Reported Decision: (2007) DFC 95-411 New South Wales Court of Appeal CITATION: Shortall v White [2007] NSWCA 372 HEARING DATE(S): 28 November 2007 JUDGMENT DATE: 19 December 2007 JUDGMENT OF: Hodgson JA at 1; Santow JA at 2; Handley AJA at 3 DECISION: Appeal dismissed with costs. CATCHWORDS: DEFACTO RELATIONSHIPS - agreement between former defacto partners - principle in Balfour v Balfour [1919] 2 KB 571 and Cohen v Cohen [1929] HCA 15 - (1929) 42 CLR 91 no longer applicable - TRUST - intention to create - bilateral transaction for consideration - test objective Balfour v Balfour [1919] 2 KB 571 Cohen v Cohen [1929] HCA 15; (1929) 42 CLR 91 Commissioner of Stamp Duties (Qd) v Jolliffe [1920] HCA 45; (1920) 28 CLR 178 Kauter v Hilton [1953] HCA 95; (1953) 90 CLR 86, 100 CASES CITED: Konskier v B Goodman Ltd [1928] 1 KB 421 Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491 Saunders v Vautier [1841] 4 Beav 115 [49 ER 282] T Choithram International S A v Pagarini [2001] 1 WLR 1 PC Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 Walker v Corboy (1990) 19 NSWLR 382 PARTIES: Alan Shortall Louise White FILE NUMBER(S): CA 40836/06 COUNSEL: G Curtin (Appellant) N Perram SC with P Castley (Respondent) SOLICITORS: Middletons (Appellant) Stephen Bottrill Solicitors & Attorneys (Respondent) LOWER COURT JURISDICTION: Supreme Court - Equity Division LOWER COURT FILE NUMBER(S): SC 2719/06 LOWER COURT JUDICIAL OFFICER: Campbell J LOWER COURT DATE OF DECISION: 15 December 2007 LOWER COURT MEDIUM NEUTRAL CITATION: White v Shortall [2006] NSWSC 1379 - 10 - IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40836/06 SC 2719/06 HODGSON JA SANTOW JA HANDLEY AJA Wednesday 19 December 2007 Alan SHORTALL v Louise WHITE DEFACTO RELATIONSHIPS - agreement between former defacto partners - principle in Balfour v Balfour [1919] 2 KB 571 and Cohen v Cohen [1929] HCA 15; (1929) 42 CLR 91 no longer applicable TRUST - intention to create - bilateral transaction for consideration - test objective The parties had been in a defacto relationship which had broken down but they continued to see each other. On 17 March 2003 they had an emotional 2 hour counselling session with a psychologist during which the respondent said she wanted some security and the appellant agreed to give her a letter indicating that he held some shares in a public company in trust for her. Later that day the appellant said that he would not sign such a letter unless the respondent gave him a cheque for $20,000 which she did. The appellant then gave the respondent a letter confirming that he held 222,000 shares in the company in trust for her which he would transfer on request made after 1 August 2003. Unknown to the respondent the shares were held in escrow until 1 November 2004 following listing of the company on the ASX. The respondent called for a transfer of the shares which was refused. The Judge held that the letter gave rise to a contract as well as a trust and awarded the respondent damages for breach of the promise to transfer based on the difference between the market value of the shares at the time of the request and their value after 1 November 2004. The defendant appealed claiming inter alia that there had been no attention to contract and he had not intended to create a trust. Held: (1) the principle in Balfour v Balfour [1919] 2 KB 571 and Cohen v Cohen [1929] HCA 15; (1929) 42 CLR 91 extends to parties living in a defacto relationship but not after their relationship has broken down; (2) the terms of the letter and the surrounding circumstances viewed objectively demonstrated an intention to enter into legal relationships; (3) the necessary intent to create a trust had also been established; (4) where a trust is alleged to have been created by a bilateral transaction for value, pursuant to a contract, the intention to create the trust must be judged objectively, and the principle in Commissioner of Stamp Duties (Qd) v Jolliffe [1920] HCA 45; (1920) 28 CLR 178, 181 does not apply. ORDER Appeal dismissed with costs. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40836/06 SC 2719/06 HODGSON JA SANTOW JA HANDLEY AJA Wednesday 19 December 2007 Alan SHORTALL v Louise WHITE Judgment 1 HODGSON JA: I agree with Handley AJA. 2 SANTOW JA: I agree with Handley AJA. 3 HANDLEY AJA: The appellant and respondent were in a defacto relationship after 1999 which began to break down after October 2002. They did not separate immediately and when they did they continued to see a lot of each other and they had a holiday in the Maldives in July - August 2003. 4 The proceedings leading to this appeal arose out of a letter in the appellant's handwriting which he gave to the respondent on the first date it bears. It was in the following terms: "Louise White 25 The LINKS BYRON BAY NSW 2481 17/3/03 Dear Louise, THIS LETTER IS TO CONFIRM THAT I AM HOLDING IN TRUST FOR YOU 222,000 UNITRACT SHARES. THESE SHARES WILL BE TRANSFERRED TO YOUR NAME AND CONTROL AT ANY TIME THAT YOU REQUEST AFTER 1/AUGUST/2003. IN THE CASE OF MY DEATH, THE ABOVE TRANSFER OF 222,000 UNITRACT, TO YOUR NAME, WILL BE AUTHORISED BY MY EXECUTOR, STEVEN SHORTALL. I FURTHER COMMITT TO MAKE AVAILABLE 25,000 UNITRACT SHARES FOR FINANCIAL SUPPORT FOR [AS] EACH [AS] BOTH MAVERICK AND JACKSON ON OR AFTER 1/AUGUST 2003. [ALAN SHORTALL] ALAN DENIS SHORTALL 18/3/03 [AS]" 5 The respondent alleged that the letter gave rise to enforceable obligations and sued for breach of contract and breach of trust based on the appellant's failure to transfer the shares on request after 1 August 2003. Campbell J held that the letter gave rise to such obligations and entered judgment for the respondent for $548,452 as damages for breach of the promise to transfer the shares. 6 The appellant's shareholding was acquired when Unitract listed on the Australian Stock Exchange on 1 November 2002 but his shares were subject to escrow until 1 November 2004. The respondent was not aware of this until after she asked for the shares to be transferred. On the supposition that there might be no enforceable contract the Judge assessed equitable compensation of $266,400 for the breach of trust based on the value of the shares on 1 November 2004. 7 The appellant's first point was that the claim for award of damages for breach of contract was not covered by the pleadings. Other points argued in support of the appeal were that the letter did not establish either a trust or a contract because there was no intention to enter into legal relationships and there was no contract because there was no consideration. 8 Para 3 of the original statement of claim alleged that the defendant agreed in the letter to transfer the shares to the plaintiff "as security for loans" (red 6), although damages were claimed for his refusal to transfer them on demand (red 5). 9 The plaintiff was given leave to amend during the trial and para 4 of the amended statement of claim pleaded that the shares were being provided as security for existing loans and a further loan of $20,000 when the letter was handed over (red 33). 10 The amended statement of claim pleaded a demand by the plaintiff for a transfer of the shares, the defendant's failure to do so, and claimed damages for that breach of contract (red 35), and a claim for breach of trust was based on the same facts (red 34). The prayers for relief claimed in the alternative damages or equitable compensation (red 31). The pleading was complicated and confused with unsupportable and unnecessary claims of breach of fiduciary duty and estoppel. Counsel then appearing for the plaintiff (who did not appear on the appeal) still managed to plead a contract on or about 17 March 2003 for valuable consideration that was partly in words and partly in writing. 11 The respondent's case at the trial clearly included claims for breach of contract and breach of trust based on the letter and the events which led up to the appellant giving it to the respondent in exchange for a cheque for $20,000. The appellant was not misled by the form of the pleadings and there was no prejudice. The evidence was led without objection, and the pleading point, such as it was, was not taken then or in final address. 12 In any event the pleading point is without substance. As Scrutton LJ said in Konskier v B Goodman Ltd [1928] 1 KB 421, 427: "… a plaintiff is not now bound to state the legal effect of the facts on which he relies; he is only bound to state the facts themselves …" 13 The inability of counsel then appearing for the plaintiff to identify and plead the true legal effect of the 17 March 2003 letter did not prevent the trial Judge granting relief on that basis. 14 On 17 March the appellant and respondent attended a counselling session with Mr Keiran Riordan, a psychologist, which lasted about 2 hours and was a very emotional experience for both of them. The Judge accepted the evidence of the respondent and Mr Riordan about this meeting and rejected the evidence of the appellant and his account of how the letter came into existence (red para 77). Mr Riordan's contemporary notes of the meeting included the following (red para 55): "[Louise] 'Nervous re no security with my shares'. 'They are in your name - I have no security. What if you die?' [Alan] 'Agrees to write letter indicating what shares are held in trust for Louise. Explains available in August 03.'" 15 The respondent's evidence was that she and the appellant went home after the meeting. When they got there the appellant said he would not write the letter unless she gave him a cheque for $20,000. The appellant wrote out the cheque in the respondent's cheque book which she signed and gave to him. 16 The cheque was in evidence and it was common ground that, apart from the signature, it was in the handwriting of the appellant. It was met on presentation. The cheque butt is also in his handwriting. After she signed and handed over the cheque the appellant wrote out a letter of 17 March and gave it to her. 17 Counsel for the appellant submitted that the matrix of surrounding circumstances negatived any intention on the part of his client, and perhaps both parties, to enter into legal relationships. These included some earlier payments which the respondent claimed were loans but the Judge found were not, earlier statements by the appellant that he held some of his shares for the respondent, their failed defacto relationship, and the emotionally charged meeting with Mr Riordan. 18 In my judgment, these matters, viewed objectively, do not negative the intention evident from the terms of the letter and the circumstances in which it was given to the respondent including the cheque. Although the principle in Balfour v Balfour [1919] 2 KB 571 and Cohen v Cohen [1929] HCA 15; (1929) 42 CLR 91 would normally apply to parties in a continuing defacto relationship as well as those who are married, this is not the case once the relationship breaks down. 19 The respondent wanted "security" and the letter was intended to provide it. Only a letter with legal effect could do this and a letter of "comfort" would not give her any security at all. If the appellant's evidence that he did not intend to be bound by the letter had been true his conduct on this occasion would have been dishonest and duplicitous. The Judge rejected his evidence but acquitted him of such conduct. 20 Mr Curtin for the appellant appealed to the probabilities and asked rhetorically why the appellant would bind himself to transfer the shares on demand after 1 August 2003 when he knew that they were held in escrow until 1 November 2004 and would be exposing himself to a substantial liability if demand was made beforehand. He also relied on the disparity between the amount of the cheque and the obligations undertaken by the letter. 21 These matters are not decisive when one considers the letter which is eloquent of an intention to enter into legal relationships. As Mr Riordan's notes demonstrate the date of 1 August was suggested by the appellant who never explained why he chose it. The respondent did not know that the shares were held in escrow and the matters relied upon, other than the amount of the cheque, are only significant in the light of this fact. 22 The status of these shares was not a mutually known fact and cannot be used to construe the letter. The question of contractual intention must be judged objectively and in this case the mutually known surrounding circumstances, the terms of the letter, and the fact that it was only given after the respondent had complied with the appellant's demand that she hand over a cheque for $20,000 demonstrate that it was intended to give rise to legal relationships. 23 The submission that there was no consideration for the appellant's promise was without substance. He demanded and received a cheque of $20,000 in exchange for the letter. This consideration was not appropriated to a separate parcel of the shares and applied to the whole letter. 24 The appellant's related point was that there was no trust because he did not intend to create one. The Judge found that the test in this case was subjective relying on the majority decision in Commissioner of Stamp Duties (Qd) v Jolliffe [1920] HCA 45; (1920) 28 CLR 178, 181 that no form of words will create a trust contrary to the real intention of the person alleged to have created it. The opening of the savings bank account in that case "in trust" for the depositor's wife was, and on the evidence, remained a unilateral voluntary transaction of which the wife knew nothing. The principle applied by the majority, despite the vigorous dissent of Isaacs J, may be accepted as properly applicable where the transaction is unilateral and the beneficiary and others are not informed: compare Kauter v Hilton [1953] HCA 95; (1953) 90 CLR 86, 100; and T Choithram International S A v Pagarini [2001] 1 WLR 1 PC, 6, 12. 25 The transaction evidenced by the letter of 17 March was of an entirely different character. It represented the outcome of discussions earlier that day between the parties, and the letter evidencing the trust was handed to the beneficiary. The transaction was for value and it created a contract. In cases such as the present one would think, on principle, that the contract rule would apply and the intention to create a trust or otherwise would be judged objectively. 26 The respondent filed a notice of contention by leave to contend that the Judge erred in holding that the test of intention was subjective. The cases cited in support of that contention by Mr Perram SC for the respondent support it although they dealt with trusts of a different character. In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107, which concerned a trust of a promise in a policy of indemnity insurance, Mason CJ and Wilson J said at 121: "… the courts will recognise the existence of a trust when it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. We are speaking of express trusts, the existence of which depends on intention. In divining intention from the language the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention." 27 In the same case Deane J said (at 147): "… equity's requirement of an intention to create a trust will be at least prima facie satisfied if the terms of the contract expressly or impliedly manifest that intention as the joint intention of both promisor and promisee." 28 These principles have been applied in other situations where the parties were in a contractual relationship. Thus in Walker v Corboy (1990) 19 NSWLR 382 the Court of Appeal had to determine whether a farm produce agent held the net proceeds of sale on trust for his principal, or was merely the principal's debtor. In Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491 Gummow J applied those principles in determining whether a Quistclose trust had been created. 29 Thus both principle and authority support the application of an objective test to determine whether an alleged settlor intended that a bilateral transaction should create a trust. 30 In any event the appellant faced an insuperable difficulty on this point because the Judge rejected his denials and found that he intended to create a trust when he handed over the letter: paras 129, 130, 141. The Court is not entitled to disturb these findings. 31 The remaining ground of appeal was that the Judge erred in finding that the subject matter of the contract was shares in Unitract "in general" and not shares already owned by the appellant. The Judge did not decide this. He said (para 142) that the defendant had a contractual obligation to transfer 222,000 shares once the plaintiff requested the transfer after 1 August 2003, but this was provided for on the plain terms of the letter. The natural construction is that the respondent was only entitled to 222,000 shares, and the trust attached to shares held by the appellant. 32 The appellant's contractual promise to transfer the shares on demand after 1 August 2003 was not qualified in terms or by necessary implication. In those circumstances his inability to perform his promise by transferring shares he already held cannot excuse his breach of contract. A person who sells shares he does not possess (a short seller) and does not deliver is liable for breach of contract whether or not he could have bought in to cover his contract. 33 In any event a trust for a beneficiary who is absolutely entitled to the trust property, subject to a term restricting transfer until demanded after a fixed date, would be within the Saunders v Vautier [1841] 4 Beav 115 [49 ER 282] principle once that date had passed. The respondent may have been entitled to equitable compensation on that basis but it is not necessary to pursue this question. 34 The grounds of appeal fail and the appeal must be dismissed with costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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