New South Wales Supreme Court CITATION : McNally v Harris (No. 3) [2008] NSWSC 861 HEARING DATE(S) : 07/08/08 JUDGMENT DATE : 8 August 2008 JURISDICTION : Equity JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 8 August 2008 DECISION : See paras 48-51 of judgment. CATCHWORDS : EQUITY – equitable remedies – equitable compensation – value of shares – appropriate date for assessing equitable compensation is the date of orders Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 Re Dawson [1966] 2 NSWR 211 Target Holdings Ltd v Redferns (a firm) [1996] AC 421 Robinson v Robinson (1851) 1 De GM & G 247; 42 ER 547 Nestle v National Westminster Bank plc [1994] 1 All ER 118 Lewis v Nortex Pty Ltd (in liq) [2005] NSWSC 482 Jaffray v Marshall [1993] 1 WLR 1285 CASES CITED : McNeil v Fultz (1906) 38 SCR 198 Nant-y-Glo & Blaina Ironworks Co v Grave [1878] 12 Ch D 738 Steamship Carisbrook Company v London & Provincial Marine & General Insurance Company [1901] 2 KB 861 Michael v Hart & Co [1902] 1 KB 482 Guerin v R (1984) 13 DLR (4th) 321 Armory v Delamirie (1722) 1 Stra 505; 93 ER 664 LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) (1990) 24 NSWLR 499 Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 TEXTS CITED : W F Fratcher, Scott On Trusts, 4th ed (1988) Little, Brown & Co at Vol III JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia, 7th ed (2006) LexisNexis Butterworths Katharine Myfanwy McNally & 7 Ors PARTIES : v Nicholas Peter Harris & 5 Ors (No. 3) FILE NUMBER(S) : SC 5203/05 Plaintiffs: TGR Parker SC COUNSEL : 1st - 4th Defendants: DEJ Ryan & DV Robinson 5th & 6th Defendants: B McManus Plaintiffs: Judd Commercial Lawyers SOLICITORS : 1st - 4th Defendants: Horton Rhodes 5th & 6th Defendants: Colin Biggers & Paisley IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WHITE J 08/08/08 5203/05 Katharine Myfanwy McNally & 7 Ors v Nicholas Peter Harris & 5 Ors (No. 3) JUDGMENT 1 HIS HONOUR: In their statement of claim the plaintiffs sought orders for the payment of equitable compensation and for the tracing and taking account of the proceeds of disposal of the Oxiana shares. 2 In my reasons for judgment I held that the plaintiffs were entitled to either remedy at their election. They have elected to be paid equitable compensation. 3 The question is how the quantum of equitable compensation should be assessed. 4 The Oxiana shares were disposed of by Harris Johnsson Nominees and Harris Johnsson Partners between 2003 and 2005 for prices ranging between 56 cents and $1.22. It is common ground that equitable compensation was not to be calculated on the value of those shares at the date of breach of trust. 5 When proceedings were instituted on 29 September 2005 Oxiana shares were trading at $1.33. On 19 November 2007, being the first day of the hearing, shares in Oxiana, now called Oz Minerals Limited, traded at $4. 6 I am told that when I delivered my reasons for judgment on 30 June 2008, the share price was $2.60. On that date, the proceedings were stood over to 22 July 2008 in order for counsel to bring in short minutes of order and to deal with questions of costs. 7 On 22 July 2008, or shortly before then, the plaintiffs advised the defendants that they would be seeking an order for equitable compensation based on the share price on 19 November 2007. The defendants were not then in a position to deal with that contention and the matter was stood over to 7 August 2008. It is common ground that the opening price of the Oxiana shares on 7 August 2008, being the day on which I heard argument as to the assessment of equitable compensation, was $1.78. 8 The plaintiffs seek an order that the first and second defendants pay equitable compensation of $3,124,000, being the market price of 781,000 Oxiana shares, as I will continue to call them, as at 19 November 2007. 9 They seek an order that the third defendant pay equitable compensation of $2,600,000, being the market price of 650,000 Oxiana shares on that day. 10 The first to third defendants say that equitable compensation should be assessed as at the date of these orders using the last price advised to the Court. The compensation payable by the first and second defendants would be $1,390,180, and by the third defendant, $1,157,000. 11 Those defendants also seek an order that judgment for those sums could be satisfied by delivery to the first and eighth plaintiffs of 781,000 Oxiana shares within a time to be specified. 12 The plaintiffs relied upon the following passage from the judgment of McLachlin J in Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 at 554-555: " A related question which must be addressed is the time of assessment of the loss. In this area tort and contract law are of little help. There the general rule is that damages are assessed based on the value of the shares as at the time of wrongful act, in view of what was then foreseeable, either by a reasonable person, or in the particular expectation of the parties. Various exceptions or apparent exceptions are made for items difficult to value, such as shares traded in a limited market. The basis of compensation at equity, by contrast, is the restoration of the actual value of the thing lost through the breach. The foreseeable value of the items is not in issue. As a result, the losses are to be assessed as at the time of trial, using the full benefit of hindsight ... . " 13 The last sentence was quoted by the High Court in Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at 499. McLachlin J was not considering the distinction between compensation being assessed at the date of trial and its being assessed at the date of making the order. To the contrary, her Ladyship emphasised (at 547) that the traditional duty of the defaulting trustee is to effect restitution to the estate, but that as restitution in specie may not be possible, equity awards compensation in place of restitution. 14 In Re Dawson [1966] 2 NSWR 211, Street J said (at 216): " ... in equity a defaulting trustee must make good the loss by restoring to the estate the assets of which he deprived it notwithstanding that market values may have increased in the meantime. The obligation to restore to the estate the assets of which he deprived it necessarily connotes that, where a monetary compensation is to be paid in lieu of restoring assets, that compensation is to be assessed by reference to the value of the assets at the date of restoration and not at the date of deprivation. In this sense the obligation is a continuing one and ordinarily, if the assets are for some reason not restored in specie , it will fall for quantification at the date when recoupment is to be effected, and not before. " 15 Recoupment is not effected at the date of trial nor at the date reasons for judgment are published, but at the date of the making of the order for payment of compensation in lieu of restitution in specie. 16 In Target Holdings Ltd v Redferns (a firm) [1996] AC 421, Lord Browne-Wilkinson, with whom the other members of the House of Lords agreed, said (at 437) that the quantum of equitable compensation payable is fixed at the date of judgment and is assessed at the figure to put the trust estate back into the position in which it would have been had there been no breach. This passage was cited with evident approval by the High Court in Youyang Pty Ltd v Minter Ellison Morris Fletcher at 504. 17 Consistently with these authorities, I consider that the appropriate date for assessing compensation is the date of making the orders, that is today, based on the last information as to the share price. 18 Mr Parker SC, who appears for the plaintiffs, submitted that to assess compensation at the date of the order based on the current market price of Oxiana shares does not provide full compensation because the trust lost not only the shares, but the opportunity to sell the shares in a rising market. That opportunity has been lost by the market's subsequent fall. 19 There is considerable force in this submission but it does not follow that the value of the lost opportunity is to be assessed on the basis that the current trustees would have sold the shares at the top of the market, or they would have sold the shares, had they had them, on the day which happened to be the first day of the trial. 20 If Harraw Nominees had not been removed as trustee and if it had been sued for compensation for its breach of trust, it would not be liable to pay compensation on the basis of the market price of the shares when the market was at its peak unless it had a duty to sell at that time. (See by analogy Robinson v Robinson (1851) 1 De GM & G 247 at 257-258; 42 ER 547; Scott On Trusts, 4 ed Vol III, s 211 at 286-287; and cf Nestle v National Westminster Bank plc [1994] 1 All ER 118 at 126-127.) 21 That is not the present case but it demonstrates that it would be wrong simply to select the date of trial as a date of assessment of compensation irrespective of other circumstances. That would be an arbitrary date. 22 The assessment of compensation payable by an accessary to a breach of trust should be assessed on the same principles as apply to a defaulting trustee as the accessary is treated as though he were a trustee (Lewis v Nortex Pty Ltd (in liq) [2005] NSWSC 482 at [33]). However, in my view, it would be wrong to assess the compensation payable by the defendants on the same basis as compensation would be assessed against Harraw Nominees had it been sued, and also on the assumption, contrary to the fact, that Harraw Nominees remained in office as trustees. 23 The learned authors of Scott on Trusts say (at s 208.3 pp 269-270): " In some of the cases in which the beneficiaries seek to be put in the position in which they would have been if the trustee had not committed a breach of trust by selling the trust property, it is held that they are entitled to charge the trustee with the value of the property at the time of the commencement of the suit. It would seem, however, that if the property has appreciated in value after the bringing of the suit and before the rendition of the decree, the beneficiaries should be entitled to the value at the time of the decree, and not merely at the time of the commencement of the suit. " 24 However, the time of the commencement of the suit is not usually regarded as an appropriate time for assessment of compensation. (See Jacobs Law of Trusts in Australia, 7 ed at [2206]). In my view, that date would only be justified on the ground that it is at that time the trustee is called on to account, that the trustee should not be better off because he resisted his obligation to do so, and, if it were established that had the trustee accounted for the asset in specie at that time the asset would have been realised prior to judgment (Target Holdings v Redferns at 440.) 25 I accept that if the plaintiffs could show that had the defendants restored the shares at the time the suit was instituted the plaintiffs would have sold the shares at some favourable time, then the compensation that would be needed to put the trust estate back into the position as if there had been no breach would be assessed by reference to the value of the shares at the time of the hypothetical sale. But there is no such evidence, and the plaintiffs do not seek a further hearing for that purpose. It is, therefore, unnecessary to consider the defendants' submission that any such claim would need to have been articulated and proved at the hearing. 26 The plaintiffs submitted that it should be presumed against the defendant wrongdoers that the trust assets would have been dealt with to best advantage had they been available to the plaintiffs. 27 This is the same argument as prevailed in Jaffray v Marshall [1993] 1 WLR 1285, but that decision was overruled in Target Holdings Limited v Redferns at 440. I was referred to the decision of the Supreme Court of Canada in McNeil v Fultz (1906) 38 SCR 198, which does provide some support for the plaintiffs' submission. 28 There, the defendant held bonds and securities on an express trust for the plaintiffs. He was obliged to account to the plaintiffs for bonds to a face value of $5,000 and shares to the same value but accounted only for a proportion of those assets. The Supreme Court upheld an assessment of what it called damages on the basis of the selling value of the bonds and shares at the date of default. 29 The defendant had submitted that his obligation was to deliver such bonds and shares in specie and was liable to pay "damages" only on the date of demand for delivery of the bonds and shares, being the date on which the proceedings were instituted. 30 Duff J, giving the judgment of the Court, said (at 205): " On the other hand the defendant was under an obligation to account to the plaintiffs at once for that which he received as trustee for them. Treated as a trustee wrongfully withholding property which he was bound under his trust to deliver to his cestuis que trustent , he is liable to make reparation for the loss suffered by the trust by reason of his breach of trust; and (every presumption being made against him as a wrongdoer), that loss must be calculated on the assumption that the securities would have been sold at the best price obtainable. " 31 The cases cited as authority for this proposition were Nant-y-Glo & Blaina Ironworks Co v Grave [1878] 12 Ch D 738 at 750; Steamship Carisbrook Company v London & Provincial Marine & General Insurance Company [1901] 2 KB 861 at 866; and Michael v Hart & Co [1902] 1 KB 482 at 488. 32 In my respectful view none of the cases cited supports the proposition. Nant-y-Glo & Blaina Ironworks Co v Grave concerned the obligations of a director to account to the company for profits derived by him in breach of his fiduciary duty to the company. The profit was in the form of shares transferred to the defendant by the company's promoters which he held on constructive trust for the company. Bacon VC held the defendant liable to account for whatever value the defendant could have derived from the shares. His liability was not limited to accounting for the very shares in question, which at the time of the suit had fallen to £1, whereas they previously traded for up to £80. As counsel acknowledged, the case was concerned with principles for an account of profits. In Target Holdings Limited v Redferns, Lord Browne-Wilkinson (at 440) treated it as having no relevance to the principles for assessing compensation for loss suffered by the beneficiary, as distinct from requiring a delinquent fiduciary to account for profits derived by him. 33 The Steamship Carisbrook Co v London & Provincial Marine & General Insurance Co was a maritime case and is quite beside the point. 34 Michael v Hart was a claim for damages for breach of contract. The headnote of the judgment at first instance, [1901] 2 KB 867, reads: " The defendants, a firm of stockbrokers, in pursuance of a contract in that behalf bought shares on the Stock Exchange on behalf of a principal, and contracted that they would at any time before the settling day, if so directed, sell the same upon the principal's behalf. Before the settling day arrived the defendants in breach of their contract sold the shares without the principal's consent:--. " Wills J held that the defendants' wrongful sale of the shares was an anticipatory breach of contract, but that breach was not accepted by the plaintiffs as putting an end to the contract. 35 His Lordship held (at 869-870): " Under those circumstances it seems to me that the plaintiff is entitled to all the advantages that would have been his or that might have been his if the contract had been carried out. Amongst those advantages was the right to sell the shares whenever he chose during the period over which the transactions were to run, and at different times different prices might have been realized. No doubt the plaintiff would in fact never have realized the best prices that ruled during that period. But I think I am right in saying that the Courts have never allowed the improbability of the plaintiff's obtaining the highest prices to be taken into consideration for the purpose of reducing the damages. The defendants are wrong-doers, and every presumption is to be made against them. In my opinion the plaintiff is entitled to the highest prices which*870 were obtainable during the period during which he had the option of selling. " 36 The appeal on this point was compromised. (See Michael v Hart & Co [1902] 1 KB 482 at 488 and 493.) However, in argument Collins MR said (at 488): " Has the principle applied in this case by the learned judge ever been applied to the assessment of damages except in cases where there was a continuous obligation to restore property or funds? " 37 It was in reliance on these cases and Guerin v R (1984) 13 DLR (4th) 321 that in Jaffray v Marshall it was held that in assessing compensation for breach of trust there was an irrebuttable presumption against a defaulting trustee who had a continuing obligation to restore a trust asset, that the asset to be restored would have been realised for the benefit of the trust at its highest value during the period of breach up to judgment, provided there was the opportunity to realise the asset. 38 Nicholas Stewart QC, sitting as a High Court judge, said (at 1293): " The underlying point of the authorities seems to be that the breach of trust has deprived the party who ought to have had the assets throughout the relevant period of the opportunity of realising them at any point he chose. Evidence may have to be considered to see whether that opportunity was there at all. In Guerin v R the opportunity of leasing on the terms approved by the Indian band was not, so that possibility had to be left out of account. But if the opportunity was there at every point during the continuing breach of trust, the defaulting party must make compensation on the footing of the lost value of the opportunity at its highest point. " 39 But in Target Holdings Limited v Redferns, Jaffray v Marshall was overruled. Lord Browne-Wilkinson said (at 440): " Mr Patten also relied on Jaffray v Marshall [1993] 1 W.L.R. 1285 where the principles applicable in an action for an account of profits were, to my mind wrongly, applied to a claim for compensation for breach of trust. In my judgment that case was wrongly decided not only because the wrong principle was applied but also because the judge awarded compensation by assessing the quantum on assumption (viz. that the house in question would have been sold at a particular date) when he found as a fact that such sale would not have taken place even if there had been no breach of trust. " 40 I take his Lordship to be saying that the authorities applied in Jaffray v Marshall, including McNeil v Fultz stated principles applicable to an action for account of profits and were inapplicable to the assessment of compensation for loss occasioned by the breach of trust. 41 The general principle in relation to the making of presumptions against wrongdoers on questions of assessment of value, or of damages, is not simply that every presumption is to be made against a wrongdoer. Rather, it is that a Court can resolve questions of value against a wrongdoer whose actions have made the assessment of damages problematic (Armory v Delamirie (1722) 1 Stra 505; 93 ER 664; LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) (1990) 24 NSWLR 499 at 508; Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 59; Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 at [96]). 42 The fact that an inquiry would be as to an hypothetical fact does not mean that it is to be presumed against the defendants, unless they proved to the contrary, that the opportunity to sell the shares, had it been available, would have been taken. 43 The assessment of the value of the lost opportunity to realise the shares in a rising market would be difficult in itself, but not because the wrongdoers' actions had made that assessment difficult. In my view, it would require evidence from the plaintiffs that such an opportunity would have been, or may have been, taken. (See by analogy Nestle v National Westminster Bank plc at 127; Poseidon Ltd & Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355, 367-368.) 44 That the plaintiffs would have taken such an opportunity, had it been available, might be presumed if they would have been under a duty to realise the investment but no such case has been put. 45 Accordingly, I consider that the equitable compensation should be assessed by valuing the Oxiana shares at their current price. On the last evidence, that is $1.78 per share and the equitable compensation payable in the case of the first and second defendants is $1,390,180, and in the case of the third defendant, is $1,157,000. 46 I do not accept the defendants are entitled to an order that they could satisfy the judgments in those amounts by the delivery within a specified period of 781,000 shares in Oz Minerals Pty Ltd or, in the case of the third defendant, 650,000 shares. A defaulting trustee may be required to make specific restitution. (See Scott on Trusts, s 208.4 p 271.) I was referred to no authority that the beneficiaries or, in this case, the new trustees, could be compelled to accept restitution in specie rather than monetary compensation. 47 I did not consider that the defendants can, in effect, compel the plaintiffs to hold trust assets, being an investment in Oxiana shares, during the period which might be fixed for delivery of those shares. 48 For these reasons I make the following further orders: 49 I give judgment in favour of the first plaintiff and the eighth plaintiff against: (a) the first defendant in the sum of $1,390,180; (b) the second defendant in the sum of $1,390,180; and (c) the third defendant in the sum of $1,157,000. 50 These judgments are not cumulative. 51 The exhibits may be returned after 28 days. [Counsel addressed on costs.] 52 I regard the argument upon which I have just given judgment as part of the overall argument in the proceedings. Success by the first and third defendants on this particular issue is not a sufficient reason to make a separate order for costs in relation to that issue. Accordingly, the costs of that argument will be part of the costs of the proceedings which was the subject of cost orders made yesterday. ****** 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.