Gibb Australia Pty Limited v Cremor Pty Limited [1992] ACTSC 68; (1992) 108 FLR 129 (10 July 1992)

SUPREME COURT OF THE ACT

GIBB AUSTRALIA PTY LIMITED v. CREMOR PTY LIMITED
No. SC 143 of 1991
No. SCA 68 of 1991
Partnership - Trusts - Equitable Set Off
[1992] ACTSC 68; (1992) 108 FLR 129

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Miles C.J.(1), Gallop(1) and Higgins(1) JJ.

CATCHWORDS

Partnership - Constructive trust - Appeal from the Master.

Partnership - Lease obtained by representation - Co-directors unaware of representations - Land and building subsequently let to partnership.

Trusts - Constructive trust - Fiduciary duty - Alleged breach - Lease obtained by fiduciary - Misrepresentation - Whether held for benefit of partnership - Diversion of funds - Principals property and profits allegedly diverted for use of fiduciary - Benefits not disclosed - Trust property.

Equitable set off - Claim and cross-claim - relevance of fiduciary relationship - Principles.

Imperial Acts Application Act 1986, s. 5, Schedule 3

Set-off of Debts Acts 1729 and 1735

The Metropolitan Bank v Heiron (1880) 5 Ex D 319

Lister and Co v Stubbs (1890) 45 Ch D 1

Keech v Sandford [1726] EWHC J76 (Ch); (1726) Sel Cas Ch 61; 25 ER 223

Keith Henry and Co Pty Ltd v Stuart Walker and Co Pty Ltd [1958] HCA 33; (1958) 100 CLR 342

Regal (Hastings) Ltd v Gulliver [1942] UKHL 1; (1967) 2 AC 134

Phipps v Boardman [1966] UKHL 2; (1967) 2 AC 46

Timber Engineering Co Pty Ltd v Anderson (1980) 2 NSWLR 488

Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178

Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41

NZ Netherlands Society v Kuys (1973) 1 WLR 1126

Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373

Queensland Mines Ltd v Hudson and Ors (1978) 52 ALJR 399

Rawson v Samuel (1841) Cr and Ph 161

Edward Ward and Co v McDougall (1972) VR 433

D Galambos and Son Pty Limited v McIntyre (1974) 5 ACTR 10

Ex parte Stevens (1805) 11 Ves 24; 32 ER 996

Fong v Cilli (1968) 11 FLR 495

Bayview Quarries Pty Ltd v Castley Development Pty Ltd (1963) VR 445

Henriksens A/S v Rolimpex (1974) 1 QB 233

Knockholt Proprietary Limited v Graff (1975) QD R 88

Argento v Cooba Developments Pty Ltd (1987) 71 ALR 253

AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705

British Anzani v International Marine Ltd [1978] EWHC 2 (QB); (1980) 1 QB 137

M Lambert Pty Ltd v N A and T Papadatos Pty Ltd (1991) 5 ACSR 468

General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1961) 112 CLR 125

Harry Smith Car Sales v Claycom (1978) 29 ACTR 21

Theseus Exploration NL v Foyster [1972] HCA 41; (1972) 126 CLR 507

Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87

HEARING

CANBERRA
10:7:1992

Counsel for the Appellant: Mr S.J. Gageler

Instructing solicitors: Messrs Blake Dawson Waldron

Counsel for the Respondent: Mr B. Collins QC with Mr C.P. Comans

Instructing solicitors: Messrs Sly and Weigall

ORDER

THE COURT ORDERS THAT:

1. The appeal be upheld.
2. The judgment entered herein be set aside.
3. The application for summary judgment be refused and the defendant
have leave to defend.
4. The costs of that application and this appeal be costs in the
cause.
5. This action be heard together with actions No. SC 824/90 and
SC 266/91.

DECISION

This is an appeal from a decision of the Master. On 17 May 1991, the Master granted leave to the respondent, Cremor Pty Ltd (Cremor), to enter judgment against the appellant, Gibb Australia Pty Ltd (Gibb) pursuant to Order 15 of the Rules of this Court.

2. The judgment was for rent of premises, the title to which was in Cremor's name. Gibb alleged that unbeknown to it, Cremor had obtained the Crown Lease of the subject premises by representing to the relevant authorities that Cremor was a vehicle for the partnership that later became Gibb. The members of the partnership, subsequently co-directors of Gibb, were unaware of these representations. Cremor was controlled by a co-director of Gibb, previously the Australian partner (all others were based in England), Mr Peter Reeves. Later, another Australian partner, Mr Kevin Cairns, was added to the Gibb partnership. He had no interest in Cremor nor has he ever acquired any.

3. Cremor, it was alleged, having concealed from the Gibb partnership the representations it made to the authorities, proceeded to cause a building to be erected on the subject land and then sub-let it to the partnership and, subsequently, to Gibb.

4. The Crown Lease of the land (Block 63 Section 37 Deakin) is dated 25 June 1988. However, it is common ground that Cremor went into possession of the land as early as 1982.

5. From the time Cremor entered into possession of the land at Deakin, it acted as if it was the beneficial owner of it. It paid expenses accordingly. There was no evidence that the rent it charged Gibb was commercially unrealistic or even unfavourable to Gibb.

6. Before the Master, the issue raised by Gibb was that it had what was described as "an equitable set-off".

7. There was evidence before the Master of a letter written by Reeves in April 1979 to the "Minister for The Capital Territory", Mr Ellicott. It is clearly arguable that the letter made a request on behalf of the Gibb partnership for the grant of a Crown Lease to enable the partnership to carry on its professional engineering practice from its own premises.

8. In October 1981, Reeves submitted a formal application for the grant of such a lease. He described the "Applicant" as "Sir Alexander Gibb and Partners, Australia". A question appeard in the document -

"18. In what name is it intended that the lease sought would be
issued?"

The answer was "Cremor Pty Limited Superannuation Fund".

9. Of course, it could be that there is no significance in the words "Superannuation Fund" but it is arguable that the answer was intended to give the impression that Cremor Pty Limited, or Cremor Pty Limited Superannuation Fund, was a vehicle for the "Sir Alexander Gibb and Partners Australia" or its superannuation fund.

10. Reeves verified the information contained in the application by an annexed statutory declaration dated 14 October 1981.

11. An unsigned letter dated 17 December 1981 on the letterhead of "Sir Alexander Gibb and Partners Australia" was addressed to the then Department of Capital Territory. It said (inter alia):-

"As requested, we enclose a copy of our Accountant's confirmation
of our financial ability to fund the proposed development."

12. It is arguable that both that and the enclosed letter from "David M F Royle, Chartered Accountant" were sent by Reeves. They were certainly received by the Department. Mr Royle certified that,

"... adequate funds are available from internal sources to carry
out the above development ..."

13. Cremor was referred to by Royle in the following terms:-

"I understand the partnership through its service Company, Cremor
Pty Limited, is proposing to develop an office at the above location
at a total approximate cost of $500,000."

This paragraph is capable of being interpreted as a representation, approved by Reeves, that Cremor was a service company for the Gibb partnership and that, as a result, the beneficial ownership of the Crown Lease being sought would be held by Cremor for the use of the partners.

14. This impression was continued by a letter to Mr RG Gallagher, Assistant Secretary, Business Leases, Department of the Capital Territory, dated 25 June 1982. It purports to be signed by Reeves on behalf of the partnership. It concludes:-

"I now have pleasure in enclosing a cheque for (amount) being the
first years rental for the lease. I should be grateful if you would
note when the formal lease is prepared it should be in the name of
CREMOR PTY LTD SUPERANNUATION FUND."

15. A form sent to the Department on 19 September 1982 requested the issue of the lease in the name of "Cremor Pty Ltd". It was enclosed with a letter headed "Cremor Pty Ltd" and signed by Reeves.

16. It is at least arguable that none of this correspondence would have led the Department, or any of its responsible officers, to conclude that Cremor was the private investment vehicle of Mr and Mrs Reeves. They might well have concluded that Cremor was a corporate vehicle for the Gibb partnership.

17. Of course, as Cremor has submitted, it is arguable that the partnership and its successor, Gibb, were aware that the lease over the land at Deakin had been acquired in the manner described above. In that case, if the Department was misled, it might create some rights in the lessor to the lease but not affect Cremor's beneficial ownership of it viz-a-viz Gibb.

18. In other proceedings, Gibb has also alleged against Reeves various breaches of fiduciary duty. It alleges that Reeves has diverted sums totalling in excess of $2,000,000.00 from the partnership and/or Gibb to his own use (and that of Mrs Reeves and of Cremor) as a result of those breaches. Those allegations are denied and the proceedings relating to them are being defended. The case supporting those claims has been conceded by the Reeves and Cremor to be an arguable one.

19. It was submitted to the Master that no constructive trust arose out of the circumstances in which the Crown Lease was granted to Cremor. It was contended that, even if there was a duty to account for the profit made by Cremor arising out of its acquisition of the Deakin property, it was uncertain whether there would be a sum due to Gibb after due allowance to Cremor for its expenses.

20. The Master was persuaded that it was unarguable that the beneficial ownership of the Deakin land had vested in the partnership and, subsequently, in Gibb. He found that there was no case for an equitable set-off because any cross-claim for the alleged breach of fiduciary duty could not be shown to significantly off-set the claim for rent. He also found that, in any event, Gibb could litigate the issue in the other proceedings it had embarked upon.

21. Gibb appeals to this Full Court against that decision.
Constructive Trust

22. For the purposes of this appeal, it must be assumed, as it was by the Master, that Gibb will establish the facts it would rely on in defence. It must therefore be assumed that Cremor obtained title to the Deakin land by means of a representation that it would hold the land to the use of the Gibb partnership and, after its incorporation, Gibb. It must be assumed further that, in contrast to the representation, Cremor used the leased land as its own and let space to Gibb concealing from Gibb its knowledge of the representation. As a vehicle for the Reeves, Cremor can be assumed to have had that knowledge.

23. The fundamental question is whether it is open to conclude, if this evidence was to be accepted on the balance of probabilities at trial, that the property itself, subject to any proper allowances to Cremor, belongs in equity to Gibb. If so, it would be open to declare the Deakin property subject to a constructive trust in favour of Gibb. Then, whatever else Cremor may be entitled to, it cannot ever have been entitled to rent.

24. A great deal depends not merely on whether there is an alleged breach of a fiduciary duty but what the result of that breach has been.

25. For example, in The Metropolitan Bank v Heiron (1880) 5 Ex D 319, a director received a bribe to favour a particular supplier. There was no doubt that this was a transaction tainted by breach of fiduciary duty. The bribe, however, was paid by the supplier with the intention that it should be the property of the director not the company. More than six years after it had declined to pursue the allegation of bribery, not then being satisfied as to its truth, the company sued the director to recover the amount of the bribe.

26. Brett L.J. said,

(324) "Neither at law or in equity could this sum of 250 1. be
treated as the money of the company, until the Court, in an action
by the company had decreed it to belong to them on the ground that
it had been received fraudulently as against them by the defendant."

It is different if the property or money received is received for the company (or other fiduciary principal) rather than being received for the fiduciary subject only to an obligation to account to the principal.

27. Lister and Co v Stubbs (1890) 45 Ch D 1 illustrates the difference. It was another case of "secret commissions" received, in this case, by an employee. Stirling J noted that if it had been the employer's money, the employer could "trace" it. If the supplier had refused to pay an outstanding secret commission the employer could not have sued to recover it. However, the employee was liable to account for any monies received by him from the supplier in breach of his fiduciary duty to his employer. The Court of Appeal agreed.

28. In this case, Gibb is seeking to invoke the rule in Keech v Sandford [1726] EWHC J76 (Ch); (1726) Sel Cas Ch 61; 25 ER 223. That rule was described in Keith Henry and Co Pty Ltd v Stuart Walker and Co Pty Ltd [1958] HCA 33; (1958) 100 CLR 342, in the following terms,

(350) "The doctrine of Keech v Sandford is shortly stated by
saying that a trustee must not use his position as trustee to make
a gain for himself: any property acquired, or profit made, by him in
breach of this rule is held by him in trust for his cestui que
trust. The rule is not confined to cases of express trusts. It
applies to all cases in which one person stands in a fiduciary
to another: it has been applied as between partners, as between
principal and agent, and as between master and servant."

29. Keech v Sandford itself has some analogy with the facts alleged by Gibb. A trustee had sought renewal of a lease for an infant beneficiary. Renewal was refused. The trustee then, and only then, took the lease for his own benefit. Lord Russell of Killowen summarised the effect of that decision in Regal (Hastings) Ltd v Gulliver [1942] UKHL 1; (1967) 2 AC 134 (the case was decided in 1942),

(145) "Though his duty to obtain it for the infant was incapable of
performance, nevertheless he was ordered to assign the lease to the
infant upon the bare ground that, if a trustee on the refusal to
renew might have a lease for himself, few renewals would be made for
the benefit of cestuis que trust."

30. In the Regal (Hastings) case itself, action was taken to recover profits made on the acquisition and subsequent sale of shares in a subsidiary company by directors. There was held to be a duty to account for the purchase and sale of the shares.

31. Lord Russell held that the duty to account,

(144-5) "...in no way depends on fraud, or absence of bona fides
... The profiteer, however honest and well-intentioned, cannot
escape the risk of being called upon to account."

The principle was applied in Phipps v Boardman [1966] UKHL 2; (1967) 2 AC 46.

32. Where profits or property which are those of the principal are diverted to the use of a fiduciary not only are those benefits required to be accounted for, they are and remain trust property. Accounting for profits is but one remedy to enable the principal to realise the benefit to which that principal is entitled.

33. For example, in Timber Engineering Co Pty Ltd v Anderson (1980) 2 NSWLR 488, employees diverted profits and trade of their employer company to themselves, their spouses and companies they controlled. Kearney J held that the benefits received should be characterised as trust property for which the fiduciaries are liable to account, including the disgorging of any accretions gained by the use of that property.

(498) "The fact that the (fiduciary) carried on (a business to which
the employer was beneficially entitled) and improved it by its own
exertions did not, in my view have the effect of extinguishing the
trust property so as to terminate the trust."

An equitable lien was granted over the shares in the business.

34. That the Deakin property is capable of being regarded as one of Gibb's assets is further illustrated by Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178.

35. In 1979, Drs Zacharia and Chan entered into partnership. They obtained the grant of a lease of premises. In 1981, Dr Chan dissolved the partnership. Dr Zacharia desired to renew the lease intending that the renewed lease should then be an asset of the partnership. Dr Chan declined to join in the exercise of the option for renewal. Subsequently, Dr Chan procured the issue of a lease of the premises to himself alone. Dr Zacharia sought a declaration that the lease procured by Dr Chan, not ostensibly on behalf of the dissolved partnership, was held on constructive trust for the partnership. This claim was upheld by Mitchell J in the Supreme Court of South Australia and, subsequently, by the Full Court. Dr Chan appealed to the High Court. Gibbs C.J. considered it had been inequitable for Dr Chan to have refused to join in renewal of the lease. It had been his duty to do so. He could not refuse to do his duty and then get for himself the lease he could not otherwise have obtained but for that breach of duty. Brennan J delivered a concurring judgment. Deane J discussed the principles in depth and concluded there was a trust in favour of the partnership in respect of the rights conferred by the new lease.

36. There was found to be a trust of the rights under the lease in Chan v Zacharia when the landlord had been asked to issue the lease for Dr Chan's benefit. Dr Chan had not represented to the landlord that the lease he was seeking was to be for the benefit of the partnership. Thus the fact, if it be established, that Cremor sought the lease in question here for the partnership (and then for Gibb) not only establishes that it had a fiduciary obligation towards the partnership but also that it was intended by the landlord that Cremor should hold the lease in question as trustee for the partnership. The lease was taken for and on behalf of the partnership not for and on behalf of Cremor.

37. In so concluding we are, of course, not suggesting that a finding that there was such a constructive trust is inevitable or even probable. The obtaining of the benefit must be the result of a misuse of a fiduciary position (see, for example, Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, 108 per Mason J). There may have been a "special arrangement" based on full disclosure whereby the benefit obtained by the fiduciary was not to accrue to the principal (see, for example, NZ Netherlands Society v Kuys (1973) 1 WLR 1126; Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373; Queensland Mines Ltd v Hudson and Ors (1978) 52 ALJR 399 (PC)).

38. In this matter, it is alleged that Gibb was not informed by Cremor of the circumstances of the acquisition of the Deakin property, that is, that the Crown Lease was sought and accepted ostensibly on behalf of Gibb. Of course, Gibb could have renounced or declined its rights but it alleges that it has not done so.
Equitable Set-off

39. The preceding matters are sufficient to dispose of the issue raised by this appeal. However, it was also suggested that, even if there was no constructive trust of the Deakin premises, there was a number of cross-claims against Cremor and both of its directors such as would make it inequitable that Cremor should have judgment. That is, that those claims should be set-off against Cremor's claim for rent.

40. There is no doubt that Gibb has a seriously arguable case for claiming that Cremor, as the vehicle for a co-partner/director of Gibb, is liable on those cross-claims for a sum exceeding the outstanding rent.

41. There is a real difference between a mere cross-claim and a cross-claim which may be set-off, whether at law or in equity. The present case concerns only the availability of equitable set-off.

42. It may be noted that the Imperial Acts Application Act 1986, s. 5 and Schedule 3, continue in the Territory the Set-off of Debts Acts 1729 and 1735. However those Acts deal with the mutual set-off of debts at law and not with equitable set-off.

43. The seminal authority on equitable set-off is Lord Cottenham's judgment in Rawson v Samuel (1841) Cr and Ph 161. In that case the Lord Chancellor said that the mere existence of cross-claims is not sufficient to give rise to a set-off nor is it sufficient that the two claims arose out of the same contract.

44. Rather the applicant for relief must show some good equitable grounds for being protected against the plaintiff's claim such that the plaintiff's title to his claim is impeached. What constitutes good equitable grounds has never been precisely formulated.

45. Australian courts have tended to be more conservative on questions of equitable set-off than their English counterparts, and generally have continued to espouse the formulation of the principle enunciated and applied by Lord Cottenham in Rawson v Samuel.

46. As Gowan J pointed out in Edward Ward and Co v McDougall (1972) VR 433, a judgment, even if stayed, can affect a defendant's financial credit and reputation. Insurance rights can be affected and different consequences will follow on insolvency. These matters in themselves, however, are insufficient to give rise to an equitable right to set-off. As to when the right to equitable set-off arises, his Honour commented as follows:-

(439) "The solution of the problem must be found in the test of the
nexus which must exist between the opposing claims and in a
determination of the question whether in the circumstances the
defendants show an equity of the necessary kind in respect of the
whole or of part of their indebtedness to the plaintiff."

47. In that case the plaintiff, a firm of stock and share brokers, sued the defendant for the balance due of moneys paid to the defendant's use as the purchase price of shares or as stamp duty and for brokerage charged on work done in buying and selling shares. The plaintiff took out a summons for final judgment, whereupon the defendant sought leave to defend on the basis of an alleged equitable set-off arising from a cross-claim for damages for negligence or breach of contract in respect of the purchase of some of the shares and the sale of others. Gowans J said that he had "great difficulty in reaching a positive conclusion" (p 439) as to whether the facts justified an equitable set-off but said that there was a real question of law to be investigated so that leave to defend should be granted.

48. Equitable set-off does not depend on the existence of a fiduciary relationship between the claimant and the cross-claimant. Indeed, in D Galambos and Son Pty Limited v McIntyre (1974) 5 ACTR 10, Woodward J, noted that,

(15) "Cases in which courts of equity would more readily intervene
to allow a set-off because of a fiduciary relationship between the
parties may be put to one side."

His Honour referred, in that context, to ex parte Stevens (1805) 11 Ves 24; 32 ER 996.

49. The case of D Galambos and Son Pty Limited v McIntyre involved an action for payment of the balance due on a building contract. It was held that cross-claims by the defendant against the plaintiff relating to non-performance of the contract or to defective work (requiring remedial work or directly reducing the value of the work done) constituted matters of pure defence sufficient to defeat the plaintiff's claim.

50. Woodward J noted that, in Fong v Cilli (1968) 11 FLR 495, Blackburn J, sitting in the Supreme Court of the Northern Territory, had refused to allow a set-off against a claim for arrears of rent. There was, in Fong v Cilli, no fiduciary relationship between landlord and tenant. The nature of the cross-claim was a claim for damages for delay in completion of a contract for sale and purchase of land. Blackburn J held that, except in special cases, no set-off could be allowed in favour of a lessee against a claim for rent nor in any case where a cross-claim for an unliquidated demand was raised against a liquidated demand (see Bayview Quarries Pty Ltd v Castley Development Pty Ltd (1963) VR 445).

51. Even so, Woodward J commented on Fong v Cilli in the following terms:-

(25) "In doing so he (that is, Blackburn J (as he then was)) was
following a substantial line of authority peculiar to the
particular topic, though even here, when the rule is tested by its
exceptions (for example Beasley v Darcy (1800) 2 Sch and Lef
403 - deduction from rent due for damage done by the landlord to
timber on the farm), there must be some doubt as to its scope."

Having carefully reviewed the authorities on the subject of equitable set-off generally, Woodward J concluded,

(25-6) "I believe that the relevant principles to be extracted from
the authorities are as follows:-
(i) Failure in part to perform a contract, or defective
performance of a contract requiring work to be done again or
directly reducing the value of work done or goods supplied, may be
raised as a defence to an action for money due under that
contract.
(ii) Claims for money due under a contract and for damages for
breach of the same contract (arising, for example, from delay)
may be set-off against each other where the equity of the case
requires that it should be so. This will depend on how closely
the respective claims are related, particularly as to time and
subject matter. The general conduct of the respective parties
will, as always, be relevant to the granting of such equitable
relief.
(iii) Even where one of the claims is not in terms based upon the
contract, but it flows out of and is directly connected with it,
a court may be prepared to recognize an equitable set-off.
(iv) The above statements of principle cannot be regarded as
having universal application. They do clearly apply to contracts
for work and labour, but special considerations are relevant in
other areas such as - bills of exchange (due to "special nature" of
bills of exchange), landlord and tenant (Fong v Cilli) and
carriage of goods" (where no reduction in the value of the work
done - freight payable under a charter party to which a
cross-claim was subject to article III rule 6 of the Hague Rules)."

52. The reference to "carriage of goods", it should be added, is a reference to maritime carriage pursuant to a charter party (see Henriksens A/S v Rolimpex (1974) 1 QB 233 where Denning M.R. (249) noted that the law of England had developed "along its own special lines" in this area to deny set-off against freight charges - Cairns L.J. (254) referred to it as a "special rule").

53. The reference to special considerations being relevant in the area of landlord and tenant reflects the once held view that special considerations applied to a landlord's claim for rent, so that a tenant could not raise a cross-claim against the landlord (for example, for breach of an obligation to repair) as a defence to an action instituted by the landlord against him for payment of arrears of rent. However, recent cases indicate that a tenant's liability to pay rent is no longer regarded as being different in kind from other forms of indebtedness as regards set-off, so that an equitable set-off may proceed (provided that the tenant's cross-claim is so closely connected with the liability to pay rent that the landlord's title to prosecute the claim may be regarded as impeached).

54. Whether or not equitable set-off is more restrictively applied in the case of a claim for rent, there is no rule that set-off will never be permitted. Sums expended on repairs by a tenant have been regarded as appropriately set-off against a landlord's claim for rent even in the absence of any fiduciary relationship between the parties (see Knockholt Proprietary Limited v Graff (1975) QD R 88; Argento v Cooba Developments Pty Ltd (1987) 71 ALR 253; AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705).

55. It seems that the existence of any general rule treating claims for rent differently is subject to considerable doubt. The basis for allowing an equitable set-off is the connection between the claim and the cross-claim. The mere coincidence of claim and cross-claim is not enough.

56. That point seems to be illustrated by British Anzani v International Marine Ltd [1978] EWHC 2 (QB); (1980) 1 QB 137. In that matter, the plaintiffs were lessees of a plot of land. They agreed with the defendants to construct a warehouse on part of the land and then to grant an underlease to the defendants. The agreement provided that the plaintiffs should be liable to make good any defects which appeared in the floor of the warehouse. The building was completed and a sublease entered into. The defendants were subsequently sued for arrears of rent but raised as a defence a cross-claim against the plaintiffs for breach of the agreement to repair defects in the floor. Forbes J allowed a set-off, holding that an unliquidated cross-claim may be the subject of a set-off against a claim for rent if the case is one in which the defendants' equity impeaches the plaintiffs' title to the legal demand for rent and that there was a sufficiently close connection between the claims to give rise to an equitable set-off.

57. His Honour regarded the question as one depending on a "close connection" between the claim and cross-claim. That conclusion was applied to the facts of the case in the following terms:-

(156) "It would in my view be manifestly unjust to allow the
landlords to recover the rent without taking into account the
damages which it is alleged the tenants have suffered through
failure by the landlords to perform their part of the agreement."

58. Thus, it seems to us that if there is a "close connection" between claim and cross-claim and it appears that there would be "manifest injustice" if set-off was to be denied, set-off should be permitted even against a claim for rent, even in the absence of a fiduciary relationship between the parties to which their respective claims are relevant.

59. We note that Mclelland J saw no difficulty in principle in allowing a set-off against a claim for rent in M Lambert Pty Ltd v N.A. and T. Papadatos Pty Ltd (1991) 5 ACSR 468. In the latter case, however, the sum to be set-off would have been insufficient to reduce the claim to avoid a winding up of the lessor.

60. The Master, in dealing with the claim to set-off, had decided, as we have noted, that a constructive trust did not, even arguably, arise as to the Deakin property. We have indicated our respectful disagreement with that conclusion.

61. The Master did take account of the other claims alleged to be the result of other breaches of the fiduciary duty arising out of the relationship between the parties which gave rise to the claim for an accounting of profits for the Deakin premises.

62. Even if there had been no constructive trust of the Deakin property and the result of any accounting for profit in letting it to Gibb was uncertain, the other alleged breaches of the same fiduciary duty involve claims that, at least arguably, exceed the claim for unpaid rent.

63. In our view, those other claims are so closely connected to the breach of fiduciary duty alleged in relation to the Deakin property as to make it inequitable that Cremor should have judgment for unpaid rent without set-off of any other sum or sums found due in respect of those claims.
Discretion - Test of Arguability

64. Gibb took issue with the Master's expression of opinion concerning the test to be applied before its proposed defences could be rejected.

65. It had submitted that Cremor had to show its defences were "utterly baseless" (see General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1961) 112 CLR 125, 129 per Barwick C.J.). The Master considered that test inappropriate because the entry of judgment for arrears of rent did not prevent the issues arising from the letting by Cremor to Gibb being litigated in other proceedings. Any sum found due from Cremor could be taken into account in those proceedings.

66. That consideration, whilst no doubt relevant, does not take account of the adverse consequence of the entry of judgment, even if execution be stayed. It does not consider the advantage of a cross-claim being treated as a matter of defence rather than as a mere cross-claim.

67. This was a case, in our view, where there was a "genuine possibility" of a defence to the claim (see, for example, Harry Smith Car Sales v Claycom (1978) 29 ACTR 21).

68. It is clear that these issues between Cremor and Gibb, both as to the existence of a constructive trust and as to the availability of claims which ought to be set-off against Cremor's claim, are not capable of resolution without the determination of issues of fact. Cremor does not concede (nor do Mr and Mrs Reeves) that there have been any breaches of Mr Reeves' fiduciary duties. That having emerged, summary judgment is an inappropriate procedure (see Harry Smith Car Sales v Claycom). The final determination of disputed issues of law should, also, normally await a final hearing (see Theseus Exploration NL v Foyster [1972] HCA 41; (1972) 126 CLR 507).

69. This is not a case where the defence is a mere denial of the claim (see, for example, Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87, 98). The cross-claims are stated with particularity. They have been verified by affidavit evidence.

70. We order that -

(i) the appeal be upheld;
(ii) the judgment entered herein be set aside;
(iii) the application for summary judgment be refused and the
defendant have leave to defend;
(iv) the costs of that application and this appeal be costs in the
cause;
(v) this action be heard together with actions no. SC 824/90 and SC
266/91.