There have been inconsistent formulations of the “dishonest and fraudulent design” element of the second limb of Barnes v Addy since the Court of Appeal of Western Australia in Westpac Banking Corporation v Bell Group Ltd (No 3) interpreted the High Court decision in Farah Constructions Pty Ltd v Say-Dee Pty Ltd as lowering the standard of conduct to include all significant breaches of fiduciary duty.  In this case, the New South Wales Court of Appeal has provided some welcome clarification on the issue by rejecting the Court of Appeal of Western Australia’s interpretation and preferring a tighter test that dishonesty requires “a transgression of ordinary standards of honest behaviour”.

Mr Curtis and Mr Hasler were employees of an Optus company and Sumo Distribution & Storage Pty Ltd (in liq) (Sumo) (which was owned equally by Mr Hasler, Mr Curtis and each of their wives) provided warehousing services to Optus through the brokering firm Almad Pty Ltd (Almad).  Almad charged a 20% premium on the services provided by Sumo.  Effectively, Mr Curtis approved the services provided by Sumo to Optus, the price of which he had determined as a shadow director of Sumo.  Mr Curtis had also caused Sumo and another related company PJC333 Pty Ltd (Electrosales) to make substantial payments to relatives of certain Optus employees.  This case involved claims by 3 Optus companies against Mr Hasler, Mr Curtis, Sumo, Electrosales and Almad in respect of breaches of fiduciary duty and conversion.

The key point of interest in this case was the New South Wales Court of Appeal’s discussion of the second limb of Barnes v Addy LR 9 Ch App 244 which allows the beneficiary of a fiduciary duty to obtain an equitable remedy against a third party who falls short of inducing or procuring, but nevertheless participates in, a breach of fiduciary duty that amounts to a ‘dishonest and fraudulent design’  In considering the proper interpretation of the requirement that the fiduciary’s breach be a ‘dishonest and fraudulent design’ the Court noted that in Westpac Banking Corporation v Bell Group Ltd (No 3) [2012] WASCA 157, the Court of Appeal of Western Australia interpreted the High Court’s decision in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, as lowering the standard of conduct sufficient to constitute a ‘dishonest and fraudulent design’ to include all breaches of fiduciary duty “if the breach of duty is more than a trivial breach and is also too serious to be excusable because the fiduciary has acted honestly, reasonable and ought fairly to be excused”.

In this case, the Court had to consider whether it should depart from the more relaxed test formulated inBell Group.  Whilst it was not strictly necessary to address the issue in order to resolve the appeal, Leeming JA felt that the Court should do so because the issue was recurring, important and leading to inconsistent formulations of the principle in courts across Australia.  The High Court had in fact granted special leave to appeal the decision in Bell Group, but the matter settled prior to being listed for hearing.  Leeming JA rejected the Court of Appeal of Western Australia’s interpretation of Farah as expanding ‘dishonest and fraudulent design’ to include all significant breaches as ‘plainly wrong’, ‘not well-defined’ and ‘unhistorical’.  Instead, his Honour found that dishonesty requires “a transgression of ordinary standards of honest behaviour”.

Barrett, Leeming and Gleeson JJA also rejected the purported reversal of the onus of proof in requiring Optus to prove that they did not provide fully-informed consent to the breach of fiduciary duty.  Their Honours iterated that fully-informed consent operates as a defence to a breach of fiduciary duty and proof of an absence of consent is not an element of a knowing assistance claim.

See the case.