BECK and ANOR v STATE BANK OF NEW SOUTH WALES LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY, HANDLEY and POWELL JJA 8 November 1993, 11 February 1994 [1994] NSWCA 20 APPEAL from Equity Division — Plaintiffs owed money to Bank — Claim that security for money was invalid — Ongoing disputes — Agreement that property be sold at auction, loan discharged and proceeds divided between plaintiffs and Bank in agreed tranches — Property sold to company in which plaintiffs and their relations had interests — Bank refused to perform agreement — Plaintiffs sued for specific performance — Held: Plaintiffs owed fiduciary duties to Bank — Acted in breach of those duties by sale to such company — Bank justified in refusing to perform agreement. COMMERCIAL AGREEMENT — When involves fiduciary duties. Mahoney JA Walter Tibeaudo Beck and his son Christopher Kim Beck were the registered owners of a grazing property. (I shall, for convenience, refer to them as "the Becks", although the father Walter Tibeaudo Beck appears to have conducted most of the transactions here relevant). The property was subject to a mortgage to State Bank of New South Wales Limited. For some years disputes had existed between the Becks and the Bank in relation to their indebtedness to the Bank. In those disputes the validity of the Bank's securities had been questioned by the Becks and they had done what they could to defeat the Bank in its attempts to realise upon its security. On or about 16 January 1991 an agreement was finally made between the Becks and the Bank ("the debt agreement"). The agreement provided, inter alia, for the sale of the property and the division of the proceeds. In due course, the property was sold at auction. The purchaser was a company Moreco Pty Ltd in which, it appeared, one of Mr Walter Beck's daughters and the husband of another had interests and in respect of which there was an arrangement with Mr Beck senior. When the Bank discovered those associated with Moreco Pty Ltd it refused to carry out its part of the debt agreement. The Becks thereupon sued for specific performance of that agreement. On 18 November 1991 Needham J held that the debt agreement gave rise to fiduciary obligations between the Becks and the Bank and that the Becks had acted in breach of those obligations. His Honour refused specific performance and awarded specific possession of the property to the Bank as claimed by it under its mortgage. The Becks have appealed to this Court against his Honour's judgment. 1. THE FACTS: In order to understand the basis of the judgment of Needham J and the submissions made to this Court in respect of it, it is necessary to refer in some detail to the facts 88 found by his Honour. I shall refer to them only insofar as it is necessary to do so to explain those submissions and the conclusions reached by me in respect of them. 2 UNREPORTED JUDGMENTS The grazing property owned by the Becks comprised (I shall use the measures principally used in the proceedings) some 2940 acres. The Bank claimed that the Becks were indebted to it, and there was secured upon the property, a total sum approaching $2 million. This was far in excess of what, at the end of 1990, was seen as the value of the property. If on sale the property realised $250 per acre, that would represent a sum of the order of $735,000; $275 per acre would represent some $808,000; $300 per acre some $882,000; $350 per acre some $1,030,000; and $400 per acre some $1,176,000. The expectations or the claims of the parties in respect of the possible yield on sale varied greatly and that is of relevance in considering the terms of the debt agreement at which they arrived. Following detailed negotiations the Bank forwarded to the Becks a letter of 21 December 1990. That letter was, on or about 16 January 1991, signed by the Becks. It has been accepted for the purposes of this appeal that the agreement which the Becks seek to have enforced is contained in that letter. The relevant portions of the letter are as follows: "T refer to your letter of 6 November 1990 and the alternative proposals suggested. The options have been considered by the Bank, which has responded by accepting the second alternative as varied hereunder: The State Bank of New South Wales Ltd agrees that WT and CK Beck should proceed to prompt and orderly sale of all assets described in their solicitors' letter of 6 November 1990, with all proceeds being paid to Gordon Garling and Giugni Trust Account and thereupon invested, with all interest being paid to the Bank. Upon finalisation of sales then the State Bank of New South Wales Limited authorises proceeds to be paid in the following order: 1. Payment of all legal sales costs and commission associated with the sale of all farm assets; 2. The first $250,000 to WT and CK Beck; 3. The next $1,840,493 plus interest described above to State Bank of New South Wales Ltd; 4. Excess above $2,090,493 as detailed in 2 and 3 above, up to a maximum sum of $250,000 to be paid to WT and CK Beck; 5. All excess above $2,340,493 plus interest described in 3 above, and detailed in 2, 3 and 4 above to be paid to State Bank of New South Wales Ltd. This agreement and authorisation is made subject to the unconditional written undertakings from WT and CK Beck to the following: a) That WT and CK Beck will immediately place all assets for sale in the best possible condition to all prospective buyers for the best available market price; b) That WT and CK Beck will place farm assets for sale by Auction for a date not later than 28 February 1991 should they not be sold by 31 December 1990; c) That WT and CK Beck will conclude all sales by 15 April 1991, and provide detailed certified copies of all settlement statements, and sales accounts of all assets described in Solicitors letter of 6 November 1990 detailing sales prices received, and a Certified Copy of the Elders Account secured by lien; d) That WT and CK Beck will meet all Government Agency debts from their own resources; e) That WT and CK Beck will keep the terms of all negotiations and agreement confidential to themselves excepting for legal representatives; URJ BECK and ANOR v STATE BANK OF NEW SOUTH WALES LTD (Mahoney JA) 3 f) and, that WT and CK Beck will either prior to or upon release of funds held in Trust by Gordon Garling and Giugni, execute and exchange a Deed of Release with the State Bank of New South Wales Ltd. and that Gordon, Garling and Giugni acknowledge the above agreements and irrevocably undertake to disburse funds following sale of all assets without delay. (A form of undertaking is provided at the foot of this letter). In exchange for these agreements and undertakings then the State Bank of New South Wales Ltd undertakes to: g) Accept the sums as detailed in the above offer as full and final settlement of all debts owing by WT Beck and WT and CK Beck; h) Waive all residual debt owing; i) Execute and exchange a Deed of Release to conclude all matters. Eris, I believe the above is fair and equitable and meets Wally and Chris' need to simplify matters. Please arrange for Wally and Chris to execute the following acknowledgment to the agreements and return Wally and Chris' and your acknowledgment as soon as possible so that matters may be quickly finalised." The agreement embodied in the letter involved, inter alia: that the Becks would prepare the property for a "prompt and orderly sale" and would "place all assets for sale in the best possible condition to all prospective buyers for the best available market price"; that the sale would be a sale by the Becks; and that, after payment of costs and commission, the proceeds of the sale would be divided as follows: the $250,000 to the Becks; the next $1,840,493 "plus interest" to the Bank; the next $250,000 to the Becks; and the balance to the Bank. It was part of the agreement that the Bank would accept the sums referred to in the agreement "as full and final settlement of all debts owing by" the Becks and would execute a "deed of release to conclude all matters". The contemplation was that, on such a sale, the purchaser would take free of the Bank's mortgage. Consequent upon this agreement the Becks arranged for the sale of the property by auction. No reserve was fixed. There was argument at the trial as to whether it had been agreed between the Becks and the Bank that a reserve should be fixed. The trial judge does not appear to have concluded that there was. However that be, no effective reserve was fixed or acted upon. The property was sold at auction on 13 March 1991. The auctioneer was, it may be accepted, an experienced auctioneer. His Honour's finding in relation to what took place was as follows: "When a bid of $200 an acre was made, the auctioneer referred to Mr Walter Beck a question from the floor whether 'the property was on the market'. This, as the evidence discloses, is a question whether the property is to be sold regardless of the price reached. Mr Beck signified that the property was on the market. The bidding then reached $250 an acre - the bids were required by the auctioneer to be in $50 rises. There was a pause in the bidding and the auctioneer indicated that rises of $25 an acre would be acceptable. A bid of $275 was made and the property knocked down to that bidder. The bidder was acting for a company, Moreco Pty Ltd, a director of which company then came forward to sign the contract. That director was Mr Aitken, the son in law of the first plaintiff, who was a shareholder in Moreco Pty Ltd. The 4 UNREPORTED JUDGMENTS only other director and shareholder was a daughter of the first plaintiff (not married to Mr Aitken) Mrs Ward. The contract price was $807,961." In late March 1991 the Bank became aware of the identity of the directors of Moreco Pty Ltd and of their relationship to the Becks. It then refused to perform the debt agreement and claimed possession of the property. The Becks then brought proceedings claiming specific performance of the debt agreement. It is that proceeding which was before Needham J and is before this Court. There was, at the trial and before this Court, dispute as to the events which occurred prior to the auction, in relation to the formation of Moreco Pty Ltd and the arrangements made with respect to it. His Honour made findings in relation to these matters. I am not satisfied that his Honour's findings were wrong. As they are of some significance for the determination of the issues now before this Court, I shall refer to them. As I have indicated, the parties had differed widely as to the value of the property and their rights in respect of it. An offer had been made by the Becks of $200,000 to discharge all of their liabilities. The Bank had indicated that it believed that a fair figure for auction purposes was $400 per acre. The offer of $200,000 was made by Mr Beck "on behalf of his daughters, Mrs Aitken and Mrs Ward" and, it may be, the Bank was aware of the fact at least that members of Mr Walter Beck's family were or might be involved in the offers made. However that be, his Honour said: "After a meeting between Mr Beck and Mr Prior (an officer of the Bank) on 28 February 1991, when Mr Prior said that a reserve of $400 an acre should be set, the family, being principally Mr Beck and Mr Aitken, discussed the possibility of the property being saved for the family. Mr Aitken had recently lost his position and was considering the possibility of working the farm. The weekend before the auction saw serious discussions between Messrs Beck and Aitken. A company, Moreco Pty Ltd, was purchased, with, as I have said, two shareholders and directors (Aitken and Mrs Ward). Finance was provided from other family members and Mr Beck undertook to 'leave in' his $250,000 allowed from the sale. According to Mr Aitken, Mr Beck was to run the property. He also said that, later on, the share holdings and directorships should be reviewed. The plan was that Mr Beck would be allotted shares, although there were thoughts that he might be paid back his $250,000. As a result of the arrangements made, the consortium, if I can so describe it, had available to it a sum equivalent to $300 an acre or a little more. This was known to Mr Beck. Mr Beck had breached his agreement with the Bank by disclosing the fact that he was to receive the first $250,000 from the sale, and this sum formed the basis for the subsequent bid by Moreco Pty Ltd." His Honour pointed out that, although Mr Aitken had experience of auctions, he himself did not bid for Moreco Pty Ltd but employed an agent to do so. "None of these matters was disclosed to the Bank". His Honour set forth in his judgment evidence given by Mr Aitken in cross examination: "COLQUHOUN: Q. Was it proposed as far as you were concerned that in due course Mr Beck would be given a shareholding in the company having regard to the $250,000 that he had made available to the company? A. That is correct. Q. So that the intention was that his money would be utilised, was it, as far as you were concerned as capital towards shares in the future? A. That is correct. URJ BECK and ANOR v STATE BANK OF NEW SOUTH WALES LTD (Mahoney JA) 5 Q. And was it discussed or agreed that Mr Beck would remain on the property if it was purchased by the company? A. Yes, we would be using his skills to operate the farm. Q. So in effect the farm was to be carried on effectually as it was prior to any sale? A. [had some ideas of changes that would be made but in effect we would be using Walter's skills to operate the farm. HIS HONOUR: Q. If he were to be or to remain on the farm and to have an interest amounting to $250,000 in the purchase, why wasn't he made a shareholder in the company? A. It seemed appropriate at the time that Walter or that Garielle and I be the only directors. Q. Why was it appropriate? Some nasty minded person might say you were trying to hide the fact that Mr Beck was involved? A. I guess that is a possibility. Q. Did that idea cross your mind at the time? A. Yes, it would have crossed my mind at the time. Q. Can you tell me what was the process of reasoning that left Mr Beck's name out of this purchase or out of the company that was making the purchase? A. We didn't know what the auction value may have been. There were other possibilities as to the finance that would have been available. I haven't at this stage mentioned that we owned a property in Sydney which, had all this come off, and I had decided to pursue this as a career option, that property could have been sold and again the shareholding in the property could have been vastly different to what has come out of this point. Q. But that doesn't affect Mr Beck's contribution, does it? A. It could have. Q. That he was providing $250,000? A. Yes, and I believe that if possible we may have been able to find an additional $250,000. Q. To pay him back? A. To pay him back. It was fluid at that stage as to what would be the ultimate directorship, shareholding of the company." It is, I think, to be inferred that his Honour acted upon and drew inferences from what Mr Aitken there said. His Honour stated his conclusions as follows: "Tt is clear Moreco Pty Ltd, to the knowledge of Mr Beck, was prepared to bid slightly in excess of $300 an acre. Mr Beck, using what was in effect the Bank's money, was to benefit from a purchase by Moreco Pty Ltd, in that he would obtain what would have been a substantial interest in that company, and would retain his home. As a result of his conduct of the auction, the property was knocked down to an entity in which he had a substantial interest at a price less than he and his associates were prepared to pay. The Bank, as I have said, was kept in ignorance of these facts. The Bank submitted that, in these circumstances, once the bidding reached a stage where Mr Beck's $250,000 was secured, and the price to be obtained on the sale was no longer a matter in which he or his son was interested, but in which the Bank had a considerable interest, his relationship to the Bank became that of a fiduciary and he was under a duty to obtain the best price obtainable at the time - this without determination of the question whether Mr Beck had agreed that he would place a reserve of $400 per acre." His Honour added: 6 UNREPORTED JUDGMENTS "The agreement made by the Bank involved the surrender of its rights under the personal covenant and, as I have pointed out, placed the Bank's interests in the hands of the mortgagors. Once the mortgagors' share of $250,000 was secured, they ceased to have any interest in the price achieved by the sale. The sole body interested was the Bank. In those circumstances, the mortgagors, in effect, sold to a company in which one of them had a significant interest at a price less than they knew was available. Such a sale, in my opinion, cannot stand." 2. THE ISSUES BETWEEN THE PARTIES: As I have indicated, the proceeding was brought by the Becks to secure specific performance of the debt agreement. That would involve, in practical terms, that the Bank discharge its mortgage over the property and that accordingly Moreco Pty Ltd acquire the property on purchase free of any debt to the Bank. The Bank's claim was, and his Honour accepted, that the agreement should not be specifically performed. It refused to be bound by it. Moreco Pty Ltd has not been a party to the proceeding. Accordingly, nothing found in the proceeding affects formally its rights. It is perhaps arguable - on this I express no opinion - that even if the agreement between the Becks and Bank is not to be performed, it has acquired rights in respect of the property effective against the Bank. Matters of that kind have not been in issue before this Court and no finding made in this proceeding is a finding formally binding on Moreco Pty Ltd. The proceeding between the Becks and the Bank was commenced on summons and no formal pleadings were exchanged. Particulars of the parties' claims were to an extent formulated and the proceeding has proceeded by reference to them. In the details of its defence and its counter claim for possession, the Bank raised a number of matters which have either been found against it or have not been formally pursued in this appeal. The matter essentially in issue before this Court is whether the Becks owed fiduciary obligations to the Bank, whether they acted in breach of them, and whether (if they did) the debt agreement should not be performed and should on the contrary be treated as repudiated by the Becks. No distinction has been drawn in argument between the refusal of specific performance and the repudiation of the agreement. It has, I think, been assumed that if there be conduct justifying refusal of specific performance that conduct justified a repudiation of the debt agreement by the Bank. The claim that the Becks were in breach of fiduciary obligations of the kind here in question was not, I think, pleaded strictly and in terms in the documents prepared by the Bank. However, no objection has been taken to the way in which in this regard the matter was dealt with by the trial judge and I shall deal with the appeal accordingly. 4. FIDUCIARY OBLIGATIONS: Mr Spender QC, for the Becks, submitted that the debt agreement imposed no fiduciary obligations on his clients. The debt agreement was, it was submitted, a commercial agreement made between parties at arm's length, who had negotiated the terms on which they were to settle the dispute which it existed between them. Mr Spender submitted that the Becks' obligations involved essentially that they prepare the property for sale to the best advantage and that they sell it at auction in a way calculated to produce the highest price. They had performed these obligations and accordingly were not in breach of the debt agreement. They were entitled, he submitted, to have the proceeds of sale divided as the debt agreement provided. URJ BECK and ANOR v STATE BANK OF NEW SOUTH WALES LTD (Mahoney JA) 7 Mr Spender's argument emphasised, I think, that the relationship between the parties did not fall within the recognised cases of ordinary relationship. It was not, he submitted, relevantly that of mortgagor and mortgagee. They were, the argument suggested, debtor and creditor: the fact that a mortgage existed was, in the relevant sense, accidental. The debt agreement did not involve obligations derived from the existence of the mortgage. The parties might have chosen an arrangement under which rights were to be exercised under the mortgage but they chose a relationship under which the property was to be sold, not in exercise of rights or obligations under the mortgage, but by the Becks as owners. The mortgage was relevant only to the extent that the parties, following the sale and the division of the proceeds, were to have the mortgage discharged. The argument suggested that the Becks auctioned the property, not as agent for the Bank, but in their own right. Their duty was only to account for the proceeds. There is, I think, force in this submission. The law does not impose fiduciary obligations upon parties to transactions which are essentially commercial. The reason for this is not formal but functional. It would impose restrictions upon the speed and, perhaps, the vigour of commercial transactions; in them the power to make a profit at the expense of another is central and each party places reliance, not on the other, but upon himself. I do not mean that the law does not encourage parties in commerce to act honestly and fairly or that life in commerce is to be seen as nasty, brutish and short. But, in a sense, commerce involves the opposite of fiduciary relations: each party places his trust, not in the other, but in himself; the information which he has is not required to be revealed to the other but may be the source of profit for himself; he may use such influence as he has over the other for his own advantage, subject only to such doctrines as economic duress and the like; and his duty of good faith ordinarily extends no further than, eg, Mackay v Dick (1881) 6 App Cas 251 and Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288. However, the fact that a transaction is commercial does not mean that the relationship, or some of the incidents of it, cannot give rise to fiduciary obligations: United States Surgical Corporation v Hospital Products International Pty Ltd (1981) 147 CLR 457 puts this beyond question. In the present case, there were considerations which gave rise to fiduciary obligations. There is no exhaustive catalogue of the indicia of a fiduciary relationship or of a relationship which gives rise to some fiduciary obligations. In Kelly v CA and L Bell Commodities Corporation Pty Ltd (1989) 18 NSWLR 248 at 256 et seq, I referred to some of these indicia and to some of the cases in which such matters have been discussed. I shall not repeat what was there said. The nature of the transaction was of a special kind. The debt agreement required that the Becks sell the property. This was done, not merely so that they would have money which they might use to pay to the Bank; it was done as part of an arrangement by which the money would necessarily go to the Bank and for the purpose of discharging the mortgage. The money was, I think, to be charged with an obligation to pay the relevant part to the Bank. In addition, the debt agreement did not leave the Becks free to conduct the auction simply as they saw fit: as the judge said, the fact that the first $250,000 was provided for by the bids made did not mean that they could thereafter, eg, take any bid. The Becks were obliged - I do not pursue the exact boundaries of this obligation - to do what they reasonably could to obtain the best price. The debt agreement placed on them the obligation to have repaid to the Bank (as it was to 8 UNREPORTED JUDGMENTS be) the balance of the price to be obtained for the property. The Bank had, in this sense, placed reliance on the Becks and placed its interests in their control. And, I think, this obligation was fiduciary in the sense at least that the Becks could not, in respect of what they were to do in this regard, put themselves in a position where their interest conflicted with their obligation to the Bank. If the Becks were themselves to bid, they would, on the one hand, have an interest in "buying" the property for the lowest bid; but they would on the other hand have a duty to the Bank to achieve the highest price available. The Becks were not themselves simply "buying" the property; it was to be bought by Moreco Pty Ltd. But the judge concluded, I think, and I agree, that the Becks had such an interest, actual or potential, in Moreco Pty Ltd that in a practical sense, such a conflict did arise. Their interest was that Moreco Pty Ltd obtain their property for a lower rather than a higher bid; their duty was that it be sold for a higher rather than a lower bid. And, as I have said, the auction was, by the debt agreement, put in their control; for example, they could decide at what point the property was "on the market" and so had to be sold for the best bid thereafter made. But Mr Spender's argument suggested that, if there was a fiduciary obligation of this kind, there was no breach of it: at least, the bid made by the company, $275 per acre, was the best that was available. I do not think that that argument means that there was no breach such that the Bank could not terminate the agreement. It is not clear that the other person who bid at the auction would not have gone to a higher bid if the property had not been put on the market (at $200 per acre). The judge did not make findings in relation to this aspect of the matter. But in any event, the judge accepted, I think, that Moreco Pty Ltd would, if pressed, have paid $300 per acre or perhaps more. The Becks knew of this or (if it be relevant) would have known if they had pressed inquiries in pursuance of their duty to the Bank. If they had known that an independent third party was prepared to bid $300 per acre or more, but let the property be "on the market" and knocked down for a lesser sum, they would have been in breach of their duty to the Bank. They were, therefore, in the position where their knowledge of a possible higher bid was not used to the advantage of the Bank. This was because their interest and their duty conflicted; this is the kind of situation which the principle that a fiduciary may not put himself in a position where duty and interest conflict is designed to avoid. In my opinion, the Bank was entitled to refuse to be bound to extinguish the debt claimed to be secured by the mortgagee. In this regard, it is proper to add one further observation. The letter in question had been preceded by a long course of correspondence and discussions. It is not necessary to form a concluded view as to what that showed or how it bore on what occurred. I have dealt with the parties' contentions by reference simply to the debt agreement and what they did in relation to it. However, were it necessary to refer to such matters, it may be that the background of the debt agreement would provide assistance in understanding the effect of it and why the parties did what they did. It is clear that the Bank was critical of the actions of the Becks and of what they had done and would in the future do. The Becks were equally critical of the Bank. Insofar as it may be relevant, it may be inferred that had the Bank been told that the Becks, with their family associations, were to bid at the auction, it would have acted differently. An offer by the Beck family interests had previously been made or foreshadowed on at least one occasion. The Bank made the debt agreement because, I think, it saw difficulty in procuring the Beck family to pay enough. If URJ BECK and ANOR v STATE BANK OF NEW SOUTH WALES LTD (Powell JA) 9 the Bank had been told that the Beck family interests were prepared to provide up to $300 per acre or even more, it may well have acted in a different way. Therefore the judge was correct in refusing specific performance of the debt agreement. As I have indicated, Moreco Pty Ltd is not a party to this proceeding. Its position under the auction sale remains to be decided. This proceeding should be returned to the Equity Division to be dealt with in accordance with the views expressed by this Court. If any applications are to be made for other relief, those applications may be made in the Division. The appeal is dismissed with costs. Handley JA In this appeal I have had the benefit of reading in draft form the reasons for judgment of Mahoney JA. I agree with those reasons and with the orders he has proposed. I would only add that in my opinion it is clear that the Becks, in arranging for the sale of the property, were acting in part as agents for the Bank. Counsel for the appellants, accepted, as indeed he was bound to, that a sale pursuant to the debt agreement for less than the mortgage debt would have bound the Bank and obliged it to discharge its mortgage. In other words action taken by the Becks pursuant to the debt agreement would have affected the legal rights of the Bank as between itself and the purchaser. In accordance with settled authority this establishes that the Becks were agents for the Bank. See International Harvester Co v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644. Powell JA I agree with Mahoney JA. Appeal dismissed with costs. Counsel for the Appellant: JM SPENDER QC, DJ HAMMERSCHLAG Instructed by: ISP LAW Counsel for the Respondent: GA PALMER QC, DJ RUSSELL Instructed by: PW KEARNS