New South Wales Supreme Court CITATION : Reglon Pty Limited v Hill & Ors [2006] NSWSC 1360 HEARING DATE(S) : 20 and 23 June 2006; 7 and 8 November 2006 and 1 December 2006 JUDGMENT DATE : 11 December 2006 JURISDICTION : Equity Division JUDGMENT OF : Windeyer J at 1 DECISION : Judgment for the plaintiff for $1,331,212 plus interest. CATCHWORDS : TORTS - conversion - bailment - breach of agreement - whether there was a right to immediate possession - whether contract provisions overrode common law rights of bailor - CO-MIXTURE - scaffolding of plaintiff mixed with other scaffolding - mixing not fault of plaintiff - rights of co-owners in the whole - conversion by co-owner LEGISLATION CITED : Motor Vehicles (Third Party Insurance) Act 1942 Baker v Barclay's Bank Ltd [1955] 2 All ER 571; [1955] 1 WLR 822 McDonald v Lane (1882) 7 SCR 462 Nominal Defendant v Andrews (1969) 121 CLR 562 North General Wagon & Finance Co Ltd v Graham [1950] 2 KB 7 Reliance Car Facilities Limited v Roding Motors [1952] 2 QB 844 CASES CITED : Sandeman & Sons v Tyzack & Branfoot Steamship Co Ltd [1913] AC 680 Smith v Torr [1862] 3 F&F 505 The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (2006) 65 NSWLR 400 Union Transport Finance Ltd v British Car Auctions Ltd [1978] 2 All ER 385 Helmore Commercial Law and Personal Property in New South Wales 10th Edition 1992 page 40 Vaines: Personal Property 4th Edition 1967 at 387 and Reglon Pty Limited (Plaintiff) PARTIES : Grahame Peter Hill (First Defendant) Citadel Financial Corporation Pty Ltd (Second Defendant) Action Construction Service (NSW) Pty Ltd FILE NUMBER(S) : SC 1478 of 2006 COUNSEL : Mr M Ashhurst with him Ms T Baur (Plaintiff) Mr B Connell (Defendant) SOLICITORS : Peter Kemp Solicitors (Plaintiff) Kemp Strang (Defendants) - 15 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER J MONDAY 11 DECEMBER 2006 1478/06 REGLON PTY LIMITED V GRAHAME PETER HILL & 2 ORS JUDGMENT Outline 1 The main question to be decided is whether a receiver appointed by a mortgagee of personal property and a mortgagee in possession of property, are liable for conversion of other goods mixed by the mortgagor with its own goods by leasing or licensing the total quantity of mixed goods. The action is brought by the true owner of the goods improperly mixed, which owner has parted with possession of the goods under a hire contract which is in default. 2 The moral of the story is that dealing in scaffolding is as risky as playing with fire but that many of the participants in the business seem to enjoy such games. Facts 3 The plaintiff, Reglon Pty Limited (Reglon) which is controlled by Mr John Smit and his brother Mr Herman Smit, purchased a quantity of scaffolding from court appointed receivers on 21 September 2004 for $1,478,125 including GST and buyer's commission. 4 The scaffolding was situated on two sites, at Prestons in New South Wales and at Brooklyn in Victoria. The items at each site were enumerated in the sale agreement. There were 116,865 individual items identified in that list plus identified numbers of pallets of particular items which would have amounted to a considerable number of individual items. 5 The contract for sale provided for completion on 21 December 2004 and for the sites to be cleared by 31 January 2005. 6 Reglon was introduced to the transaction by Mr Brian Baker a man known to Mr Smit as a man involved in the scaffolding hire industry for many years. Mr Brian Baker was involved with a scaffolding company, Rildean Pty Limited (Rildean) which was put into receivership and liquidation in 2002. He formed a new company, Action Construction Services Pty Limited (Action) which company in 2004 purchased from the receiver of the assets of Rildean scaffolding then described as "the Rildean scaffolding". It appears the whole of the purchase price was borrowed from Citadel Financial Corporation Pty Limited (Citadel) which company took a fixed and floating charge over the assets of Action, other than debtors, to secure the loan. The scaffolding so purchased and charged has been called "the Action scaffolding" and I will use that name for it. 7 ACS Hire Pty Limited (ACS Hire) was another Baker company formed in 2002. Mr Todd Baker, a son of Brian, was its sole director from incorporation until December 2004, after which another son, Gregory Baker, was sole director for a time but in fact it is clear that Mr Brian Baker was the person who exercised control. 8 On 13 June 2004, Reglon entered into an agreement to hire the scaffolding purchased from the court appointed receivers to ACS Hire. It had been intended that the purchase agreement and the hire agreement be signed on the same day, but something intervened to prevent that happening. Nothing is said to turn on that. The documents related to the same equipment. The hire term was ten years. Under the agreement ACS Hire assumed the obligation to clear the Prestons and Brooklyn sites and transferred all the scaffolding to premises of the Smit interests at Wetherill Park, which were made available to the Baker interests at an agreed rent. 9 The relevant terms of the hire agreement are: 2. Hiring Agreement 2.1 Subject to clause 3, Reglon will from the Commencement Date hire to ACS the Scaffolding on the terms and conditions contained in this Agreement. 2.2 Reglon agrees that the value of the Scaffolding is $1,250,000.00 ("the Value of the Scaffolding") 2.3 The parties acknowledge that the Scaffolding has been hired to ACS for the purposes of on-hire to scaffold users in the building and construction industry. … 5. Ownership of the Scaffolding 5.1 Reglon's title to the Scaffolding, as at the date of this Agreement, is not, and shall not be, affected in any way by the terms of this Agreement, notwithstanding: 5.1.1 ACS taking possession or control of the Scaffolding; or 5.1.2 the management and use of the Scaffolding by ACS; or 5.1.3 any temporary attachment of the Scaffolding to any land or buildings to facilitate use of the Scaffolding. subject only to the rights of ACS as a mere bailee of the Scaffolding with a right only to use them in accordance with, and under, this Agreement. 15. Default and Termination 15.1 Events of Default Each of the following events is an event of default, namely: 15.1.1 if ACS fails to pay fees or other moneys payable under this Agreement to Reglon on the due date for payment and such failure continues for more than fourteen (14) business days; or 15.1.2 if ACS fails to perform or observe any of the covenants or provisions of this Agreement to be performed or observed by ACS and (if capacity of remedy) such default continues for more than twenty one (21) business days (or such longer period as Reglon in their absolute discretion permits) after notice from Reglon requiring ACS to remedy the same; or 15.1.3 if ACS becomes subject to any external administration pursuant to Chapter 5 of the Corporations Act; or 15.1.4 if, without Reglon's prior consent, effective control of ACS is altered to any material extent from that subsisting at the date of this Agreement. For the purposes of this clause "effective control" of ACS means: (c) control of the composition of the board of directors of ACS; (d) control of more than half of the voting power of ACS; or (e) control of more than half of the issued share capital of ACS excluding any part of it which carries no right to participate beyond a specified amount in the distribution of either profit or capital; or 15.1.5 if, in the opinion of Reglon, there is a material adverse change in the financial condition of ACS; or 15.1.6 if the Scaffolding or any part of it is abandoned or condemned or are seized or appropriated by any lawful authority and not released within twenty-one (21) days or are attached, sequestrated, impounded or restrained upon and not released within twenty-one (21) days unless such an event constitutes a casualty occurrence; or 15.1.7 if any insurance required to be maintained under this Agreement is not maintained or is compromised or made void as a result of some action or inaction on behalf of ACS. 15.2 Consequences of Default If an event of default occurs, Reglon, at its option, may: 15.2.1 Enforce Performance By proceeding by appropriate court action, either at law or in equity, enforce performance by ACS of the applicable terms and provisions of this Agreement or recover damages for the breach concerned; or 15.2.2 Termination Terminate this Agreement and ACS' right to possession of the Scaffolding by notice in writing to ACS. Upon service of such notice all rights of ACS to or in the use of the Scaffolding will terminate and Reglon may, directly or by its agent, take possession of the Scaffolding. Any damages reasonably occasioned by Reglon taking possession are expressly waived by ACS. Reglon will, upon taking possession of the Scaffolding hold, possess and enjoy the Scaffolding free from any right of ACS or its successors or assigns to use the Scaffolding for any purpose. Alternatively, Reglon may require ACS at ACS' expense to dispose of the Scaffolding and to account to Reglon for the proceeds of such disposal. 15.2.3 Retake Possession of the Scaffolding By entering upon the location and detaching or dismantling the Scaffolding as required for its removal. In this regard, ACS will do all things and sign all documents and give all directions reasonably required by Reglon to pass to Reglon, or as Reglon may direct, all and any benefit of any contracts, agreements or arrangements entered into by ACS relating to the Scaffolding. 15.3 Events Constituting Fundamental Breach 15.3.1 It is expressly agreed and declared by ACS and Reglon that the obligations of ACS under the following clauses are essential and fundamental terms of this Agreement such that failure to comply with them will constitute a repudiation of this Agreement entitling Reglon to accept such repudiation: clause 6, clause 9, clause 10 and clause 14. ACS further agrees that should any event of default occur, its occurrence will be a breach of an essential and fundamental provision of this Agreement by ACS amounting to a repudiation by ACS of this Agreement. 15.3.2 The presence of clause 15.3.1 does not mean, and will not be construed as meaning, that there are no other terms and conditions which are fundamental and essential terms and conditions of this Agreement. Clauses 6, 9, 10 and 14 of the hire agreement related to payment of hiring fees, possession and use of scaffolding, insurance and indemnities respectively. 10 The transfer of the scaffolding from Prestons to Wetherill Park was supervised by Mr Gregory Baker. The transfer from Brooklyn to Wetherill Park was supervised by Mr Paul Stuart. Both of these persons were employees of Action. I find that the equipment purchased was all transported to Wetherill Park. While there were no loading documents to support this I am satisfied that the equipment from each site was all put onto trucks and sent to Wetherill Park and received there. The evidence is sufficient to establish that. 11 It was apparently a requirement of Citadel that the charged property of Action be painted a distinctive colour and it was probably a union requirement as well. Mr Paul Stuart and Mr Baker set up a painting area at Wetherill Park. Mr Stuart organized a particular paint from Luxury Paints in Queensland to be purchased and called it "action red". At this time Action had a yard at Granville, but there was no room there to set up a painting dock. Mr Stuart therefore sent Action scaffolding to Wetherill Park to be painted there and Action scaffolding coming back from sites after hire was also taken to Wetherill Park to be painted. At the same time the Reglon scaffolding was being painted and some, perhaps about 30 percent or less of the Reglon stock, was subject to a micro-dotting process. There was no separation by Action of the scaffolding of Reglon from the Action scaffolding at Wetherill Park. The items are such that they can be interchanged and apart from painting one cannot be told from the other. 12 Although ACS Hire was the company which hired the scaffolding from Reglon it did not hire it out to operators on building sites. That was done by Action. All ACS Hire did was to employ the administrative staff so as not to be liable to higher workers compensation premiums for those staff which would otherwise be payable by a scaffolding company. During the time the hire fees were being paid ACS Hire paid them, but was reimbursed by Action. 13 The Smit interests required possession of the whole of the Wetherill Park site in November 2005. By this stage ACS Hire was in default with its payment of hire fees. Mr Greg Baker arranged for all scaffolding at Wetherill Park to be moved to another yard at St Peters, probably leased by Action. Any stock at Granville was also moved to St Peters. 14 On 29 December 2005 Citadel appointed Mr Graham Hill, the second defendant, receiver and manager of the assets of Action pursuant to the charge. On 20 January 2006 Mr Peter Krejci was appointed voluntary administrator of ACS Hire. He was appointed liquidator on 13 April 2006. On 31 January 2006 Mr Krejci was also appointed voluntary administrator of Action. 15 Mr Maiolo is the sole director of Citadel. He is also the sole director of another company, Action Constructions Services (NSW) Pty Limited (NSW) which was formed around 16 January 2006. It was he who arranged to appoint Mr Hill as receiver. Mr Hill, on 18 January 2006 licensed NSW to carry on the business of Action. By then he had taken possession of all the equipment in the St Peters yard and the Granville yard and he had given notice of his appointment to those persons operating those sites on which there was scaffolding hired from Action. Some of that scaffolding can be assumed to have come from Reglon. 16 Mr Hill knew of the claim of Reglon that part of the scaffolding at St Peters and Granville belonged to it. Although he was told by Mr Kemp, the plaintiff's solicitor, that the Reglon items could be identified by the micro-dotting and in other ways, he had been told by Action staff that this was not the case. Nevertheless he proceeded either on the basis that it could be identified or that it could not be, yet he licensed NSW to use all the mixed stock and undertook or allowed Action to undertake in the licence agreement to make available to NSW "Action scaffolding and any other scaffolding (if any) that is being used by it to perform the contracts to enable the licensee to enter into and perform such contracts". 17 Mr Hill retired as receiver on 15 May 2006, on which date Citadel entered into possession of the assets of Action as mortgagee in possession. On the same date Citadel entered into a new licence deed with NSW on similar terms to the previous one. In other words Citadel proceeded to licence NSW to carry out the Action contracts using the mixed stock. 18 Mr Maiolo was well aware of the claims of Reglon that stock was mixed with the Action stock in the St Peters and Granville yards. He said that Mr Smit had said to him that the Reglon stock could be identified and that he had told Smit that if that was so then there would be no problem in taking the Reglon stock. Mr Smit agreed he may have made the last statement but said Mr Maiolo's remark was not said with conviction and I think it is clear that that is the position. Mr Maiolo was well aware of his actions in connection with the mixed stock and that he was using some stock of Reglon for his own benefit or the benefit of his own companies, and against the interests of the true owner. Claims of the plaintiff 19 The final relief claimed by the plaintiff is an order that the defendants deliver up to the plaintiff the equipment or in the alternative an order for damages for conversion of the equipment. In addition the plaintiff seeks an order for an inquiry as to damages for loss of potential hiring charges, although it is fair to say this was not pressed. 20 It is necessary to explain what is meant by "the equipment". The summons identifies this as being "sufficient scaffolding equipment that equates to the scaffolding equipment claimed by the plaintiff in the proceedings and described in the schedule to the summons". The schedule to the summons sets out the same items as were included in the purchase agreement by Reglon from the court appointed receivers of the scaffolding. 21 I should say at the outset that while I take it to be the position where alternative claims are made that the defendant may elect to return the equipment in respect of which the detinue claim is made, that is not an order which I would make in the present proceedings. Apart from anything else it is necessary in detinue for a demand to be made prior to the commencement of the proceedings. The proceedings commenced on 15 February 2006 prior to any proper demand having been made. The summons cannot operate as the demand because the demand is central to the cause of action in detinue. In addition it would not be appropriate to order return of the scaffolding when some of it is hired to contractors on building sites. In those circumstances I turn to the claim in conversion. Confusion and intermixture 22 It is not necessary to embark on a discussion of this subject from Roman law to the present day. Despite the strongly pressed arguments of Mr Coles QC, I think it clear that it is not essential that goods or products such as oil, sugar or cotton be mixed together in one vessel or container so as to merge in one substance for the general principles of co-mixture law to be brought into play. It is true Bramwell B is reported to have said in Smith v Torr [1862] 3 F&F 505 that the doctrine of confusion of property did not apply to distinct chattels like chairs and tables but to commodities "such as corn, wine, oil and the like of which there can be commingling of substance". Generally speaking in 1862 people could identify their furniture, but the doctrine has been applied in Canada to logs of wood: McDonald v Lane (1882) 7 SCR 462. I can see no reason to require a commingling of substances as distinct from a mixing of many types of identical items, when the ownership of a particular one of such items is impossible to tell from other items of the same type. The evidence is that apart from painting colours on items of scaffolding, such as those in issue in these proceedings, they cannot be distinguished one from another. I hold that commingling occurred. 23 The law in such a case can I think be stated as follows: Where there is wrongful intermingling of a substance or substances by one party, the whole belongs to the other party; where the intermingling is not wrongful, the whole is shared in common ownership in the proportions each has contributed; and perhaps in a case where there has been no intermingling of a substance, yet the mingling is wrongful, the innocent party should share in the whole, to the extent of his property introduced to the whole in a case where the contributions of the wrongdoer cannot be established or the case where both contributions cannot be satisfied. Sandeman & Sons v Tyzack & Branfoot Steamship Co Ltd [1913] AC 680 at 694. The subject is discussed in various texts including Vaines: Personal Property 4th Edition 1967 at 387 and Helmore Commercial Law and Personal Property in New South Wales 10th Edition 1992 page 40. In the present case the mixing was not shown to be authorised yet there is no mixing of substance. In those circumstances as between the owners entitled to claim and Action, I would hold that Reglon was entitled to recover from the articles painted red, equipment to the amount claimed in the summons. However, the matter is not as simple as that. Interest of the parties 24 Neither Citadel nor Mr Hill could claim a greater interest in the mixed stock than could Action. They take title through Action. That was not disputed. Reglon claims in its own right. Conversion 25 A co-owner does not commit conversion merely by using the joint property himself. But if one co-owner assumes exclusive possession and then uses the property solely for his benefit, then that will amount to a conversion. Here, each defendant by entering into a licence agreement with NSW would, I consider, be liable in conversion as it acted in complete disregard of Reglon's interest. See: Baker v Barclay's Bank Ltd [1955] 2 All ER 571; [1955] 1 WLR 822. 26 A receiver of the assets of the company appointed by a chargee under a deed or charge takes control of the assets of the chargor subject to the charge pursuant to the terms of the charge agreement. To license another company to use those assets mixed with the assets of some other company, without the consent of the other company, in my view amounts to a conversion. The conduct of Citadel and Mr Maiolo in licensing NSW, a company of which he was the sole director, to use the jointly owned equipment is a more blatant conversion. Standing of the plaintiff 27 Standing to sue in conversion requires possession or a right to immediate possession. Here Reglon did not have actual possession. I have set out the terms of the licence agreement with ACS Hire. 28 Failure to pay hiring fees and the appointment of an administrator to ACS Hire were events of default giving a right to terminate by notice in writing. No such notice was given. Clause 15.2.3 of the hire agreement is badly drawn but I consider the only reasonable construction of it is that it relates to scaffolding on building sites and not to scaffolding in the hirer's yard. I realise of course that the yard was the yard of Action. 29 Counsel for the plaintiff relied on North General Wagon & Finance Co Ltd v Graham [1950] 2 KB 7. That case involved a car hire purchase agreement under which the hirer agreed not "to do anything prejudicial to the rights of the owner". It provided that on failure of the hirer to observe any stipulation the owner could terminate the hiring. There was no provision for notice of termination. The hirer put the car up for sale and sold it contrary to the terms of the hire agreement. It was held that this breach brought about a right to immediate possession giving standing for an action in conversion. The Court of Appeal in England held that on the proper construction of the contract no notice of termination was required so that there was a right to immediate possession upon breach. All that the case really held was that the terms of the particular contract did not impose on the general proposition that "a bailee acting in a manner utterly repugnant to the terms of the bailment terminates the bailment and therefore the right to possession reverts in the bailor": North General Wagon & Finance Co Ltd v Graham at 11. 30 That the question depends upon the terms of the contract was made clear in a subsequent Court of Appeal decision in England: Reliance Car Facilities Limited v Roding Motors [1952] 2 QB 844 which case must have escaped counsel's attention. That case distinguished North General Wagon & Finance Co Ltd v Graham by reference to the contract terms to which I have referred. The real question is whether an event of default makes the bailment determinable at will on whether termination – in this case by notice – is necessary. When the alternative rights provided by clause 15.2 are taken into account I consider election necessary so that notice of termination was required to bring about a right of immediate possession. This is a difficult area which must be decided in light of the principles established in The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (2006) 65 NSWLR 400, which decision was only referred to by Counsel when I listed the matter for further submissions on a particular subject. 31 That case determined that any provision in a bailment contract which might limit a bailor's right to possession where there is an action by the bailee repugnant to the bailment, must do so in clear terms; the majority - Young CJ in Eq with whom Santow JA agreed, approving Union Transport Finance Ltd v British Car Auctions Ltd [1978] 2 All ER 385 to that effect (at 390 and 391). Basten JA, the other member of the court placed more attention on the proper construction of the contract terms than upon the Union Transport decision. 32 It was argued by Mr Coles, QC that The Anderson Group was contrary to the decision of the High Court of Australia in Nominal Defendant v Andrews (1969) 121 CLR 562. In that case Barwick CJ held, at 567, that a provision of a hire purchase agreement giving a right in the hiring company in the event of breach "to determine the hiring and retake possession of the goods" did not, in the event of breach, give rise to a right to possession at "termination". Termination required a decision; it did not require notice, presumably unless a contract requirement for notice overrode the position on common law bailment. Nominal Defendant v Andrews was not referred to in The Anderson Group and is not in the list of cases referred to in argument. I cannot tell whether it was overlooked or not nor whether the particular provisions of the Motor Vehicles (Third Party Insurance) Act 1942 would have been thought to bear on the matter. While I consider it a difficult area of law to determine when contract provisions reduce common law rights of a bailor, this does not require final conclusion by me. I should say the decision is not assisted by the inelegant drafting of clause 15.3 33 I have come to the conclusion that the provisions of clause 2.3 and 5 of the hire agreement bear upon the question of right to immediate possession. The bailment was to ACS Hire to use the scaffolding in accordance with the agreement. There was no right to hand the scaffolding over to Action for hire. That was an action outside the terms of possession acquired by the contract. Possession is handed over for the purposes of the bailment and not otherwise. Insofar as it acted outside those terms ACS Hire had no entitlement to possession and therefore the right to possession was in Reglon. It follows that I consider the plaintiff has standing to sue. Damages 34 Orders were made at an earlier stage for a joint report of expert valuers to be obtained to establish the market value of the equipment. One of the valuers, Mr Hyman, considered the value to be $1,625,937 and the other, Mr O'Mara, $1,479,125. There was little argument put as to whether I should accept this evidence and if I did which valuer I should accept. The defendant did not challenge either except in general terms. The increased value brought in by Mr Hyman was as a result of his applying what he described as an "uplift", as a result of comparing the replacement cost as against the sale price of scaffolding at various comparable sales and giving attention to one of those sales where the sale price was a considerably greater percentage of the replacement cost than was the case in the other sales. This was not done by Mr O'Mara, the other valuer. As neither valuer was called and as the reasons apparently given by Mr O'Mara for not considering any uplift seem to be reasonable I consider that the lower figure should be taken to be the proper figure. 35 Although it is not altogether clear whether the valuations were at the date they were made or at February 2006, it has been accepted by counsel that they are appropriate values at conversion date if otherwise accepted. 36 The final question to be decided is whether all goods identified in the summons were subject to conversion. I have found they all came into possession of Action. The evidence of a later count under instructions of Mr Maiolo is quite inconclusive of whose scaffolding was in the count. It is, however, reasonable to make some allowance for loss prior to conversion and for damaged stock. Precision is impossible but I consider it reasonable to allow a reduction in overall value of 10%. It follows that there should be judgment for the plaintiff against the defendants for $1,331,212 together with interest. 37 The parties should calculate the interest and I will enter judgment for the agreed amount. Interest would run against Mr Hill from 18 January 2006 and the second defendant from 15 May 2006. 38 I will hear any short argument on costs when I enter judgment. The plaintiff has succeeded and would ordinarily be entitled to 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.