Ardlethan Options Ltd v Easdown [1915] HCA 53; (1915) 20 CLR 285 (20 August 1915)

Ardlethan Options Limited Defendants, Appellants; and Easdown Plaintiff, Respondent.

Leverrier K.C. (with him R. H. Long Innes), for the respondent, was not called upon as to the £366 13s. 4d.

The first is whether, in addition to one sum of £366 13s. 4d. awarded to the appellant Company against the respondent Easdown, it is entitled to another sum of like amount.

Before referring to the portion of the decree under which this question arises, the relevant facts may be stated.

Before the incorporation of the Company a man named Bonnar had acquired an option of purchase of eighteen acres of mining land for £1,400. Easdown, a mining engineer, and one of the promoters of the future corporation, desired that this land should be acquired by the Company when it came into existence. He negotiated with Bonnar, and having to some extent ascertained the terms, he arranged with Dr. Crowe to purchase the option rights. A document was signed on 14th February 1913, whereby Bonnar agreed to sell to Easdown the option rights for £2,500, the deposit being £250. But before this was finally agreed to, Bonnar knew that Crowe as well as Easdown was to be concerned in the purchase from him, and it must be accepted as a fact that Easdown entered into the agreement on behalf of himself and Crowe in equal shares. The beneficial interest of these two consisted in this: that Bonnar had promised to give Easdown two-thirds of the £1,100—the difference between £1,400, which he was himself to pay for the land, and the £2,500 that the proposed Company was to pay. One-third, namely, £366 13s 4d., he was to keep for himself; the other two-thirds, £733 6s. 8d., he was to hand over to Easdown. But it is the fact—and the deciding fact on this branch of the case—that the £733 6s. 8d. was to be handed over by Bonnar to Easdown, not wholly for himself, but half for himself and the remaining half for Crowe. Crowe had contributed one-third of the deposit, and was to get one-third of the profit. Easdown, in the eventual settlement of accounts, got into his hands the whole £733 6s. 8d., and up to the present has not paid anything over to Crowe.

The Company being sued in respect of some shares, which form the subject of the second branch of the case, counterclaimed against Easdown—Crowe not being a party—to have him declared a trustee of the £733 6s. 8d. for them. The counterclaim set out two alternative cases. One was that Bonnar alone was the vendor to the Company, and that Easdown—who after the Company was incorporated became its mining engineer and confidential adviser—abused that confidence by secretly accepting commission or profit from the vendor, and at the same time persuading the Company to purchase. The alternative case was that Easdown and others, having formed a syndicate, were themselves the real vendors to the Company, and surreptitiously made a profit.

After the trial had proceeded some time a decree was made, by consent, both on the claim and the counterclaim. The claim will be dealt with hereafter. On the counterclaim, the first alternative was taken as the basis of the consent decree, and that basis cannot now be reconsidered. The declaration pertinent to this point is in these terms:—"And this Court doth further declare that the plaintiff is a trustee of the defendant Company of and in respect of all moneys and other property received by the plaintiff on or after the first day of February 1913 from the persons mentioned in par. 2 of the counterclaim, or from any of them by way of commission or in respect of any profit received or made by the plaintiff on the sale by such persons or any of them of the options in the counterclaim hereunder mentioned." The persons referred to as mentioned in par. 2 of the counterclaim are Bonnar and others in a similar position who sold various mining options to the Company.

The question therefore resolves itself into this: Was the second sum of £366 13s. 4d. received by Easdown within the meaning of that declaration?

It is clear from the evidence that he received that sum, not for himself, but to hand over to Crowe; and in no sense can he be said to have received it to his own use. It is not that as between him and Bonnar the arrangement was that Easdown, and he only, was to be entitled to the whole £733 6s. 8d., leaving Crowe's title to rest on a separate and independent agreement between Crowe and Easdown only. But Crowe's right to one £366 13s. 4d. from Bonnar is founded on precisely the same agreement or arrangement as creates Easdown's right to receive for himself a like sum.

Now, the claim upon which the Company succeeded in getting a declaration is based on the fraud of Easdown, not as promoter, but as servant. He broke his fiduciary obligation of honesty towards his employer by accepting what in law is a bribe from the vendor for persuading the employer to enter into the bargain.

Money or money's-worth received in that way, is received not in trust for, but to the use of, the employer. The fraudulent servant or agent, in such a case, is not a trustee of the property, but a debtor in respect of the money or the money's-worth he has received. The full extent of the benefit he surreptitiously receives, he owes to his employer as an equitable debt, because the mere receipt of the benefit in such circumstances is a fraud on his employer, and he cannot be allowed to retain it if the employer claims it. This is the result of many cases such as McKay's Case[1], Lister & Co. v. Stubbs[2], Mayor &c. of Salford v. Lever[3], Gold Exploration Case[4] and Hovenden v. Millhoff[5], all cases in the Court of Appeal. But this species of fraud, faithlessness to an employer, is necessarily confined to the employee himself, and its consequences are limited to the benefit he receives. He may be guilty, as Lord Esher points out in Mayor &c. of Salford v. Lever[6], of another fraud, namely, conspiracy with the person bestowing the benefit to defraud the employer. For this fraud other consequences are provided, quite independently of the remedy against the servant for his personal faithlessness.

But there is another kind of fiduciary relation, that of promoter, which the appellant here endeavoured to call in aid. It is exemplified by such cases as the New Sombrero Case[7] and Gluckstein v. Barnes[8]. There, by a breach of the fiduciary obligation which promoters owe to the company they call into existence, they may, in conjunction, induce the company to part with its own money upon some contract to purchase. If they do, each and every one of the wrongdoers may be made to restore to the company what was originally its property, of which it has by the combined fraud of the culpable promoters been deprived.

But that is wholly different in principle from the case here. The second lot of £366 13s. 4d. was not, on the case presented, the Company's property, the Company was not deprived of it. The money belonged to Bonnar, and he could have kept it, and if he had kept it, the Company could not, upon the case made, have set up any claim to it. Consequently, Bonnar could validly give it to Crowe, who owed no allegiance to the Company as a servant, or, so far as is established, as promoter either.

The appellants' argument therefore fails. It is not to be understood, however, that any suggestion is made either that an action would or would not lie against Bonnar or Crowe. Neither of them is made a party here, or charged with liability—the only case determined is that Easdown failed in his duty as servant of the Company.

The second question raised by this appeal is as to the amount of loss and damage sustained by the plaintiff by reason of the Company's refusal to issue share certificates or scrip for sixty shares, and also for refusing to register transfers of twenty-five of those sixty shares.

As to the latter, the plaintiff was compelled to purchase outside shares at £8 each to satisfy his contracts. But he purchased at not above a fair price, indeed it is admitted he purchased at £2 a share less than the then market price, and if he parted with £8 for every share he purchased he sustained no actual loss, because he retained for every sum of £8 so expended another share which was worth at least £8, and actually £10, and which he otherwise must have parted with. Then as to three shares borrowed from Crosby, he is not shown to have lost anything by that: they were also represented by three which he retained the value of, which was the same. It comes back to the loss on the sixty shares.

Then as to the refusal of certificates for these sixty shares. It is important to inquire how the duty to deliver certificates arises. The Companies Act of New South Wales, Act No. 40 of 1899, provides, by sec. 18, that a person who has agreed to become a member of the Company, and whose name is entered on the register of members, is a member. Now, as soon as a person is a member, he is entitled to all the benefits of the share he holds in the undertaking and becomes a party to the social contract constituted by the articles of association. By sec. 238 a certificate under the seal of the Company specifying any shares held by a member is primâ facie evidence of his title to the shares specified. But the right of the member in the present Company to get a certificate is given by article 11 which provides that "every member shall be entitled without payment to one certificate under the common seal of the Company specifying the shares held by him and the amount paid up thereon." It is clear that until registration the plaintiff could not require a certificate—for until then he was not a member.

One question, however, that acquired prominence in the argument is whether the Company was in default for failing within a reasonable time after registration to deliver to him a certificate without any demand on his part. It would be a most unreasonable construction of the article to hold that to be its meaning. A member may not need a certificate. He may be content to be on the register and remain a shareholder. But as Cockburn C.J. says in In re Bahia and San Francisco Railway Co.[9]:—"This power of granting certificates is to give the shareholders the opportunity of more easily dealing with their shares in the market, and to afford facilities to them of selling their shares by at once showing a marketable title, and the effect of this facility is to make the shares of greater value." Consequently, most people desire to have these certificates, but, if so, they must ask for them. It would be impracticable—almost impossible—otherwise to comply with the article. The Company would have to follow every shareholder, and at its peril see that he got the certificate personally. When he transferred a share, a new certificate must be similarly forwarded, because he is only entitled to one certificate; if a call is paid, a fresh certificate would have to be similarly given, and if without compliance a period should pass, asserted to be unreasonably long, the Company would be exposed to unknown liability.

Not only is the suggested construction unreasonable, but it is not warranted by the words of the article. Article 11 does not say "upon allotment" or "upon registration"; on the contrary, it operates from time to time, and possibly years after registration, and after the holding has varied by transfer or the amount paid up has varied.

Demand is therefore necessary, and by a person who is a member, but, as the article provides, no payment is necessary. This condition as to demand is only satisfied by the telegram of 3rd July, because registration took place on 24th June, and the refusal was the reply of 4th July.

Now, what is the true measure of damages? Taking the case of Williams v. The Peel River Land Co.[10] as laying down the correct principle, the question is what would a prudent man in the position of the plaintiff have done with regard to selling the shares?

Until the refusal of 4th July, it cannot be said that any abstention by the plaintiff from selling his shares was caused by the Company's refusal to issue certificates. Therefore, if we take 4th July as the first date upon which damage could be said to have possibly occurred, it is not ungenerous to the plaintiff.

Then, in what quantities and over what period would the sales have been distributed? It cannot be assumed, in the absence of evidence, that he would and could have sold the whole of his shares at the very moment when the price was highest. What evidence there is as to probability is against it. When the price was much higher, he did not do so. His later sales in July were in parcels of two, three, ten, and ten, respectively, but on what dates he does not say, except that transfers for twenty-three were lodged by 10th July, and by the 14th two more were sold, and that the time for delivery for all was up by the 14th, when refusal was definitely adhered to.

The prices remained fairly steady up to the end of 16th July, and may be roughly taken to be £10 for that period. On the 18th the price went down to £8 and under, and has since declined. Take it in plaintiff's favour that his sales of the sixty shares would have been completed by the 16th at £10 a share. Then allow, as the Master did, and as both sides admit is just, a deduction of 10s. per share for vendors' shares, the balance is £9 10s. per share, saleable value. But from that must also be deducted, in order to ascertain the damage actually sustained, the value of the shares at the time when the plaintiff could have got the certificates.

The decree gave him the right instanter, and the decree is dated 23rd February 1914. At that date, at all events, a prudent man really desiring to sell would have entertained no doubt that he could obtain the certificates on application, and would not have been deterred from selling by the fear of not being able to produce the certificates when required. In point of fact the plaintiff did not hesitate to sell the twenty-five shares without then having the certificates, and the purchasers were not deterred from purchasing. Why suppose the position less secure after the Court's decree in his favour? So that whether the Company was technically bound or not to seek him out and place the certificates in his hand—a conclusion by no means to be taken as correct—still he was bound, as every person claiming damages is bound, to do all things reasonable to mitigate his loss.

After the decree was pronounced, and still more after it was drawn up, the plaintiff could have had no shadow of doubt as to the willingness of the Company to give him a certificate whenever requested.

From a practical standpoint it would have been the most reasonable course to adopt for him to go to the Company's office, if he had any desire or intention to sell, and to ask for the certificates. Of course he would have got them. To stand by and allow his shares to dwindle to nothing without making any effort to save loss was most unbusinesslike and unreasonable. These considerations have a double effect. First, they are most material in affecting the mind of the jury, so to speak, as to whether from the time of the decree the plaintiff really wanted to sell or would have sold even if he had the certificates. If he would not, then his damage stops at the date of the decree.

Next, assuming, without deciding, that the view is correct that the damage resulting from the refusal must be calculated down to the moment of assessment, the answer is that, looking at all the circumstances, the plaintiff was acting unreasonably in not selling as soon as the decree was made, and asking for the certificate, which he must have known would not be refused; and, consequently, if he has lost from that date, the loss is attributable to himself and not to the Company.

Stopping, then, on 23rd February, what were the shares worth on that date? Their value at that time does not appear. The nearest we can get is on 21st March and 25th March 1914, when they were selling at £2. It is not unfavourable to the plaintiff to take that date—a month after the decree,—and if we deduct that value from the selling value obtainable previously, the result is a net loss of £7 10s. per share, which totals £450 instead of £600, arrived at by the Master, and to that amount of £450 the damages should be reduced.

I concur in the judgment which has just been delivered, except that I think that, in estimating the loss and damage suffered by the plaintiff, we should take into account the refusal of the defendant Company to register the transfer to various purchasers of twenty-five shares belonging to him. Because of such refusal the plaintiff had to buy twenty-three other shares for which he paid £8 each, or £184. Had his own twenty-five shares been available for transfer he would have transferred them and the purchase of these other shares would have been unnecessary. After their purchase he remained owner of the twenty-five shares and entitled to demand a certificate in respect of them from the defendant Company, but he had spent £184. Shares were then worth more than £8 each, and had he obtained immediate delivery from the defendant Company he would have suffered no loss, but the Company refused a certificate and persisted in declining to recognize the plaintiff's right to deal with these shares until they had greatly fallen in value, and his ultimate loss was the difference between £184 and their value at the time when he became entitled to delivery of them under the decree. With respect to the balance of thirty-five shares I think the method of assessment adopted by my brother Isaacs is correct, and I concur with him in thinking that £450 is a reasonable estimate of the total loss and damage sustained by the plaintiff.

I agree with the judgment delivered by my brother Isaacs, for the reasons given by him for it.

Order (1) that the order of the Supreme Court of 10th September 1914 be varied by reducing the sum of £600 for damages to £450; (2) that all sums recovered by one party against the other, whether by way of debt, damages or costs, be mutually set off and the balance be paid to the party entitled thereto; and (3) that this appeal be otherwise dismissed without costs.

[1] 2 Ch. D., 1, at p. 5.

[2] 45 Ch. D., 1.

[3] (1891) 1 Q.B., 168.

[4] (1900) 1 Q.B., 233.

[5] 83 L.T., 41.

[6] (1891) 1 Q.B., 168, at p. 176.

[7] 5 Ch. D., 73; 3 A.C., 1218.

[8] (1900) A.C., 240.

[9] L.R. 3 Q.B., 584, at p. 594.

[10] 55 L.T., 689.

High Court of Australia

Ardlethan Options Ltd v Easdown [1915] HCA 53; (1915) 20 CLR 285 (20 August 1915)

HIGH COURT OF AUSTRALIA