose of considering whether UDC also stood in a fiduciary relationship, it is unnecessary to decide whether persons negotiating for a partnership always stand in a fiduciary relationship; I have no doubt that they may sometimes do so. The parties in the present case had, on 24 October 1973, proceeded beyond the stage of mere negotiation. The situation was accurately described as follows by Samuels J.A. in his judgment in the Court of Appeal:

"Both Brian and UDC had undertaken to accept an interest in each development. UDC had made payments on account of its share (as equity participant) of the cost of each venture; and Brian had paid its share of the cost of the hotel project. SPL had embarked upon its duties as manager, and was expending moneys to advance this business, with the knowledge and approval of both Brian ... and UDC. Brian knew that SPL would mortgage the lands in order to secure the necessary funds from UDC; and assumed by the 24th October 1973 that a mortgage had been given to UDC for that purpose. UDC undoubtedly knew that Brian was involved."

Samuels J.A. went on to point out that the inference was inescapable that all the parties regarded the expenditure being made and the other steps being taken as consistent with the terms of the formal agreement they intended to execute, and therefore done in furtherance of the joint venture. When the mortgage was given UDC was fully aware that the land registered in the name of SPL was held in circumstances which required SPL to account to the intended partners. The evidence shows also that before that time UDC had become aware that "a joint venture agreement ... in identical terms and conditions as the Brookfield project" was in the course of preparation - SPL, UDC and others, not including Brian, were parties to an agreement made on 28 March 1973 regarding a similar venture at Brookfield. The Brookfield agreement provided that all moneys (other than contributions payable under par.5) required for the purposes of the joint venture would be borrowed, "upon such terms ... as the parties shall unanimously agree" and that the parties authorized SPL to execute any mortgage "which the parties shall unanimously agree should be given or (entered into) in respect of the (joint venture)".

The same provisions appeared in the agreement when it was executed on 23 July 1974. UDC was not a financier dealing at arm's length with SPL and entitled to leave it to SPL to disclose the terms of the mortgage to the persons, including Brian, for whom SPL was acting, but was in a relationship with those persons which, if not one of partnership, was one between persons who, intending to become partners, had already embarked on the partnership venture, of which the execution of the mortgage was an incident. Moreover, UDC knew that it would be contrary to the understanding between the parties, later to be elevated into a formal agreement, if SPL were to grant the mortgage on terms to which Brian did not agree and for purposes unconnected with the joint venture.

There was no reason to believe that Brian had agreed or would agree to the inclusion of the collateralisation clause, which was so obviously adverse to its interests. Although it is not easy to attempt to define the circumstances in which a fiduciary relationship will be found to exist (see the discussion in Hospital Products Ltd. v. U.S. Surgical Corporation (1984) 58 ALJR 587, at p 596 et seq.; 55 ALR 417 , at p 431 et seq.) there was, in the circumstances of the present case, a relationship between UDC and Brian based on the same mutual trust and confidence, and requiring the same good faith and fairness, as if a formal partnership deed had been executed.

6. Once it is held that UDC was in a fiduciary relationship to Brian, there can be no doubt that UDC was in breach of its fiduciary obligations. It obtained for itself an advantage at the expense of and without the knowledge or consent of Brian, and is therefore bound to account to Brian for the improper advantage which it obtained. It is not to the point that it would have been possible for Brian or its advisers to have discovered that the mortgage contained the "collateralisation clause" if they had made the necessary investigations.

7. I agree that the appeal should be dismissed.