UTi (Aust) Pty Ltd v Sheehan & Anor

1. [1]

   UTi (Aust) Pty Ltd (“UTi”) manages supply chain logistics. From 1995 UTi made a series of profit sharing agreements with Mr Brian Sheehan, a customs broker and freight-forwarding consultant. On 21 March 2016, Uti terminated all its existing agreements with Mr Sheehan, who was declared bankrupt on 17 June 2016.

2. [2]

   The plaintiff, UTi alleges that Mr Sheehan, the first defendant, defrauded it between October 2015 and February 2016. UTi claims that Mr Sheehan developed a fraudulent scheme whereby: (1) he presented false invoices to UTi in the names of various logistics carriers, totalling some $2,911,411.76; (2) he obtained in his possession cheques corresponding to these invoices from UTi; (3) he deposited the cheques into the bank account of Scarlet Amber Pty Ltd (“Scarlet Amber”), the second defendant; and (4) he obtained the indirect benefit of these payments, as he was at all times a director, secretary and 50% shareholder of Scarlet Amber.

3. [3]

   UTi seeks relief against both Mr Sheehan and Scarlet Amber. But Scarlet Amber went into liquidation on 10 June 2016. The proceedings against Scarlet Amber were stayed by operation of law upon its liquidation under Corporations Act 2001 (Cth) s 471B. Only UTi’s action against Mr Sheehan continues, and it does so upon the terms described later in these reasons.

4. [4]

   UTi seeks four forms of relief: (1) a declaration that Mr Sheehan holds the cheque proceeds of $2,911,411.76 on constructive trust for UTi, or in the alternative, equitable compensation to the extent that Mr Sheehan no longer holds those funds; (2) damages for breach of contract in the sum of $2,911,411.76; (3) damages for misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law in the sum of $2,911,411.76; and, (4) damages for $2,911,411.76 for the tort of deceit.

5. [5]

   UTi has an additional claim in contract unrelated to Mr Sheehan’s alleged fraud. It also seeks $134,724.52 for amounts Mr Sheehan allegedly owes to it for services it provided to the joint venture and which remain unpaid in breach of the express or implied terms of their mutual arrangements.

Procedural history

1. [6]

   The Court heard these proceedings on 14 and 15 November 2016. Mr Withers of counsel appeared for UTi. As Mr Sheehan did not appear, Uti was required to prove that he had been served with proper notice of the hearing. The detailed procedural history shows that he was.

2. [7]

   UTi commenced these proceedings by Summons on 2 March 2016. Black J made freezing orders that day against Mr Sheehan and Scarlet Amber. Those freezing orders have been varied several times since then.

3. [8]

   UTi filed a statement of claim on 11 April 2016. Mr Sheehan and Scarlet Amber filed their defences on 19 May 2016. But soon after, on 15 June 2016, the defendants’ solicitor on the record ceased to act.

4. [9]

   On 13 July, the Registrar in Equity set the proceedings down for hearing on 14 and 15 November 2016. At pre-trial directions held on 21 September 2016, the defendants again did not appear. But the solicitor for Mr Sheehan’s Trustee in Bankruptcy, Mr Mattiussi, was granted leave to appear, and informed the Court that Mr Sheehan had by then been declared bankrupt.

5. [10]

   On 9 November 2016, the Federal Court of Australia granted leave to UTi under s 58(3) of the Bankruptcy Act 1966 (Cth) to continue and take fresh steps in these proceedings against Mr Sheehan. But that leave was subject to a condition that until Mr Sheehan were to be discharged from bankruptcy, UTi must take no step to enforce any judgment or order of this Court without the further leave of the Federal Court, other than to enforce the benefit of any trust or equitable interest in property held by Mr Sheehan that this Court declares.

6. [11]

   Steps were taken to deal with the non-appearance Mr Sheehan at the commencement of the hearing on 14 November 2016. Email correspondence dated 11 November 2016 was tendered that had taken place between Uti’s solicitor, Mr Lynch, and Mr Sheehan’s wife, Carol Sheehan, initiated from her email address (“the Bigpond email address”). Mrs Sheehan stated in this correspondence that Mr Sheehan was unable to attend Court on 14 November because he was “very unwell” and she attached a medical certificate in support of her contention. I accept that Mr Lynch had used the Bigpond email address to communicate with Mr Sheehan once he was no longer legally represented.

7. [12]

   Upon Mr Sheehan’s non-appearance on 14 November 2016, the proceedings were ordered to be stood over until 10am on the next day, 15 November 2016, to afford him a final opportunity to attend and contest the proceedings or apply for an adjournment of the hearing. The Court directed UTi on 14 November to send a copy of the orders of that day to Mr Sheehan by email to the Bigpond email address.

8. [13]

   Mr Sheehan did not appear on 15 November 2016. But Mrs Sheehan had emailed a communication on 14 November 2016 from her Bigpond email address:

9. [14]

   The Court is satisfied that Mr Sheehan has been made aware of the proceedings and the hearing days on 14 and 15 November. No application for an adjournment was made on Mr Sheehan’s behalf by anyone appearing at Court. The Court cannot adjourn proceedings based on medical certificates only advanced by email to the Court. The proper course for a party seeking an adjournment is to arrange for someone to appear and argue for the adjournment based on admissible evidence. Unless this standard of proof were maintained, the conduct of court proceedings could be manipulated by a succession of untested medical certificates. UTi had no opportunity to test the medical evidence Mrs Sheehan sought to put before the Court. So the Court proceeded to hear the matter on 15 November.

Supply Chains, UTi and Brian Sheehan – 1995 to 2016

1. [15]

   Except where it is clear that only submissions or allegations are being recorded, what follows in this and subsequent sections of these reasons is a narrative of the Court’s findings based upon the evidence UTi read and tendered at the hearing on 15 November 2016. This narrative of findings forms the basis for the Court’s conclusions and grant of relief.

2. [16]

   Between 1995 and 2016, UTI and Mr Sheehan regulated their relations through a series of written agreements. On 5 September 1995, UTi (then named Freight Management International Pty Ltd, trading as “Union Transport”) appointed Mr Sheehan as its customs agent and tariff consultant. Mr Sheehan accepted that appointment in writing on 13 September 1995, when he and Union Transport (then trading as Bricar Customs and Shipping Agencies (“Bricar”)) entered an agreement, described in the pleadings as the “Bricar Agreement”.

3. [17]

   On 15 January 1996, the parties terminated the Bricar Agreement and entered into a new profit sharing agreement (“the January 1996 Agreement”) pursuant to which Union Transport was entitled to 20% of the revenue generated by Mr Sheehan, calculated twice monthly.

4. [18]

   Mr Warren Elsworth, UTi’s Vice President-Global Freight Forwarding Projects and Finance Australasia proves, in his affidavit evidence, the Bricar and January 1996 Agreements, and proves Mr Sheehan’s initial letter of appointment. His evidence establishes the later agreements made between the parties right up to the events the subject of these proceedings.

5. [19]

   UTi claims that the January 1996 Agreement was subsequently varied by the conduct of the parties. I accept Mr Elsworth’s evidence that the parties entered into three further agreements to regulate their mutual affairs, respectively on 29 September 2008, 10 January 2011 and 1 June 2012. He describes these agreements in terms adopted in these reasons, as the “Profit Share Agreement”, the “Profit Share Agreement Extension” and the “Further Profit Share Agreement Extension”.

6. [20]

   The Profit Share Agreement is constituted by a letter dated 29 September 2008 from UTi to Mr Sheehan and records then recent discussions:

7. [21]

   A further letter to Mr Sheehan from UTi dated 10 January 2011 contains the relevant terms of the Profit Share Agreement Extension:

8. [22]

   A final letter from UTi to Mr Sheehan dated 1 June 2012 recording the Further Profit Share Agreement Extension is in almost identical terms to the Profit Share Agreement Extension, save that 31 May 2013 is nominated as the review date and 1 May 2013 as the date upon which the parties would meet to discuss any amendments.

9. [23]

   UTi pleads that from 1 November 2011 it agreed on terms with Mr Sheehan (“the 2011 Agreement”):

10. [24]

    But oral submissions revealed that the date 1 November 2011 was not significant and that references to the 1 November 2011 Agreement should be read as indistinguishable from the Profit Share Agreement the parties made in September 2008.

11. [25]

    Mr Elsworth’s evidence was that pleaded terms (a) and (b) above were aspects of the joint venture between the parties arising from the January 1996 Agreement. Term (d) appears in Appendix A to the letter of 29 September 2008 extracted above.

12. [26]

    In the defence filed in these proceedings before his solicitors ceased to act, Mr Sheehan admitted that, at least by 1 January 2014, terms (a), (b) and (d) formed part of his agreement with UTi. But Mr Sheehan denied that pleaded terms (c) and (e) were part of his agreement with UTi, pleading instead different terms:

13. [27]

    Nothing ultimately turns on any differences between the pleaded form of terms (c) and (e) and Mr Sheehan’s formulation of these terms. But the terms Mr Sheehan pleads appear to align more precisely with the terms of the 29 September 2008 letter.

14. [28]

    On 1 January 2014, UTi implemented a new global freight forwarding operating system (“1 View”). Under this operating system, it was not possible for UTi to calculate profit share pursuant to its existing agreement with Mr Sheehan. Mr Elsworth explained in his affidavit why this was so:

15. [29]

    To continue working together, UTi and Mr Sheehan needed to renegotiate their existing arrangements. They commenced contractual negotiations with respect to: (1) a new process for determining profit share; (2) a new interest rate to allow for Mr Sheehan’s use of UTi’s working capital; and (3) a new written agreement governing the overall relationship between Mr Sheehan and UTi.

16. [30]

    UTi pleads that between 1 January 2014 and 21 March 2016, the parties by their conduct varied their pre-existing agreement to add terms moulded around UTi’s new 1 View global freight forwarding operating system:

17. [31]

    Mr Sheehan admitted in his defence that the above terms were agreed between the parties with the exception of term (i), which is not of present relevance.

18. [32]

    A slight discrepancy exists between the above post-January 2014 terms that UTi pleads and Mr Elsworth’s evidence. In respect of pleaded terms (e), Mr Elsworth states, and I accept, that it was Mr Sheehan, not a UTi employee as is pleaded, who would scan copies of the invoice and cheque into the UTi document management system. Mr Chris Edwards, the Victorian State Forwarding Manager of UTi, supports that as being the procedure:

19. [33]

    Given what ultimately occurred and the findings below as to the nature of Mr Sheehan’s fraud, nothing turns on whether it was Mr Sheehan or a UTi employee who entered copies of the invoices and cheques into the system. The important issue is what Mr Sheehan did with UTi cheques when they were physically in his possession and before they were banked into a Commonwealth Bank of Australia (CBA) bank account in the name of Scarlet Amber.

The Claims in Equity

1. [34]

   This judgment makes findings of fraudulent conduct against Mr Sheehan, which may, were it proved to the requisite standard in criminal proceedings, amount to a crime. And this judgment does so in his absence. These reasons have already dealt with the notice given to Mr Sheehan both of this proceeding and this hearing. Whilst the applicable standard of proof is the balance of probabilities, the Court is mindful that in making any findings of fraud against Mr Sheehan it must be reasonably satisfied that such a serious allegation is made out: Briginshaw v Briginshaw (1938) 60 CLR 336.

2. [35]

   UTi alleges Mr Sheehan constructed a scheme to defraud it between 19 October 2015 and 17 February 2016. With the minor variations detailed below, the evidence supports UTi’s contention that Mr Sheehan practised the following fraudulent scheme upon UTi between these dates. Mr Sheehan prepared 299 false invoices totalling $2,911,411.76 and addressed to UTi. The false invoices were issued in the name of third party carriers, who had not actually supplied any of the services to UTi described in the invoices. In accordance with the functions that UTi had generally entrusted to him once UTi’s new 1View global freight forwarding operating system commenced, he then drew up UTi cheques in payment of these invoices, using a UTi chequebook and inserting the figure corresponding to the invoices in the bottom right-hand corner of the cheques. Mr Sheehan then presented the false invoices together with the draft cheques to Mr Chris Edwards at UTi. On the faith of these documents Mr Edwards, who was the joint signatory on UTi’s Citibank cheque account with Mr Sheehan, approved and signed the cheques. Mr Sheehan subsequently deposited the cheques into a CBA bank account held by Scarlet Amber. But by the time they were so deposited the cheques had been readdressed to the payee (and fictional company) “BCR Freight P/L”, not the original payee identified in the invoices presented to Mr Edwards.

3. [36]

   UTi’s pleadings allege that Mr Sheehan amended the payee on the cheques from the particular company named in the false invoice to the entity “BCR Freight P/L”. But Mr Withers submitted on behalf of UTi that this aspect of the pleading was not strictly correct, as the cheques in fact contained no payee when signed by Mr Edwards. Mr Edwards’ evidence well supported Mr Withers’ submission, revising UTi’s case:

4. [37]

   Mr Elsworth’s evidence also supported Mr Withers’ submission that Mr Sheehan himself completed the details on the cheques:

5. [38]

   Mr Withers submitted at one point that, as between himself and Mr Edwards, Mr Sheehan was the first person to sign the cheques. But the evidence is to the contrary: Mr Edwards’ evidence, which is likely to be the most reliable account on this issue, supports the inference that he signed first.

6. [39]

   UTi’s 2015-2016 payment procedures were fraught with the risk of fraud. Mr Withers submitted, and I accept, that the correct construction of the evidence is, that the imprudent UTi practice of allowing Mr Edwards to sign cheques that were blank but for a date and an amount in numerals, had evolved over many years since 1996. The evidence of such a long business relationship between Mr Sheehan and UTi and of UTi’s witnesses supports the inference, that the Court draws, that by late 2016 there was a well-developed a relationship of trust between Mr Sheehan and others acting for UTi. Before then that relationship had not been questioned, thereby leading to the parties being content to transact their business under less than fully prudential financial practices, especially when they were temporarily negotiating a new profit-sharing agreement.

7. [40]

   Copies of all the 299 invoices, and the 299 completed cheques sent from Mr Sheehan to UTi, were in evidence in the form of a substantial annexure to Mr Edward’s affidavit. UTi also tendered copies of the cheques deposited by Mr Sheehan (subpoenaed by UTi from the CBA) together with a table produced by CBA indicating the account into which each cheque was deposited. The table shows that all of the cheques except one were deposited into an account in the name of Scarlet Amber Pty Ltd. The payee of the remaining cheque designates the payee as “Melbourne OPC to advise final destination”.

8. [41]

   Mr Sheehan identified in his affidavit of 11 April 2016 that the CBA account into which the cheques were paid was an account “held in the name of Scarlet Amber”. Mr Sheehan was obliged to file this affidavit in these proceedings pursuant to an order made by Black J. As a result the Court will grant Mr Sheehan a certificate under Evidence Act 1995 s 128A in respect of the contents of that affidavit: the Court is satisfied that the contents of that affidavit may tend to incriminate Mr Sheehan.

9. [42]

   UTi tendered two “Company & Business Name” searches by SAI Global of the names “BCR Freight Pty Ltd” and “BCR Freight Pty Limited”, both of which record “No matching names found”. I infer from this material that that no company of that name exists.

10. [43]

    I am satisfied on all the evidence that Mr Sheehan prepared the 299 false invoices in the names of third party carriers, and that he falsely represented to UTi that the cheques he presented to UTi for its approval for payment with the invoices were for genuine payments to the third party carriers nominated in each of the invoices. There is no other likely explanation for the invoices coming into existence other than to facilitate the diversion of funds from UTi to Scarlet Amber for Mr Sheehan’s benefit.

11. [44]

    The Court has reviewed sufficient of the invoices and related cheques to be satisfied the pattern of invoice/cheque/payment described above is replicated without variation in the materials concerning all 299 cheques. In addition to that review, for the purposes of illustration of the Court’s inference that Mr Sheehan engaged in widespread fraud on UTi, the Court has selected for more detailed explanation a sample invoice for each of the five different corporate third party carriers named on the invoices. I accept all the evidence of the witnesses from these third party carriers and from the CBA.

12. [45]

    In each of the five examples, the UTi document management system contains a cheque drawn up for payment of the amount stated in the invoice to the company named in the invoice. The CBA records contain a cheque bearing the same cheque number for payment of an identical sum, however the payee on the cheque deposited into the CBA account is named as “BCR Freight P/L”. There are some slight variations in the overall pattern, such as minor changes to the date of the cheque but nothing of substance turns on these differences. The Court is satisfied that these examples are representative of all the 299 cheques the subject of these proceedings.

13. [46]

    The first example is an invoice dated 19 January 2016 in the name of “Hanjin Shipping Pty Ltd” in Australia for the sum of $9,820.38. Mr Young Jung, the Financial Controller of Hanjin Shipping Pty Ltd (Hanjin), states in his affidavit, and I accept, that he has reviewed the Hanjin’s invoice records and that there is no record of that invoice, and that the invoice (among others in the company’s name presented by Mr Sheehan) is not a genuine invoice of Hanjin. The genuine Hanjin invoices look quite different. The invoice corresponds with a copy cheque in UTi’s document management system bearing the number “676877” dated 19 January 2016 for payment of $9,820.38 to “Hanjin Shipping” that is signed by Mr Edwards and Mr Sheehan. However, in the material subpoenaed from the CBA, cheque number “676877” has been drawn for the payment of $9,820.38 to the payee “BCR Freight P/L”. The cheque in the material from the CBA is dated 17 January 2016, rather than 19 January 2016 for the UTi copy. While the UTi and CBA cheques are made out for exactly the same amount, there are subtle differences in their visual presentation – for example, in the cheque dated 19 January, the letter “D” in the word “Dollars” appears underneath the letters “U” and “N” in the word “HUNDRED”, whereas “D” is directly underneath “H” in the cheque dated 17 January.

14. [47]

    The second example is an invoice dated 27 January 2016 in the name of “Marfret Shipping Agencies Pty Limited” for $9,815.51. Mr Craig McElvaney, Director of Seaway Agencies Pty Ltd (Seaway), the Australian Agent for Marfret Compagnie Maritime, states that there is no company registered in the name represented on the invoice, and that the ABN provided by the invoice belongs to an agency which ceased representing Marfret Compagnie Maritime in 2005. His evidence is that the invoice records of Seaway contain no record of this invoice. The invoice corresponds with a cheque in the UTi document management system bearing the number “677512” dated 27 January 2016 drawn up for payment to “Marfet Shipping”. However, in the CBA records, the cheque numbered “677512” of the same date has been drawn up for payment to “BCR Freight P/L”. As with the earlier example, there also are slight variations in the visual presentation of the CBA and UTi copies of the cheques related to this invoice.

15. [48]

    The third example is an invoice dated 22 December 2015 in the name of “ABBA Logistics Pty Ltd” for the sum of $9,518.46. Ms Emily Shih, an Office Manager and Director of ABBA Logistics Pty Ltd (ABBA), states that ABBA has no record of the invoice. The invoice corresponds with a cheque bearing the number “676968” drawn up for payment to “ABBA Logistics P/L”. Again, the cheque numbered “676968” in the CBA records bears the same date and sum, but names “BCR Freight P/L” as the payee.

16. [49]

    The fourth example is an invoice dated 11 January 2016 in the name of “BCR Australia Pty Ltd” for the sum of $9,518.47. Mr David Katte, Director and Chief Executive Officer of BCR Australia Pty Ltd (BCR), states in his affidavit that the invoice records of BCR contain no record of this invoice. He identifies other odd features of the invoice that are inconsistent with it being a genuine BCR invoice:

17. [50]

    The invoice corresponds with a cheque numbered “676846” in the UTi document management system dated 11 January 2016 drawn up for payment to “BCR Australia P/L”. But, again replicating the pattern of the other cheques examined, in the CBA records, the cheque numbered “676846” names “BCR Freight P/L” as the payee.

18. [51]

    The final example is an invoice dated 3 February 2016 in the name of “Global Freight Services Pty Ltd” for $9,518.43. The evidence of Mr Paul Gardiner, who has been a director of Global Freight Services Pty Ltd (Global) since 1992, is that the company has no record of the invoice and that it is not genuine. The corresponding copy cheque in UTi’s document management system is numbered “677554” and names “Global Freight Services” as the payee. However, in the CBA records, the cheque bearing that number is addressed to “BCR Freight P/L”.

19. [52]

    The above examples, and indeed the rest of the evidence, do not reveal the precise mechanics by which the two versions of the same cheque number were generated, so as to be addressed to different payees. But a number of important facts, established on the evidence and common to all the cheques, indicate fraud here. These are that in each case: the invoice presented by Mr Sheehan to UTi recorded a supply of services or other business transaction that never took place; the payee on the cheque banked into Scarlet Amber’s account did not correspond with the payee on the invoice Mr Sheehan presented to Mr Edwards at UTi; at all times from the time Mr Edwards signed them, Mr Sheehan had control of the cheques in question; and the funds were received into an account in the name of Scarlet Amber from which Mr Sheehan benefited.

20. [53]

    On the basis of these findings, I am satisfied that UTi has established that all the funds paid out by UTi on the basis of the 299 cheques were so paid as a result of Mr Sheehan’s fraudulent misrepresentations. In Derry v Peek (1889) 14 App Cas 337, Lord Herschell stated (at 374) that fraud will be proved where it is shown that “a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false”.

21. [54]

    This is a case of actual knowledge, not mere lack of belief in the truth or recklessness. When Mr Sheehan presented each of the invoices to Mr Edwards for signing he thereby falsely represented that each invoice was genuine and that the cheques would be paid onto the third party carriers for services they had genuinely provided. The signing ceremony with Mr Edwards could not have meant anything else. The Court infers that Mr Sheehan actually knew the invoices were false and probably prepared them himself: the invoiced services never having been provided by the third party carriers and the invoices never having been sourced from them, it is not credible that Mr Sheehan could have somehow made a mistake or was careless in dealing with these entities or their agents some 299 times in the space of five months. The evidence does not identify any person other than Mr Sheehan was involved in the preparation of or the handling of the cheques before or after their signature by Mr Edwards. Indeed no plausible hypothesis emerges from the material before the Court to suggest that any persons other than Mr Sheehan could have been involved, either in preparing these invoices, or in handling these cheques so as to be responsible for their alteration. Mr Sheehan was in a unique position of peculiar trust with UTi because of his long association with it to enable him to handle these cheques and invoices this way.

22. [55]

    And Mr Sheehan took the benefit of monies from Scarlet Amber during the period that funds were being paid into it pursuant to these false invoices. Mr Sheehan produced bank statements (pursuant to a notice to produce) revealing payments from Scarlet Amber into an account held in the joint names of himself and Mrs Sheehan during the period from 7 December 2014 to 8 March 2016. Those payments are said to total $85,905.62. The first payment from Scarlet Amber recorded in the statement is dated 11 December 2014, some months before the relevant period.

23. [56]

    These payments at least confirm that Mr Sheehan controlled Scarlet Amber. But UTi does not make in these proceedings a tracing or other claim for relief for monies paid from Scarlet Amber to Mr and Mrs Sheehan. So it has not been necessary to trace UTi’s funds through Scarlet Amber or to separate them in Scarlet Amber’s hands from Scarlet Amber’s own funds or from funds claimed by others.

24. [57]

    Upon these findings UTi seeks a declaration that any funds held by Mr Sheehan that were obtained pursuant to the 299 cheques (or any property acquired with those funds) are impressed with an institutional constructive trust that arose at the time that the funds were fraudulently obtained, with the consequence that the funds (or property) will then be trust property in Mr Sheehan’s bankruptcy held for UTi’s benefit.

25. [58]

    In support of the relief sought, UTi relies on the decision of the High Court in Black v S Freedman & Co (1910) 12 CLR 105. In that case the appellant, Mr Black, paid sums of money stolen from his employers into his personal bank account. He subsequently withdrew monies from his bank account and paid them into an account in his wife’s name. The question before the High Court was whether the employers could recover against Mr Black’s wife. In this context O’Connor J stated (at 110):

26. [59]

    This statement of principle has recently been restated by the Court of Appeal in Sze Tu v Lowe [2014] NSWCA 462 at [141] (Gleeson JA, Meagher and Barrett JJA agreeing). Gleeson JA continued at [147]-[150]:

27. [60]

    The question in Sze Tu v Lowe was whether the trial judge erred in failing to consider whether proprietary relief was appropriate, on the basis that the facts of the case (the purchase of real properties using misapplied partnership funds) could only give rise to a remedial (as opposed to an institutional) constructive trust (at [156]). The appellants in that case placed reliance on a statement of the Full Federal Court in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 at [255] as suggesting that the principle of appropriateness has application to a claim based on Black v S Freedman & Co in respect of assets in the hands of a volunteer.

28. [61]

    The Court of Appeal held in Sze Tu v Lowe that the trial judge did not err in concluding that the claim based on Black v S Freedman & Co “gave rise to an institutional constructive trust over the partnership moneys or their traceable product” (at [162]). Gleeson JA (at [157], [238]) emphasised the remarks of Allsop P (Campbell JA and Handley AJA agreeing) in Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 at [154]-[155] to the effect that “the trust rests on the existence of property rights and in that sense is not purely remedial”.

29. [62]

    In coming to this conclusion, Gleeson JA acknowledged at [155] that it has been suggested in the United Kingdom that it is not strictly correct to speak of the fraudster as a “trustee”, even though the fraudster may be “liable to account as if they were” (Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 per Lord Millett). I note in this context that Spigelman CJ in Robb Evans v European Bank Ltd (2004) 61 NSWLR 75; [2004] NSWCA 82 at [115]-[116] also questioned whether the trust that arises upon receipt of stolen funds by an active participant in the theft is properly characterised as a constructive trust, as opposed to a presumed or resulting trust.

30. [63]

    In the present case, it is unnecessary for the Court to resolve these analytical debates. In accordance with the principles stated in Black v S Freedman & Co and restated in Sze Tu v Lowe, I am satisfied that Mr Sheehan dishonestly diverted to himself the funds the subject of the 299 cheques and that the circumstances of the present case gave rise from the date the funds were fraudulently obtained to an institutional constructive trust in favour of UTi over the cheque proceeds that thereby came into and remain in Mr Sheehan’s hands.

31. [64]

    The Court will make declarations accordingly. The declarations will suffice for the present instead of judgments, as UTi has no intention of enforcing judgments in view of Mr Sheehan’s bankruptcy. Mr Sheehan was the actor who received the various cheques into his hands after Mr Edwards signed them. So it is apt to frame the declarations and orders against Mr Sheehan on the basis that the funds in question were received by Mr Sheehan and were then paid at his direction to Scarlet Amber.

32. [65]

    The Court has not analysed the extent to which the sum of $2,911,411.76 that Mr Sheehan obtained from UTi has since been dissipated. That is a larger and different inquiry. The Court has neither been provided with the evidence that would show what happened to these funds nor asked to undertake the exercise. UTi has flagged that it seeks equitable compensation for monies so dissipated. But it is possible to frame declaratory relief to cover the consequences, by way of UTi’s entitlement to equitable compensation, of dissipation of monies by Mr Sheehan.

33. [66]

    UTi seeks various other forms of relief, which are considered below. This other relief is mostly sought in the alternative to the same sum that is claimed in the principal relief already analysed above. But as will be seen, one money claim among the other relief sought is additional to and does not overlap with the primary relief sought.

Breach of contract

1. [67]

   UTi seeks damages for the breach of both implied and express terms of the agreements between UTi and Mr Sheehan. First UTi’s claims as to the implied terms may be shortly stated.

2. [68]

   UTi contends that two terms are implied into its agreements with Mr Sheehan:

   1. (1)

      That third party carrier invoices presented to UTi by Mr Sheehan in the course of his work under the agreements would be genuine; and

   2. (2)

      That Mr Sheehan would, upon the termination of the 2011 and 2014 Agreements, pay to UTi all monies owing to it for services UTi provided to Mr Sheehan.

3. [69]

   As to implied term (1), UTi claims it suffered a loss of $2,911,411.76, the amount of the false invoices, from Mr Sheehan’s breach of this term.

4. [70]

   As to implied term (2), in its statement of claim, UTi quantifies the loss suffered by breach of this term as $3,467,816.92, being the sum of $2,911,411.76 in respect of the false invoices plus an additional $556,405.16 that is said to be outstanding in respect of a number of invoices UTi had issued to Mr Sheehan in respect of UTi’s Freight Forwarding Service. At the hearing, Mr Withers informed the Court that the additional outstanding sum in respect of UTi’s invoices to Mr Sheehan on account of this service had been reduced from $556,405.16 to $134,724.52, although UTi’s written submissions had claimed a slightly lower figure of $131,057.33 on this account. The claim on account of UTi’s invoices to Mr Sheehan for $134,724.52. This was for the total of the invoices identified in three overdue account statements of DSV Air & Sea Pty Limited dated 11 November 2016 which Mr Elsworth explains were issued by UTi to Mr Sheehan for $42,356.98, $3,508.43, and $88,859.11 respectively.

5. [71]

   In the alternative, in relation to the invoiced amounts the subject of term (2), UTi puts its claim for $134,724.52 for its invoices to Mr Sheehan as one for damages for breach of an express contractual term. UTi says that it was an express term of the 2011 Profit Share Agreement Extension (clause (b)(iv) that Mr Sheehan would pay to UTi all monies owing to it for services UTi provided to Mr Sheehan. Term (b)(iv) of the 2011 Profit Share Agreement Extension is set out earlier in these reasons but for convenience relevantly provides:

6. [72]

   In answer to UTi’s express contract plea, Mr Sheehan pleaded in his defence, filed when he was legally represented, that the effect of this express term was that he was only liable to pay UTi for UTi Customer Invoices to him when he himself had been paid. Although Mr Sheehan was not present at the hearing, as this issue was raised on the record in his defence, it was dealt with in submissions. UTi submitted at the hearing that term (b)(iv) of the 2011 Profit Share Agreement Extension was not a “pay when paid” provision but requires payment on the UTi Customer Invoices as submitted.

7. [73]

   In his defence, Mr Sheehan admitted that the amount of $556,405.16 (now reduced to $134,724.52) had not been paid. He explained the circumstances of the non-payment in his 11 April 2016 affidavit:

8. [74]

   It is useful to deal with UTi’s submissions as to the express term first. Express term (b)(iv) in the 2011 Agreement continued to govern relations between these parties at the time of the termination of their relationship. And UTi’s contention that it is not a “pay when paid” term is persuasive. It does not purport to be a “pay when paid” provision and does not readily bear the construction that Mr Sheehan’s defence sought to put upon it to that effect. The UTi invoices were due under term (b)(iv) in accordance with their terms. It is not therefore necessary to consider whether UTi’s term (2) should be implied into the agreements between UTi and Mr Sheehan as the additional $134,724.52 is recoverable under the express term.

9. [75]

   Term (1) as pleaded should be implied in fact to give business efficacy to the contract between the parties. I accept Mr Withers submission that each of the criteria set forth by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (BP Refinery) for the implication of term (1) is fulfilled in this case. Their Lordships stated (at 283) that:

10. [76]

    That statement of principle has been repeatedly reaffirmed by the High Court: see most recently Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32 at [21] (footnote 41) (French CJ, Bell and Keane JJ).

11. [77]

    UTi submitted, and I accept, that the above criteria are satisfied with respect to term (1) for at least the following reasons:

    1. (1)

       The term is reasonable and equitable, as it does not impose any onerous contractual duties on the parties, or impose an obligation that unfairly favours one party over another.

    2. (2)

       The term is necessary to give business efficacy to the contract because without the term, funds could be misapplied by the contracting parties using non-genuine invoices.

    3. (3)

       The term is so obvious that it goes without saying. It is implicit in the parties’ relationship that they would deal with one another honestly and that one party should not be permitted to gain a benefit from another using illegitimate means.

    4. (4)

       The term is capable of clear expression: it imposes a precise negative obligation.

    5. (5)

       The term does not contradict any express term of the contract: the written agreement between the parties does not deal with the subject matter of the posited implied term.

12. [78]

    I am satisfied that there was an implied term that invoices presented by Mr Sheehan to UTi were genuine for the above reasons. As I noted at the hearing of this matter, it is difficult to imagine a term more obvious than this one.

13. [79]

    The $2,911,411.76 UTi paid out on the false invoices is a loss flowing from Mr Sheehan’s breach of this implied term. The Court’s findings on the claim in equity are sufficient to found the inference for the purpose of the present claim that UTi paid these funds away because it was presented with non-genuine third party invoices in breach of this implied term.

Deceit

1. [80]

   UTi seeks damages for the tort of deceit in respect of Mr Sheehan’s false representations that the invoices presented for approval were genuine and that the cheques being requested to be drawn were for payment of services genuinely provided by the third party payees identified on the cheques which would be transmitted to those third parties.

2. [81]

   In Magill v Magill (2006) 226 CLR 551; [2006] HCA 51, Gummow, Crennan and Kirby JJ summarised the elements of deceit as follows (at [114]):

3. [82]

   Mr Withers submitted that each of these elements is established in the present case. On the facts the Court has now found, Mr Withers’ submission is persuasive.

4. [83]

   In respect of the first element, Mr Withers submitted that Mr Sheehan:

5. [84]

   For the reasons give above, I accept that the invoices presented by Mr Sheehan were false, that Mr Sheehan falsely represented to UTi that the cheques would be paid to third party carriers for services genuinely provided, and that Mr Sheehan made these false representations knowingly.

6. [85]

   In respect of the third element, UTi submitted, and I accept, that Mr Sheehan must have intended that UTi would rely upon the false representations because upon presentation of an invoice to UTi Mr Sheehan knew that UTi would approve the use of its cheques to make payment of the invoices presented to it, as was the usual commercial practice between UTi and Mr Sheehan from early 2014.

7. [86]

   In respect of the fourth and fifth elements, UTi submits that it relied on Mr Sheehan’s false representations by approving the use of the cheques, suffering a loss of $2,911,411.76. Reliance was placed on the statement by Mr Edwards in his affidavit that:

8. [87]

   I accept all Mr Edwards’ evidence and am satisfied that UTi’s reliance on Mr Sheehan’s false representations resulted in the loss of $2,911,411.76, and accordingly UTi is entitled to that sum in damages for deceit.

Misleading or deceptive conduct

1. [88]

   UTi also seeks damages under s 236 of the Australian Consumer Law in the sum of $2,911,411.76 for losses it claims to have suffered on account of breaches of s 18 by Mr Sheehan. Section 18(1) provides that:

2. [89]

   UTi claims that by presenting false invoices and cheques for approval, Mr Sheehan engaged in misleading or deceptive conduct in trade or commerce. It submits that the relevant conduct occurred in the context of “trade or commerce” because the parties “had a contractual business relationship with each other”.

3. [90]

   The phrase “trade or commerce” as it appeared in the Trade Practices Act 1974 (Cth) was examined at length by Mason CJ, Deane, Dawson and Gaudron JJ in Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 at 603-4. Their Honours construed the term as limited to “activities or transactions which of their nature, bear a trading or commercial character”. See also Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59 at [33].

4. [91]

   Mr Sheehan presented to UTi the invoices. And the cheques were drawn pursuant to a profit sharing agreement between the parties. In those circumstances, I am satisfied that the conduct falls within the phrase “trade and commerce”.

5. [92]

   The meaning of “misleading or deceptive or is likely to mislead or deceive” was recently examined in Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640; [2013] HCA 54, where French CJ, Crennan, Bell and Keane JJ stated at [39] that:

6. [93]

   UTi submitted that Mr Sheehan’s conduct induced error within the meaning of their Honours’ remarks, by causing UTi to approve the use of the cheques to make payment of invoices that had not in fact been issued by third party carriers.

7. [94]

   Whilst it is true that UTi’s conduct in signing substantially blank cheques was in many respects careless, that lack of care was really the product of UTi temporarily letting its guard down during the transition to a new profit sharing agreement, because of a long standing relationship of trust which Mr Sheehan exploited. It would stand ill in Mr Sheehan’s mouth to say that UTi should not be compensated under the Australian Consumer Law on account of its failure to take care of its own interests, when he knowingly took advantage of UTi’s trust in him.

Interest up to Judgment

1. [95]

   UTi claims interest up to judgment. The equitable jurisdiction to award compound interest in claims for recovery of trust funds, where the interests of justice so demand is well established (Wallersteiner v Moir (No 2) [1975] QB 373; Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8). Mr Withers indicated that UTi seeks only simple interest from the commencement of the proceedings on account of the logistical difficulty in calculating interest on these individual transactions from the date each of them occurred.

2. [96]

   This in substance means that there is no difference between the interest that UTi claims for the recovery of the monies that Mr Sheehan held as an institutional trustee for UTi and the other money claims in tort and contract on which simple interest would normally be calculated at the rates prescribed from time to time under Civil Procedure Act 2005 s 100. Interest up to judgment under Civil Procedure Act s 100 on the amount due on these other claims is payable to compensate a plaintiff for the loss or detriment suffered by the plaintiff being kept out of the money adjudged to be due: MBP (SA) Pty Limited v Gogic (1991) 171 CLR 657.

3. [97]

   Interest should be awarded here both in the Court’s general equitable jurisdiction and under Civil Procedure Act 2005 s 100. The circumstances of Mr Sheehan’s deliberate misapplication of UTi’s funds for his own benefit attract an award of interest in the Court’s equitable jurisdiction. As UTi has been out of its money since the time of payment on these false invoices, there is no apparent basis to deny the exercise of the Court’s jurisdiction to award Civil Procedure Act 2005 s 100 interest.

4. [98]

   The Court will order interest at Civil Procedure Act 2005 s 100 rates from the date of commencement of proceedings up until the entry of judgment. The Court will direct UTi to bring in a calculation of that interest in accordance with these reasons, so that the Court can make an order for interest in a particular sum. UTi calculated that interest up to 17 November 2016 in the amount of $107,380.80. Directions are made below for that calculation to be updated to the time of entry of judgment.

Orders

1. [99]

   The Court will make the orders set out below. As the form of the orders contemplates, some work still needs to be done by the solicitors for UTi to prepare and render the orders in a composite form so they can be entered in final form into the Court record incorporating schedules 1 and 2. Accordingly, the present orders give directions for that to be done. The Court therefore makes the following orders:

   1. (1)

      In respect of the cause of action pleaded at paragraphs 41 to 45 of the Statement of Claim (fraud):

   2. (2)

      In respect of the cause of action based in contract pleaded at paragraphs 18-23 of the Statement of Claim, the cause of action based on the tort of deceit pleaded at paragraphs 24 to 34 of the Statement of Claim and the misleading and deceptive conduct claim pleaded at paragraphs 35 to 40 of the Statement of Claim declare that the First Defendant is liable to the Plaintiff in damages in the amount of $2,911,411.76.

   3. (3)

      In respect of the further breach of contract claim pleaded at paragraph 51 of the Statement of Claim, declare that the First Defendant is liable to the Plaintiff for damages in the amount of $134,724.52 based on the several unpaid invoices for amounts due and payable to the Plaintiff, which invoices are recorded in the three statements of account in the amounts of $42,356.98, $3,508.43 and $88,859.11 issued on behalf of the Plaintiff by DSV Air & Sea Pty Limited dated 11 November 2016.

   4. (4)

      The maximum total amount the Plaintiff is entitled to recover from the First Defendant pursuant to orders 1 and 2 above is $2,911,411.76.

   5. (5)

      The First Defendant is to pay pre-judgment interest to the Plaintiff, being interest in the amount of $107,380.80 calculated from 11 April 2016 (the date proceedings were commenced) until 17 November 2016 (the day after the hearing) but the final amount of pre-judgment interest will be updated in accordance with a supplementary calculation to be provided when final orders, including interest orders are made.

   6. (6)

      The First Defendant is to pay the Plaintiff’s costs of these proceedings as agreed or assessed.

   7. (7)

      Direct the Plaintiff to bring in short minutes of order to give effect to these reasons by allowing the Court to make final orders including complete calculations of interest and including Schedules 1 and 2.

2. [100]

   Finally, the Court has decided to refer the papers in this case to the Attorney General as first law officer, as the first defendant’s conduct may found a criminal prosecution.