Rahnam Investments v Esplin [2004] NSWSC 529

Zolstat, a company controlled by Mr Oayda, developed a residential flat building which became the subject of a strata subdivision. The defendants were solicitors practising under the name “Esplins”. They were retained by Zolstat to act for it upon sales of the units as and when buyers were found.

There were, at the relevant times for this matter, two mortgages affecting all the lots in the strata subdivision owned by Zolstat. The first of these mortgages to be created was a mortgage to the plaintiff, Rahnam. The other mortgage, subsequently created, was a mortgage to Perpetual.

Both mortgages were registered. Zolstat, Rahnam and Perpetual subsequently became parties to a deed entitled “deed of postponement” in accordance with which a postponement of mortgage was executed and registered so that Perpetual’s mortgage came to enjoy priority, in point of security, over Rahnam’s mortgage as to the whole of the moneys secured by it.

Rahnam (the second lender), as plaintiff, contended that it was entitled to certain moneys that Esplins received out of the proceeds of the sale of certain of the lots in the strata subdivision. The moneys in question were appropriated by Esplins out of balances standing to the credit of their trust account. The appropriation was to meet unpaid fees payable to Esplins.

Rahnam in submissions did not assert a right to the funds in question as mortgagee or chargee. Rahnam regarded itself as lender of the real property only. Rahnam’s claims did not involve the proposition that moneys accruing due to Zolstat became subject to a charge in favour of Rahnam at a particular point when in the hands of a third party. Rahnam’s claims proceeded on a different basis, namely, that Esplins, from the point at which they ceased to be a stakeholder in relation to the deposit moneys in their trust account, held those moneys, “upon a constructive trust for the lenders in the order of their priority”. The constructive trust is said to have arisen – or, perhaps, to be in need of imposition by the court – because of unconscionability. They argued: “It is unconscionable for solicitors who have been entrusted by all parties to a conveyancing settlement to deal with deposit moneys for the purpose of completing a settlement, to capture and apply those funds to the payment of their own costs at a point after partial discharges of mortgages have been given and the outgoing mortgagees are vulnerable to an abuse of that trust.”

Having contended in early December 2003 that the moneys taken by Esplins from its trust account were moneys belonging to Perpetual, Rahnam sought to say that they were moneys belonging to Rahnam.

Rahnam’s argument, was that all moneys in Esplins’ trust account representing deposits for the sale of apartments in the development the subject of the two mortgages were the subject of a species of specific purpose trust (of the kind most often associated with Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567). This was based upon the 20 November 2003 direction given by Zolstat to Esplins that those monies were to be accounted to the first and second mortgagees in turn, after payment of Esplin’s costs and expenses and other amounts necessary to affect the settlements. Rahnam said that where a party is given money with specific directions as to its application, such as was the case here, that party has a fiduciary duty to apply those funds as directed.

Rahnam contended that Eslpins were in breach of this fiduciary duty by deducting from the deposit monies amounts above and beyond those permitted by the direction before passing the monies to Perpetual. Rahnam argued that this action was unconscionable, and gave rise to a constructive trust .

 It was uncontroversial that a fiduciary duty arises in the circumstances described by Rahnam. As noted by Lord Millett at 192:

“I do not think that subtle distinctions should be made between ‘true’ Quistclose trusts and trusts which are merely analogous to them. It depends on how widely or narrowly you choose to define the Quistclose trust. There is clearly a wide range of situations in which the parties enter into a commercial arrangement which permits one party to have a limited use of the other’s money for a stated purpose, is not free to apply it for any other purpose, and must return it if for any reason the purpose cannot be carried out. The arrangement between the purchaser’s solicitor and the purchaser’s lender is an example of just such an arrangement.”

But such duty is owed only to the person who paid the money with directions as to its application. Rahnam was not a party to the 20 November 2003 direction. Nor did Rahnam pay money to Esplins on terms as to its disposition. Rahnam could not be the beneficiary of any fiduciary duty of Esplins arising from the receipt of the deposit moneys into their trust account. Furthermore Rahnam could not assert a beneficial interest under any trust.

There being no duty owed to or beneficial interest enforceable by Rahnam, it was unnecessary to consider whether Esplins was in fact in breach of the 20 November 2003 direction.
Similarly the assertions made by Rahnam that a constructive trust arose failed for lack of ‘proximity’, for want of a better term, between the parties. Rahnam sought to bring its claim under the general rubric of “unconscionability”. But to say, in isolation, that particular conduct is “unconscionable” leads nowhere. As the High Court has emphasised in Australian Broadcasting Commission v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 and Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 77 ALJR 926, “unconscionability” is a characteristic of action or inaction which may preclude assertion of or reliance on legal rights in circumstances where equity has the capacity, in any event, to intervene. It is not itself a cause of action or an independent basis for intervention. In the present case, the capacity of equity upon which Rahnam sought to rely was the capacity to find or impose a constructive trust under Guimelli v Guimelli principles as an instrument for redressing unconscionability. For reasons I have given, Rahnam’s attempt in that direction failed and its claim was dismissed.

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