A Queensland Supreme Court decision on breach of trust which contains fascinating insights into strategy in this hard-fought case, illuminates trust law and makes findings that might prove decisive on any appeal. The case is Sino Iron Pty Ltd & Anor v Palmer & Anor (No 3)  QSC 94 (4 May 2015).
In August and September 2013 the first defendant, Mr Palmer drew 2 cheques on the bank account of Mineralogy Pty Ltd (styled “Port Palmer Operations”) of which he was a director, one in the amount of $10 million payable to the second defendant, Cosmo Developments Pty Ltd (Cosmo), the other in the amount of $2.167 million payable to Media Circus Network Pty Ltd. Both cheques were presented and paid.
Mr Palmer was the sole director of Cosmo, the sole signatory on Mineralogy’s bank account and the person who signed the cheques.
The plaintiffs, Sino Iron Pty Ltd and Korean Steel Pty Ltd, sought declarations that:
1. both payments were made by Mineralogy in breach of trust;
2. Mr Palmer:
- dishonestly procured or was involved in or assisted Mineralogy’s breaches of trust;
- knowingly assisted Mineralogy in its dishonest and fraudulent breaches of trust;
- was liable to account to the plaintiffs, as constructive trustee, for the payments;
- received the $10m payment with knowledge of Mineralogy’s breach of trust;
- was liable to account as constructive trustee to Mineralogy for that payment;
4. as against Mr Palmer and Cosmo, the plaintiffs were entitled to an enquiry as to any profits made or benefits derived by the defendants and to elect as to an account of profits alternatively equitable compensation.
1. shortly before the hearing Mineralogy paid to the plaintiffs a sum including an amount of $12,167,000, which the plaintiffs accepted;
2. however, the plaintiffs maintained their claim on the bases that they might elect to claim interest, and that they were entitled to an inquiry as to any profits made by the defendants;
3. Mineralogy abandoned a defence that $12 million of the payments was made pursuant to an agreement dated 1 June 2013 between Mineralogy and Qld Nickel Ltd under which the latter would provide services and discharge the responsibilities of Mineralogy pursuant to certain “Facilities Deeds”. His Honour observed that the abandonment was “completely unexplained”, as was Mr Palmer’s “apparent attempt to manufacture evidence to show that there was a written contract of a similar kind, although neither of the defendants relied on that document in defence of the plaintiff’s claim” (at ; see also -);
4. the defendants were prepared to make 3 concessions, but only if a finding was made that the payments were made from funds held on trust:
(a) a concession that the payments were made by Mineralogy in breach of trust;
(b) if a finding was made that Mr Palmer had knowledge of the trust, a concession that Mr Palmer procured the breaches of trust constituted by the making of the payments;
(c) if those findings were made, a concession that the plaintiffs did not need to prove that the breaches of trust were fraudulent or dishonest, or that Mr Palmer in procuring the breaches of trust acted fraudulently or dishonestly in order to obtain the relief they sought.
The consequence of these concessions being, the defendants said, that questions of fraud and dishonesty would become irrelevant.
5. the plaintiffs refused to accept these concessions and tendered evidence intended to prove that Mineralogy’s breach of trust was dishonest and fraudulent, and sought findings of dishonesty against Mr Palmer and Mineralogy.
The Facilities Deeds mentioned above were deeds in near identical terms between Mineralogy and each of the plaintiffs, respectively, relating to the approval, development, administration and maintenance of certain facilities to be constructed at or near Cape Preston in Western Australia.
Put simply each deed contained detailed provisions for the establishment and use of an Administrative Fund by Mineralogy for the carrying on of its business, specifically for the payment and reimbursement of its administration costs and expenses of operating, maintaining and repairing the facilities. None of those provisions referred to any trust concerning the funds.
CITIC Pacific Mining Management Pty Ltd, on behalf of both plaintiffs, made contributions to the Administrative Fund, which was operated as a single fund in relation to both deeds.
Relevant findings and the result
The case turned on whether the parties had manifested a clear intention to create an implied trust of the funds.
In his Honour’s view that analysis was informed by a close consideration of the arrangements constituted in the deeds, and by “keeping in mind the structure of the relationship, rights and obligations which those contracts create” (at ).
The critical dispositive finding was that the contributions made by the plaintiffs were not held on trust by Mineralogy “because the contractual obligations of Mineralogy did not extend to an obligation not to deposit into and thereby mix other moneys in the bank account” (at ).
His Honour referred at  to the duty of a trustee to keep trust funds separate and not to mix them with money from other sources as “a hallmark duty of a trustee”, as described by McPherson A-CJ in Jessup v Queensland Housing Commission  2 Qd R 270. His Honour noted at  that in Korda & Ors v Australian Executor Trustees (SA) Ltd  HCA 6 each of the judgments in that case held that the absence of such a requirement from the contractual relations of the parties was an important or dispositive element in favour of the conclusion that no trust was intended.
In this case there was no express term in the deeds prohibiting the mixing of funds, and his Honour found that it was not necessary to imply such a contractual term as the deeds “work perfectly well as a matter of contract without it” (at ).
This finding disposed of the case in favour of the defendants.
However, mindful of a possible appeal and also that acceptance of the defendants’ submissions may constitute an independent ground to dismiss the plaintiffs’ claims, his Honour went on to make further findings as to whether, assuming a breach of trust by Mineralogy, the defendants had the requisite knowledge or notice to be liable for such breach of trust.
The defendants disputed that Mr Palmer knew there was a breach of trust, on the basis that he did not know Mineralogy held the Administrative Fund contributions on trust. However the defendants did not go so far as to suggest that Mr Palmer did not know that the payments were made in breach of contract. In that regard his Honour noted the allegation and withdrawal of the allegation (referred to above) that there was a contractual basis for the payments or that they were made for port management services (at ).
At  his Honour found that Mr Palmer knew:
- that the terms of the [deeds] included that the Administrative Fund was to be used solely for the authorised costs and reimbursements;
- the approximate amount of the balance of the bank account before the challenged payments were made;
- that the balance was derived from contributions made by or on behalf of the plaintiffs;
- that the $10M payment to Cosmo was not an authorised payment; and
- that the $2,167,000 payment to Media Circus was not an authorised payment.
After a detailed analysis of the authorities his Honour also made the following findings (at  and ):
- that Mr Palmer’s knowledge was sufficient to make him liable for knowingly procuring or inducing the alleged breach of trust by Mineralogy;
- that Cosmo’s knowledge [recalling that Mr Palmer was its sole director] was sufficient to make it liable under the first limb of Barnes v Addy for knowing receipt of the alleged trust property constituted by the receipt of the $10 million payment.
His Honour observed (at -) that:
“In my view, it was not necessary for either species of liability that [Mr Palmer] knew that the plaintiffs had a beneficial interest in the funds held in the bank account when the challenged payments were made. It is enough that he knew, in general, of the provisions of the Facilities Deeds for contributions to be made to the Administrative Fund, how they were to be dealt with under the provisions of the Facilities Deeds and that the challenged payments were made in breach of the contractual obligation to pay only the authorised costs and reimbursements under the Facilities Deeds.
… To require that a defendant must actually appreciate that the relevant facts constitute a trust in law would favour the legally ignorant over the legally aware, when the facts and knowledge otherwise are identical. In my view, the preferable principle is that liability is engaged by the relevant factual knowledge.”
In concluding his Honour said:
“In view of those findings, it is unnecessary for me to go further. It is not necessary to make a specific finding of dishonest or fraudulent design by Mineralogy, through [Mr Palmer], or of dishonest assistance with knowledge by [Mr Palmer]. There are reasons why, in my view, I should not do so. First, such findings could cause significant reputational damage to [Mr Palmer], but they are not necessary in order to resolve the liability of [Mr Palmer or Cosmo] as a matter of fact and law. Second, the way in which this case has been conducted does admit of the possibility that the plaintiffs seek not only to obtain the relief claimed in the proceeding but also to embarrass [Mr Palmer] at the same time.” (at ).