Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Raulfs v Fishy Bite Pty Ltd; Fishy Bite Pty Ltd v Raulfs [2012] NSWCA 135
• Hearing dates: 27 March 2012
• Decision date: 11 May 2012
• Before: Campbell JA at [1]; Meagher JA at [113]; Barrett JA at [114]

Decision

(1) Appeal dismissed with costs.

(2) Grant leave to cross-appeal.

(3) Cross-appeal allowed with costs.

(4) Set aside the orders in the court below that Mr Ajaka and Fishy Bite pay the costs of Ms Ablett of the hearing, and in lieu thereof order that Mrs Raulfs pay the costs of Ms Ablett of the hearing.

(5) Grant Mrs Raulfs a certificate under the Suitors' Fund Act 1951 concerning her costs of the application for leave to cross-appeal and the cross-appeal.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: TRUSTS AND TRUSTEES - express trusts constituted inter vivos - Quistclose trust - partner paid money into capital of partnership - money subsequently misappropriated - whether misappropriated fund subject to Quistclose trust - existence of Quistclose trust depend on the circumstances - moneys paid and held for purposes of partnership - no Quistclose trust; TRUSTS AND TRUSTEES - constructive trusts - Muschinski v Dodds trust - capital contribution made to partnership which failed prematurely - specific terms of partnership agreement providing for division of assets on its termination - no Muschinski v Dodds trust; TRUSTS AND TRUSTEES - tracing - partnership monies misappropriated and applied to discharge joint liability of a director of partner and third party - whether other partner entitled to personal remedy against third party and proprietary remedy against her property - partner's beneficial interest in partnership assets not entitle partner to claim traceable proceeds or personal rights against owner of traceable proceeds; PRACTICE AND PROCEDURE - costs - Sanderson orders - principles to be applied
• Legislation Cited: Partnership Act 1892; Property (Relationships) Act 1984; Real Property Act 1900; Suitors' Fund Act 1951
• Cases Cited: ACQ v Cook (No 2) [2008] NSWCA 306; Atwood v Maude (1868) LR 3 Ch App 369; Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335; Baltic Shipping Company v Dillon (1993) 176 CLR 344; Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Barnes v Addy (1874) LR 9 Ch App 244; Baumgartner v Baumgartner (1987) 164 CLR 137; Bennett v Horgan (NSWSC, 3 June 1994, unreported); Besant v Wood (1879) 12 Ch D 605; Boscawen v Bajwa [1996] 1 WLR 328; Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253; Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321; Clarke v Clarke (1885) 10 PD 188; Commissioner of Stamp Duties (Qld) v Jolliffe (1920) 28 CLR 178; Council of the City of Liverpool v Turano (No 2) [2009] NSWCA 176; Federal Commissioner of Taxation v Everett [1980] HCA 6; (1980) 143 CLR 440; Gibert v Gonard (1884) 54 LJ CL 439; Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230; Hill v Hill [2005] NSWSC 863; Hyman v Hyman [1929] AC 601; In re Rogers (1891) 8 Morr 243; Kriezis v Kriezis [2004] NSWSC 167; Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411; Lyon v Tweddell (1881) 17 Ch D 529; Marshall v Marshall (1879) 5 PD 19; McKay v McKay [2008] NSWSC 177; Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583; National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251; Raulfs v Fishy Bite Pty Ltd (No 2) (NSW Supreme Court, Rein J, 8 March 2011, unreported); Raulfs v Fishy Bite Pty Ltd [2011] NSWSC 105; Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491; Scott v Scott (1963) 109 CLR 649; Toovey v Milne (1819) 2 B&A 683; 106 ER 514; Twinsectra Ltd v Yardley [2002] UKHL12; [2002] 2 AC 164; United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673; Watson v Ralph (1982) 148 CLR 646; West v Mead [2003] NSWSC 161; (2003) 13 BPR 24,431; Wilson v Wilson [1846-48] 1 HLC 538
• Texts Cited: Young, Croft and Smith, On Equity (2009) Lawbook Co; Fletcher, The Law of Partnership in Australia, 9th ed (2007) Lawbook Co
• Category: Principal judgment
• Parties: Deborah Raulfs (Appellant/Cross-Respondent); Fishy Bite Pty Ltd (First Respondent/Cross-Appellant); Louie Ajaka (Second Respondent/Second-Cross Appellant); Helen Mary Ablett (Third Respondent/Second Cross-Respondent)
• Representation: Counsel: MLD Einfeld QC; MW Sneddon (Appellant); C Birch SC (Respondents); Solicitors: McLaughlin & Riordan (Appellant); JSM Lawyers (Respondents)
• File Number(s): 2011/101406

Decision under appeal

• Jurisdiction: 9111
• Citation: Raulfs v Fishy Bite Pty Ltd [2011] NSWSC 105
• Date of Decision: 2011-03-02 00:00:00
• Before: Rein J
• File Number(s): 2008/280770

Judgment

1 CAMPBELL JA:

Nature of the Case

2 The Appellant, Mrs Deborah Raulfs, entered a partnership agreement with the First Respondent, Fishy Bite Pty Ltd ("Fishy Bite"). The Second Respondent, Mr Louie Ajaka, effectively owned and controlled Fishy Bite. At the time of entering the partnership agreement, Mrs Raulfs paid $400,000 as a contribution to the capital of the partnership. Without her consent, that $400,000 was used by Mr Ajaka to reduce the debt secured over a property at Clovelly of which he and the Third Respondent, Ms Helen Ablett, were registered proprietors.

3 The personal and business relationship between Mr Ajaka and Mrs Raulfs broke down very soon after the partnership agreement was entered. Consent orders were made for the winding up of the partnership business. Mrs Raulfs claimed to be entitled to recover her $400,000, with interest, from each of the Respondents. She also claimed an entitlement to an equitable charge over the Clovelly property to secure that sum. Rein J dismissed her claim: Raulfs v Fishy Bite Pty Ltd [2011] NSWSC 105. Mrs Raulfs appeals against that judgment.

4 The primary judge ordered that Mr Ajaka and Fishy Bite pay Ms Ablett's costs of the proceedings. Fishy Bite and Mr Ajaka seek leave to appeal against that costs order.

Relevant Facts

The Partnership Agreement

5 There was no dispute on the appeal about the relevant facts. On 27 July 2006 Mr Ajaka (on behalf of Fishy Bite) and Ms Raulfs, signed a partnership agreement. It related to the business of a take-away fish and chip shop that Fishy Bite had previously carried on for some years in leased premises at 491 Bronte Road, Bronte. In the agreement, Mrs Raulfs was referred to as "Deborah".

6 The agreement proceeded on the basis that at the time of its execution, the partnership was already on foot. It contained the following provisions:

"INTRODUCTION

A. The parties are partners in the business trading as 'Fishy Bite' at 491 Bronte Road Bronte (the business).

B. The parties have agreed to carry on their business in partnership and now wish to set out the terms of their agreement in writing.

...

1. INTERPRETATION

In this Deed unless otherwise indicated by the context:

...

(c) Capital Account means the account kept by the Partnership showing the amount, adjusted from time to time, subscribed by a Partner by way of capital pursuant to clause 4;

(d) Current Account means the amount, adjusted from time to time, by which a Partner's entitlement to a share of profits of the Partnership varies from his drawings;

...

2.1 Subject to the other provisions of this Deed, the Partners agree that as from the date of this Agreement they have carried on and hereafter they will carry on the Business in partnership on the terms set out in this Deed during the joint lives of the Partners and thereafter during the joint lives of any two or more of the Partners.

...

4.1 The capital of the Partnership has been contributed by the Partners as to 65% by 'Fishy Bite' and 35% share by Deborah and the assets of the Partnership shall belong to the Partners as to an 65% share to 'Fishy Bite' and a 35% share to 'Deborah'.

4.2 Subject to the following provisions, the Partners shall be entitled to the profits of the Partnership and shall bear any losses as to 65% share to 'Fishy Bite' and a 35% share to 'Deborah'.

4.3 A Partner making for the purpose of the Partnership any actual payment or advance beyond the amount of capital which he has agreed to subscribe shall not be entitled to be paid interest on any such payment or advance.

4.4 The parties acknowledge that Deborah has made a contribution of $400,000.00 towards the capital of the Partnership.

...

5. ...

Each Partner shall be entitled to draw from the Partnership Bank Account each 4 weeks or more often if mutually agreed upon between the Partners, such amount as may be agreed upon between the Partners from time to time on account of his share in the profits of the Partnership.

...

7.1 The Banker of the Partnership shall be the Bondi Junction Branch of the Westpac Bank and/or such other Bank or Banks as the partners shall agree upon from time to time.

...

10. ...

The Partners shall keep or shall cause to be kept proper books and accounts for the Partnership showing all receipts and disbursements and assets and liabilities of the Partnership. ... All such books, accounts, particulars, vouchers and invoices and all other documents relating to the Partnership shall at all times be open to inspection and examination by any Partner and each partner shall be entitled to all reasonable explanations and information relating thereto.

...

12. ...

Subject to any contrary provision of this Deed, any decision to be taken or act to be done by the Partners connected with the Partnership shall only be taken or done if agreed to by both the Partners.

...

14. ...

Each Partner shall unless otherwise permitted by all the other Partners:

(a) conscientiously devote his time and attention to the Business ...

23.1 Where the Partnership is terminated, then within 12 weeks of the date of termination of the partnership, a general account shall be taken of the assets and liabilities of the Partnership and the assets (including, but not limited to, the Business and its goodwill) shall be realised and sold and in settling accounts between the Partners the following rules shall, subject to any contrary agreement between the Partners, be observed:

(a) losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the Partners individually in the proportion which they are entitled to share profits;

(b) the assets of the Partnership, including the sums, if any, contributed by the Partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

(i) in paying the debts and liabilities of the Partnership to persons who are not members of the Partnership;

(ii) in repayment to each Partner (pro rata if necessary) of any actual payment or advance made by a Partner as referred to in clause 4.3;

(iii) in payment to each Partner (pro rata if necessary) of the final balance of his Current Account;

(iv) in repayment to each Partner (pro rata if necessary) the balance of his Capital Account; and

(v) the balance, if any, remaining after the above amounts have been paid in full shall be divided between the Partners in the same proportions as they were entitled to share in the profits of the partnership immediately prior to the termination of the Partnership." (Blue 99-107)

7 Mrs Raulfs made her contribution to the partnership capital by drawing a cheque for $400,000 payable to Fishy Bite on 27 July 2006. She handed it to Mr Ajaka. That cheque was paid into the Westpac bank account of Fishy Bite the same day. Notwithstanding clause 7.1 of the partnership agreement, the partnership itself did not have, then or ever, its own bank account.

Breakdown of Relations Between the Partners

8 Negotiations between Mrs Raulfs and Mr Ajaka concerning going into business together in a restaurant or café had begun around April 2006. While the negotiations were proceeding an intimate relationship had developed between Mrs Raulfs and Mr Ajaka. Mrs Raulfs had no experience whatsoever in restaurants or cafés, and it was agreed that Mr Ajaka would have to train her and explain the business to her, though precisely what was entailed in that was not agreed.

9 As mentioned before, the personal and business relationship between Mr Ajaka and Mrs Raulfs broke down very soon after the partnership agreement was entered.

10 The judge made findings on some disputed issues of fact at [40], including:

"(1) Mrs Raulfs was not given a role by Mr Ajaka in the management or administration of Fishy Bite.

(2) Mr Ajaka did not involve Mrs Raulfs in any issues relating to the conduct of the partnership in the period 27 July to December 2006 (or beyond)."

11 There was a factual contest about whether Mrs Raulfs worked in the shop over a nine-day period, or only for three days, and a dispute about whether she was "sacked" by Mr Ajaka. The primary judge made no finding about the precise period of time that she worked in the shop. However, one could conclude that Mrs Raulfs worked in the shop at least a little, for at least three days. The primary judge made a finding, at [44] that "Mr Ajaka had no intention of teaching or training Mrs Raulfs in relation to buying product, handling accounts and general administration. Mr Ajaka on his own evidence was to train Mrs Raulfs so she could run Fishy Bite as a café". The judge accepted Mrs Raulfs' account of the circumstances in which she came to cease working at Fishy Bite (at [44]):

"... she complained about the lack of instruction and he said to her 'Well, you are sacked and I don't want you going back to Fishy Bite anymore' ... and that the conversation continued:

Me: I have put money into that business. I am a Partner, you can't speak to me like that.

LA: I'm the majority shareholder and I don't want you going to Fishy Bite any more. Deborah, it won't be very long now until we have Sea Salt, you will then be able to go and work there and do functions and things for us. You will be better suited doing that.

Me: That's good, because as I've told you before I hate cooking, I think I will be better working in Sea Salt doing the functions and the PR.

LA: Yes, you will be good at that."

Sea Salt was another café that they had talked about buying and running in partnership, but the purchase never eventuated.

12 From December 2006, Mrs Raulfs was making a claim to be repaid her $400,000, and to receive certain other money from Fishy Bite. On 8 December 2006, solicitors for Mrs Raulfs wrote to Mr Ajaka and Fishy Bite, saying, inter alia:

"b) our client has been refused access to the business and has been prohibited from working in the business.

c) you have failed to provide all financial and banking records to our client despite requests for same.

d) no drawings have been paid to Ms Raulfs.

e) failed to include our client in decisions as required by clause 12 of the agreement.

f) threatened our client so as to make it impossible for her to fulfil for [sic] obligation under the agreement.

Our client requires that you:

1. Forthwith provide all financial and banking records for her Inspection.

2. Account to her for drawings she should have received.

3. Provide her with all information in relation to the important issues of the business including but not limited to the lease dispute.

Having regard to the matters raised it is our client's intention to apply to the Court for an order dissolving the partnerships [sic] whereby a Receiver will be appointed to initially run and thereafter sell the business. We will also seek an inquiry into your breach of clause 9 of the Agreement and an accounting to the partnership for income derived by you from other sources during the term of the partnership.

The only other alternative is for you to purchase our client's interest in the partnership for $400,000 plus drawings plus a share of profits to date."

The letter threatened proceedings unless the matter was resolved within seven days.

13 Solicitors for Mr Ajaka and Fishy Bite replied on 18 December 2006, indicating their willingness to discuss the issues. A meeting on 19 December 2006 resulted in an in-principle agreement to settle the dispute. One provision of the proposed settlement was that Mrs Raulfs be paid an amount of $3,750 per month, said to be interest at the rate of ten percent per annum, calculated on $450,000. Other provisions related to Mrs Raulfs being provided with certain financial and other information relating to the partnership business.

14 As things eventuated, the agreement in principle was not consummated. However, in the course of Mrs Raulfs' solicitors seeking documents relating to the financial affairs of the partnership, it emerged that the partnership was not registered for GST, and had not lodged BAS returns, though Fishy Bite itself was registered for GST and had lodged BAS returns as though it alone was carrying on the business. Mrs Raulfs succeeded in obtaining some of the financial documents she sought, and information about the lease of the premises. The primary judge found that an amount of $32,000 was paid to Mrs Raulfs for interest, while the attempts to finalise the agreement in principle were continuing.

The Role of Ms Ablett

15 Ms Ablett, had been in a de facto relationship with Mr Ajaka for some years. Since 2000, Mr Ajaka and Ms Ablett had been the registered proprietors as joint tenants of Real Property Act 1900 land at Clovelly. That land had erected on it the house in which Mr Ajaka and Ms Ablett lived with their three sons. The property was at all relevant times mortgaged to Suncorp Metway.

16 On 27 October 2006, Mr Ajaka organised the withdrawal of the $400,000 from the Fishy Bite bank account, and paid the money into a Suncorp Metway account. That account was in the name of himself and Ms Ablett, and recorded the amount that they owed on the mortgage secured over the Clovelly property. As at 22 October 2006, the amount secured by that mortgage was a little over $499,000. On 27 October 2006 an amount of a little more than $502,000, which included the $400,000 that Mr Ajaka withdrew from the Fishy Bite account, was paid into the Suncorp Metway account, reducing its balance to zero.

17 By September 2007 the relationship between Mr Ajaka and Ms Ablett had broken down. On 14 September 2007, Mr Ajaka and Ms Ablett entered into a termination agreement in accordance with Part 4 of the Property (Relationships) Act 1984. Under it, they divided their assets. In that division of assets Ms Ablett was to receive (inter alia) the Clovelly property, while Mr Ajaka was to receive the shares in Fishy Bite and (with a fine disregard for Fishy Bite's separate corporate existence) the 65% interest in the business it conducted. By the time of that agreement, a debt of $190,000 was owing to Suncorp Metway secured over the Clovelly property. There was no finding about how that debt arose, but it necessarily must have arisen by fresh drawings after the debt had been reduced to zero in October 2006. Under the agreement, Ms Ablett agreed to take the Clovelly property subject to the mortgage debt.

18 The agreement contained an acknowledgment by both parties that they had received independent legal advice. It also provided:

"This Deed is intended to operate in substitution for all the rights of either party to claim spousal maintenance and/or adjust property orders under the Property (Relationships) Act 1984. Nothing in this deed shall prevent Helen from seeking maintenance as to the Children of the relationship from Louie."

19 In January 2008, a transfer from Mr Ajaka to Ms Ablett relating to the Clovelly property was registered, so that she became the sole registered proprietor subject to the mortgage.

20 Ms Ablett left control of the Suncorp account to Mr Ajaka. Ms Ablett had no knowledge of the source of the funds that Mr Ajaka applied to discharge the Suncorp debt. Only in July 2008, when Mrs Raulfs confronted her in the street, did she learn that Mrs Raulfs claimed that her $400,000 had been used to pay off Ms Ablett's mortgage.

The Court Proceedings

21 In 2008, Mrs Raulfs began proceedings in the Equity Division of the Supreme Court seeking an order for the dissolution of the partnership and the appointment of a receiver. On 3 October 2008, the court, by consent, made orders and declarations. The declaration was:

"The partnership between the [Mrs Raulfs] and [Fishy Bite Pty Ltd] in the business styled 'Fishy Bite' was dissolved as from 25 September 2008."

22 The consent orders were that the partnership business be wound up under the direction of the court, for the appointment of a receiver, and for the conferring of powers on the receiver to conduct the business and sell it. Mrs Raulfs later amended the Statement of Claim in those proceedings to claim the various orders for repayment of money that are the subject of this appeal.

23 Since the proceedings began Ms Ablett has sold the Clovelly property and purchased another property at Malabar. The parties have agreed that the Malabar property will be subject to any obligations to which the Clovelly property would have been subject, had it not been sold.

The Arguments on the Appeal

24 On the hearing of the appeal, Mr M Einfeld QC and Mr M W Sneddon appeared for Mrs Raulfs. Dr C Birch SC appeared for Fishy Bite, Mr Ajaka and Ms Ablett.

25 Mr Einfeld puts the Appellant's claims for orders for repayment of money on five separate bases. The first is that there is what he calls a resulting trust of the type recognised in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. The second is that there is a constructive trust of the type identified in Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583. The third is that there has been a total failure of consideration for the payment of the $400,000. The fourth is that Ms Ablett has a personal obligation to repay the money pursuant to principles discussed in Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230. The fifth is that Ms Ablett is obliged to repay the money as money had and received, because Mr Ajaka was her agent in paying the money into the Suncorp Metway account. He also argues that the Clovelly property was subject to an equitable lien or charge securing the payment of $400,000 to Mrs Raulfs.

26 At first instance, any claim against Ms Ablett based on Barnes v Addy (1874) LR 9 Ch App 244 was disavowed. There was no attempt to retreat from that position on the appeal.

27 By a Notice of Contention, Dr Birch seeks to support the primary judge's decision by arguing that the termination deed between Mr Ajaka and Ms Ablett gives rise to a defence of change of position, or alternatively the equitable defences of laches and acquiescence.

28 I will consider Mr Einfeld's arguments seriatim.

"Quistclose Trust"

29 Mr Einfeld submits that Mrs Raulfs paid the $400,000 for a specific purpose, namely for use as capital in the partnership. He submits that that purpose failed when Mr Ajaka withdrew the money and used it for his own private purposes, and that thereupon a resulting trust for Mrs Raulfs arose.

30 Mrs Raulfs' cheque for $400,000 was paid into the Fishy Bite Westpac bank account as part of a deposit of $401,320 made on 27 July 2006. Immediately before that deposit was made, the bank account was in credit, in an amount of $2,589.29. By 18 August 2006, the balance in the Westpac bank account had dropped to $397,822.15. Bank statements between 18 August 2006 and the date that $400,000 was withdrawn from the account were not in evidence.

31 Notwithstanding that the balance manifestly dropped below $400,000, the parties in the court below conducted the case on the basis that it was "the $400,000" that Mr Ajaka withdrew from the Fishy Bite bank account and used to discharge the mortgage debt. They do not seek to depart from that basis on the appeal.

32 The trial judge at [54] accepted the relevant principle as being that "if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given": Gibert v Gonard (1884) 54 LJ CL 439 at 440 per North J, cited with approval by Lord Millett in Twinsectra Ltd v Yardley [2002] UKHL12; [2002] 2 AC 164 at [76].

33 At [55] the primary judge rejected the Quistclose trust submission for two reasons:

"... The first is that the payment to Fishy Bite was intended to be the payment of the $400,000 as partnership funds that Mrs Raulfs had agreed to pay. In other words, the money 'was paid and received with the intention that it should become the absolute property' of the partnership: see Twinsectra per Lord Millett at [91]. On receipt by Fishy Bite, the monies were beneficially owned by the partnership, not Fishy Bite, and when the $400,000 was paid out to Mr Ajaka, wrongly on Mrs Raulfs' case, what was paid out were assets of the partnership. The second point is the obverse of the first. If Fishy Bite were to now pay back $400,000 to Mrs Raulfs, then she would not have contributed the $400,000 which she was obliged to contribute and she would be required to pay over to the receiver that same amount (subject to the resolution of the remaining issues)."

34 In Quistclose, Rolls Razor was a company in serious financial difficulties. It had declared a dividend, thereby incurring a debt to its shareholders, but lacked ready funds to pay it. Quistclose lent Rolls Razor a sum of money, on terms that it would be used only to pay the dividend. The borrowed funds were paid into a separate bank account with Barclays Bank. Rolls Razor went into liquidation before the dividend was paid. The supervening liquidation of the company had the consequence that the dividend could not be paid, as the debts to the shareholders were postponed to debts owed to ordinary creditors. Lord Wilberforce (with whom Lord Reid, Lord Morris of Borth-y-Gest, Lord Guest and Lord Pearce agreed) said at 580:

"The mutual intention of the respondents and of Rolls Razor Ltd, and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd, but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend. A necessary consequence from this, by process simply of interpretation, must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents: the word 'only' or 'exclusively' can have no other meaning or effect."

35 Lord Wilberforce at 580 identified the situation as one:

"... for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years."

36 At 580, Lord Wilberforce referred to Toovey v Milne (1819) 2 B&A 683; 106 ER 514. That action was a common law claim for money had and received, brought by the assignee of a bankrupt. Before his bankruptcy, the bankrupt had borrowed money from the defendant for the purpose of paying his creditors, but when not all of the money was used in payment of creditors the bankrupt returned the unspent portion, some £95, to the lender. The report notes, at 683-4, 515:

"It did not appear that the individual notes composing the 95l were any part of the notes originally advanced ... nor was there at the time of the advance any express stipulation, that if the object was not attained the money should be restored."

37 The assignee's claim to recover the £95 from the lender failed at trial, and also on a motion for a new trial. Abbott CJ said, at 684:

"I thought at the trial, and still think, that the fair inference from the facts proved was that this money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation, that the money shall be repaid. That has been done in the present case; and I am of opinion that that repayment was lawful, and that the nonsuit was right."

Even if the bankrupt had been acting in breach of trust in mixing the notes he received with his other money, an equitable charge would exist over the mixed fund, entitling the lender to receive back from the mixed fund the amount that had not been expended in paying creditors.

38 Lord Wilberforce also referred to In re Rogers (1891) 8 Morr 243, which his Lordship summarised as deciding "the money was advanced to the bankrupt for the special purpose of enabling his creditors to be paid, was impressed with a trust for the purpose and never became the property of the bankrupt."

39 At 581, Lord Wilberforce distinguished these cases from ones in which money that had been paid to a company for the purpose of obtaining an allotment of shares had been held not to give rise to a trust. He said that cases that had reached that conclusion:

"... are merely examples which show that, in the absence of some special arrangement creating a trust (as was shown to exist in Re Nanwa Gold Mines Ltd), payments of this kind are made on the basis that they are to be included in the company's assets. They do not negative the proposition that a trust may exist where the mutual intention is that they should not."

40 At 581-2, he held that it was possible for a trust and debt to co-exist in the one relationship:

"... when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see Re Rogers where both Lindley and Kay LJJ explicitly recognised this): when the purpose has been carried out (ie, the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (ie, repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets) then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lenders, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it." (citation omitted)

41 In Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335, Mainline was a builder which encountered financial difficulties when it had partly completed a building project. The proprietor of that building project called on a bank security guarantee that Mainline had provided to it, and used part of the proceeds to pay subcontractors that Mainline had left unpaid. The dispute concerned the unexpended balance of the amount paid under the guarantee. The majority in the High Court held that the proprietor was not obliged to pay the unexpended balance to the bank.

42 Gibbs ACJ (Jacobs and Murphy JJ agreeing) said at 353 that the decision in Quistclose:

"... is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust."

43 Notwithstanding that Gibbs ACJ referred to "the argument advanced by counsel for the Bank in reliance on the decision in Barclays Bank Ltd v Quistclose Investments Ltd" (353), it appears that in truth counsel for the Bank advanced a somewhat different argument to that which had been advanced in Quistclose. Gibbs ACJ continued at 353:

"In the present case it was submitted not that a trust was created, but that there was a contract express or implied between the appellant and the bank that so much of the money as was not spent in the discharge of the obligations of Mainline would be refunded to the Bank. However, there was no evidence from which it can be concluded that it was intended that the money should not form part of the general assets of Mainline. There was no requirement that it should be kept in a separate fund; in this report the provisions under which the security was given - those of cl 30(c) - may be contrasted with those of cl 30(d) which require the retention fund to be paid to an interest bearing deposit in joint names, the amount of which was to be held in trust. Further, the obligations of Mainline under the contract were various, and the likely amount of Mainline's final liability to the appellant was quite unknown when the guarantee was given. The payment by the bank was not a provisional payment, or a payment on account; the money was provided as a security and was used for that purpose. In all these circumstances it should be concluded that the intention of the parties to the guarantee was that the money was to form part of the general assets of the appellant, to be used as it wished, subject only to an obligation to account (to Mainline) for any surplus. No stipulation to repay the money to the bank can be implied."

44 In Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491, Gummow J said, at 500, that Lord Wilberforce's finding of a mutual intention pursuant to which there was a primary trust, and a secondary trust, was:

"... indicative of an express trust with two limbs rather than an express trust in favour of the shareholders and a resulting trust in favour of Quistclose which arose by reason of an incomplete disposition by Quistclose of the whole of its interest in the money lent to Rolls Razor."

That remark concerns the analysis of the particular fact situation revealed in Quistclose. It does not purport to be, and should not be taken as, a statement about whether a "Quistclose trust" is "really" an express trust or a resulting trust, nor about whether there is any such legal institution as a "Quistclose trust".

45 Gummow J said, at 501, that the money banked into the special account "never at any stage became the beneficial property of Rolls Razor. It acquired no more than what Dixon J called a dry legal interest ...".

46 At 502, Gummow J said that the references to "purpose" by Lord Wilberforce in Quistclose and Gibbs ACJ in Mainline should not be regarded as recognising:

"... an express trust which did not have to satisfy the ordinary requirements for any private (as distinct from public) trust. There was, on Lord Wilberforce's analysis of the facts, a trust fund held by a trustee on certain terms for a class of ascertained beneficiaries, with a limitation (whether as an express or resulting trust) back to the settlor in specified circumstances. The expression 'purpose' was apt to describe the end sought to be achieved by the settlor, Quistclose, and accepted by the trustee, Rolls Razor. This was formulated in the terms stipulating the conditions upon which the shareholders might take a beneficial interest in the fund. The use of the expression 'purpose' should not be read as heralding a new era for the non-charitable purpose trust."

47 At 502, Gummow J recognised the truism of trust law, that "the question as to the existence of any express trust will always have to be answered by reference to intention." After some discussion of whose intention was the relevant one, he said, at 503:

"The relevant intention is to be inferred from the language employed by the parties in question and to that end the court may look also to the nature of the transaction and the relevant circumstances attending the relationship between them ... There is no need for particular caution in drawing the inference that a trust was intended ..."

48 Notwithstanding some earlier uncertainty arising from the decision in Commissioner of Stamp Duties (Qld) v Jolliffe (1920) 28 CLR 178 it is now clear that in deciding whether there is an intention to create a trust, the court ascertains that intention by inference from the outward manifestations of intention: Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 at [53]-[59], [102]-[115]. Thus, the task of ascertaining whether there is an intention to create a trust and, if so, on what terms is a similar one to ascertaining the intention of parties to a contract for the purpose of deciding whether there is an intention to enter contractual relations and the terms of any contract that has been entered. The sort of factors that Gibbs ACJ considered in Mainline are relevant to whether there is the sort of trust that was recognised in Quistclose.

49 Young, Croft and Smith, On Equity (2009) Lawbook Co, at [6.1020] said, correctly:

'Cases in this area will often depend on a close analysis of the facts, and in particular, whether the person who provided the money annexed a trust or equitable obligation that it was only to be used for the nominated purpose. The mutual intention of the parties ... will be important. A trust will not necessarily arise just because a lender inquires into the purpose for which a loan is sought and money is paid over for that particular purpose."

50 A footnote to the last sentence of that passage refers to Lord Millett in Twinsectra at 185. In paras [73]-[74] on 185, his Lordship said:

"A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often enquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and maybe used as part of his cashflow. Commercial life would be impossible if this were not the case.

The question in every case is whether the parties intended the money to be at the free disposal of the recipient ..."

51 In my respectful view, this statement by his Lordship has the potential to mislead in two respects. The first is in its assumption that there is such a thing as "a Quistclose trust". Rather, consistently with Byrnes v Kendle, and the remarks of Gummow J in Australian Elizabethan Theatre Trust, one needs to analyse an individual fact situation for the purpose of deciding whether there is an intention to create a trust, and, if so, on what terms. Quistclose recognises that sometimes there can be a trust whose terms are that the trust property is to be paid to particular people, and if it is not paid to those people, it is to be held for someone else. That is a matter arising from analysis of the facts of the particular case in accordance with well established principles for identifying when there is a trust, not because there is any separate legal institution known as a "Quistclose trust". Further, it is a gloss upon the law concerning identification of the terms of a trust to say that the "question in every case is whether the parties intended the money to be at the free disposal of the recipient". That suggests that being at the free disposal of the recipient marks a dividing line between a "Quistclose trust" and something else. Facts about the intention with which a person has parted with an item of property cannot usefully be categorised in such a cut and dried fashion. However, the more limited statements in the passage I have quoted from On Equity are correct.

52 In the present case, there was no basis for inferring that the parties had an objective intention that the $400,000 that Mrs Raulfs paid to Fishy Bite would be repaid to her in any circumstances. Neither of the partners said anything about repayment. They signed a partnership agreement that acknowledged, in clause 4.4, that the $400,000 had been paid as a contribution towards the capital of the partnership.

53 There is clear authority about the rights of a partner concerning partnership property.

54 In Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411 at 453, Kitto J said:

"That he has a beneficial interest, which the law will recognize and enforce, in every piece of property which belongs to the partnership is clearly established ...; and none the less so because the nature of the interest is peculiar in that his share in the partnership, by virtue of which the interest in a given asset exists while the asset belongs to the partnership, consists not of a title to specific property but of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership. ... that is to say, not a 'definite' share or interest in a particular asset, no 'right to any part' of it, but an interest which 'can be finally ascertained only when the liquidation has been completed, and ... consists of his share of the surplus'." (citations omitted)

That passage has since been approved in Watson v Ralph (1982) 148 CLR 646 at 650 per Gibbs CJ (Mason, Wilson and Brennan JJ agreeing), and in other High Court authority that I will shortly mention.

55 In Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 at 327-8, McTiernan, Menzies and Mason JJ said:

"The partner's share in the partnership is not a title to specific property but a right to his proportion of the surplus after the realization of assets and the payment of debts and liabilities. However, it has always been accepted that a partner has an interest in every asset of the partnership and this interest has been universally described as a 'beneficial interest', notwithstanding its peculiar character. The assets of a partnership, individually and collectively, are described as partnership property (Partnership Act 1892 as amended (NSW) s 20). This description acknowledges that they belong to the partnership, that is, to the members of the partnership.

In Re Fuller's Contract [1933] Ch 652 at 656, Luxmoore J (as he then was) said:

'... as between the partners, the partnership property must be dealt with in a particular way, but so far as all the rest of the world is concerned, there is no limitation on the interests of the partners; the partners have the beneficial interest in the partnership assets, which are held together as an undivided whole, but they respectively have undivided interest in them.'

It is significant that s 20(ii) of the Partnership Act 1892 as amended (NSW) treats a partner as having a beneficial interest in real estate belonging to the partnership, for in this respect no distinction can be drawn between the nature of a partner's interest in real estate and his interest in personal estate.

The appellant submitted that the nature of a partner's interest was analogous to that of a residuary legatee in an unadministered estate. There is some similarity between the two cases in that the residuary legatee and the partner each have the right to insist upon due administration, the former of the estate and the latter of the partnership assets and liabilities, and the precise entitlement of each must await the due course of administration. Nevertheless we think that the interest of the partner in an asset of the partnership is sui generis (cf Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411 at 453-4; [1961] ALR 534 at 560. It is, as we have said, recognized as a beneficial interest."

56 The purpose of those remarks, however, was to hold that the interest of a partner in a partnership asset had priority over an equitable mortgage granted by one partner over an asset that was in fact a partnership asset. The order of the court below, that the High Court left undisturbed, was (325) to the effect that:

- the non-mortgaging partner was entitled to retain the partnership assets that it had collected,

- the non-mortgaging partner was entitled to be paid by the mortgagee the partnership assets that the mortgagee had collected,

- the non-mortgaging partner was to apply those assets in accordance with the partnership agreement, and

- the interest of the non-mortgaging partner in the partnership assets ranked in priority to the interest of the mortgagee in those assets.

57 As well, the partnership in question was of very short duration, and it is highly likely that the partnership had ended by the time of the litigation in the High Court.

58 Similarly, in Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 at 446-7, Barwick CJ, Stephen, Mason and Wilson JJ said:

"Although a partner has no title to specific property owned by the partnership, he has a beneficial interest in the partnership assets, indeed in each and every asset of the partnership: Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 at 327-328; 3 ALR 409 at 412; Livingston v Comr of Stamp Duties (Qld) (1960) 107 CLR 411 at 453. His share in the partnership consists of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership: Bakewell v DFC of T (SA) (1937) 58 CLR 743 at 770; Bolton v FC of T (1964) 9 AITR 385 at 389."

59 Similarly, in United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673 at 688 Mason J (Barwick CJ, Gibbs and Wilson JJ agreeing) explained the way in which a charge over one partner's interest in the partnership operated:

"... the partner's interest is in truth a chose in action, which, as Everett acknowledged, 'consists of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership' (1980) 143 CLR at p 446. A mortgage or charge is considered to vest rights over that chose in action but it is not considered to carry any title to the specific assets until dissolution.

It follows that so long as the partnership business is carried on, its assets may be disposed of in the ordinary course of that business free of any claim to title by the holder of a mortgage or charge over a partner's share in the partnership. What I have said applies to an individual who is a partner as well as to a corporate partner. A fixed charge is appropriate to create a security over a partner's share. It gives rise to a present security over the chose in action which is the partner's share. Although it creates no specific interest in the partnership assets until dissolution, this is not because the charge is dormant; it is because the rights conferred by the charge relate to the existing chose in action and that the security over the chose in action confers no entitlement to the assets of the partnership until dissolution."

60 The partnership agreement prescribed the manner in which the assets of the partnership would be applied. It made explicit provision, in Clause 23, for the manner in which the assets of the partnership would be applied when the partnership came to an end. Mrs Raulfs had no right to receive or recover the $400,000 prior to the determination of the partnership. While Clause 23.1(b)(iv) might result in her receiving an amount of $400,000 from the partnership assets upon termination of the partnership, whether she actually received any such sum would depend upon whether there were sufficient assets available upon termination of the partnership, and in any event, even if she were to receive such a sum, it would not be the same $400,000 that she paid to Fishy Bite.

61 A significant factor in the absence of any intention that the $400,000 would be held on trust to be repaid to Mrs Raulfs is that there was no requirement that it be paid into a separate account. Rather, it was paid into the account into which the takings of the partnership business were deposited, and from which at least some of the expenses of the partnership were paid. A trust always requires that there be identifiable trust property, and the absence of a requirement to keep the supposed trust property separate is a powerful indication that no trust was intended. There was no objective circumstance known to Mrs Raulfs that could have suggested to her when the payment was made that the business was at risk of failing, nor any objective circumstance that could have suggested to her at that time that there was a real risk that the money might be misappropriated.

62 The present case is not, however, a case like that considered by Lord Millett in Twinsectra, where the money paid was at the free disposal of Fishy Bite. Upon Mrs Raulfs passing her cheque over, Fishy Bite was subject to a fiduciary obligation to apply the cheque and its proceeds for the purposes of the partnership. It is inherent in the notion of a sum of money paid as working capital of a business enterprise that the money might be expended in the course of conducting that enterprise. That is why I say that the $400,000 was paid subject to a fiduciary obligation to apply it for the purposes of the partnership, not that it was held on trust. Upon payment, the $400,000 became subject to the obligations more specifically set out in s 20(1) Partnership Act 1892:

"All property, and rights and interests in property, originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership, and in accordance with the partnership agreement."

63 For the purpose of ascertaining whether it was partnership property, it is unimportant that title to the $400,000 was held by Fishy Bite. Fletcher, The Law of Partnership in Australia, 9th ed (2007) Lawbook Co, correctly observes at 141-2:

"While transfer of title from the original owner to all partners jointly would be evidence that the property is partnership property, no adverse inference is drawn from a failure to make such a transfer. The question to be determined is whether the original owner retains both legal and beneficial interest in the property or whether the title-holder has transferred the beneficial interest in favour of the partners collectively. The inquiry is essentially a search for evidence of intention ..."

64 Similarly to the $400,000, other items that were being brought into the partnership, such as, perhaps, the lease of the premises, and whatever rights Fishy Bite had concerning the fittings and fixtures, continued to be held in the name of Fishy Bite, although thenceforth it would hold them for the benefit of the partnership.

65 In the present case, the partnership deeds provide the clearest evidence that it was the intention of both Mrs Raulfs and Fishy Bite that the $400,000 should be partnership property.

66 Mr Ajaka caused Fishy Bites to breach its obligations as a partner when he misappropriated the $400,000. However, the judge was right in holding that the consequence of that misappropriation is that Mr Ajaka and Fishy Bite have an obligation to account to the receiver of the partnership for the $400,000. If the receiver receives that $400,000, it will then be applied in accordance with the partnership agreement.

67 As Barrett JA pointed out in the course of argument, once Mrs Raulfs' cheque for $400,000 was paid, nothing further needed to be done to make the $400,000 the absolute property of the partnership. It may be that legal title to it was in Fishy Bite (ignoring for the moment, as the parties seem to have consented to do, the fact that it was held as part of a mixed fund and not as a separate asset capable of being held as trust property) but it was held by Fishy Bite subject to fiduciary obligations to apply it for the partnership.

68 Regardless of whatever rights a partner might have to sue concerning partnership property while the partnership is on foot, in the present case, the consent orders that the court made on 3 October 2008 have conferred on the receiver power, implicitly to the exclusion of the partners themselves, to conduct all dealings relating to the partnership assets. It might be the case (though I explicitly refrain from deciding) that the receiver of the partnership has rights that could be enforced, on behalf of the partnership, against Ms Ablett or the property whose value has been swelled by the misappropriated partnership asset. If the receiver were to bring any such action, closer attention would need to be paid to a topic that does not need to be gone into for the purposes of this judgment. It is whether any equitable rights of the receiver were affected, in whole or part, by Ms Ablett having given consideration for her interest in the Clovelly property increasing from an undivided half share to being the sole registered proprietor. What matters for present purposes is that Mrs Raulfs has no such rights.

69 For these reasons, the submission that there is a "Quistclose trust" in favour of Mrs Raulfs fails.

Muschinski v Dodds

70 In Muschinski v Dodds at 618, Deane J said:

"Both common law and equity recognize that, where money or other property is paid or applied on the basis of some consensual joint relationship or endeavour which fails without attributable blame, it will often be inappropriate simply to draw a line leaving assets and liabilities to be owned and borne according to where they may prima facie lie, as matter of law, at the time of the failure. Where there are express or implied contractual provisions specially dealing with the consequences of failure of the joint relationship or endeavour, they will ordinarily apply in law and equity to regulate the rights and duties of the parties between themselves and the prima facie face legal position will accordingly prevail. Where, however, there are no applicable contractual provisions or the only applicable provisions were not framed to meet the contingency of premature failure of the enterprise or relationship, other rules or principles will commonly be called into play."

71 Deane J continued, at 619-620:

"The prima facie rules respectively entitling a fixed term partner to a proportionate refund of his or her premium and a contractual joint venturer to a proportionate repayment of his or her capital contribution on the premature dissolution of the partnership or collapse of the joint venture are properly to be seen as instances of a more general principle of equity. That more general principle of equity can also be readily related to the general equitable notions which find expression in the common law count for money had and received (cf Moses v Macferlan (1760) 2 Burr 1005 at 1012; [97 ER 676 at 680-1]; J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539; 61 FLR 108 at 120) and to the rationale of the particular rule of contract law to which reference has been made (cf Fibrosa, supra, at pp 61ff and esp at p 72). Like most of the traditional doctrines of equity, it operates upon legal entitlement to prevent a person from asserting or exercising a legal right in circumstances where the particular assertion or exercise of it would constitute unconscionable conduct: cf Story, Commentaries on Equity Jurisprudence, 12th ed (1877: Perry ed), vol 2, para 1316; Legione v Hateley, 152 CLR at p 444). The circumstances giving rise to the operation of the principle were broadly identified by Lord Cairns LC, speaking for the Court of Appeal in Chancery, in Atwood v Maude, supra, at p 375 where 'the case is one in which, using the words of Lord Cottenham in Hirst v Tolson (1850) 2 Mac & G 134; 42 ER 52, a payment has been made by anticipation of something afterwards to be enjoyed [and] where ... circumstances arise so that future enjoyment is denied'. Those circumstances can be more precisely defined by saying that the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do (cf Atwood v Maude at pp 374-5 and per Jessel MR, Lyon v Tweddell (1881) 17 Ch D 529 at 531)."

72 Mr Einfeld submitted that the partnership has terminated prematurely, because Clause 2.1 of the partnership agreement provided for it lasting for the joint lives of the Partners. (Such a clause is clearly inapposite when one of the partners is a corporation, but for the sake of the argument, I would construe that clause as referring to the joint lives of Mrs Raulfs and Mr Ajaka.)

73 Mr Einfeld also submitted that the "without attributable blame" element in Muschinski v Dodds should be broadly interpreted. He reminded us that in Bennett v Horgan (NSWSC, 3 June 1994, unreported), Bryson J said, in a passage that has been approved by Burchett AJ in Kriezis v Kriezis [2004] NSWSC 167 at [23] and Brereton J in McKay v McKay [2008] NSWSC 177, and that I adopted in Hill v Hill [2005] NSWSC 863 at [35]:

"The concept of attributable blame must be understood and applied with some tolerance; in my view it does not call for a judgment attributing blame among members of a family for the continuing relationship becoming intolerable, unless perhaps in particularly gross cases. Such judgment would be difficult and unreliable, as it is rare indeed that something or other which could be said to be a ground for blame cannot be identified and laid to the charge of each of the persons concerned. Leaving gross cases involving criminality or similarly reprehensible behaviour on one side, it should usually be understood, in my opinion, that where personal relationships deteriorate and the sharing of a dwelling becomes intolerable to some or all of those concerned, there is, within the meaning of Deane J's expression, no attributable blame and the case is one for an equitable adjustment."

74 Mr Einfeld submits that in the present case the personal relationship between Mrs Raulfs and Mr Ajaka broke down without attributable blame, in consequence of which the consensual joint relationship or endeavour between Mrs Raulfs and the alter ego of Mr Ajaka (the partnership) has failed. He submits that it would be unconscionable for Fishy Bite to retain the $400,000 it received.

75 The primary judge dealt with this submission at [68]-[69]:

"I think that Mrs Raulfs may well have had, by the end of November 2006, a basis for seeking rescission of the partnership agreement as there had, to that point, been a total failure of consideration brought about by Mr Ajaka's effective preclusion of her from any of the normal incidents of partnership and his refusal to permit her any role in the management and administration of the business. This would have entitled her, in accordance with the principles outlined in Muschinski v Dodds, to the return of the $400,000. However, I think that her application for, and obtaining of, an order for dissolution of the partnership and appointment of a receiver amount to an election between two inconsistent rights: namely on the one hand, to assert that the partnership agreement had failed for want of consideration, and on the other hand to seek to proceed to enforce rights granted to her as a partner (see, in relation to election in the contractual context, Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 at [56]-[58]). Demands to see the partnership accounts are in the same category and the agreement that, if the settlement provisionally reached did not eventuate, the $32,000 to be paid to her should be deemed to be on account of drawings also falls into the same category.

It follows that in my view no claim can now be maintained based on total failure of consideration or Muschinski v Dodds ..."

76 Mr Einfeld submits that the question of whether a constructive trust should be imposed in accordance with Muschinski v Dodds is quite separate to whether there has been a total failure of consideration. He submits that Muschinski v Dodds presupposes the existence of the joint venture. He submits that such a trust can be imposed regardless of whether it is possible to rescind the partnership agreement. I accept these submissions.

77 I agree that the partnership agreement failed prematurely. I will also assume, without deciding, that Mr Einfeld is right in submitting that the "without attributable blame" test has been satisfied. However, I do not accept that it would be unconscionable for Fishy Bite to retain the $400,000 it received.

78 For a start, Fishy Bite does not at present have the $400,000. The purpose of the Muschinski v Dodds type of constructive trust is to prevent one of the parties to a joint venture from retaining, at the conclusion of the joint venture, property that was acquired in the course of, or for the purposes of, the joint venture if it is unconscionable for that party to retain that property.

79 Even if it were appropriate to consider the situation immediately before Fishy Bite paid away the $400,000 on 27 October 2006, there would not in my view be any occasion for imposing a constructive trust of the type for which Mr Einfeld contends.

80 In Baumgartner v Baumgartner (1987) 164 CLR 137, Mason CJ, Wilson and Deane JJ adopted, at 148, principles that Deane J had articulated in Muschinski v Dodds. In Baumgartner, their Honours identified it as:

"the general equitable principles which restores to a party contribution which he or she has made to a joint endeavour which fails when the contributions have been made in circumstances in which it was not intended that the other party should enjoy then."

81 In West v Mead [2003] NSWSC 161; (2003) 13 BPR 24,431 I said, at [63] concerning a Baumgartner type of constructive trust, that one way

"... in which the intention of the parties would be relevant would be if they had formed an express intention about what was to happen in the circumstance which has in fact arisen. If the parties have expressly contemplated the very situation which has arisen, and have, in advance, agreed how the assets built up as a result of their joint efforts should be divided in that situation, it would often be the case that there is nothing unconscionable in holding the parties to their agreement."

82 That proposition is closely related to Deane J's statement in Muschinski v Dodds, quoted earlier, that:

"Where there are express or implied contractual provisions specifically dealing with the consequences of failure of the joint relationship or endeavour, they will ordinarily apply in law and equity to regulate the rights and duties of the parties between themselves and the prima facie legal position will accordingly prevail."

83 I accept that it is possible for an equity of the type recognised in Muschinski v Dodds to arise in the context of a partnership. The two cases that Deane J referred to in Muschinski v Dodds as providing an example of how "equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him to do so" were Atwood v Maude (1868) LR 3 Ch App 369 at 374-375 and Lyon v Tweddell (1881) 17 Ch D 529 at 531. Each of those was a case where an incoming partner had paid, or agreed to pay, a premium, but the partnership was dissolved prematurely. In Atwood, the premium had been paid in full, and the court held that the partner who had paid it should receive a partial refund. In Lyon the premium had been paid in part, and the court held that the incoming partner should not be required to pay the balance. In each case, however, the premium was payable to the existing partner, and was not a contribution to the capital. In Atwood, there had been an agreement for dissolution of the partnership in question, which contained no stipulation as to the return of any part of the premium (373).

84 In my view, the present is not a circumstance in which a Muschinski v Dodds trust arises, because Clause 23 of the partnership agreement contains express provision for the manner in which the partnership assets are to be divided upon termination. There is nothing unconscionable about holding the parties to their agreement in that respect.

85 Mr Einfeld submits that this is not a case to which Clause 23 of the partnership agreement applies, because Mrs Raulfs' $400,000 "never went into the capital of the partnership" (tp 36). For reasons already given when discussing the status of the $400,000 as partnership property, I do not accept that submission. Fishy Bite was obliged to deal with it as a partnership asset, and that suffices for it to "go into" the capital of the partnership. Once Mr Ajaka performs his equitable obligation and accounts for the $400,000 to the receiver of the partnership, it can be applied in accordance with the parties' intention.

Failure of Consideration

86 Though written submissions were made on this topic, nothing was added to them in oral argument.

87 The written submissions contend that Mrs Raulfs received nothing in the nature of a share of the partnership, and that as a matter of practical reality the parties never carried on the business "in common with a view of profit". The written submissions point out that it is the performance of the defendant's promise, not the promise itself, which provides the relevant consideration for the purpose of this principle: Baltic Shipping Company v Dillon (1993) 176 CLR 344 at 350-1. The submissions make no attempt, however, to deal with the primary judge's finding that there had been an election against asserting a right to rescind the partnership agreement.

88 In Baltic Shipping Company at 355-6, Mason CJ said:

"The action to recover money paid on a total failure of consideration is on a common money count for money had and received to the use of the plaintiff. The action evolved from the writ of indebitatus assumpsit. It is available only if the contract has been discharged, either for breach or following frustration, and if there has been a total, and not merely partial, failure of consideration. It is now clear that in these cases, the discharge operates only prospectively, that is, it is not equivalent to rescission ab initio. Nor is rescission ab initio a precondition for recovery. Unconditionally accrued rights, including accrued rights to sue for damages for prior breach of the contract, are not affected by the discharge." (footnotes omitted)

89 If the primary judge's finding that "Mrs Raulfs may well have had, by the end of November 2006, a basis for seeking rescission of the partnership agreement" is understood as referring to a rescission ab initio (and it is far from clear that it should be so understood) it would be an irrelevant observation. Likewise it would be irrelevant to consider whether a right to rescind the partnership ab initio had been lost by election. However, in my view, the judge was right in concluding that, by the time of the trial, Mrs Raulfs had received some of the consideration. She had been provided with documents and information concerning the financial affairs of the partnership, to which she had an entitlement under Clause 10 of the partnership agreement. That is sufficient to rebut the claim that there was a total failure of consideration.

Heperu

90 Mr Einfeld accepts that Ms Ablett gave consideration to Mr Ajaka under the termination agreement between them. He is right to do so. Section 45 of the Property (Relationships) Act makes clear that two people who are not married to each other may enter into a termination agreement without infringing public policy. Section 46 provides that, except to the extent that Part 4 of the Property (Relationships) Act itself provides otherwise, any such agreement is subject to the general law of contract. Those provisions overcome, for people who have been in a domestic relationship, some obstacles, exemplified in Hyman v Hyman [1929] AC 601, to the legal recognition and enforceability of such agreements between husband and wife. If married people enter an agreement under which they give up rights to seek relief from a court concerning their matrimonial affairs, or compromise their claims to litigate about their matrimonial affairs or property, that giving up of rights or compromise provides consideration: Wilson v Wilson [1846-48] 1 HLC 538 at 573; Besant v Wood (1879) 12 Ch D 605 at 620-622; Marshall v Marshall (1879) 5 PD 19 at 22-3; Clarke v Clarke (1885) 10 PD 188 at 194. The situation would be the same concerning a termination agreement between people who had been in a domestic relationship.

91 Mr Einfeld submits that it does not matter that Ms Ablett gave consideration to Mr Ajaka when the termination agreement was entered in September 2007. That is because at the time the $400,000 was used to pay off the debt on the Clovelly property in October 2006, Ms Ablett was a volunteer. He submits that the principles recognised by this Court in Heperu v Belle confer on Mrs Raulfs an entitlement to both a personal remedy against Ms Ablett, and a proprietary remedy against the Clovelly property. Consideration of that submission requires a fairly detailed account of Heperu v Belle.

92 In Heperu, Mr Chincotta was a finance intermediary who proved to be fraudulent. Heperu gave Mr Chincotta some cheques, made payable to Perpetual Trustee, after Mr Chincotta represented that the cheques would be invested in a particular type of investment that Perpetual offered. Mr Chincotta had earlier opened a cash management account at Perpetual in the name of his wife. By the time the matter reached the Court of Appeal, Mr Chincotta's wife was known as Ms Belle. Mr Chincotta had opened the Perpetual account with Ms Belle's genuine signature after misrepresenting to her the purpose of the account, but forged her signature on a document that gave him authority to operate the account.

93 Mr Chincotta paid Heperu's cheques into that account. He forged Ms Belle's signature on each form applying for investment that accompanied a payment of one of Heperu's cheques into the Perpetual account. He withdrew money from that account, and paid it into an account with Westpac that was also in his wife's name. Money withdrawn from that account was used, in part, to pay principal and interest on loans secured on certain real property held in the name of Mr Chincotta and his wife, or in the name of his wife alone. Ms Belle relied on her husband in business matters, and did not know that he was engaging in impropriety.

94 Through this flow of funds, Ms Belle had come to receive a traceable benefit from Heperu's funds that had been in the Perpetual account, and had received that benefit as a volunteer. Allsop P at [92], identified the relevant principle as being:

"... a person entirely innocent of a fraud who comes to know that he or she has received and still retains the proceeds of, or taken advantage of, a fraud to which he or she was not party, cannot knowingly seek to retain those proceeds or that advantage, without, in effect, becoming a party to that fraud and liable accordingly: Black v S Freedman [(1910) 12 CLR 105] at 109 (Griffith CJ), 110 (Barton J) 110-111 (O'Connor J)."

95 Because Mr Chincotta paid various sums of money not derived from Heperu into the Westpac accounts, Allsop P held at [112] that the funds in that account were a mixture of trust funds and personal funds of the effective defaulting fiduciary, Mr Chincotta. Trust money that passes through a mixed fund can be traced into an asset that is still in existence when a court considers the matter. This arises through application of the principle that a defaulting trustee who withdraws from a mixed fund and dissipates the withdrawal is presumed to have dissipated his own money. Thus, it was open to Heperu to trace the trust funds from the mixed fund into any asset that had been purchased from the mixed fund: Scott v Scott (1963) 109 CLR 649 at 664. Further, if a withdrawal from the mixed fund was used to discharge a mortgage over real estate, tracing into that real estate could be effected by reason of Heperu being subrogated to the proprietary right of the mortgagee whose mortgage was paid out: Boscawen v Bajwa [1996] 1 WLR 328 at 340-1; Heperu v Belle at [135].

96 Allsop P held that, to the extent to which Heperu had a traceable equitable right in Ms Belle's real estate, Ms Belle owed Heperu a corresponding personal obligation to pay. There were some problems in identifying the precise extent of the traceable equitable right ([144]), but that did not affect the principle.

97 Mr Einfeld also submits that it is not to the point that Ms Ablett gave consideration to Mr Ajaka, as Ms Ablett was at all times a volunteer as against Mrs Raulfs. For many of the purposes for which equity enquires whether someone is a volunteer or has given consideration, it is of no importance to whom the consideration has been given. Thus, for example, a bona fide purchaser for value of the legal estate without notice prevails over an earlier equitable interest holder, notwithstanding that the only consideration that the purchaser gave is to the vendor of the property in question, not to the earlier equitable interest holder. However, this case can be decided without going into whether Ms Ablett was, in any sense that would enable her to prevail against Mrs Raulfs, someone who had given consideration.

98 Even if Ms Ablett had at all times been a volunteer, the principles that led to Heperu succeeding against Ms Belle would not have given Mrs Raulfs either a personal claim, or a proprietary claim against Ms Ablett. Heperu could succeed against Ms Belle because Heperu had an equitable title to the money that had been fraudulently taken from it. Here, because the $400,000 became partnership property, Mrs Raulfs had no claim to it as an individual item of property. Thus, she has no claim to its traceable proceeds. Nor does she have a personal right against Ms Ablett as the owner of some of the traceable proceeds.

Authority

99 In Heperu, Ms Belle gave Mr Chincotta authority to operate the relevant Westpac accounts. A submission was made that, because of that authority, she had received as principal cheques that Mr Chincotta deposited into the accounts. The submission failed. On the basis of National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251, Allsop P (Campbell JA and Handley AJA agreeing) said, at [59]:

"Whatever may be the contractual position vis-à-vis Westpac, there is no reason to conclude that she authorised the collection of the product of misappropriated cheques to found a conclusion that she received such funds in the context of a claim by the third party against her. Batty was concerned with the relationship of principal and agent and the extent of the authority of the fraudulent agent in dealing with a party in contractual relations with the firm, the bank. The question here is whether Ms Belle received the funds merely because they were deposited into the Westpac account and then removed from the Westpac account. (I leave to later the question of benefit and receipt from how the funds were deployed out of the Westpac account.) This question is not answered by distinguishing Batty; it is answered by asking (as Gibbs CJ did in Batty) whether the authority that Ms Belle gave to her husband can be understood to include receiving on her behalf the proceeds of misappropriated cheques. On the primary judge's findings as to Ms Belle's honesty and knowledge, the answer to that question is, no."

100 Mr Einfeld submits that the present case is a stronger one than Heperu, and that it should be concluded that Ms Ablett gave authority to Mr Ajaka to pay the $400,000 off the Suncorp-Metway mortgage. He says that that conclusion arises because of answers that Ms Ablett gave in cross-examination concerning the Suncorp Metway accounts:

"Q. And would this be fair, that you, in effect, gave him full control over the accounts?

A. Yes.

Q. He had your complete authority to operate the accounts as he saw fit, is that right?

A. No.

Q. In what way no?

A. In the way that if he was going to do something dramatic, I would assume - we had an understanding that we would discuss it.

Q. What was that based on?

A. Conversation.

Q. What?

A. Conversation that we had.

Q. When?

A. In the course of our relationship. It was an understanding that we had.

Q. And when you say doing something dramatic, like what? Pay out the loan, is that what you meant; is that what you were directing your attention to?

A. I meant spending large amounts, actually.

Q. You would have been delighted, no doubt, if Mr Ajaka, from time to time, put money into the account to reduce the mortgage over your jointly owned property at Clovelly?

A. Yes.

Q. And whether the amounts be small or large, no doubt he had your complete authority to put any monies into the account so as to reduce the mortgage, would that be right?

A. Yes.

Q. But not take monies out for private purposes unrelated to the servicing of the mortgage, would that be right?

A. Yes. (Black 350)

101 After establishing that Ms Ablett had no idea how to use the internet banking facility through which the Suncorp Metway accounts could be operated, the cross-examination continued:

"Q. In 2007 you came to learn from Mr Ajaka that the $500,000 Suncorp Metway loan had, in fact, been completely paid out, is that right?

A. Yes.

Q. You certainly didn't put any money into the account to enable that to happen?

A. No.

Q. But, as I think you have told me, you would have been quite happy to have the loan completely paid out?

A. Yes.

Q. That would be right?

A. Yes."

102 In re-examination, Ms Ablett said:

"Q. Was there a conversation you ever had with Mr Ajaka about his authority in regard to the Suncorp Metway account?

A. No."

103 Mr Einfeld rightly recognises that this submission about agency is "only a small part of the case" (tp 54). I do not accept it. Any general words must always be interpreted in the universe of discourse in which they were made. I do not regard Ms Ablett's agreeing with the proposition that "he had your complete authority to put any monies into the account so as to reduce the mortgage" as involving an acknowledgement that he had her authority to put money derived dishonestly into the account. It would take a far more focused cross-examination of Ms Ablett, that put to her squarely the proposition that Mr Ajaka had her authority to put dishonestly derived money into the account, before any such conclusion could be drawn.

104 As the challenges to the judge's conclusions fail, there is no need to consider the Notice of Contention.

The Application for Leave to Cross-Appeal

105 The primary judge gave separate reasons for judgment on 8 March 2011 relating to the appropriate orders for costs: Raulfs v Fishy Bite Pty Ltd (No 2) (NSW Supreme Court, Rein J, 8 March 2011, unreported and no medium neutral citation). At [21], he identified the relevant question as being "whether or not the costs that have been incurred by the plaintiff in joining Ms Ablett have reasonably and properly been incurred." He appears to have accepted that, at the time she joined Ms Ablett as a defendant in the litigation, Mrs Raulfs knew where the $400,000 had gone, and that notice of the source of the $400,000 was not given to Ms Ablett until 2008. He appears also to have accepted that it was only in the course of the proceedings that Mrs Raulfs came to know that there had been a settlement agreement between Mr Ajaka and Ms Ablett in 2007. An important matter, in his Honour's mind, was (at [26]): "That Mr Ajaka and Fishy Bite removed money from the account when they should not have done so and paid off a mortgage which was for the benefit of both Mr Ajaka and Ms Ablett". In light of those circumstances, he concluded that the joinder of Ms Ablett was reasonable and proper notwithstanding that Mrs Raulfs has failed in her claim against Ms Ablett. He therefore made a Sanderson order, requiring Mr Ajaka and Fishy Bite to pay Ms Ablett's costs.

106 Ms Ablett had been separately represented for some time prior to the hearing, though by the hearing there was joint representation for all three respondents. Rein J estimated that 15% of the costs of the joint representation was an appropriate estimate of the proportion that was attributable to the case for Ms Ablett. There is no appeal concerning that estimation.

107 It is appropriate to grant leave to appeal, because all the facts that are relevant to the costs question have been exposed in the course of running the appeal; the extra cost for the parties and time for the court in dealing with the question of costs is minimal; and, as will appear, the decision below is wrong.

108 The judge made an error of principle in regarding the only relevant question as being whether the costs involved in joining Ms Ablett had been reasonably and properly incurred. In Council of the City of Liverpool v Turano (No 2) [2009] NSWCA 176 at [47], Giles JA said:

"It must be borne in mind that the mere fact that the joinder of two defendants was reasonable on the plaintiff's part is insufficient to support the making of an order that the unsuccessful defendant should pay, directly or indirectly, the costs of the successful defendant, whether in whole or in part: see Gould v Vaggelas (at 229) per Gibbs CJ; (at 260) per Brennan J. Prima facie an unsuccessful defendant should not have to pay a successful defendant's costs unless the unsuccessful defendant has acted in a way 'that makes it appropriate to shift the incidence of the successful defendant's costs', bearing in mind that '[t]he plaintiff [too] has been unsuccessful': McCracken & McCracken v Pippett (No 2) [2000] VSCA 20 (at [11]) per Callaway JA (Batt and Chernov JJA agreeing); Victoria v Horvath (No 2) [2003] VSCA 24 (at [10]) per Winneke P, Chernov and Vincent JJA; Nationwide News Pty Ltd v Naidu ; ISS Security Pty Ltd v Naidu (No 2) [2008] NSWCA 71 (at [20]) per Spigelman CJ, Beazley and Basten JJA."

109 I set out here, a collection of principles originally stated in ACQ v Cook (No 2) [2008] NSWCA 306 at [32]-[43]:

"Gould v Vaggelas [1985] HCA 85; (1985) 157 CLR 215 concerned an action brought by the purchasers of a business against the vendor, alleging they had been induced to purchase the business by misrepresentations. In the alternative, they sued accountants who had advised them before purchase concerning the financial standing of the business. They succeeded against the vendors, but failed against the accountants. The trial judge made a Bullock Order relating to the costs the purchasers were ordered to pay the accountants. The Queensland Full Court set aside that order. The High Court in turn restored it. Gibbs CJ, at 229-230 said:

'... the mere fact that the joinder of two defendants was reasonable does not mean that the unsuccessful defendant should be ordered to pay, directly or indirectly, the costs of the successful defendant. Obviously a judge should make a Bullock Order only if he considers it just that the costs of the successful defendant should be borne by the unsuccessful defendant, and, if nothing that the unsuccessful defendant has said or done has led the plaintiff to sue the other defendant, who ultimately was held not to be liable, it is difficult to see any reason why the unsuccessful defendant should be required to pay for the plaintiff's error or overcaution.

The ground on which a Bullock Order may be made is ... that the costs which the plaintiff has been ordered to pay to the defendant who succeeded, and which the plaintiff recovers from the defendant who has failed 'are ordered to be paid by the unsuccessful defendant, on the ground that ... those costs have been reasonably and properly incurred by the plaintiff as between him and the [unsuccessful] defendant.' In Johnsons Tyne Foundry Pty Ltd v Maffra Corporation Williams J (1948) 77 CLR at 572-573 stated the principle in a similar way and Starke and Dixon JJ, in giving their reasons for making a Bullock order, both relied on the circumstance that the attitude adopted by the successful defendant had induced the plaintiff to join the other defendant (1948) 77 CLR at 559-560, 566. In my respectful opinion the true position was clearly stated by Blackburn CJ in Steppke v National Capital Development Commission (1978) 39 LGRA 94 at 100; 21 ACTA 23 at 30-31 when he said that:

"There is a condition for the making of a Bullock order, in addition to the question whether the suing of the successful defendant was reasonable, namely that the conduct of the unsuccessful defendant has been such as to make it fair to impose some liability on it for the costs of the successful defendant."'

Wilson J (with whom Murphy J agreed on this point), at 247, stated the test for when the making of a Bullock Order was permissible as being:

'... where the costs in question have been reasonably and properly incurred by the plaintiff and between him and the unsuccessful defendant.'

Brennan J, at 260, stated the test as being that the order can be made:

'... in an action brought against two or more defendants for substantially the same damages only if the conduct of the unsuccessful defendant in relation to the plaintiff's claim against showed that the joinder of the successful defendant was reasonable and proper to ensure recovery of the damages sought.'

In Gould v Vaggelas the Bullock Order was restored notwithstanding that the causes of action against the accountants and the vendors (as Gibb CJ said at 231):

'... were unrelated. Failure against one does not mean success against the other.'

In Stevedoring Industry Finance Committee v Gibson [2000] NSWCA 179; (2000) NSWCCR 417 at [128] Mason P (with whom Stein and Heydon JJ agreed) quoted and applied the following summary of the law, taken from the judgment of Asche CJ in Lackersteen v Jones (No 2) (1988) 93 FLR 442 at 449:

'1. It must be seen to have been reasonable and proper for the plaintiff to have sued the successful defendant.

2. The causes of action against two or more defendants need not be the same but they must be substantially connected or dependent the one on the other.

3. While it is essential to find that the plaintiff has acted reasonably and properly that alone is not sufficient. The court must find something in the conduct of the unsuccessful defendant which makes it a proper exercise of discretion.

4. Finally, in considering whether to make such an order, the court should, in the exercise of its discretion balance overall two considerations of policy: the first, that an unnecessary multiplicity of actions should not be forced on litigants, so that a plaintiff who acts reasonably in joining two or more defendants should not be penalised or lose the fruits of his victory in costs on the basis that he should have either elected or taken separate actions; secondly, that an unsuccessful defendant should not have to pay more than one set of costs merely because he is unsuccessful.'

The case was a complex personal injury case where numerous defendants had been sued concerning injury caused by exposure to asbestos. Mason P, at [134] approved the reasoning of the trial judge as follows:

'The conduct of SIFC relating to the joinder of AEWL sufficient to justify a Bullock order was the denial of a duty by SIFC and the submission that 'in the special circumstances of this case' AEWL owed a duty of care to the plaintiff. In circumstances where the plaintiff was facing a denial of duty or breach by all defendants this denial made it reasonable to find that as between the plaintiff and SIFC, where the plaintiff's injuries arose from transactions in which both SIFC and AEWL were intimately involved (employees of each had faced direct and repeated complaints by the men working with asbestos), it is just that SIFC bear the cost of the successful defendant, AEWL. If SIFC had not denied duty the joinder of AEWL would not have been necessary.'

In Almeida v Universal Dye Works Pty Ltd (No 2) [2001] NSWCA 156 Priestley JA made a Bullock Order, saying at [8]:

'... any conduct by the defendant or state of affairs in which the defendant is an integral part which makes it fair and reasonable for other parties to be joined as defendants will be relevant to deciding on fair costs orders.'

That case arose from an injury on a building site, all three defendants were under common control, and the plaintiff was unable to ascertain who was the occupier or head contractor in charge of work on the site.

In Roads and Traffic Authority of New South Wales v Palmer (No 2) [2005] NSWCA 140 Giles JA (with whom Spigelman CJ and Handley JA agreed) cited at [30] the following from his judgment in Sved v Municipality of Woollahra (1998) NSW Con R 55-852 at 55, 605:

'... reasonableness as between the plaintiff and the unsuccessful defendant will normally be demonstrated by some conduct of the unsuccessful defendant which made it proper that the successful defendant be joined or that the unsuccessful defendant should bear the costs of the successful defendant. Such conduct was found in Lackersteen v Jones (No 2) in the unsuccessful defendant denying the authority of its agent whereby the plaintiff joined the agent who became the successful defendant, and more widely has been found in the unsuccessful defendant telling that the plaintiff in one way or another that it should look to the successful defendant for its remedy (Altamura v Victorian Railways Commissioners; Gould v Vaggelas; Fennell v Supervision & Engineering Services Holdings Pty Ltd).'

That was a case where a plaintiff who was severely injured when her car went off the road sued the RTA, the local Council, and Pioneer. The RTA had funded the work, on quite detailed terms, but did not actually carry it out. The Court of Appeal held it did not owe a duty of care to the plaintiff. Pioneer was a road making contractor, who carried out the work in question under contract with the Council.

In RTA v Palmer (No 2) Giles JA said (at [34]-[35]):

'The plaintiff relied on the wide view of conduct in Almeida v Universal Die Works Pty Ltd (No 2). She said that it was an RTA road, the work was funded by the RTA, the Council and Pioneer were aware of the arrangements by which control over the road works were to be judged, but the Council and Pioneer denied liability to the plaintiff and made no admissions as to control. The Council and Pioneer each cross-claimed for contribution, and at least on appeal the Council submitted that the RTA was liable to the exclusion of the Council. In these circumstances, it was said, there was conduct of the Council and Pioneer which made it not only proper but essential for the plaintiff to join the RTA as defendant and maintain her claim against it.

It may have been reasonable for the plaintiff in her own interests to join the RTA as a defendant, but I do not think that there was conduct which made it just that the Council, and still less Pioneer, pay the costs payable by the plaintiff to the RTA. Neither the Council nor Pioneer created any circumstances of uncertainty as to who was the proper defendant. They were not obliged to concede liability or make admissions in order to remove the RTA from contention, there being a respectable argument that the RTA was liable, and there is no reason to think that short of effective capitulation by the Council and Pioneer the plaintiff would not have maintained her claim against the RTA. In my opinion, conduct has not been shown such as to make it fair to impose on the Council and Pioneer liability for the costs of the RTA.'

In Nominal Defendant v Swift [2007] NSWCA 56 a plaintiff injured in a road accident sued in the alternative, the Nominal Defendant (on the basis that the accident had been brought about by the manner of driving, of an unidentified vehicle) and the council (on the basis that the defective manner of construction of the road had materially contributed to the accident). The trial judge had found both the Nominal Defendant and the council liable. On appeal the judgment against the Nominal Defendant was upheld, but the judgment against the council was set aside. However Santow JA (with whom McColl JA agreed) made a Bullock Order against the Nominal Defendant. He said, at [99]:

'... the respondent was justified, even prompted, in bringing proceedings against the Council, by reason of the Nominal Defendant denying liability as it did disputing, inter alia, that it was an 'unidentified vehicle'. That action made inevitable the joining of the Council by the respondent.'"

110 In the present case, Mr Ajaka did not do anything (beyond his initial misappropriation of the money and using it to pay down the mortgage) that induced or encouraged Mrs Raulfs to sue Ms Ablett. He did not cross-claim against her. He did not suggest, even in correspondence between solicitors, that it was Ms Ablett rather than he who should bear the liability, or that for any other reason Ms Ablett should be joined. It was not a situation where there was any doubt about the roles that Mr Ajaka and Ms Ablett had played in the events, as there sometimes is when there is doubt about which of several possible defendants was the occupier of a particular site or the employer of a negligent person. The claim against Ms Ablett was dependent upon the claim against Mr Ajaka, because only if Mrs Raulfs had an equitable claim against Mr Ajaka for the $400,000 would she have, through tracing, either a personal or a proprietary claim against Ms Ablett. However, the claim against Ms Ablett was not an alternative claim to that against Mr Ajaka. Rather, it sought to spread the net of liability wider so as to obtain an additional defendant who might be able to afford to pay, and sought a proprietary remedy instead of merely a personal remedy. In my view, while it might have been reasonable in Mrs Raulfs' own interests to join Ms Ablett, the joinder of Ms Ablett was not reasonable as between Mrs Raulfs and Mr Ajaka.

111 In my view, the judge's error of principle has led him to the wrong conclusion concerning who should bear Ms Ablett's costs.

Orders

112 I propose the following orders:

(1) Appeal dismissed with costs.

(2) Grant leave to cross-appeal.

(3) Cross-appeal allowed with costs.

(4) Set aside the orders in the court below that Mr Ajaka and Fishy Bite pay the costs of Ms Ablett of the hearing, and in lieu thereof order that Mrs Raulfs pay the costs of Ms Ablett of the hearing.

(5) Grant Mrs Raulfs a certificate under the Suitors' Fund Act 1951 concerning her costs of the application for leave to cross-appeal and the cross-appeal.

113 MEAGHER JA: I agree for the reasons given by Campbell JA that the orders he proposes should be made.

114 BARRETT JA: In relation to the appeal, I agree with Campbell JA and would add only this. None of the contentions advanced by Mrs Raulfs on appeal can prevail when it is appreciated that:

(a) Mrs Raulfs and Fishy Bite entered into the partnership agreement on 27 March 2006 and thereupon commenced to carry on business in common;

(b) the $400,000, although paid by one partner (Mrs Raulfs) to the other (Fishy Bite) by means of the cheque dated 27 March 2006, became partnership property upon and by virtue of the payment, that being the parties' intention as evidenced by the partnership agreement;

(c) the partnership property was required to be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement: Partnership Act 1892, s 20(1);

(d) neither partner had title to specific property owned by the partnership: Federal Commissioner of Taxation v Everett [1980] HCA 6; (1980) 143 CLR 440 at 446;

(e) the payment of $400,000 by Fishy Bite into the joint account of Mr Ajaka and Ms Ablett with Suncorp Metway Bank on 27 October 2006 was a clear misapplication of partnership property by one of the partners; and

(f) on 3 October 2008, the court, at the invitation of the partners, made orders that not only recognized the creation and subsequent dissolution of the partnership but also appointed a receiver whose function it became to take possession of the partnership property and to wind up the partnership business.

115 In those circumstances, the primary judge was correct in his conclusion that Fishy Bite did not come under any equitable obligation to pay or otherwise make good to Mrs Raulfs $400,000 or any other sum. Rather, Fishy Bite's obligation as a partner to account to its co-partner for misapplied partnership moneys indicated a need for Fishy Bite to make payment to the court-appointed receiver so that the proceeds of the payment might take their proper place among the assets to be applied in the winding up of the partnership business through the regime imposed by the court on 3 October 2008 at the partners' request.

116 In relation to the application for leave to cross-appeal and the cross-appeal itself, I agree with Campbell JA and have nothing to add.

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Decision last updated: 16 May 2012