KTC v David (No. 2)

These reasons should be read as a continuation of the Court’s judgment in KTC v David (No 1) [2019] NSWSC 281 (the “First Decision”). Terms defined in that judgment have the same meaning in these reasons. Because of the strike out motion, references in these reasons to “local defendants” means Mr Singh and XALT.

These reasons determine the jurisdiction motion. As I explained in the First Decision (at paragraph [3]), at the conclusion of the hearing of the three notices of motion before the Court, it was necessary to make provision for further brief written submissions on the jurisdiction motion.

It was common ground that Mr David’s Australian solicitors had accepted service of these proceedings on the basis that he would be entitled to challenge the Court’s jurisdiction. Although KTC submitted that there were several bases on which the Court had jurisdiction over Mr David, notwithstanding his current domicile in the United States, most of the argument turned on whether Mr David was a necessary or proper party to these proceedings insofar as they were properly brought against the local defendants.

This was because Mr David conceded that if the proceedings against the local defendants were properly brought, then he would be a necessary or proper party to the action against them. His primary submissions were that the proceedings were not properly brought because they were doomed to fail against the local defendants either because the claim of fiduciary duty and constructive trust against him and RAAL was doomed to fail, or because none of the heads of loss and damage or other claims were recoverable by KTC.

KTC has failed to establish jurisdiction over Mr David on all but one of the bases it relies on. However, Mr David’s jurisdiction motion fails because the Court is not satisfied to the requisite, high degree of certainty that the case against the local defendants is doomed to fail. It follows that the Court has jurisdiction over Mr David because he is a necessary or proper party to the proceedings which are properly brought against the local defendants.

By motion filed on 26 September 2018, Mr David sought orders including:

Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) Part 12 rule 12.11 includes:

The parties accepted that the Court would have jurisdiction over Mr David if the originating process could be served on him outside of Australia without leave under UCPR Part 11 rule 11.4, which required bringing the proceedings within the circumstances set out in Schedule 6 to the UCPR. The circumstances set out in that schedule contended for by KTC were:

The argument over whether Mr David was a necessary and proper party focused on the damages claimed against each of the defendants. The particulars of those damages were the same in relation to each defendant:

In his written submissions, Mr David conceded that on the assumption the proceedings against the other defendants (including the local defendants) were properly brought, he would be a necessary or proper party to the actions against them. However, he submitted that the proceedings against the other defendants could not be said to have been properly brought if they were doomed to fail: OZ-US Film Productions Pty Limited v Heath & Ors [2001] NSWSC 298 (“OZ-US”) applying Witted v Galbraith [1893] 1 QB 577 (“Witted”); Rosler v Hilbery [1925] 1Ch 250 (“Rosler”); and Tyne Improvement Commissioners v Armement and Anversois S/A (The Brabo) [1949] AC 326 (“Tyne”).

The submission that the proceedings were doomed to fail divided the particulars of damage set out in paragraph [9] above into two groups. Damage of the kind set out in sub-paragraphs (ii) and (iii) could not arise because, it was submitted, no relevant fiduciary duty had been pleaded or could be said to be owed by Mr David and RAAL to KTC in relation to the selection of the IBC Bid and sale of the Waste Facility (the “Alleged Sale Duty”).

The damages identified in sub-paragraphs (i), (iv) and (v) were said to be irrecoverable by KTC because they were really ECL’s losses. So understood, KTC’s claim had to fail by reference to the principle that reflective losses were irrecoverable, including in equity (the “Alleged Reflective Losses”).

The Court will first analyse the content of the “doomed to fail test” and then deal with each of Mr David’s objections in turn. Finally, the other bases for jurisdiction relied on by KTC will be considered.

Mr David relied on the decision of Master McLaughlin (as his Honour then was) in OZ-US. Like these proceedings, OZ-US was a case where fiduciary and Barnes v Addy claims were advanced.

The relevant parts of Master McLaughlin’s judgment are:

Master McLaughlin understood the “doomed to fail” test to be on all fours with the well-known test in General Steel Industries Inc v Commissioner for Railways [1964] HCA 69; (1964) 112 CLR 125 (“General Steel”):

In order to understand better the test to be applied in this case, it is helpful to review the three authorities relied on by Master McLaughlin. In the citations which follow I will emphasise what seem to me to be the critical passages.

In Witted, Lindley LJ said (at 579 – with Kay LJ expressing a view to like effect):

In Rosler, the English Court of Appeal was considering the case against a local defendant, Mr Hilbery. Pollock MR said (at 26O) “It seems to me that there is no substance in the claim against Mr Hilbery”. Warrington LJ was of the same opinion, saying (at 262) “That it is not shown by the plaintiffs that the action is properly brought against Mr Hilbery, the defendant in this country. The affidavit does not say so, and it shows no facts from which we can infer that there is any right of action in these plaintiffs at all against Mr Hilbery”. Sargeant LJ delivered a concurring opinion.

Tyne was a claim by the authority responsible for the River Tyne against the owners of a Belgian steamship which sank in the river and became an obstruction. The commissioners used their statutory powers to salvage such portions of the wreck and the cargo as were salvageable and to disburse the rest. The commissioners claimed damages in relation to the expenses incurred by them in relation to the wreck and the cargo from the Belgian shipowners, as first defendants, and against those to whom the ship’s cargo had been consigned, being the Minister of Supply and a British company, the British Islands Steel Corporation Limited.

In considering the claim against the Belgian defendant, Lord Porter said (at 338-343):

Lord Simons, after acknowledging that the relevant facts could not be regarded as seriously in dispute, went on to say (at 345-350):

Lord du Parcq said (at 354-356):

Lord Normand (at 357) said:

Although Lord MacDermott adopted a slightly different approach, on the facts of the case before him he ultimately concluded (at 360) that “I accordingly reach the conclusion that in law, and assuming the defence of immunity to be taken, the plaintiffs would not succeed against either of these defendants”.

In my respectful opinion, a proper understanding of the authorities to which I have referred by reference to the emphasised passages supports the conclusion that the test which the Court must apply in a case such as this is an even higher one than the General Steel test. In paragraph [17] of the First Decision I referred to the decision of the New South Wales Court of Appeal in Shaw v State of NSW [2012] NSWCA 102 (“Shaw”) which explained that test as inviting the question whether the relevant claims are so obviously untenable or groundless that there is a “high degree of certainty” that they will fail if allowed to go to trial. It seems to me that the authorities which stand behind the decision in OZ-US to which I have referred go further than “a high degree” and require a position of certainty on the part of the Court that the case against the local defendants must fail.

If the analysis in the preceding paragraph is wrong, perhaps creating a distinction without a difference, then the Court must apply the test laid down in Shaw. I will now set out the reasons why the Court is not satisfied to either the standard of “a high degree of certainty” or, if applicable, “certainty” that KTC’s claim against the local defendants will fail if allowed to go to trial.

Before finally coming to Mr David’s arguments it is necessary to set out some of the paragraphs of the ASOC to demonstrate how Mr David (and RAAL’s) fiduciary obligation to KTC is said to arise:

The essence of the case against Mr Singh and XALT is that they are accessorily liable for the breaches of fiduciary duty by David and RAAL. So much appears from these paragraphs at the ASOC:

Mr David’s argument was that the case against Singh and XALT was doomed to fail because the allegations of breach of fiduciary duty against him and RAAL were doomed to fail.

Mr David made a detailed attack on the ASOC. However, it is sufficient for the Court to concentrate on what he submitted was the fundamental defect in KTC’s case on this point. That defect was said to be that to the extent there was any fiduciary duty owed by him and RAAL to KTC, it was that of a fiduciary joint venturer, being owed as a co-investor from the inception of their relationship in mid-2008. Only later did KTC act as a purchaser. The pleaded scope of any fiduciary duty was one owed to KTC as a co-investor and not a duty to KTC qua purchaser of ECL’s shareholding in GRL with its interest in the Waste Facility.

Similarly, insofar as RAAL was said to be a constructive trustee of KTC’s shares in ECL, its fiduciary duties were those of a bare trustee with an obligation to restore the shares or rectify the register. No greater duty was pleaded or could be identified.

Mr David’s submissions on both of these points were summarised in the proposition that KTC had approach the matter “backward”. This point was encapsulated in Mr David’s supplementary submissions:

It was submitted that a further difficulty was that because any interest of KTC qua purchaser was not within the scope of the duty allegedly owed by Mr David and RAAL, KTC was not entitled to compensation of the kind which it sought. Rather, any liability Mr David had was to account or to pay equitable compensation in order to restore the fund or property held on trust for the subject of the fiduciary duty to the state it would have been in had there been no breach: Agricultural Land Management Limited v Jackson (No 2) [2014] WASC 102; (2014) 48 WAR 1 per Edelman J (then sitting as a judge of the Supreme Court of Western Australia) at [341]-[343].

KTC’s response was, in essence, that Mr David had misunderstood KTC’s case. That case had as its foundation precisely the duties owed between Mr David and RAAL, on the one hand, and KTC, on the other, as shareholders in ECL. Ms Loughnan QC put the submission this way (T117:16-40):

KTC submitted that its case was of the kind identified by Young JA in Crawley v Short [2009] NSWCA 410; (2009) 262 ALR 654 (with whom, on this point, Allsop P and Macfarlan JA agreed):

KTC also submitted that the reasoning sought to be applied by Mr David was exactly that which was criticised by the High Court in Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43; (2018) 92 ALJR 918 (per Kiefel CJ, Keane and Edelman JJ) (“Foresters”):

KTC emphasised this passage in the judgment of the plurality:

Weighing the parties’ respective submissions, I am unable to conclude that Mr David’s analysis is so obviously correct and KTC’s analysis is so obviously untenable that KTC’s case in relation to the alleged sale duty is doomed to fail (either on the General Steel test or the more stringent test of certainty which, in my respectful opinion, is the correct one in a case of this kind). On the contrary, this is a case which raises substantial questions of fact and difficult questions of law of the kind referred to by Lord Porter in Tyne (see paragraph [21] above) where, for that reason, the Court cannot accept Mr David’s argument that KTC’s accessorial case against the local defendants is doomed to fail because the case against Mr David is doomed to fail. To recall the language of the plurality in Foresters (at [16]), this is a case in which “all of the circumstances must be considered, including the nature of the conduct”. That will be done at trial. The result is that the Court concludes that in relation to alleged sale liability Mr David is a necessary or proper party to the proceedings such that the Court has jurisdiction over him.

Mr David made a strong case that the particularised losses could not be recovered at the suit of KTC because they were in fact ECL’s losses. This is an application of the reflective loss principle, which was considered by Campbell JA (with whom Spigelman CJ and Allsop P agreed) in Oates v Consolidated Capital Services Ltd [2009] NSWCA 183; (2009) 233 FLR 283 (“Oates”):

In response, KTC submitted that, again, Mr David’s submissions in relation to reflective loss misapprehended the causes of action that KTC sought to make out against Mr David in the ASOC. It was submitted that those causes of action stem from what were described as the “fact based fiduciary duties owed to KTC by Mr David and RAAL” as a shareholder in ECL. The breach of that duty, it was submitted, gave rise to damages shareholder to shareholder distinct from any losses suffered by ECL. KTC referred to the third proposition extracted in paragraph [211] of the judgment of Campbell JA set out in the preceding paragraph.

Despite the initial attraction of the arguments put on behalf of Mr David, in the context of the present application it seems to me that, with respect, they should be approached with caution. That caution derives from this observation of Campbell JA in Oates:

The Court accepts that at the final hearing there will have to be careful scrutiny of the damages claimed by KTC qua shareholder to ensure that they do not fall foul of the reflective loss principle. However, the “close attention” referred to be Campbell JA is a reminder that the principle of reflective loss will often raise mixed questions of fact and law which a court would rarely, if ever, be able to adjudicate upon in what is, in effect, a summary judgment application.

I am unable to conclude on the basis of the ASOC that it will be impossible for KTC to prove losses qua shareholder/joint venturer which are not simply reflective of ECL’s losses. Contrary to the position adopted by Mr David, it seems to me that the possibility of such recovery is stronger (rather than weaker) when it is understood that ECL was the vehicle for the conduct of the joint venture. This is because the legal relationship between the parties is arguably juridically different from, and more complex than, the relationship between two parties that happen to be shareholders in a company. It is that arguable juridical difference which leaves open the prospect of KTC being entitled to damages against the local defendants and Mr David which are not simply reflective of ECL’s losses.

For these reasons, Mr David has failed to satisfy the Court to the high standard (on either basis I have identified) that KTC’s case in relation to the alleged reflective losses is doomed to fail.

Because of the conclusions I have reached above, I will deal only briefly with the other grounds for jurisdiction asserted by KTC, all of which fail.

This basis relies on item (l) in Schedule 6 which refers to “when a claim is made for … the remedy of constructive trust and the alleged liability of the person to be served arises out of an act or omission that was done or occurred wholly or partly in Australia”.

It was submitted for Mr David that there was no evidence of any act or omission in Australia.

In response, Ms Loughnan QC submitted that many of the factual matters that formed the basis of the claim against Mr David set out in paragraph 60-90 of the ASOC, being acts inconsistent with his alleged fiduciary duty, occurred in Australia.

The facts proven before me do not support Ms Loughnan QC’s submission. What the evidence established was that Mr David was in Sydney on 27 September 2010 when he swore an affidavit and that he had been in Australia for meetings with Mr Mavro and Mr Bullock in November and December 2009. Otherwise, it was submitted for KTC that insofar as Mr David gave G+T instructions, irrespective of where Mr David was physically located at the time, those instructions (and therefore Mr David’s conduct) took place where the instructions were received, namely by G+T in Sydney.

I do not think any of those matters is sufficient to engage item (l) of Schedule 6 because I do not accept it can properly be said that Mr David’s alleged liability pursuant to the constructive trust can be said to “arise out of” any of those matters that were said to have been done in Australia. It is clear from the ASOC, and the way in which KTC has sought to defend its pleading generally, that any liability in Mr David arises out of the dilution of KTC’s shareholding in ECL. That was done at a board meeting in the UAE. All of the matters of which KTC complains flow from that event.

KTC next relied on item (n) in Schedule 6 being “when the claim is founded on a cause of action arising in Australia”. KTC submitted that “a fundamental part” of its claims is the advice alleged to have been given by Mr Bullock to Mr David in December 2009 at a meeting in Sydney.

Mr David drew attention to the treatment of this item in Nygh’s Conflict of Laws in Australia, 9th edn, Lexis Nexis Butterworth, Australia 2014 at 3.53: “For a cause of action to arise in the jurisdiction it is not necessary that every element arose locally; rather the test is to ask: “Where in substance does the cause of action arise?” Reference was also made to the decision of French J (as his Honour then was) in Traxon Industries Pty Ltd ACN 009 318 987 v Emerson Electric Co (2006) 230 ALR 297 at [62], where his Honour observed that the expression “cause of action” did “not refer to all the elements of the cause of action. It refers rather to the act on the part of the defendant which gave the plaintiff his cause for complaint”.

I do not agree that, even if the advice allegedly given by Mr Bullock was given by him in Sydney, the advice “in substance” gave rise to the causes of action pleaded against Mr David in the ASOC. That is because the advice may or may not have been followed. It was the acting on the alleged advice which “gave [KTC its] cause for complaint”. That occurred in the UAE at the board meeting which authorised the dilution of KTC’s shareholding in ECL. This basis for jurisdiction is not made out.

Finally, KTC relied on item (s) in Schedule 6 being “when the claim, so far as it concerns the person to be served, falls partly within one or more of the above paragraphs and, as to the residue, within one or more of the others of the above paragraphs”. KTC submitted that its claim, insofar as it concerns Mr David, fell partly within one or more of paragraphs (h)(i), (l) and (n) of Schedule 6 while the residue of the claim falls within one or more of the other paragraphs of Schedule 6, namely paragraph (g).

Reliance on item (s) in this way does not assist KTC. The Court has found that jurisdiction under items (l) and (n) of Schedule 6 has not been made out. Furthermore, Ms Loughnan QC properly recognised that at the time of purported service on Mr David’s solicitors, Mr David was not “domiciled or ordinarily or habitually resident in Australia” for the purposes of item (g) of Schedule 6.

The Court has jurisdiction over Mr David because he is a necessary or proper party to the proceedings which are properly brought against Mr Singh and XALT within the meaning of item (h)(i) of Schedule 6. The jurisdiction motion will be dismissed.

The Court will give the parties an opportunity to bring in short minutes of order to reflect these reasons and the First Decision.