Introduction

John Jay is regarded as one of the Founding Fathers of the United States of America. There, he is well known as Statesman and first Chief Justice of the United States. In Australia, we know relatively little about him, compared to other American Statesmen and judges. John Jay did leave an enduring judicial legacy, including for Australian law. It is worth exploring that legacy in these pages.

Background

John Jay was born in Manhattan, New York City on 12 December 1745.[1] He was of French Huguenot and Dutch heritage. The son of a wealthy merchant, he grew up on the family farm in Rye, New York. He went to a grammar school at New Rochelle, where his  studies included French. From 1760 to 1764, he went to King’s (now Columbia) College and there received a classical education.  

Jay’s childhood home in Rye, New York

He determined on a career in law. To this end, he began by studying Grotius. Two weeks after graduating from College, he was apprenticed to barrister Benjamin Kissen.

In 1768 he was admitted to the New York Bar, and formed a partnership with Robert R Livingston Jr.[2] He built up a substantial and successful practice and became known for his brilliant oratory.[3]

In 1774, he was elected one of the New York delegates to the First Continental Congress in Philadelphia. In 1775 he was also a New York delegate to the Second Continental Congress, which body adopted the Articles of Confederation in 1777. He did not sign the Declaration of Independence of 4 July 1776 because he had also been appointed delegate of the New York Provincial Assembly in April of that year, which refused to allow him leave of absence to travel to Philadelphia. But he proposed the resolution at the New York Provincial Assembly that the Declaration of Independence be adopted by New York State.

John Jay played a pivotal role in drafting the New York Constitution, which was adopted by the New York Provincial Assembly in 1777.  He was immediately appointed Chief Justice of the Supreme Court of Judicature of New York established under the said New York Constitution, which was intended to continue, or replace, the Colonial Supreme Court which had been in existence since 1691. However, within British lines Judge Ludlow also continued to sit as judge of that latter body.

Minimal records have survived of his work as state Chief Justice.[4] Jay CJ’s work on that Court was interrupted when the New York legislature resolved that he be appointed to make representations to the Continental Congress on the settlement of a dispute between New York and the region which was to become Vermont. Shortly thereafter, he was appointed President of the Congress.

John Jay resigned as Chief Justice on 10 August 1779, thereby making himself available to serve in that and other capacities.

In 1779, he was appointed Minister to Spain, where he lobbied for diplomatic recognition and monetary support for the war. He occupied this role until 1782, when he was appointed Commissioner to treat with Great Britain to negotiate for peace. He spent several years in France and amongst other things played an integral role in the multi-party negotiations which led to the Treaty of Paris (1783), which officially ended the Revolutionary War. The treaty was well received at home.[5]

John Jay returned to New York City in 1784, and was appointed Secretary for Foreign Affairs.

John Jay was not a delegate to the Constitutional Convention which met in May 1787 in Philadelphia, because some voted against him on account of his known federalist views. But the drafters of the United States Constitution had before them John Jay’s New York Constitution. And he was a leading member of the New York Convention which ratified the United States Constitution in July 1788.

Further, between October 1787 and June 1788 a series of essays were written by Alexander Hamilton, James Madison and John Jay and published in New York newspapers, anonymously, under the pseudonym “Publius”. They advocated the federalist case. The essays were also collected and published in two volumes as the “Federalist”. There were eighty-five essays in all. Most were authored by Alexander Hamilton and James Madison. Mr Jay wrote five. He might have played a larger role in that regard but for an injury – a stone had been thrown at his head at a riot which Mr Jay was trying to quell.

It has been said that “The essays became, for supporters, a Federalist bible” and “Perhaps no other single document best speaks in detail to the intention of the framers behind many of the concepts underlying the federal constitution”.[6] 

As soon as he recovered from his injury, John Jay also published, anonymously, an “Address to the People of New York”, distributed in pamphlet form,[7] which advocated the Federalist case.

On 26 September 1789, President Washington appointed John Jay first Chief Justice of the United States, and he was confirmed, without objection, by the Senate.

In that role, he and Associate Justices also sat on federal Circuit Courts. The obligation of “riding circuit” was time consuming and burdensome. In those days travel was by horse drawn carriage, and Justices were required, since 1792, to rotate between Circuits, including Circuits that did not include their home States.[8] 

His judicial duties were interrupted by being called to serve as special envoy to Great Britain in 1794. He negotiated a treaty (commonly referred to since as the “Jay Treaty”) to settle issues remaining since the Treaty of Paris. The Treaty was ratified by the Senate in 1795. Despite that, it was not generally received well and, it is said, “very possibly” cost him the Presidency.[9]

Mr Jay resigned as Chief Justice of the United States in 1795. He had been elected Governor of the State of New York. He was re-elected as Governor three years later. During his tenure, he played a pivotal role in the passage of an Emancipation Act in 1799 which law “set in motion the gradual ending of slavery within the state over a period of years”.[10] He did not stand in 1801 for a further term, and he retired from public life.

He declined an offer to nominate him for a second term as Chief Justice of the United States. John Marshall was nominated in his stead.[11]

Mr Jay died peacefully at Bedford, New York, on 17 May 1829, at the age of 83.

Jurist

In assessing the impact of Jay CJ as a jurist, it is not to be forgotten that his time as Chief Justice of the United States, like his time as New York Chief Justice, was interrupted by being called to serve in other ways including those mentioned above. That is not to say that his judicial output was insubstantial numerically – it was not.[12]  It is not intended in this paper, nor is it feasible, to conduct a wide-ranging survey of the decisions of Jay CJ, whether sitting in the state or federal Supreme Courts or on circuit. But there are nevertheless some opinions of his which should be singled out as having had a particular impact in Australia.

…some opinions of his [Jay CJ] which should be singled out as having had a particular impact in Australia.

War Pensions

In 1792, the United States Congress enacted the Invalid Pensions Act which provided for pensions for war veterans who were placed on an approved pension list.[13] The Act conferred a jurisdiction on the Circuit Courts to decide if applicants should be placed on that list, which decision was reviewable by the Secretary of War and Congress. 

On about 5 April 1792,[14] the Circuit Court for the District of New York, consisting of Jay CJ, Cushing J and Duane District Judge, unanimously agreed:[15]

“That by the constitution of the United States, the government thereof is divided into three distinct and independent branches, and that it is the duty of each to abstain from, and to oppose, encroachments on either. That neither the legislative nor the executive branches, can constitutionally assign to the judicial any duties, but such as are properly judicial, and to be performed in a judicial manner. That the duties assigned to the circuit, by this act, are not of that description, and that the act itself does not appear to contemplate them as such; inasmuch as it subjects the decisions of these courts, made pursuant to those duties, first to the consideration of and suspension of the secretary of war, and then to the revision of the legislature; whereas, by the constitution, neither the secretary of war, nor any other executive officer, nor even the legislature, are authorized to sit as a court of errors on the judicial acts or opinions of this court…”

They went on to consider whether they could act in persona designata.

Their Honours asked the Clerk of the Court to write to the President enclosing a copy of their observations, requesting that it be passed on to Congress. Subsequently, Jay CJ and Cushing J held the Circuit Courts for the Districts of Connecticut, Rhode Island and Vermont, together with the District Judges, and gave a similar opinion.

Thereafter, in April and June of 1792, Justices Wilson, Blair and Iredell et al made similar representations to the President, acting in the name of the Circuit Courts for the Districts of Pennsylvania and North Carolina, respectively.[16] Different views were expressed on whether the members of the Court could act in persona designata.

In August 1792, in Hayburn’s case, a motion came on before the Supreme Court of the United States for mandamus directed to the Circuit Court for the District of Pennsylvania compelling it to proceed in a certain petition for an invalid pension for William Hayburn. After hearing argument on the merits, the Court, Jay CJ presiding, adjourned the Court until the next term (February 1793). In the meantime, in February 1793 before the Court reconvened, Congress repealed and replaced the provisions considered unconstitutional, and otherwise provided for the relief of the pensioners.[17] No doubt the Court had given Congress that opportunity. The case was then dismissed as being purely academic.

But there had been cases where judges as commissioners had certified pending claims by applicants to be placed on the pension list under the 1792 Act. There was no decided Supreme Court decision that bound all Circuits. The 1793 Act indeed provided in s 3 that:

“But it shall be the duty of the Secretary of War, in conjunction with the Attorney General, to take such measures as may be necessary to obtain an adjudication of the Supreme Court of the United States, on the validity of any such rights claimed under the Act aforesaid, by the determination of certain persons styling themselves commissioners.” 

In February 1794, the Supreme Court heard Ex Parte Chandler.[18] There, a veteran had been approved for a pension by the Eastern Circuit, but his name was not included in the pension list.  John Chandler applied to the Supreme Court by writ of mandamus to compel the Secretary of War to place his name on the list. The Supreme Court, including Jay CJ, denied the writ by oral decision. There is no record of the reasons. It has been surmised, with some force, that the Court considered that the 1792 Act was unconstitutional and that the approval by the Eastern Circuit of Mr Chandler’s application was accordingly null and void.[19]

Also in February 1794, the Supreme Court, Jay CJ presiding, held that the United States could have restitution of a pension paid under the 1792 Act in an action for moneys had and received.[20]

Marshall CJ discussed the aforesaid events in Marbury v Madison, 5 US 137 (1803). The impact of that case in America and Australia needs no elaboration. In the course of upholding the principle of judicial review,[21] Marshall CJ observed at pp171-2:[22]

“This opinion seems not now, for the first time, to be taken up in this country.

It must be well recollected that in 1792, an act passed, directing the secretary at war to place on the pension list such disabled officers and soldiers as should be reported to him, by the circuit courts, which act, so far as the duty was imposed on the courts, was deemed unconstitutional; but some of the judges, thinking that the law might be executed by them in the character of commissioners, proceeded to act and to report in that character.

The law being deemed unconstitutional at the circuits, was repealed, and a different system established; but the question whether those persons, who had been reported by the judges, as commissioners, were entitled, in consequence of that report, to be placed on the pension list, was a legal question, properly determinable in the courts, although the act of placing such persons on the list was to be performed by the head of a department.

That this question might be properly settled, congress passed an act in February, 1793, making it the duty of the secretary of war, in conjunction with the attorney general, to take such measures, as might be necessary to obtain an adjudication of the supreme court of the United States on the validity of any such rights, claimed under the act aforesaid.

After the passage of this act, a mandamus was moved for, to be directed to the secretary at war, commanding him to place on the pension list, a person stating himself to be on the report of the judges.

There is, therefore, much reason to believe, that this mode of trying the legal right of the complainant, was deemed by the head of a department, and by the highest law officer of the United States, the most proper which could be selected for the purpose.

When the subject was brought before the court the decision was, not that mandamus would not lie to the head of a department, directing him to perform an act, enjoined by law, in the performance of which an individual had a vested interest; but that a mandamus ought not to issue in that case – the decision necessarily to be made if the report of the commissioners did not confer on the applicant a legal right.

The judgment in that case, is understood to have decided the merits of all claims of that description; and the persons on the report of the commissioners found it necessary to pursue the mode prescribed by the law subsequent to that which had been deemed unconstitutional, in order to place themselves on the pension list.

The doctrine, therefore, now advanced, is by no means a novel one.”

It should also be mentioned that the remonstrances of Jay CJ and the other Justices were referred to with approval by Dixon J in the important separation of powers case of Victorian Stevedoring and General Contracting Co Pty Ltd v Dignan (1931) 46 CLR 73 at p90.

The Treaty of Paris, by Benjamin West (1783) (Jay stands farthest to the left). The British delegation refused to pose for the painting, leaving it unfinished.

Chisholm

In 1793, a case came before the United States Supreme Court concerning whether an individual citizen of one State had a right to sue another State in that Court: Chisholm v Georgia, 2 US 419 (1793).

One Robert Farquhar had supplied cloth to the Continental Army in Georgia in 1777, for a price agreed with the authorised agent of the State of Georgia. Chisholm, Farquhar’s executor, sued Georgia invoking the original jurisdiction of the United States Supreme Court but the State of Georgia denied liability, maintaining that Georgia had sovereign immunity from suit.[23] Georgia refused to appear in the Supreme Court other than to demur to the jurisdiction.

By a 4:1 majority, the Court held that the State of Georgia was amenable to suit. The majority comprised Jay CJ, Blair, Wilson and Cushing JJ. Iredell J dissented. Each judge published a separate opinion. Opinions were given in reverse order of seniority, as was the custom at the time.

Article III § 2 of the United States Constitution provided relevantly that:

“The judicial power shall extend to all cases, in law and equity, arising under this Constitution, the laws of the United States, and treaties made, or which shall be made, under their authority; – to all cases affecting ambassadors, other public ministers and consols; – to all cases of admiralty and maritime jurisdiction; – to controversies to which the United States shall be a party; – to controversies between two or more States; between a State and citizens of another State; – between citizens of different States; – between citizens of the same State claiming lands under grants of different States, and between a State, or the citizens thereof, and foreign States, citizens or subjects.

In all cases affecting ambassadors, other public ministers and consols, and those in which a State shall be a party, the Supreme Court shall have original jurisdiction. In all the other cases before mentioned, the Supreme Court shall have appellate jurisdiction …” (emphasis added)

The reference to “State” first in the sequence before “citizens of another State” supported the view that the Constitution was only referring to cases where the State was plaintiff. This was consistent with the sovereign immunity argument in that the State would thereby consent to the jurisdiction of the Court. This view was consistent inter alia with statements made by Alexander Hamilton in Federalist Paper No. 81.

In rejecting that view, a common rebuttal in the opinions of the majority judges, was that the natural and plain reading of the wording included cases where the State was a defendant, relying on the fact that a State must necessarily be a defendant in the case of a controversy between two States. Jay CJ appealed to ordinary rules of construction, saying for example at p476 that “This extension of power is remedial, because it is to settle controversies. It is therefore, to be construed liberally”; and at p477, “Words are to be understood in their ordinary and common acceptation, and the word party being in common usage, applicable to both Plaintiff and Defendant, we cannot limit it to one of them in the present case”. It would have been easy for the framers to have said otherwise, if that had been their intention. Wilson J[24] remarked, citing Bracton, that it would be superfluous to provide a remedy without a right.

Jay CJ  and Wilson J also pointed to other provisions in the Constitution where the exercise of federal legislative and executive power bound the States.

Jay CJ further appealed to the reasons inherent in a federation why the natural meaning should prevail, at p476:

“… in cases where some citizens of one State have demands against all the citizens of another State, the cause of liberty and the rights of men forbid, that the latter should be the sole Judges of the justice due to the [former]…”

He said similarly at p 474:

“Prior to the date of the Constitution, the people had not had any national tribunal to which they could resort for justice; the distribution of justice was then confined to State judicatories, in whose institution and organization the people of the other States had no participation, and over whom they had not the least control. There was then no general Court of appellate jurisdiction, by whom the errors of State Courts, affecting either the nation at large or the citizens of any other State, could be revised and corrected. Each State was obliged to acquiesce in the measure of justice which another State might yield to her, or to her citizens; and that even in cases where State considerations were not always favorable to the most exact measure. There was danger that from this source animosities would in time result; and as the transition from animosities to hostilities was in the history of independent States, a common tribunal for the termination of controversies became desirable, from motives both of justice and of policy.

Prior also to that period, the United States had, by taking a place among the nations of the earth, become amenable to the laws of nations; and it was their interest as well as their duty to provide, that those laws should be respected and obeyed; in their national character and capacity, the United States were responsible to foreign nations for the conduct of  each State, relative to the law of nations, and the performance of treaties; and there the inexpediency of referring all such questions to State Courts, and particularly to the Courts of delinquent States became apparent. While all the States were bound to protect each, and the citizens of each, it was highly proper and reasonable, that they should be in a capacity, not only to cause justice to be done to each, and the citizens of each; but also to cause justice to be done by each, and the citizens of each; and that, not by violence and force, but in a stable, sedate and regular course of judicial procedure.”

Jay CJ also challenged the notion that the State of Georgia was a “sovereign State” for all purposes. He said:

“Prior to the revolution … All the people of the country were then, subjects of the King of Great Britain, and owed allegiance to him … They were in strict sense fellow subjects, and in a variety of respects one people. When the Revolution commenced, the patriots did not assert that only the same affinity and social connection subsisted between the people, of the colonies, which subsisted between the people of Gaul, Britain and Spain, while Roman provinces, viz. only that affinity and social connection which result from the mere circumstance of being governed by the same Prince; different ideas prevailed, and gave occasion to the Congress of 1774 and 1775. The Revolution, or rather the Declaration of Independence, found the people already united for general purposes, and at the same time providing for their more domestic concerns by State conventions, and other temporary arrangements. From the crown of Great Britain, the sovereignty of their country passed to the people of it … thirteen sovereignties were considered as emerged from the principles of the Revolution, combined with local convenience and considerations; the people nevertheless continued to consider themselves, in a national point of view, as one people …”

Although he (like Wilson J) advanced a notion of popular sovereignty, the underlying point was that the people were, first and foremost, Americans. 

Jay CJ also denied that suability was incompatible with sovereignty, and appealed to general principles of justice and equality, for example:

“The only remnant of objection therefore that remains is, that the State is not bound to appear and answer as a Defendant at the suit of an individual: but why it is unreasonable that she should be so bound is hard to conjecture. That rule is said to be a bad one, which does not work both ways…”

And that:

“[The decision of the Court] provides for doing justice without respect of persons, and by securing individual citizens, as well as States, in their respective rights, performs the promise which every  free Government makes to every free citizen, of equal justice and protection…”

The Court held that default judgment should be entered against the State of Georgia. But the  judgment was not enforced.[25] Georgia passed legislation making it an offence to enforce the judgment, or bring similar claims against the State, punishable by death. This stalemate might be thought to reinforce the point made by Jay CJ about the need for an independent national tribunal with power to quell controversies between States, or between a State and a citizen of another State.

Ultimately, the Eleventh Amendment was passed, ratified in 1795. It provided that:

“The judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another State, or by citizens or subjects of any foreign State.”

The United States Supreme Court has since rejected the reasoning in Chisholm, by a 5:4 majority, subject to a vigorous dissent.[26]

But much of the reasoning in Chisholm remains apposite to our own federation.

During the nineteenth century, Chisholm entered the Australian legal lexicon.

Chancellor Kent discussed Chisholm in the first volume of his renowned Commentaries on American Law published in 1826.[27]

Chisholm was referred to by Sir Isaac Isaacs at the Melbourne Convention in 1898.[28]

In their celebrated 1901 work, Quick and Garran referred to Chisolm in their discussion of s 75(iv) of the Australian Constitution.[29]

Sections 75 and 76 of the Australian Constitution provide:

“75. Original jurisdiction of High Court

In all matters:

1. arising under any treaty;
2. affecting consuls or other representatives of other countries;
3.  in which the Commonwealth, or a person suing or being sued on behalf of the Commonwealth, is a party;
4. between States, or between residents of different States, or between a State and a resident of another State;
5. in which a writ of Mandamus or prohibition or an injunction is sought against an officer of the Commonwealth;

the High Court shall have original jurisdiction. (emphasis added)

76. Additional original jurisdiction

The Parliament may make laws conferring original jurisdiction on the High Court in any matter:

1. arising under this Constitution, or involving its interpretation;
2. arising under any laws made by the Parliament;
3. of Admiralty and maritime jurisdiction;
4. relating to the same subject-matter claimed under the laws of different States.”

In Australia, the trend of judicial opinion is to affirm jurisdiction under relevant clauses of ss 75 and 76 exercised against States without their consent: see eg South Australia v Victoria (1911) 12 CLR 667;[30] The Commonwealth v New South Wales (1923) 32 CLR 200;[31] New South Wales v Bardolph (1934) 52 CLR 455, 459; The Commonwealth v Mewett (1997) 191 CLR 471 (Gummow and Kirby JJ, Brennan CJ agreeing); British American Tobacco Australia Ltd v WA (2003) 217 CLR 30.

Chisholm v Georgia was not mentioned explicitly in the judgments in those cases. But they were mostly cases where a State was sued by the Commonwealth or another State, or arising under s 76(i). So those cases did not require a decision under the limb of s 75(iv) that refers to matters between a State and a resident of another State. In Bardolph, which did arise under that limb of s 75(iv), it appears that sovereign immunity was not in contention and the Court just needed to be satisfied about its own jurisdiction.

Section 78 of the Constitution also should be noted. It provides:

“The Parliament may make laws conferring rights to proceed against the Commonwealth or a State in respect of matters within the limits of the judicial power.”

That power has since been exercised.[32] During the Melbourne Convention in 1898, Sir Isaac Isaacs argued that the mere conferral of jurisdiction in the Constitution was enough to curtail sovereign immunity.[33]  This view did not, admittedly, command universal assent, and Mr O’Connor moved an amendment which led to the insertion of what is now s 78. But it is difficult to assert that the insertion of s 78 was indicative of unanimity amongst the delegates that legislation was needed to curtail sovereign immunity. Indeed, the prevailing view in the High Court is now that s 78 was not necessary in cases falling within s 75 (as opposed to ss 76 and 77): The Commonwealth v New South Wales (1923) 32 CLR 200, 207, 214-5; British American Tobacco Australia Ltd v WA (2003) 217 CLR 30 [15]-[16], [18] (per Gleeson CJ), [59]-[60] (per McHugh, Gummow & Hayne JJ; see also The Commonwealth v Mewett (1997) 191 CLR 471, 551 (per Gummow and Kirby JJ, with whom Brennan CJ agreed at 491, but see Dawson J at 496-7).

The United States Supreme Court has since rejected the reasoning in Chisholm, by a 5:4 majority, subject to a vigorous dissent.

Importantly, for present purposes, Isaacs J was a member of the High Court in The Commonwealth v New South Wales, decided in 1923. There, the question was whether Commonwealth could bring action against the State of New South Wales in tort in the High Court under s 75(iii), without the consent of the State. Knox CJ, Isaacs, Higgins, Rich and Starke JJ held that the Commonwealth could. Chisholm was cited to the Court in the course of argument.[34]

In joint reasons, Isaacs, Rich and Starke JJ said at pp 208-209 of 32 CLR 200:

“It may be convenient to refer first to the assertion (which is at the root of the defendant’s contention) that an Australian State is a ‘sovereign State’. Learned counsel placed the matter on the same plane as a foreign independent State, the ‘representative’ of which is included in sub-sec. II. of sec. 75. As to such a representative it was said the consent of the foreign State was necessary, and so of an Australian State. There are two fallacies involved in this. The first is that there is any analogy whatever between the position of the ‘representative’ of a foreign State and that of one of the States of Australia … what possible analogy is there between such a case – where person and property are judicially deemed to be outside the territory and beyond the territorial jurisdiction of the local Courts – and the case of an Australian State, an integral and necessary part of the territory of the Commonwealth in relation to this Court? New South Wales is not a foreign country. The people of New South Wales are not, as are, for instance, the people of France, a distinct and separate people from the people of Australia. The Commonwealth includes the people of New South Wales as they are united with their fellow Australians as one people for the higher purposes of common citizenship, as created by the Constitution. When the Commonwealth is present in Court as a party, the people of New South Wales cannot be absent. It is only where the limits of the wider citizenship end that the separateness of the people of a State as a political organism can exist…

The second fallacy in the defendant’s argument is in the use of the expression ‘sovereign State’ in relation to a State of Australia. Before the great struggle of the American Union for existence, costing uncounted lives and treasure, that expression was not uncommon in the United States. And that, despite the warning given by Story J. in his work on the Constitution. He says:- ‘In the first place, antecedent to the Declaration of Independence none of the Colonies were, or pretended to be, sovereign States, in the sense in which the term sovereign is sometimes applied to States. The term sovereign or sovereignty is used in different senses, which often leads to a confusion of ideas, and sometimes to very mischievous and unfounded conclusions.’ (par. 207). The conclusion to which we were invited to come in interpreting the Constitution upon the assumption that New South Wales is a ‘sovereign State’ would be both mischievous and unfounded. The term ‘sovereign State’ as applied to constituent States is not strictly correct even in America since the severance from Great Britain (see Story, par. 208). Still further from the truth is it in Australia…”

Story at those paragraphs refers to the Chisholm case in footnotes.[35]

Isaacs, Rich and Starke JJ went on (at pp210-1 and 213) to rely on the plain and literal reading of s 75.

Their Honours further referred at p214 to the principle of “equal and undiscriminating responsibility to obey the law or make reparation”, and noted at p215:

“As to all cases of controversies in which there might be the element of conflicting interests politically considered, an opportunity was definitely created of invoking the jurisdiction of a tribunal independent of any State …”.

By such reasoning, their Honours followed a similar path to Chisholm.

Their Honours cited Farnell v Bowman (1887) 12 App Cas 643. There, the Privy Council held that the New South Wales Claims against the Colonial Government Act of 1876 (39 Vict. No 38) curtailed sovereign immunity from suit, according to its plain meaning.[36] Farnell has since been described as “epochal” and “cataclysmic”.[37] But it was not the first case to conclude that sovereign immunity from suit had been curtailed. Chisholm v Georgia had decided as much nearly a century earlier.

Conclusion

John Jay’s contribution as a Statesman to the establishment of the United States was monumental. His contribution, particularly as a jurist, has not received the attention it deserves in Australia, which is perhaps not surprising because his time on the Bench was interrupted by other governmental duties. But in his judicial duties his work has had a significant impact including in Australia. His views on the separation of powers have been cited by Dixon J, and relied on in the oft cited case of Marbury v Madison. Indeed, the Hayburn and Chandler litigation set the scene for Marbury v Madison concerning judicial review of executive and legislative action. Further, in the writer’s view, Chisholm, including Jay CJ’s reasoning, shone a light on the path which would later be followed by the High Court of Australia.  

[1] The factual background herein draws heavily on George Pellow, Making of Modern Law (Boston: Houghton, Mifflin & Co 1898).

[2] Whom Jay would later run against, and defeat, in the race for Governor of New York in 1798: Mark Dillon, The First Chief Justice: John Jay and the Struggle of a New Nation, pp39-240 (SUNY 2022).

[3] For further reading on his pupillage and his substantial trial experience, see eg Dillon, supra n 2, pp6-18.

[4] An account of his work as Chief Justice is given at Dillon, supra n 2, pp34-5.

[5] Dillon, supra n 2 at p43.

[6] Dillon, supra n 2 pp47, 48.

[7] Making of Modern Law, supra, pp229-230.

[8] Circuit Courts at that time had original as well as appellate jurisdiction (from District Courts).

[9] Dillon, supra n 2, pp52-3, 58-5; Making of Modern Law, supra, p283.

[10] Dillon, supra n 2, p241.

[11] Dillon, supra n 2, p243.

[12] For further reading on his judicial activity, see Dillon, supra n 2, pp34-5, 52-3, 61-5, 71-195, 215-224.

[13] 1 Statutes at Large p243.

[14] The note to Hayburn’s Case, 2 US 408, 410 (1792) must be mistaken when it says the opinion was on 5 April 1791, as that would have been before the Act was enacted.

[15] Note to Hayburn’s Case, 2 US 408, 410-411 (1792).

[16] Ibid.

[17] 1 Statutes at Large, p324.

[18] The case is unreported. For further reading, see Dillon, supra n 2, pp91-111 esp at pp109, 111.

[19] Dillon, supra n 2, pp109, 111. But contra, David Miller, “Some Early Cases in the Supreme Court of the United States”, 8:2 Virginia Law Review pp108-120 (1921).

[20] United States v Todd, 13 How, 52, note.

[21] The Court held that William Marbury was entitled in principle to a writ of mandamus against the Secretary of  State compelling the latter to deliver up a commission, but that the Supreme Court could not issue that writ in its original jurisdiction as the Constitution only conferred appellate jurisdiction on the Supreme Court in the present kind of case. The Act of Congress which purported to confer such original jurisdiction on the Supreme Court was to that extent unconstitutional and invalid.

[22] Chandler’s case was cited in argument at p149.

[23] Chisholm had previously sued, unsuccessfully, in the Southern Circuit Court, in Georgia. The  Court was comprised of Iredell J and Pendleton District Court Judge.

[24] A member of the Constitutional Convention which framed the Constitution.

[25] Georgia later changed its mind and paid the judgment in 1847: see Dillon, supra n 2, p130.

[26] See Alden v Maine, 527 US 706 (1999).

[27] James Kent, Commentaries on American Law, vol. 1, Lecture XIV, p278 (1826).

[28] Convention Debates (Melbourne 1898) p1675.

[29] Quick and Garran, The Annotated Constitution of the Australian Commonwealth, §324, p 774 (1901, reprinted by Legal Books 1976).

[30] The Court comprised Griffth CJ, Barton, O’Connor, Isaacs and Higgins.

[31] The Court comprised Knox CJ, Isaacs, Higgins, Rich and Starke JJ.

[32] See Judiciary Act 1903 (Cth), s 64, if not also s 58.

[33] Convention Debates (Melbourne 1898) p1675.

[34] (1923) 32 CLR 300, 201.

[35] Story, Commentaries on the Constitution of the United States, Book II, §§207, 208, 4th ed (Boston: Little Brown & Co 1873). See also at §178. And see §216 of the first edition (1833). 

[36] Affirming Bowman v Farnell (1886) 7 NSWLR 1 (Faucett and Windeyer J, Martin CJ dissenting).

[37] Downs v Williams (1971) 126 CLR 61, 80 (per Windeyer J). 

Commissioner of Taxation v Wood [2023] FCA 574; 116 ATR 34 (Stewart J) (2 June 2023)

by Stephen Lee – Denning Chambers

Issue

Whether a payment made to settle litigation qualifies as a deduction from assessable income under s 8-1 of the Income Tax Assessment Act 1997 (Cth).

Facts

From 1998 to 2011, Mr Wood, the taxpayer, was employed by a company he and his wife controlled (C Pty Ltd) to provide consultancy services to another company (A Pty Ltd). A Pty Ltd paid consultancy fees to C Pty Ltd under a consultancy agreement. C Pty Ltd, in turn, paid a salary to Mr Wood.

In 2011, the arrangement came to an end, and Mr Wood took up employment with an unrelated company.

Later, A Pty Ltd sued Mr Wood and C Pty Ltd for damages for $2.4M alleging that Mr Wood had, unbeknown to A Pty Ltd, negotiated a number of unauthorised transactions whilst performing the consultancy services in 2006 or 2007. The claim was for misleading and deceptive conduct, breach of fiduciary duty, breach of contract and breach of statutory duty.

Mr Wood and C Pty Ltd disputed the allegations and filed a cross claim, and Mr Wood separately threatened a defamation claim arising out of statements made to Mr Wood’s new employer concerning A Pty Ltd’s allegations. C Pty Ltd went into liquidation.

In December 2013, a Settlement Deed was entered into between Mr Wood and A Pty Ltd, by which Mr Wood was to pay A Pty Ltd $200,000.00 in return for dismissal of the action, without admission. On the same day, a separate Deed of Release was entered into requiring A Pty Ltd to pay Mr Wood $180,000.00 in return for a release of the defamation claim. It was agreed that one could be set off against the other and Mr Wood paid $20,000.00 on 29 January 2014.

The Commissioner disallowed Mr Wood’s claim to deduct the sum of $200,000.00 in the year ending 30 June 2014. The Commissioner disallowed Mr Wood’s objection, and Mr Wood sought review in the AAT. The AAT overturned the Commissioner’s decision and allowed the deduction. The Commissioner appealed on a question of law to the Federal Court, which dismissed the appeal.

ITAA 1997:

Section 8-1 ITAA 1997 provides (inter alia):

“8-1 General deductions

1. You can deduct from your assessable income any loss or outgoing to the extent that:
   1. it is incurred in gaining or producing your assessable income; …
2. However, you cannot deduct a loss or outgoing under this section to the extent that:
   1. It is a loss or outgoing of capital, or of a capital nature; …”

Stewart J’s Decision:

The Court observed, the relevant principles from Day’s case,[1] as follows:

• s 8-1(1)(a) refer to a relationship between the expenditure incurred and what is productive of assessable income, which is the connection for deductibility;
• “incurred in gaining or producing … assessable income” mean incurred “in the course of gaining or producing” income;
• It is necessary to read “losses and outgoings … incurred in gaining or producing the assessable income” as incurred “in the course of” gaining or producing that income;  outgoings may have an effect in gaining income, but losses cannot, as they simply reduce income;
• The statutory words “in the course of” do not require a direct connection between the expenditure and the derivation of income, but requires more than a causal (viz but for) connection.  No narrow approach should be taken;
• An outgoing may be referable to a year of income other than that in which it was incurred;
• A way of stating the question to be asked is: “is the occasion of the outgoing found in whatever is productive of actual or expected income?”;
• Essential to the inquiry is the determination of what it is that is productive of assessable income, and seeking to delineate between proper and proscribed conduct is not useful in answering that inquiry.

Stewart J held that the Settlement Sum was properly characterised as being incurred in the course of gaining or producing assessable income, even thought it was referrable to a year of income other than the year in which it was incurred.  At [42]-[46] the Court held that the occasion of the liability that was discharged was the work done by Mr Wood as employee of C Pty Ltd, under the consultancy agreement. It did not matter that the liability arose under a Settlement Deed some years after the employment had finished; it arose out of that employment. Mr Wood’s conduct in his employment was the source of income and the cause of the risk of liability. The Settlement Sum avoided the risk of a judgment for a much higher amount, which would have amounted to a much larger reduction in income for the 2006 and 2007 tax years.

It was irrelevant that his alleged conduct was wrongful or outside the scope of his employment.

The Commissioner submitted that s 8-1(1)(a) was not satisfied as there was no connection with the gaining of assessable income in the 2014 year.  Stewart J rejected this, saying at [44] that “a loss that is a reduction of past income can also qualify as a general deduction”.

The Commissioner further submitted that the $200,000.00 payment was an outgoing of a capital nature, because it preserved Mr Wood’s reputation in the finance industry. Stewart J rejected this at [52], because the payment was rather to be characterised as preventing litigation risk arising from his prior employment. It “arose out of the very activities the respondent performed in gaining assessable income”: [53]. The purpose of the Deed of Release was irrelevant.

The Commissioner has published a Decision Impact Statement on 21 February 2024 in relation to this case. The Commissioner’s view is that, “this decision has limited application beyond its own factual circumstances”.  The Commissioner is also of the view that the “decision does not represent a departure from established principles concerning section 8-1, and cases concerning the application of these principles always turn on the facts of the particular case”.

Commissioner of Taxation v Carter [2022] HCA 10; 274 CLR 304 (6 April 2022)

by Stephen Lee – Denning Chambers

Issue

Whether a disclaimer executed by a beneficiary after 30 June is effective to retrospectively expunge a present entitlement to income from a trust estate as at 30 June.  That is, the issue was one of timing.  Is a beneficiary’s present entitlement to be determined immediately prior to the end of the year of income, or can events after the end of the year of income affect or alter that position?

Facts

The Whitby Trust was a traditional family discretionary trust, settled on 27 July 2005. The Trustee was a corporate trustee, controlled by Mr Carratti. The Primary Beneficiaries were Mr Caratti’s five children, some of whom were the respondents to the appeal. 

By 30 June 2014, the Trustee had failed to appoint or accumulate the income for that year. The Trust Deed included default distribution clauses, such that no income remained with the Trustee.  On 27 October 2015, the Commissioner issued amended assessments to each of the five children for one-fifth of the income of the Whitby Trust for the 2014 year on the basis that they were “presently entitled” to the income of the trust for that year. The respondent beneficiaries then executed deeds of disclaimer on 3 and 4 November 2014 disclaiming any and all right, title and interest in the income for that year.  Those disclaimers were ineffective. Further disclaimers were signed on 30 September 2016.

The Commissioner contended that the disclaimers did not apply retrospectively to disapply s 97 of the Income Tax Assessment Act 1936 (ITAA 1936).  The respondents sought review in the AAT.  On review, the AAT accepted that the most recent disclaimers were ineffective because the earlier disclaimer amounted to a tacit acceptance of the gift of income for the 2014 year, and in any event held that a disclaimer made after 30 June 2014 could not retrospectively affect the children’s “present entitlement” as at 30 June. The Full Court of the Federal Court held that the disclaimers were effective, the earlier disclaimer was not a tacit acceptance of the default gift and the disclaimers could and did have the result that, retrospectively, the beneficiaries did not have a present entitlement to the 2014 income as at 30 June 2014.  The Commissioner appealed to the High Court. The High Court allowed the appeal, holding that the latest disclaimers were ineffective as the Commissioner’s right to tax the beneficiaries was based on their “present entitlement” to the income as at 30 June 2014.  A joint judgment was delivered by Gageler, Gordon, Steward and Gleeson JJ. Edelman J concurred but for different reasons.

Legislative and Trust Framework:

Section 96 of the ITAA 1936 provides that “Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate”.

Section 97(1) ITAA 1936 relevantly provides that:

“Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

1. the assessable income of the beneficiary shall include:
   1. so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; …”

Sections 98, 99 and 99A also operate by reference to the facts, events and legal relationship in existence at the end of the income year.

The Whitby Trust conferred a familiar discretionary power on the trustee to distribute income to any beneficiary “at any time before the expiration of any Accounting Period”, being 30 June or to accumulate all or any part of the income (cl 3.7). The Trust Deed also contained (cl 3.7) a familiar default beneficiary clause that “If in relation to any Accounting Period, the Trustee has made no effective determination … in respect to any part of the income of that Accounting Period immediately prior to the end of the last day of that Accounting Period, then the Trustee shall hold that income in trust for [a formula which here referred to the Principal Beneficiaries as were then living].”  This clause was to ensure that the income, if not otherwise dealt with, was distributed.

High Court’s Decision:

It was argued for the taxpayers that the disclaimers had effectively removed all entitlement to the income, retrospectively. The High Court rejected that argument. Their Honours regarded the question as simply one of statutory construction, particularly of s 97.

In the joint judgment at [21], it was important that s 97 is directed to identifying the position immediately prior to the end of the year of income. Their Honours referred to with approval the Court’s decision in Bamford,[2] which itself approved the Court’s earlier decision in Harmer. [3] It was said in Harmer that a beneficiary would be presently entitled if and only if:

“(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the year of income and whether or not the trustee has the funds available for immediate payment.”

The Court observed at [24] that the taxpayer’s submission would lead to uncertainty which may not be resolved for years. At [26], it was acknowledged that there may be apparent unfairness of this result, but that was addressed by the Parliament in that s 97 speaks of the “net income” of the estate, not distributable income, and of “present entitlement” not receipt.

Thus the joint judgment held that when s 97(1) refers to present entitlement, it refers to the present legal right of a beneficiary to demand and receive a share of the distributable income of the trust estate. That entitlement is determined immediately before the end of the relevant income year, that is just prior to midnight at the end of the year of income: [19]-[20]. This “cannot be altered after the end of the income year”: [23].  The disclaimers were not effective to “retrospectively expunge” the rights of the Commissioner against the respondents: [27].

The taxpayers argued that this would be inconsistent with the principle that the donee of a gift is required to assent to a gift for it to take effect. Their Honours said that their conclusion was consistent with that principle, because of the presumption of assent, which is a presumption of law: [29]-[30].

Edelman J differed on this point, saying that in equity assent is not necessary to constitute a valid trust and hence irrelevant to the notional allocation of income: [38]-[40]. His Honour otherwise agreed with the joint judgment.

This provides a salutary lesson for trustees of discretionary trusts (and beneficiaries of such) to make decisions about income before the end of the financial year.

[1] Commissioner of Taxation v Day (2008) 236 CLR 163.[2] Commissioner of Taxation v Bamford (2010) 240 CLR 481.[3] Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271.

Automotive Invest Pty Ltd v Commissioner of Taxation (2024) 419 ALR 324; [2024] HCA 36 – Divergence in the Contemporary Approach to Statutory Construction

By Richard Schulte – Hemmant’s List

Introduction

The decision in Automotive Invest Pty Ltd v Commissioner of Taxation [2024] HCA 36 exposes a divergence in the contemporary approach to statutory construction amongst some judges of the High Court.  Outwardly, the case addresses the question of “purpose” within the framework of the A New Tax System (Luxury Car Tax) Act 1999 (Cth) (LCT Act). The issue was whether the display of luxury and collectable cars at the “Gosford Classic Car Museum”, which operated as a car dealership, constituted a use of a car “for a purpose other than a quotable purpose” thereby triggering a tax liability.

The majority (Edelman, Steward, and Gleeson JJ) concluded that the cars were held for sale, with the museum functioning as a novel technique to attract purchasers such that there was no liability to tax.  Whereas the minority (Gageler CJ and Jagot J) considered that the museum served as a distinct use apart from the purpose of sale, making the cars subject to luxury car tax.

Whilst not specifically referenced by either the majority or the minority, unsurprisingly, the Court has adopted the contemporary approach[1] to interpreting legislation.  That is, with the benefit of context, the task of construction begins and ends with the statutory text. Constructional choices between one meaning and another usually turn on coherence with the statutory objects or policies rather than “linguistic fit”.[2]

Broadly, the decision of the majority as compared to the minority reveals points of divergence in the application of the contemporary approach.  The purpose of this note is to identify some of the points of difference and briefly explain the guidance practitioners can take from the decision.

The Majority’s Approach

The majority first considered the circumstances of the introduction of luxury car tax, looking at both the history and the explanatory memorandum.[3]  Emphasis was placed on the design attributed to the tax as explained in the EM.[4] 

As expected, the text of the LCT Act is exposed in detail.  The majority identified the things that influenced their approach to statutory construction. 

First, a feature of the LCT Act is the presence of an internal aid to construction of the “operative provisions” by the use of “explanatory sections”, which can only be used in certain ways.[5]  For example, the explanatory sections can only be used to determine the purpose or object underlying the operative provision.[6]

Second, the majority considered that the LCT Act was drafted to speak to the public using ordinary language and communication.  In applying the ordinary rules of interpretation to that language, it was an important contextual point that the LCT Act created a tax in the course of commercial activity.  That recognition informed two further observations that influenced interpretation.  First, that it is always important to look “at the substance and reality of the matter” and that a “commonsense and commercial approach” should be applied to the LCT Act.[7]

The ordinary language of the LCT Act was on one hand concerned with “intended purpose” and on another, also concerned with “actual purpose”.[8]  The constructional choice was whether the reference to “purpose” was to the objective or subjective purpose of the person whose purpose was in issue.[9]

The Commissioner argued that the references to the word “purpose” was to “objective purpose” ascertained by inference from how the cars were in fact used, to the exclusion of evidence given by the taxpayer.[10]

To expose the “constructional choice” as to the meaning of “purpose”, the majority differentiated between “motive”, “means” and “purpose”.[11]  With that understanding, it was possible to characterise the relevant person’s purpose or end at the proper level of generality, as distinct from any motive for that purpose or the intended means of achieving that purpose.[12]

The majority then looked at three different ways that “purpose” might be ascertained. 

First, it was considered that “purposes” of their nature had to be attributed to a person and was subjective in the sense that it belonged to a subject.  A person’s purposes could only be proved by their direct evidence, or by inference from the circumstances, or both.[13]

Second, the majority recognised that the law is sometimes concerned with the “purpose” of a legal construct such as the “reasonable person”.  In those circumstances, a person cannot give direct evidence of the purpose of the “reasonable person”.  That “purpose” can only be established by inference from the circumstances as to the purpose that such a reasonable person in the relevant position would have had.[14]  

Third, “purpose” is determined by reference to the object which some act is “apt to  achieve”.  Objective purpose can be determined by reference to what a reasonable person engaging in the act would expect to achieve.[15]

The majority then reasoned that “purpose” in the text of the LCT Act was the taxpayer’s purpose.  “Purpose” was neither the purpose of a reasonable person nor the purpose of a reasonable person in the position of the taxpayer that was “apt to achieve”.[16]  Primarily, this approach was justified by use of the words “you” and “intention” permitting the conclusion that the provision was directed at the taxpayer’s purpose.[17]

That approach was then applied consistently (and conventionally) to subsequent references to “purpose”.  Absent express language to justify a change, there was no justification to switch from the taxpayer’s purpose to the objective purpose of a reasonable person in the position of the taxpayer.[18]  In terms of proving the point, evidence of the circumstances in which the actual use occurred was not necessarily more probative than the sworn or affirmed testimony of a witness in inferring actual purpose.[19]

Without specific reference to it, the majority applied section 15AA of the Acts Interpretation Act 1901 (Cth), interpreting the LCT Act in line with its purpose of taxing luxury cars at the point of final consumption. This pragmatic approach aligned with commercial realities and the legislative objective of the LCT Act. 

The Minority’s Approach

The minority provide a strict study consistent with the proposition that the task of construction begins, as it ends, with the statutory text.[20]  As compared to the approach of the majority, there is no reference to the explanatory memorandum, historical context or how those matters might affect constructional choices.  That must necessarily be, because for the minority such context was not necessary to assist in fixing the meaning of the statutory text.   

For the minority, constructional choices were focused on ordinary or grammatical meaning (literalism) as opposed to seeking coherence with statutory objects or policies.  It was said: “the LCT Act must be construed not in accordance with some superimposed policy reflecting the general scheme of the LCT Act but in accordance with the terms of its provisions.”[21]

For the minority, the issue was not “purpose”, but rather “use” for a purpose other than that exclusively permitted without the imposition of tax.[22] That was a question of fact answered by an “objective characterisation of the purpose or purposes of the use itself viewed from the perspective of an independent observer.” That question was not answered merely by ascertaining the subjective state of mind of the taxpayer.[23]

The literal analysis of the minority meant the threshold to engage liability for tax was very low.  All that needed to be shown objectively was that a car was being used for a purpose other than for sale.  Using the car in a museum negotiated that threshold.

Conclusion

Both the majority and the minority followed the approach that statutory construction begins and ends with the text.  The real difference in their approaches concerns when and how “context” is deployed.  The minority eschewed any real resort to context preferring a literal meaning that was plain and coherent.  The majority deployed context immediately.  Construing the LCT Act in “context” resulted in meaning being given to language that was more granular and nuanced as compared to a literal meaning.

For practitioners advising on the operation of legislation the guidance is clear.  There is a divergence in approach evident in the High Court.  As can be seen from the decision in Automotive Invest that divergence can produce profoundly different outcomes.  Prudence dictates that to reveal those possibly different outcomes it is not enough to simply explore the “the contemporary approach” but resort must also be had to a strict literalism in navigating statutory construction.  

[1] See Pierce, Statutory Interpretation in Australia, 10ed, Chapter 2.[2] See SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362 per Gageler J [37]-[39].  To similar effect, see Kiefel CJ, Nettle and Gordon JJ [14].[3] [2024] HCA 36, [60].[4] [2024] HCA 36, [61].[5] See Part 5, Division 23, LCT Act.[6] Section 23.10(2)(a) LCT Act.[7] [2024] HCA 36, [105].[8] [2024] HCA 36, [106].[9] [2024] HCA 36, [109].[10] [2024] HCA 36, [109].[11] [2024] HCA 36, [110].[12] [2024] HCA 36, [111].[13] [2024] HCA 36, [113].[14] [2024] HCA 36, [115].[15] [2024] HCA 36, [117].[16] [2024] HCA 36, [143].[17] [2024] HCA 36, [126]-[128].[18] [2024] HCA 36, [131].[19] [2024] HCA 36, [134].[20] [2024] HCA 36, [4]-[16].[21] [2024] HCA 36, [55].[22] [2024] HCA 36, [9] and [19].[23] [2024] HCA 36, [55].

Century Mining Pty Limited v The Commissioner of State Revenue [2024] QSC 143 (4 July 2024) (Treston J)

by Samantha Amos – George Street Chambers

The Supreme Court has now clarified the limits of what constitutes a ‘marine cost’ for the purposes of calculating deductions from the gross value of a mineral for royalty purposes.

Century Mining Pty Limited exported zinc concentrate and silver mined from its operations at Century Mine in Lawn Hill from the Port of Karumba. Due to the physical limitations of the port, Century Mining loaded the minerals at the port onto on a transhipment vessel, the MV Wunma, which then transported the minerals to ocean-going vessels which were berthed in a roadstead anchorage just outside of the port limits.

Century Mining claimed that the costs of the MV Wunma were freight costs within the definition of ‘marine cost’ under s 54 of the Mineral Resources Regulation 2013 (Qld). The costs included not only diesel and operating costs, but dredging costs of the port and Norman River and port fees (at [11]). Section 54 provides that the value of minerals must be worked out by working out the gross value of the mineral under Part 5 and subtracting specified amounts including the marine cost for the mineral.

The Commissioner disallowed the claimed costs on objection. Century Mining appealed to the Supreme Court under ss 69 and 70 of the Taxation Administration Act 2001 (Qld).

Her Honour Justice Treston dismissed the appeal. Her Honour found at paragraph [92] that freight and insurance costs relating to the transport by water to a port outside of the State does not include those costs to transport the mineral to the point of loading on the ocean-going vessel and does not apply to activities occurring at or prior to the point of loading on the ocean-going vessel. Freight and insurance costs must be just that, costs of freight and insurance, costs ‘relating to’ freight and insurance are not covered by the definition.  ‘Marine costs’ are those are proven to be freight or insurance costs and being those costs which are activities occurring, or risks arising, after the mineral is loaded onto the ocean-going vessel.

The appeal period expired on 1 August 2024, with no appeal filed.

James Kent, author of the celebrated Commentaries on American Law, is often spoken of as the American Blackstone. The High Court of Australia has cited Chancellor Kent, describing him as one of the “great commentators”.[1] The Hon Robert French AC has described Kent as one of the “great American legal scholars”.[2]  The late Justice McPherson regarded Kent as a disciple of the common law.[3] Given such accolades, and that it is nearly two centuries since Kent’s Commentaries were first published, it is timely to examine who Chancellor Kent was and his influence on Anglo-Australian law.

Life and Career

James Kent was born on 31 July 1763 in what is now Putnam County, in upstate New York.[4] Kent’s father was half farmer, half lawyer. Kent’s mother died when he was seven. From a young age, Kent boarded with his maternal grandfather in Connecticut, in a house that would later be torched to the ground by the British during the Revolutionary War. Kent went to Yale College from 1777 to 1781, graduating among the first of his class.

During a hiatus in classes due to the Revolutionary War, Kent read the fourth volume of Blackstone’s Commentaries on the Laws of England. He decided upon a career in law. Kent commenced an apprenticeship in Poughkeepsie, New York with the State’s Attorney-General, whose next-door neighbour was John Jay. John Jay would later become Chief Justice of the United States and Governor of New York.

Kent was admitted to the New York Bar in 1785, at the age of twenty-one. He commenced legal practice in a partnership in Poughkeepsie. He also married in 1785, a union that endured until his death in 1847.

“Kent has continued to be cited by Australian courts and commentators.”

When business was slow, Kent engaged in prodigious self-study and moved in Federalist Party circles, where he built a connection with the likes of John Jay and Alexander Hamilton.

Kent was a member of the New York State Legislative Assembly at various times between 1790 and 1797.  

In 1793, Kent ended his partnership in Poughkeepsie and moved to New York City, where he commenced legal practice on his own. This did not go well. In December of that year, Columbia College appointed him inaugural professor of law.  He remained in this post until 1797, delivering lectures in law.  Columbia College conferred a Doctorate of Laws on him.[5]

He maintained his practice, being admitted as a solicitor and counsel in Chancery in 1794. The customary examination was waived due to his reputation. In 1796, Kent was appointed master in chancery, which allowed him to give up his unsuccessful practice in the city. In 1797, Kent was appointed as the Recorder of New York City, a part-time judicial position.[6]

Then, in 1798, at the age of thirty-five, Kent was appointed a justice of the New York Supreme Court.[7] In 1804, he became Chief Justice at the age of forty-one.[8] This was a court of five justices, having original as well as appellate jurisdiction.

The Supreme Court had prior to that time not shown itself to be particularly impressive as a Court.[9] One of Kent’s major innovations in that Court was that, as Chief Judge Judith Kaye put it, “he introduced to New York the custom of writing opinions on significant matters and collecting them in official, state-sponsored reporters”.[10]  Kent would produce written opinions, supported by legal authorities, with the result that the other judges effectively had to produce their own written opinions, as a matter of pride. The first official reporter, in 1804, was one George Caines, but he was very quickly regarded as unsatisfactory and was replaced by William Johnson in 1805. 

Kent demonstrated erudition in judgment writing, relying on English precedents where appropriate, but also on many occasions French and civil law in order to justify the same result, thereby overcoming the resistance of the other judges to rely on the law of the country with whom America had lately been at war.[11] He described his judicial approach in memoirs in the following terms:

“When I came to the Bench there were no reports or State precedents. The opinions from the Bench were delivered ore tenus. We had no law of our own, and nobody knew what it was. I first introduced a thorough examination of cases and written opinions…

Between that time and 1804, I rode my share of circuits, attended all the terms, and was never absent, and was always ready in every case by the day. I read in that time Valin and Emerigon, and completely abridged the latter, and made copious digests of all the English law reports and treatises as they came out. I made much use of the Corpus Juris, and as the judges (Livingston excepted) knew nothing of French or civil law, I had immense advantage over them. I could generally put my brethren to rout and carry my point by my mysterious wand of French and civil law. The judges were Republicans and very kindly disposed to everything that was French, and this enabled me, without exciting any alarm or jealousy, to make free use of such authorities and thereby enrich our commercial law.

I gradually acquired preponderating influence with my brethren, and the volumes in Johnson, after I became Chief Justice, in 1804, show it. The first practice was for each judge to give his portion of opinions, when we all agreed, but that gradually fell off, and, for the last two or three years before I left the Bench, I gave the most of them. I remember that in eighth Johnson all the opinions for one term are ‘per curiam’. The fact is I wrote them all and proposed that course to avoid exciting jealousy, and many a per curiam opinion was so inserted for that reason.

Many of the cases decided during the sixteen years I was in the Supreme Court were labored by me most unmercifully, but it was necessary under the circumstances, in order to subdue opposition. We had but few American precedents. Our judges were democratic, and my brother Spencer particularly, of a bold, vigorous, dogmatic mind and overbearing manner. English authority did not stand very high in those early feverish times, and this led me a hundred times to attempt to bear down opposition, or shame it by exhaustive research and overwhelming authority. Our jurisprudence was, on the whole, improved by it. My mind certainly was roused, and was always kept ardent and inflamed by collision.”[12]

It is from judgments written during this period that Kent has gained the reputation of father of American commercial law.[13]

“English authority did not stand very high in those early feverish times, and this led me a hundred times to attempt to bear down opposition, or shame it by exhaustive research and overwhelming authority.”

In 1814, after sixteen years, Kent left the Supreme Court to take up appointment as Chancellor of New York, head of New York’s Court of Chancery (which was a separate court until 1847).[14] Chancery was a one judge court, though there were also masters. Appeal lay to the Court of Errors, as did appeals from the Supreme Court.[15] Kent introduced written opinions, and appointed Johnson as official reporter for Chancery, who retained his position as Supreme Court reporter. Kent’s equity opinions are collected in the seven volumes of Johnson’s Chancery Reports.[16]

Kent, in a letter, wrote about this period:

“… it is a curious fact that for the nine years I was in that office there was not a single decision, opinion or dictum of either of my two predecessors (Ch. Livingston and Ch. Lansing), from 1777 to 1814, cited to me or even suggested. I took the court as if it had been a new institution, and never before known in the United States. I had nothing to guide me, and was left at liberty to assume all such English Chancery powers and jurisdiction as I thought applicable under our Constitution. This gave me grand scope, and I was checked only by the revision of the Senate, or Court of Errors. I opened the gates of the court immediately, and admitted, almost gratuitously, the first year, eighty-five counsellors, though I found there had not been thirteen admitted for thirteen years before. Business flowed in with a rapid tide. The result appears in the seven volumes of Johnson’s Chancery Reports.”[17]

In this letter, he went on to say that he studied the English nominate Chancery reports, and he also discussed his approach in deciding cases. For example, “[M]y object was so to discuss a point as never to be teased with it again”.[18]    

Professor Langbein, writing about Kent’s style and influence as Chancellor, observed:

“Of Johnson’s three series of reports that chronicle Kent’s judicial work, the Chancery Reports were undoubtedly the most influential. Because Chancery was a one-judge court, Kent had the stage to himself. His judicial style was fully mature. Equity courts had emerged from the American Revolution under a taint for several reasons, including their association with unpopular colonial governors[19] and their jury-free civil procedure. Even in England, much of the detail of equity law, including trusts and succession, had only recently developed. Kent relished the opportunity to lay down the law on a fresh slate… Kent’s Chancery decisions exemplify his campaign to entrench English decisional law as the foundation of American law… Johnson’s Chancery Reports were the only specialized American equity reports of their time, greatly enhancing their influence in other American states.”[20]

As Chief Judge Judith S. Kaye put it, “chancery law of the United States may be said to have commenced with” Kent.[21] Kent paid deference to the Lord Chancellors.[22] One practitioner said of Kent, “We view him today as a sturdy pioneer toiling in a new and stony field, but sunburnt by the light that shone from the decrees of Nottingham, Somers, Hardwicke and Eldon”.[23]

“He built a connection with the likes of John Jay and Alexander Hamilton.”

The London Law Magazine summed it up by observing: “… it has been said of [Kent] … with respect to the Court of Chancery, as was said of Augustus with respect to the city of Rome, lateritiam invenit, marmoream reliquit.”[24]

It is not surprising that he has continued to this day to be customarily known as “Chancellor Kent”.

Kent left office in 1823, on attaining the then mandatory retirement age of sixty.   

Once again, Columbia College asked him to be professor of law. He lectured in law from 1824 to 1826.  The lectures formed the basis of his Commentaries on American Law, published as a series of Lectures in four volumes between 1826 and 1830.[25]  By the time of his death in 1847, he had worked on five revisions.[26]  Others updated the work after 1847, including Oliver Wendell Holmes who edited the twelfth edition published in 1873.  The fourteenth edition came out in 1896.

This was the first time an academic work had attempted to examine the American legal system as a whole.[27] The treatise was a commercial success.

Kent died in New York City, on 12 December 1847, in his Union Square apartment. He was 84.

Chancellor Kent’s Influence

In 1834, shortly after the release of the Commentaries, Joseph Story dedicated his Commentaries on the Conflict of Laws to Kent.  Part of the dedication was in the following terms:

“It is now about thirty-six years since you began your judicial career on the Bench of the Supreme Court of the State of New York. In the intervening period between that time and the present, you have successively occupied the offices of Chief Justice and Chancellor of the same State. I speak but the common voice of the Profession and the public, when I say, that in each of these stations you have brought to its duties a maturity of judgment, a depth of learning, a fidelity of purpose, and an enthusiasm for justice, which have laid the solid foundations of an imperishable fame. In the full vigor of your intellectual powers, you left the Bench only to engage in a new task, which of itself seemed to demand by its extent and magnitude a whole life of strenuous diligence. That task has been accomplished. The ‘Commentaries on American Law’ have already acquired the reputation of a juridical Classic, and have placed their author in the first rank of the benefactors of the Profession. You have done for America what Mr. Justice Blackstone in his invaluable Commentaries has done for England. You have embodied the principles of our law in pages as attractive by the persuasive elegance of their style as they are instructive by the fulness and accuracy of their learning.”[28]

But praise also came from the other side of the Atlantic. On Kent’s passing, the editor of Barbour’s New York Chancery Reports noted, “So highly are his works esteemed abroad, that the Lord Chief Justice of England, Baron Denman wrote to Chancellor Kent some years since, acknowledging the indebtedness of the legal profession throughout the world, to him, for his able Commentaries”.[29]

Justice BH McPherson, writing extrajudicially, observed:

“Kent set himself the enormous task of integrating the laws of each State of the Union with those of England, as well as comparing the result to the legal systems of France, Holland and other continental nations. In this, his underlying purpose was twofold. One was to offset the prevailing mood of hostility in the United States to the continued use of the common law as something English, by showing, as he sought to do, that like the common law those other systems were based on natural law and so arrived at similar results in practice. His other purpose was to demonstrate the systematic or ‘scientific’ character of the common law … For many years Kent’s Commentaries held the stage as the standard legal reference work in America. Its underlying foundation of English law and its accuracy meant that it was soon being accepted and applied in England, Canada and Australia.”[30] 

Justice McPherson noted that “An electronic search of the English Reports registered over 100 ‘hits’ before 1865.”[31] It is not known what precise search term was used. The present writer has done his own electronic search of “Chancellor Kent” in the Supreme Court Library’s English Reports database for cases prior to 1865, which produced 150 results where reference was made to Kent’s decisions or his Commentaries. The subject matters of the cases in which Kent was cited included maritime law, insurance, partnership, contract, sale of goods, the Statute of Frauds, conflict of laws, water rights, vendor and purchaser, war and prize, statutory interpretation, limitation of actions, administration of estates, marriage, priorities, lunacy, remedies, accounts and inquiries, pleading, real property, deeds, time, mortgage, pledge, fraud on creditors, treaties, enemy aliens, sovereign immunity from suit, territorial sovereignty over coastal bays and joinder of third parties.

The writer has also searched for “Chancellor Kent” in the ICLR database of the English authorised Law Reports from 1865 to the present. This returned 47 “hits”, across diverse fields.

Justice McPherson went on to comment that, “Between them, Kent and Story not only naturalised English law and consolidated its place in the United States, they also rationalized the use, understanding and teaching of it in the place of its origin. It would not be the last occasion when the words of disciples of the common law from beyond the seas would be read in England.”[32]

As an early example of Kent’s Commentaries being cited by Australian courts, Justice McPherson referred to Rusden v Weekes (1861) 2 Legge 1406, a constitutional law decision of the Supreme Court of the Colony of New South Wales.[33]

Kent has continued to be cited by Australian courts and commentators. An Austlii search of “Chancellor Kent” in the High Court of Australia database produced fifteen results, where a reference is made either to a case decided by Kent or to his Commentaries. A search of “Commentaries on American Law” in the same database produced nine results.  The same searches across all Austlii databases returned 111 results (for “Chancellor Kent”) and 61 results (for “Commentaries on American Law”).

One such case is Austin v The Commonwealth of Australia, where the High Court held invalid a special Commonwealth tax on the judicial pensions of State judges.[34] Gaudron, Gummow and Hayne JJ said:

“The provision of secure judicial remuneration at significant levels serves to advantage and protect the interest of the body politic in several ways. Secure judicial remuneration at significant levels assists, as the United States Supreme Court has emphasised, to encourage persons learned in the law, in the words of Chancellor Kent written in 1826, ‘to quit the lucrative pursuits of private business, for the duties of that important station’.”[35]  

Another is ICM Agriculture Pty Ltd v The Commonwealth, a case concerned with water rights, where French CJ, Gummow and Crennan JJ said:

“The common law position in relation to flowing water, which adapted Roman law doctrine, was settled in Embrey v Owen. Baron Park adopted the view of Chancellor Kent that flowing water is publici juris in the sense that no-one has ‘property in the water itself, but a simple usufruct while it passes along’.”[36]

And in PGA v R, the High Court held that a husband can be guilty of raping his wife.[37] French CJ, Gummow, Hayne, Crennan and Kiefel JJ said:

“In his lecture entitled ‘Of Husband and Wife’, Chancellor Kent, after referring to the incompetency at common law of a married woman to deal with her property as a feme sole, went on to contrast the position in equity and described the procedural consequences as follows:

‘The wife being enabled in equity to act upon property in the hands of her trustees, she is treated in that court as having interests and obligations distinct from those of her husband.  She may institute a suit, by her next friend, against him, and she may obtain an order to defend separately suits against her; and when compelled to sue her husband in equity, the court may order him to make her a reasonable allowance in money to carry on the suit.’”[38] (footnotes omitted)

Furthermore, in Maguire v Makaronis, a case concerned with rescission for breach of fiduciary duty, Brennan CJ, Gaudron, McHugh and Gummow JJ said, after referring to a passage in the judgment of Rich and Dixon JJ in Langman v Handover[39]:

“Rich and Dixon JJ went on to consider the decision to the same effect of Chancellor Kent in Fanning v Dunham. There the Chancellor held that, where a borrower seeks relief in equity (such as delivery up and cancellation) in respect of a security on the ground of illegal usury, the plaintiff must, before being entitled to relief, pay or offer to pay the principal and so much of the interest as is lawfully due.”[40]

The other High Court cases referred to in the Austlii searches, decided between 1905 and 2022, deal with subject matters as diverse as:

• Discovery in equity in aid of foreign litigation;
• Constitutional law;
• Representative proceedings in equity;
• Joint tortfeasors;
• Native title;
• When property passes in wheat delivered under a contract for its storage;
• Whether action per quod servitium amisit is limited to menial or domestic servants;
• Contingent remainders;
• Fraudulent preferences;
• Alienation of property to defraud creditors;
• Immigration;
• Spousal privilege;
• Pawnbroking.

The said Austlii searches across all directories produced law review articles and cases of other Australian courts and courts of New Zealand concerned with a wide range of topics.

Conclusion

On 2 December 1898, Lord Lindley, then Master of the Rolls, wrote to John B Cassoday, Chief Justice of the Wisconsin Supreme Court, as follows:[41]

“Dear Chief Justice:

I have read with great interest your sketch of Scott and Marshall. I knew little or nothing of Marshall’s life tho’ I valued his great judgments very highly. I always look upon him and Kent as two of the greatest judges of whom I know anything. They seem to me to be far greater men than Story although not so widely known here as he. Thanking you for your courtesy in sending me your Brochure, I remain,

Nathan’l LindleyMaster of the Rolls.”

Whether or not Kent was a greater man than Story, it is clear that Kent was a great jurist who made a significant impact on American law and left an indelible mark on Anglo-Australian law. His influence continues to be felt especially in the High Court of Australia.

[1]               Palgo Holdings Pty Ltd v Gowans [2005] HCA 28, 221 CLR 249 [16].

[2]               “United States Influence on the Australian Legal System” (2018) 43(1) U WA L Rev 11, 12.

[3]               BH McPherson, The Reception of English Law Abroad, 493 (Supreme Court of Queensland Library 2007).

[4]               In reciting Kent’s background, the writer has drawn on Langbein, “Chancellor Kent and the History of Legal Literature” (1993) 93 Colum L Rev 547 and on other references indicated below.

[5]               A decision later to be emulated by the University of Pennsylvania, Dartmouth and Harvard: Horton, James Kent: A Study in Conservatism 1763-1847, p229 (New Jersey: Law Book Exchange 1939).

[6]               Both appointments were made by Governor Jay.

[7]               He was appointed by Governor Jay.

[8]               He was appointed by Governor Morgan Lewis, who was an ardent anti-Federalist, unlike Kent (as the Governor knew). See William Kent, Memoirs and Letters of James Kent, LL.D.: late chancellor of the State of New York, pp120-1 (Boston: Little, Brown, 1898).

[9]               William Kent, Memoirs and Letters of James Kent, LL.D.: late chancellor of the State of New York, p58 (Boston: Little, Brown, 1898); Horton, James Kent: A Study in Conservatism 1763-1847, p100 (New Jersey: Law Book Exchange 1939).

[10]             Judith S. Kaye, “Commentaries on Chancellor Kent” (1998) 74 Chicago-Kent L Rev 11, 17.

[11]             Langbein, “Chancellor Kent and the History of Legal Literature” (1993) 93 Colum L Rev 547, 569-570; Horton, James Kent: A Study in Conservatism 1763-1847, p154 (New Jersey: Law Book Exchange 1939).

[12]             William Kent, Memoirs and Letters of James Kent, LL.D.: late chancellor of the State of New York, pp116-8 (Boston: Little, Brown, 1898).

[13]             Judith S. Kaye, “Commentaries on Chancellor Kent” (1998) 74 Chicago-Kent L Rev 11, 19; Horton, James Kent: A Study in Conservatism 1763-1847, p157 (New Jersey: Law Book Exchange 1939).

[14]             He was appointed by Governor Daniel D Tompkins.

[15]             The Court of Errors was constituted by the New York Senate, the Supreme Court and the Chancellor, by analogy with the House of Lords. Members did not sit on appeals from their decisions.

[16]             For more detail on the state of law reporting at the time, and Kent’s contribution to its development, see Langbein, “Chancellor Kent and the History of Legal Literature” (1993) 93 Colum L Rev 547, 571 to 584.

[17]             William Kent, Memoirs and Letters of James Kent, LL.D.: late chancellor of the State of New York, pp 157-8 (Boston: Little, Brown, 1898).

[18]             Ibid, 159.

[19]             In colonial times, governors occupied the office of Chancellor.

[20]             Langbein, “Chancellor Kent and the History of Legal Literature” (1993) 93 Colum L Rev 547, 583-4.

[21]             Judith S. Kaye, “Commentaries on Chancellor Kent” (1998) 74 Chicago-Kent L Rev 11, 23 citing John Horton, Kent’s biographer.

[22]             Horton, James Kent: A Study in Conservatism 1763-1847, p211-3 (New Jersey: Law Book Exchange 1939).

[23]             Carson, “James Kent: Picture of Man as Lawyer, Judge and Author Presented by Series of Documents and Letters in His Own Hand-Writing and Hitherto Unpublished” (1921) 7 American Bar Association Journal 662, 670.  

[24]             He found a city of bricks; he left it a city of marble. Horton, James Kent: A Study in Conservatism 1763-1847, p197 (New Jersey: Law Book Exchange 1939).

[25]             James Kent, Commentaries on American Law, 4v (New York: O. Halsted 1826-1830). The first volume was published in 1826, the second volume in 1827, the third volume in 1828 and the fourth volume in 1830. Kent dedicated the work to William Johnson: see vol 4.

[26]             He worked on what was to be the 6th edition, which was published in January 1848, shortly after his death.

[27]             Judith S. Kaye, “Commentaries on Chancellor Kent” (1998) 74 Chicago-Kent L Rev 11, 27.

[28]             Story, Commentaries on the Conflict of Laws, iii-iv (Boston: Hilliard, Gray and Company, 1834).

[29]             2 Barbour’s New York Chancery Reports 646. This tribute also records sentiments expressed at a meeting of the New York Bar, showing the high esteem in which Chancellor Kent was held by the Bar and the grief felt on his passing.

[30]             BH McPherson, The Reception of English Law Abroad, 490-1 (Supreme Court of Queensland Library 2007) (footnotes omitted).

[31]             McPherson, ibid, p491 n 126.

[32]             McPherson, ibid, p493.

[33]             For a discussion of this case, see Hon Robert French AC, “United States Influence on the Australian Legal System” (2018) 43(1) U WA L Rev 11, 13.

[34]             [2003] HCA 3.

[35]             At [159] (footnotes omitted).

[36]             [2009] HCA 51 [55] (footnotes omitted).

[37]             [2012] HCA 21.

[38]             At [45] (footnotes omitted).

[39]             (1929) 43 CLR 334 at 356.

[40]             (1997) 188 CLR 449, 476-7 (footnotes omitted).

[41]             Cassoday (1902-3) 12 Yale LJ 146, 148.

Many excellent articles and presentations have been written or given touching upon Donoghue v Stevenson [1932] AC 562. The attention so given is entirely appropriate. The decision, especially Lord Atkin’s judgment, has been cited on countless occasions and has had a profound influence on Anglo-Australian law. But it is also worthwhile to spare a moment to reflect on a decision cited by the House of Lords in Donoghue v Stevenson, and the Judge behind that decision. The decision was MacPherson v Buick Motor Co, 217 NY 382, 111 NE 1050 (NY 1916), and the Judge behind it was Justice Benjamin N Cardozo.

In MacPherson v Buick Motor Co, it was held by the influential New York Court of Appeals in 1916 that a manufacturer of an automobile owed a duty of care in tort to a consumer injured whilst driving the vehicle, notwithstanding the absence of privity of contract.

First, a little about the man, Benjamin Cardozo.

Life and career of Cardozo J

B enjamin Nathan Cardozo, of Sephardic Jewish/Spanish-Portuguese heritage, was born in New York City on 24 May 1870 to Rebecca Nathan and Albert Cardozo. He had a twin sister, and they had four other siblings. His grandfather had been nominated a Justice of the New York Supreme Court, but died before he took office. Benjamin Cardozo’s own father was in fact a New York Supreme Court Justice, but he resigned amidst a judicial corruption scandal. This had a profound effect on Benjamin, who was determined to restore his family’s name.

Benjamin’s mother died in 1879, when he was still quite young.

At age 15, Cardozo attended Columbia College, where he earned his Bachelor’s degree followed by a Master’s in Political Science. Then, in 1889, he attended Columbia Law School. He was by all accounts a brilliant student. After two years there, he passed the New York Bar exam in 1891 and began practising law in New York City alongside his brother. He remained in practice with Simpson, Warren and Cardozo until 1913. He gained an esteemed reputation in commercial law.

In 1913, having practised for about 23 years, Cardozo was elected to a 14 year term on the New York Supreme Court, due to start on 1 January 1914. But in February 1914, he was appointed as a temporary Judge on the New York Court of Appeals, the State’s highest court. In 1917, Cardozo J became a permanent member of the Court of Appeals. In 1926, he was elected to a 14 year term as Chief Judge of that Court.

After having served 18 years on the Court of Appeals, Cardozo CJ resigned in 1932 to take up an appointment as an Associate Justice of the Supreme Court of the United States. Even though he was a Democrat, he was appointed by the Republican President, Herbert Hoover. His appointment was met with universal acclaim. The Senate confirmed his appointment by a unanimous vote.

Cardozo J was on the US Supreme Court for six years, supporting a number of Franklin D Roosevelt’s New Deal initiatives, as a member of the so-called “Three Musketeers” along with Justices Brandeis and Stone.

He suffered a heart attack in 1937 and a stroke in 1938. He passed away, aged 68, on 9 July 1938, in Port Chester, Rye, New York State.

He had never married. He was a modest man of high principles, loved by his colleagues.

In addition to his many influential judicial decisions, he was a prolific extra-judicial writer. Amongst other works, he is particularly renowned for his work “Nature of the Judicial Process” (1921), designed for judges but which is standard reading for American law students.

MacPherson v Buick Motor Co

Donald MacPherson’s 1911 Buick collapsed on the road to Saratoga Springs when he was driving just 8 miles per hour. He was thrown out and injured. One of the wheels contained defective wood, and the spokes had “crumbled into fragments”. Mr MacPherson had bought the Buick from a retailer. The retailer had bought the car from Buick Motor Co. Buick Motor Co was the manufacturer of the vehicle, though it had purchased the wheel as a component part from Imperial Wheel Co of Michigan. There was evidence that the defect could have been discovered by Buick Motor Co had it carried out a reasonable inspection. The Supreme Court held that Buick Motor Co was liable in negligence to Mr MacPherson, which decision was upheld by the Supreme Court Appellate Division. By majority, the Court of Appeals held that the decision of the Appellate Division should be affirmed.

Previously, it had been the rule in New York, based on the English decision of Winterbottom v Wright (1842) 10 M & W, 152 ER 402, that a manufacturer’s liability for negligence only extended to purchasers with whom they were in privity of contract. That English case concerned a horse drawn carriage. The New York cases recognised an exception to that rule, where the product was “inherently dangerous”, the leading example of which was a case concerning poison which had been wrongly labelled as dandelion extract: Thomas v Winchester, 6 NY 397 (NY 1852). But as the trial judge had summed up to the jury in MacPherson v Buick, “an automobile is not an inherently dangerous vehicle”. The then Chief Judge also noted in dissent that an automobile moving at only 8 miles an hour “was not any more dangerous to the occupants of the car than a similarly defective wheel would be to the occupants of a carriage drawn by a horse at the same speed”.

In MacPherson v Buick, however, Cardozo J, in delivering the leading judgment, closely analysed the cases said to be authority for the exception, pointing out the inconsistencies and uncertainties to which the exception gave rise, and the illogicality of the distinction between products inherently dangerous and those which were dangerous because of negligent construction. He also referred to the need of the law to keep a-pace with developing technology. He considered that what those earlier cases in fact decided needed to be re-visited. He said:

“The question to be determined is whether the defendant owed a duty of care and vigilance to any one but the immediate purchaser… We hold, then, that the principle of Thomas v Winchester is not limited to poisons, explosives, and things of like nature, to things which in their normal operation are implements of destruction. If the nature of a thing is such that it is reasonably certain to place life and limb in peril when negligently made, it is then a thing of danger. Its nature gives warning of the consequences to be expected. If to the element of danger there is added knowledge that the thing will be used without new tests, then, irrespective of contract, the manufacturer of this thing of danger is under a duty to make it carefully. That is as far as we are required to go for the decision of this case. There must be knowledge of a danger, not merely possible, but probable… There must also be knowledge that in the usual course of events the danger will be shared by others than the buyer… If he is negligent, where danger is foreseen, a liability will follow.”

His Honour found those factual matters to be made out in that case. Cardozo J observed, “The dealer was indeed the one person of whom it might be said with some approach to certainty that, by him the car would not be used.” He noted more generally that “it is possible that even knowledge of the danger and of the use will not always be enough. The proximity or remoteness of the relation is a factor to be considered.” But proximity or remoteness were not a problem in the instant case when the above mentioned factors were present.

These pronouncements do not seem all that remarkable to the modern day Anglo-Australian lawyer.

Donoghue v Stevenson

It is not surprising that MacPherson v Buick should have been referred to, and cited by, the House of Lords. MacPherson v Buick was the first common law case dealing with the product liability owed to a consumer by a manufacturer of mass produced products and upholding a duty of care in negligence.

Lord Atkin had this to say (at pages 598-9):

“It is always a satisfaction to an English lawyer to be able to test his application of fundamental principles of the common law by the development of the same doctrines by the lawyers of the Courts of the United States. In that country I find that the law appears to be well established in the sense in which I have indicated. The mouse had emerged from the ginger-beer bottle in the United States before it appeared in Scotland, but there it brought a liability upon the manufacturer. I must not in this long judgment do more than refer to the illuminating judgment of Cardozo J in MacPherson v Buick Motor Co in the New York Court of Appeals, in which he states the principles of the law as I should desire to state them, and reviews the authorities in other States than his own. Whether the principle he affirms would apply to the particular facts of that case in this country would be a question for consideration if the case arose. It might be that the course of business, by giving opportunities of examination to the immediate purchaser or otherwise, prevented the relation between manufacturer and the user of the car being so close as to create a duty. But the American decision would undoubtedly lead to a decision in favour of the pursuer in the present case.”

This was high praise indeed.

The qualification by Lord Atkin in the penultimate sentences in that paragraph was unnecessary, because Cardozo J indicated at several points in his judgment, that the principle would not apply if there was, and was known to be, a reasonable opportunity for intermediate examination or examination before use.

Lord Atkin then continued to state the principle as it applied to English and Scots law (at page 599):

“… a manufacturer of products, which he sells in such a form as to show that he intends them to reach the ultimate consumer in the form in which they left him with no reasonable possibility of intermediate examination, and with the knowledge that the absence of reasonable care in the preparation or putting up of the products will result in an injury to the consumer’s life or property, owes a duty to the consumer to take that reasonable care”.

This was masterful in its reduction of the principle to one sentence.

Even if Lord Atkin only “drew support for his own approach” [1] from MacPherson v Buick, the latter decision still had an influence on the result as is evident from Lord Atkin’s glowing praise.

Of course, there is much more to Lord Atkin’s speech than a statement of and upholding of the principle of a manufacturer’s product liability to a consumer. It has been pointed out there are similarities between Lord Atkin’s neighbour principle and the judgment of Cardozo CJ in the case of Palsgraf v Long Island Railway Co, 248 NY 339 (1928). [2] But it is unlikely Lord Atkin was aware of that case, as Palsgraf was evidently not cited in argument, and it is not referred to in any of the judgments, in Donoghue v Stevenson.

Moving on to other Law Lords, the above passage from Cardozo J’s judgment was set out by Lord MacMillan (one of the other majority Judges in Donoghue v Stevenson) at [1932] AC 562, 617-8. That also speaks volumes.

Lord Buckmaster, in dissent in Donoghue v Stevenson, distinguished MacPherson v Buick on the basis that it was a decision that “a motor-car might reasonably be regarded as a dangerous article”: [1932] AC 562, 577. Lords Atkin and MacMillan did not agree with that interpretation of MacPherson v Buick, with Lord Atkin referring (as had Cardozo J) to the illogicality of the distinction between a thing dangerous in itself, and a thing which becomes dangerous by negligent construction (see pages 595-6 of [1932] AC). The fact that Lord Buckmaster felt the need to distinguish a decision from another jurisdiction is testament to the force of its reasoning.

Whether Cardozo J expanded the exception in Thomas v Winchester or laid down a new principle altogether does not matter. They are one and the same thing as a matter of practice. Cardozo J so expanded the “exception” to the point where the privity rule, if not “cut out and extirpated altogether”, was “left with the shadow of continued life, but sterilized, truncated, impotent for harm”: Nature of the Judicial Process, pp98-9.

Cardozo J’s legacy

What is remarkable about MacPherson v Buick Motor Co is not only the significance of what it decided, and the fact that it was the first case to so decide. It is also the fact that it was decided in 1916 barely two years after Cardozo J’s appointment to the Court of Appeals, whilst he was still a temporary judge, and the fact that it was a majority decision, in which Cardozo J’s judgment was given notwithstanding the strong dissent of the then Chief Judge, Willard Bartlett.

Indeed, Cardozo J’s boldness and eloquent writing style are amongst the reasons why Cardozo J/CJ’s judgments have had such a profound effect, not only in the United States but also elsewhere.

MacPherson v Buick is not the only occasion where the judgments of Cardozo J/CJ are cited by Anglo-Australian courts. An austlii search of “Cardozo” in the High Court of Australia directory alone produced a staggering 100 results, including his decisions from a wide range of contexts, as well as his extra-judicial writings.

A few of the more well known examples however are:

• Wood v Lucy, Lady Duff-Gordon , 222 N.Y. 88; 118 N.E. 214 (N.Y. 1917) (“The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view to-day. A promise may be lacking, and yet the whole writing may be ‘instinct with an obligation,’ imperfectly expressed. If that is so, there is a contract”);

• Loucks v Standard Oil, 120 NE 198, 201 (NY 1918) (“The courts are not free to refuse to enforce a foreign right at the pleasure of the judges, to suit the individual notion of expediency or fairness. They do not close their doors, unless help would violate some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal”);
• Beatty v Guggenheim, 225 NY 380 (NY 1919) (“A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee”);
• Wagner v International Ry Co, 133 NE 437 (NY 1921) (“Danger invites rescue”);
• Meinhard v Salmon, 249 NY 458, 164 NE 545 (NY 1928) (“A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behaviour … the level of conduct for fiduciaries [has] been kept at a higher level than that trodden by the crowd”);
• Ultramares Corp v Touche, 174 NE 441 (NY 1932) (no duty of care where it would lead to “a liability in an indeterminate amount for an indeterminate time to an indeterminate class”);
• Baldwin v GAF Selig Inc, 294 US 511 (1935) (“The Constitution was framed under the dominion of a political philosophy less parochial in range. It was framed upon the theory that the peoples of the several states must sink or swim together, and that in the long run prosperity and salvation are in union and not division”);
• Palko v Connecticut, 302 US 319 (1937) (freedom of speech is “the matrix, the indispensable condition, of nearly every other form of freedom”).

As Lord Atkin shows us all by his example, we should not be reluctant to look to American authorities where relevant. There are many instances where Anglo-Australian law has been influenced by American law, and there is no reason why this should not continue to be so. This is not only at the common law level, but also at the statutory (including constitutional) level. For example, it is not widely known that the Judicature Acts 1873-1875 were influenced by the “Field” Code of Civil Procedure (NY) of 1848, which abolished the forms of action as well as the procedural distinction between suits in equity and actions at law. That followed upon the abolition of the Court of Chancery as a separate court in New York State in 1846. The Field Code preceded the Common Law Procedure Act of 1852.

The above is not to say that cross fertilisation is a one way street. Nor is it to say that we should always reach the same conclusions. But the way American lawyers have grappled with similar problems means that their jurisprudence has been and can continue to be of assistance in resolving disputes according to our own standards. As Cardozo J himself observed in of Loucks v Standard Oil, 120 NE 198, 201 (NY 1918), “We are not so provincial as to say that every solution of a problem is wrong because we deal with it otherwise at home”.

Dr Stephen Lee, Barrister

[1] Chapman, The Snail and the Ginger Beer: The singular case of Donoghue v Stevenson, Wildy, Simmonds & Hill, 2010, p42.

[2] Knapp, International Encyclopaedia of Comparative Law (Martinus Nijhoff 1983), p71.

Interest is a vitally important topic in commercial litigation. Without it, claimants may be undercompensated and wrongdoers may profit from the use of money or property. The interest component of a judgment may represent a substantial proportion of an overall money award. In Duke Group v Pilmer, for example, interest accounted for $41m out of an overall award of $117m against the accountants; the interest awarded against the directors was even higher.[1] The possibility of high interest awards may be heightened by compound interest, a jurisdiction which has long been recognised in equity.

Despite its importance, little attention tends to be devoted to the principles upon which interest is awarded and the basis on which it is calculated. Reasons given for judicial decisions on interest, insofar as reasons are given at all, tend to be brief. Sometimes (in academic writings as well as decisions) emphasis is placed on criteria which do not direct attention to the underlying question which the court is required to ask. The risk is that practitioners are left without adequate guidance when advising clients. Nowhere is there more need for elucidation of the principles upon which interest is awarded than the jurisdiction to award interest in equity. In recent times, some attention has been devoted to interest under statute (where compound interest is not available), and as well interest at common law following Hungerfords v Walker (1989).[2] But the same trend has not been evident in relation to the topic of interest in equity.

Part of the difficulty is that the jurisdiction to award interest in equity is capable of arising in a wide variety of contexts. This includes fraud,[3] rescission,[4] specific performance,[5] equitable tracing claims,[6] contribution and recoupment,[7] relief against forfeiture,[8] the taking of accounts as between co-tenants or on the winding up of a partnership or in the administration of trusts and deceased estates,[9] interest on legacies,[10] account of profits,[11] equitable compensation,[12] when the Court imposes terms,[13] and in many other areas.[14] The jurisdiction of courts of equity to award interest in some areas has been confirmed by statute.[15] Also, statutory remedies sometimes carry interest by analogy with their equitable counterparts, such as in the case of an account of profits for intellectual property rights.[16]

Against this background, it is hardly surprising that Lord Goff should remark that the “law of interest has developed in a fragmentary and unsatisfactory manner, and in consequence insufficient attention has been given to the jurisdiction to award compound interest”.[17]

Indeed, the diversity of the contexts in which interest can arise in equity makes it hard to identify common themes running through the cases across these different remedial contexts. But common themes there are. The particular remedial context in which the question arises is not irrelevant. Without understanding the remedial context it is difficult to understand the decision made with regard to interest. But, as always in equity, it is necessary to look through the form to discover the substance that lies underneath.

The ultimate question in awarding interest is: what does the justice of the case demand?[18] This means that equity will not award interest, just as it will not grant other relief, if it would be inequitable to do so. However, that does not mean that there is an “at large” discretion. As in other areas of equity, the jurisdiction is to be exercised for proper purposes and within settled principles. [19]

There are two purposes of interest awards in equity. The first is to prevent a party from gaining an unjust benefit or enrichment. The epitome of this is the principle that a main purpose of the award of interest is “to prevent the trustee from making a profit out of his breach of trust”.[20] The second purpose of interest is to ensure that adequate compensation is given to a party for being kept out of his or her money and for having lost the opportunity of earning profits or interest on it. Lord Denning MR expressed this view when he said, “mere replacement of the money – years later – is by no means adequate compensation, especially in days of inflation”.[21]

Those goals are not opened ended. They have limits. Preventing unjust enrichment does not mean punishing a party, even though they acted wrongly. Lord Wright put it: “Though the defendant has been fraudulent, he must not be robbed, nor must the plaintiff be unjustly enriched”.[22]

But the nature of these twin goals means that, where a person recovers money in equity, an award of interest will very nearly always follow. This is an empirical observation. Except in unusual circumstances, presumptions are available (when needed) which prove either the making of a profit from the use of the money or a loss from being deprived of it.[23] And there will rarely be equitable defences that operate to defeat interest without defeating the principal claim entirely. It is true that there can be and often are countervailing circumstances, for example where the interest claimed would overcompensate a claimant or allow a defendant to benefit from wrongdoing;[24] lack of causal connection or remoteness;[25] but not delay per se.[26] But these usually go to the quantum of interest, not to whether there should be interest at all.

Sometimes, equitable presumptions are seemingly elevated into rules. Often, a reference to a presumption is intended as no more than shorthand for the conclusion that a party is entitled to interest on the instant facts, because the presumption was not rebutted. But it should not ever be forgotten that presumptions do not replace the ultimate question. Assuming the principal claim succeeds and there are no circumstances making an award of interest inequitable, the question(s) to be asked are simply whether a party made a profit from the use of the money (and if so what profit) or whether a party suffered a loss by being held out of the money (and if so what loss). There are presumptions about the making of a profit or loss, about interest rates and about the basis of interest. For example, the presence of fraud gives rise to various presumptions considered below. But presumptions are all they are. Evidence can be led to rebut or to confirm them. The availability of such presumptions may mean that, empirically speaking, mercantile interest and/or compound interest, is more likely to be awarded when fraud is present. But that does not mean that the ultimate enquiry is whether or not the defendant was fraudulent.

This is subject to a qualification. There are some cases where a presumption does properly rise to the level of a rule. For example, there may be policy reasons why a fiduciary should not be permitted to raise a certain contention of fact at all. But, such cases aside, the presumptions referred to earlier are rebuttable by evidence.

It is the writer’s intention in this article to elucidate the above principles by showing them at work in the cases, in the context of trusts and fiduciaries. This is where the case law is particularly rich on the topic of interest, and also where there has been a spate of recent activity by the courts, especially in the last few decades. It is territory which is likely to be of particular practical relevance to litigators.

The present article will address equitable interest in turn in each of the main remedial contexts in which interest arises within the scope just mentioned. They are: account for the administration of a trust, account of profits, equitable compensation and proprietary remedies. Rescission is outside the scope of this article, but it is also fertile ground for interest in equity. It deserves separate treatment. It is not dealt with here to avoid making this article any longer than it already is.

Liability to account for the administration of a trust

In claims against trustees and other fiduciaries, interest is available in equity as an incident of the personal remedy of account. This includes an account of the administration of a trust.

A leading example is Attorney General v Alford.[27] There, an executor and trustee, who had a duty by the will to apply the residuary estate to certain charitable purposes, retained the residuary estate in his hands for over ten years without informing anyone of the existence of the charitable trust. The defendant, a solicitor, made investments of some of the funds in 3 per cent consols, claiming to have done so to better secure the capital of the trust. The Lord Chancellor concluded that the defendant had not intended to appropriate the money to his own use, but had misconceived and neglected his duties nonetheless. His Lordship held that the defendant should pay simple interest at 4 per cent, but no more, on the whole of the net residuary estate and on the income that was received on such investments that he did make. In so holding, Lord Cranworth LC stated:

What the Court ought to do … is to charge [the trustee] only with the interest he has received … or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he is estopped from saying that he did not receive it.[28]

The defendant was chargeable with interest at 4 per cent, because “it is presumed that he must have made interest, and four per cent is that rate of interest which this Court has usually treated it right to charge”.[29] His Lordship likened it to a case of “executors and trustees having money in their hands which they ought to invest and do not invest”.[30]  In other words, the defendant had a duty to invest the funds in a manner that would have achieved returns not less than, but also not greater than, those applicable to ordinary prudent trustee investments. The Court dismissed an argument that the defendant should pay 5% calculated with annual rests, because the evidence showed that the defendant had not earned 5 per cent and had not acted fraudulently to benefit himself such as would support a presumption that he earned 5 per cent.[31]

Three typical situations

It is convenient to distinguish between three main situations in which interest is typically awarded, although the categories can and do overlap in practice.

The first situation is where a trustee (including a constructive trustee[32] ) has wrongly withheld trust funds or converted them to his/her own use. On taking an ordinary (or “common”) account for the administration of a trust, the availability of interest does not depend on whether the trustee has acted fraudulently or innocently. As Long Innes J observed in Nixon v Furphy:[33]

This practice of the Equity Court as regards purely equitable demands is not confined to cases where the accounting party has been guilty of any wrongdoing, but extends practically to all cases in which he, in the contemplation of a Court of Equity, must be regarded as a trustee or quasi-trustee who has retained moneys to which he is not entitled and has thereby been the cause of the true owner losing the opportunity of earning interest on the money to which he was entitled.

The common account calls on the trustee to account for what s/he received and of what has become of it. In such a case, proof of fault or loss is not required (although it is often present). If trust property has been wrongly withheld, “wrongly” in the sense of contrary to the terms of the trust, there is power to order the trustee to pay the amount found to be due to the person entitled, together with interest.[34] Whether and when an account serves compensatory or restitutionary goals, or both, is much debated, and this topic will be returned to below.[35] Street J remarked in Re Dawson, “The Court’s jurisdiction in selecting the appropriate rate of interest is exercisable solely for compensatory purposes.”[36] By the use of “solely”, His Honour was distinguishing and eschewing punitive goals.

A variation on the above theme is where the trustee has converted trust funds to his or her own use and earned interest on those funds, where presumptions may be brought into play.[37]  Wallersteiner v Moir [No 2], discussed further below, could be viewed as an example of this.[38]

The second situation is where a trustee has misapplied trust property. An example is paying trust money to someone not entitled to it. This could be done fraudulently,[39] as occurred on one possible analysis of the facts in Wallersteiner v Moir [No 2].[40] Or a misapplication could be the result of negligence, as occurred in Alemite v Lubrequip Pty Ltd, discussed below.[41] A trustee may make an improvident or speculative investment causing loss to trust corpus. That trustee can be required to restore the lost capital in an action for a common account, together with interest which the trustee ought to have received. Or trust funds might be placed in an investment with an inadequate return, as happened in Attorney General v Alford (which case might also be analysed as one of a trustee withholding trust funds). Street J said in the oft-cited case of Re Dawson: “The general principle is that where a trustee has, through his breach of trust, occasioned loss to the trust estate then he is liable to make good that loss, together with interest”.[42]

In Re Dawson itself, the deceased left assets in New Zealand and Australia.[43] He appointed his son, Percy Dawson, as an executor. Percy wanted to transfer £4700 in funds realised from the sale of the New Zealand assets to New South Wales and to loan those funds to two companies in which he was interested. But it was illegal to transfer that amount of money across the Tasman. Percy therefore made a surreptitious deal with one Raymond Nelson to bring the funds into New South Wales by subterfuge. Mr Nelson absconded with the money and was never seen again. The New South Wales Supreme Court held that Percy’s estate was liable to account for the moneys lost to the estate at the exchange rate applicable at the date of the order together with interest at the mercantile rate of 5%. More will be said about this case below.

A third situation is where, although the trustee never received trust property, he ought to have received it and will be obliged to account as if he did. This is referred to as an account on the footing of wilful default. In this sense, “wilful” is not limited to conscious wrongdoing, but can include negligence.[44] If the trustee has failed to get in property, either because of fraud or because of negligence, the trustee can be required to account for the value of that property lost to the trust together with interest. For the purposes of taking the account, the trustee is treated as if s/he had, and is presumed to have, received the property and interest.[45]

Continued…

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Footnotes 

[1] Duke Group Ltd (in liq) v Pilmer (1999) 31 ACSR 213 (not challenged in HC: (2001) 207 CLR 165).

[2] Hungerfords v Walker (1989) 171 CLR 125 (where, incidentally, compound interest was recovered).

[3] Cf Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 [74].

[4] See Alati v Kruger (1955) 94 CLR 216, 230; Maguire v Makaronis (1997) 188 CLR 449, 475-7; Kerr on Fraud and Mistake 6th ed 1929 ed SE Williams, p467 et seq; JLR Davis, “Interest as Compensation“, p137 in PD Finn (ed), “Essays on Damages”, LBC 1992; O’Sullivan, Elliott & Zakrzewski, The Law of Rescission OUP p401-3.

[5] Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 [75]; Davies v Littlejohn (1923) 34 CLR 174, 185-6; International Railway Co v Niagara Parks Commission [1941] AC 328; Davis, “Interest as Compensation“, supra, pp138-9; Cassidy (1997) 71 ALJ 514, 525.

[6] Westdeutsche Landesbank Girozentral v Islington LBC [1996] AC 669, 727-9.

[7] Morgan Equipment Co v Rodgers [No2] (1993) 32 NSWLR 467, 486-7; AE Goodwin Ltd v AG Healing Ltd (1979) 7 ACLR 481; Halsbury’s Laws of Australia [370-1130].

[8] Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 [74].

[9] President of India v La Pintada Compania [1985] AC 104, 116; In re Tennant (1942) 65 CLR 473. But compare Re Diplock [1948] Ch 465, where an award interest against the charities was not justified on the particular facts.

[10] Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,320-1.

[11] Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 [75].

[12] See eg Harrison v Schipp [2001] NSWCA 13.

[13] See eg Nelson v Nelson (1995) 184 CLR 538; Maguire v Makaronis (1997) 188 CLR 449.

[14] See eg Halsbury’s Laws of England 4th ed volume 32 “Money”, paragraphs 109, & 112 nn 4 &5.

[15] See eg ss 27(1)(c) & 45(1) Partnership Act 1891 (Qld); s 52(1)(e) Succession Act (Qld) 1981.

[16] LED Builders Pty Ltd v Eagle Homes Pty Ltd [1999] FCA 584 [229]-[232].

[17] Westdeutsche Landesbank Girozentral v Islington LBC [1996] AC 669, 682.

[18] Hungerfords v Walker (1989) 171 CLR 125, 148.

[19] Maguire v Makaronis (1997) 188 CLR 449; Warman International Pty Ltd v Dwyer (1995) 182 CLR 544, 559.

[20] Fuller v Meehan, unreported QCA 26/2/99 (de Jersey CJ, Pincus & Thomas JJA), BC9900463, at [44]. See to like effect Wallersteiner v Moir (No2) [1975] QB 373, 388; and Scott v Scott (1963) 109 CLR 649, 660.

[21] Wallersteiner v Moir (No2) [1975] QB 373, 388 (per Lord Denning MR), also at 397 (per Buckley LJ) and 406 (Scarman LJ); Burdick v Garrick (1870) 5 LR Ch App 233, 241-2, 243-4; Re Dawson [1966] 2 NSWR 211, 218; Cureton v Blackshaw Services Pty Ltd [2002] NSWCA 187 [101]-[109]. Wallersteiner v Moir is cited with approval in Hungerfords v Walker (1989) 171 CLR 125, 148.

[22] Spence v Crawford [1939] 3 All ER 271, 288-9. See also Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41,109 per Mason J citing Vyse v Foster (1872) LR 8 Ch App 309 at 333; Wallersteiner v Moir (No2) [1975] QB 373, 388.

[23] AG (UK) v Alford (1855) 4 DeGM&G 843, 851; Burdick v Garrick (1870) LR 5 Ch App 233, 243; Wallersteiner v Moir (No2) [1975] QB 373, 388; Re Dawson [1966] 2 NSWR 211, 218-9; Campbell v Turner [2008] QCA 126 [72].

[24] See eg Fuller v Meehan [1999] QCA 37 [47]; O’Sullivan v Management Agency Ltd [1985] 1 QB 428; Ninety-Five Pty Ltd (in liq) v Banque National de Paris [1988] WAR 132; JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378 ; Aequitas v AEFC [2001] NSWSC 14.

[25] Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274, 285, 290.

[26] Aequitas v AEFC [2001] NSWSC 14; Ninety-Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132, 181.

[27] (1855) 4 De G M & G 846.

[28] AG (UK) v Alford (1855) 4 De GM&G 843, 851. See to like effect: Vyse v Foster (1872) LR 8 Ch App 309, 333; In re Barclay [1899] 1 Ch 674, 683; Wallersteiner v Moir (No2) [1975] QB 373, 397; Re Dawson [1966] 2 NSWR 211, 218.

[29] At 851.

[30] At 850.

[31] At 852.

[32] See eg Nixon v Furphy (1926) 26 SR (NSW) 409, aff’d (1925) 37 CLR 161; Southern Cross Commodities Pty Ltd (In Liquidation) v Ewing (1988) 14 ACLR 39 (SAFC); and Nattrass v Nattrass [1999] WASC 77 [158]-[159] .

[33] (1926) 26 SR (NSW) 409, 413.

[34] AG (UK) v Alford (1855) 4 De GM&G 843; Herrod v Johnston [2013] 2 Qd R 102.

[35] Cf Re Dawson [1966] 2 NSWR 211; Maguire v Makaronis (1996) 188 CLR 449, 469; Youyang Pty Ltd v Minter Ellison (2003) 212 CLR 484 [37]. See also Rickett, “Equitable Compensation: Towards a Blueprint?” (2003) 25 Syd L Rev 31.

[36] [1966] 2 NSWR 211, 218.

[37] Re Dawson [1966] 2 NSWR 211, 218; Alemite Lubrequip Pty Ltd v Adams (1997) 41 NSWLR 45, 46; Cureton v Blackshaw Services Pty Ltd [2002] NSWCA 187 [102]; Herrod v Johnston [2013] 2 Qd R 102; Ford & Lee [17.2250]; Jacobs’ Law of Trusts in Australia 7th ed [2210]; Halsbury’s Laws of Australia [370-6595].

[38] Wallersteiner v Moir (No 2) [1975] QB 373 (and see also [1974] 3 All ER 217).

[39] See eg Mulleneux v Brennan [2002] WASC 43. In cases of fraud, interest is available in equity (and at law) even in the absence of an express trust or fiduciary relationship: Johnson v R [1904] AC 817, 822.

[40] Wallersteiner v Moir (No 2) [1975] QB 373 (and see also [1974] 3 All ER 217).

[41] (1997) 41 NSWLR 45.

[42] Re Dawson [1966] 2 NSWR 211 at 218 per Street J.

[43] [1966] 2 NSWR 211.

[44] Glazier Holdings Pty Ltd v Australian Men’s Health Pty Ltd [2001] NSWSC 6 [38]-[40]; Bartlett v Barclays Bank Trust Co Ltd [No2] [1980] 2 All ER 92, 97.

[45] Williams on Executors, 18th ed 2000 [55-12].

In an earlier article, I dealt with interest in equity, with specific reference to the administration of trusts, and claims against trustees and other fiduciaries. This article deals with interest in the context of decrees of rescission.

It was seen in the previous article that interest in equity, including compound interest, can serve two goals, namely restitution for profit derived from the use of money and compensation for being held out of money. Those twin goals can be seen at work when rescission is sought as a remedy.

Take the case of a contract rescinded for misrepresentation. Where say the defendant is a vendor who exaggerated the worth of a business. On rescission the defendant will have to restore the purchase price at interest. The buyer may also have suffered trading losses, for which he is entitled to be indemnified, also at interest.

But in cases of rescission, it is not only the defendant who may have to pay interest. Sometimes the plaintiff has received money under or by reason of the contract and if so will have to restore that money with interest.

For example, when a constituent enters into a contract to sell property to or borrow money from a fiduciary, the constituent will commonly, as a condition of rescission, be required to restore that which was obtained pursuant to the contract at interest.[1]

Historically, either 4% or 5% was regarded as the appropriate rate, depending on whether the trustee rate or a mercantile rate was justified, and commonly simple interest was awarded.[2]  However, as in other contexts considered in the earlier article, more recent decisions moved away from the old 4%/5% rates, whilst still mindful of the need to distinguish between cases where a mercantile rate is appropriate and those where a lower rate should be applied. Modern courts may also be more willing to award compound interest when appropriate.

It is not useful to stay to analyse all of the old cases here. It would be surprising if the selection of the appropriate rate and the basis of the calculation simply turned on a distinction between who was the “innocent” party and who was the “wrongdoer”. That would be tantamount to admitting that an award of interest serves a punitive purpose.

On the contrary, the cases show that the ultimate enquiry is to seek what is just in the circumstances of the case which, in the rescission context, translates into doing what is “practically just” in order to achieve substantial restitutio in integrum. In approaching that ultimate question, once again particular regard should be had to one or both of the goals of (1) preventing a party from profiting from the use of the money (but not punishing a party for breach of fiduciary duty or unconscionable conduct) and (2) compensating (but not over-compensating) a party for being deprived of the use of the money. Equitable presumptions may assist in approaching these various tasks. But once again these presumptions do not replace the underlying enquiry.

It is no hard thing to conclude that a party who has deprived the other of money earned at least simple interest at least at the applicable trustee rate on the money, or that the party deprived would have earned at least that much on the money. The selection of the rate and basis of interest can be the result of inference based on slight evidence aided where applicable by presumptions. That should include a presumption that the plaintiff, had s/he not been deprived of the money would have made the most beneficial use of the money open to him/her.[3]  It should also include a presumption that the most beneficial use was made of money where it was obtained by fraud. But doing what is practically just does not always mean that interest will be ordered for the full amount or for the entire period between payment and repayment.

Three well known House of Lords decisions are examples of interest awards at the trustee rate. The first is Erlanger v New Sombrero Phosphate Company. [4]  The second is Adam v Newbigging.[5] The third is Spence v Crawford.[6] It is helpful to stay to consider these.

Erlanger v New Sombrero Phosphate Company

In Erlanger, the promoters of a company purchased a Crown lease of an income-producing island in the West Indies in 1871 (Sombrero Island), and sold it to the company some days later at double the price.[7] The syndicate had paid £55,000 for the island, and sold it to the company for £80,000 in cash plus £30,000 in shares. The purchase was approved by the board of directors, the membership of which had been arranged in such a way that proper scrutiny of the purchase transaction was unlikely to occur. It was subsequently ratified by a general meeting, attended by many of the investors who had subscribed for shares in the company following the issue of a prospectus. But they were not aware of the price that the vendors had themselves paid for the island, nor who the true vendors were. When the investors subsequently discovered the true facts, they caused new directors to be appointed, and the company sought to rescind the purchase.

At first instance, the Vice Chancellor dismissed the company’s bill without costs, but the House of Lords (delivering its judgment in 1878) upheld the decision of the Court of Appeal to set aside the purchase. As part of the decree, the syndicate was ordered to repay £80,000 with simple interest at 4% from the time of receipt of the money, and to give up the £30,000 worth of shares.[8] In return, the company had to reconvey the lease of the island and account for any profit derived from the island in the meantime. No reasons were given for the award of interest. It may not have been in dispute. But it is plain that an award of that much was justified, as it could be inferred or presumed that interest at 4% was or would have been earned. But it is interesting to ponder the question why the interest award was so limited.

The chief protagonist, Baron Erlanger, was a banker. He was the prime mover behind the syndicate and held the greatest individual stake in the venture. The other members of the syndicate were friends and acquaintances whom Baron Erlanger persuaded to put up money to buy the island with a view to on-selling it at a profit; and he managed the enterprise on behalf of the syndicate.[9] Whilst Baron Erlanger was privy to all decisions relating to the scheme or its execution, the rest of the syndicate was not.[10] Also, it is necessary to consider what cash profit was left in the hands of the syndicate members. Of the total sale price of £110,000, £55,000 repaid the syndicate for their outlay to buy the island. Of the £55,000 gross profit, £30,000 was received by share issues to the syndicate members. It is unlikely the company would have paid dividends, although some of those shares may have been on-sold and the sale proceeds could have been used to make further profits.[11] There were also costs involved in executing the scheme, including payments to solicitors and other agents. Therefore, only a small proportion of the £110,000 purchase price represented cash which the syndicate members could have used to earn further profits.[12] An award of mercantile interest against the syndicate on the £80,000 ordered to be repaid may well have made the syndicate pay more than the profit they derived, and punished them for their breach of fiduciary duty. Moreover, given that little was known about the most of the syndicate members, and they were not privy to the fraud, there was not enough to presume that they earned mercantile interest on even the cash profits they derived from the scheme. Even though such a presumption could be made against Baron Erlanger, who was a financier and masterminded the scheme, it is not clear how much cash profit he had received from the venture, as opposed to shares. He had also offered, at an early stage of the dispute, to give up to the company the profit he had made in cash and shares from the transaction; but the other members of the syndicate did not make a similar offer.[13] That, together with the delay until the House of Lords delivered judgment in 1878, after two hearings, may have contributed to the view that it would not have been just to award mercantile interest against Baron Erlanger let alone the whole syndicate.

Alternatively, compensatory reasoning did not justify an award of interest at greater than the trustee rate. It could readily be inferred or presumed that, if the true facts had been known and the company had not ratified the purchase, the company would have earned simple interest at the trustee rate on the money. But there was insufficient evidence to support anything more. The company, having been incorporated for the specific purpose of exploiting the phosphate on Sombrero Island, would either have been wound up or the objects of the company amended to allow for the company to carry on other activities. In the meantime, it was possible to infer or presume that truly independent directors would have invested the funds in authorised trustee investments at 4%.[14] It would have over-compensated the company to award 5% on £80,000.

Adam v Newbigging

In Adam v Newbigging, Mr Newbigging was induced in 1882 to become a member of a partnership by innocent misrepresentations as to the financial condition of the business.[15] The business subsequently failed. By a decision in 1888, the House of Lords held that Mr Newbigging was entitled to rescind the contract. It was further held that Mr Newbigging should have his capital repaid with interest at 4% from the times when the capital was brought in up to judgment, after deducting the sums drawn out by Mr Newbigging with interest up to the same time, and the Adams were to pay the balance to Mr Newbigging with interest at the same rate until payment.[16] Mr Newbigging had sought 5% interest. But this could not be justified on a profit-stripping approach. The business operated at a loss, and there was no other reason to believe that the Adams had made a profit from the use of Mr Newbigging’s money. There was no fraud from which one could presume that a profit had been made by the Adams.[17]

It was less obvious why the mercantile rate was not considered appropriate by taking a compensatory route. Mr Newbigging was in trade. The fact that this was his first business venture should not have altered that fact. Why was it not then presumed that he would (but for the misrepresentation) have made the best use of the money available to him, by entering into some other business of a similar kind? The answer could be that Mr Newbigging was still in the army, in India, when the misrepresentations were made and on the basis of which he was induced to give up his commission.[18] The Court may have considered that it could not infer or presume that he would have gone into business if the misrepresentations had not been made. He may still have stayed in the army. Mr Newbigging was unlikely to have testified that he would have given up his commission anyway. In those circumstances, it was correct to conclude that he would have earned interest at the trustee rate, not mercantile interest, if he had not purchased the business.

Spence v Crawford

Spence v Crawford, a Scottish appeal decided in 1939, involved rescission by a vendor.[19] Mr Spence, a holder of one half of the issued shares in a proprietary company, sold his shares to Mr Crawford, the other shareholder for £2,250. The purchaser induced the sale by fraudulently falsifying the accounts of the company. Of the purchase price, £900 was to be made up by Mr Crawford paying out a loan which the vendor had granted to the company, and £1,350 was to be paid in cash on deferred terms. The House of Lords held that Mr Spence was entitled to rescind. As part of the decree, Mr Spence was required (inter alia) to refund the £1,350 plus interest at 4% from the time of receipt, and pay a further amount to compensate Mr Crawford for a loss occasioned by reason of the transaction (arising in a respect that is not presently material to discuss), subject to Mr Crawford on the other side transferring back the shares and accounting for dividends received on the shares. The £900 did not come into play as it was actually repaid by the company, not by Mr Crawford.

Interest at 4% on the sale price of the shares (£1,350) was something which Mr Spence had offered to pay from the time of payment of the sale price, and the rate was agreed to by Counsel for Mr Crawford if Mr Spence were otherwise successful.[20] It is not clear if the compensation payable by Mr Spence, or the sums due by Mr Crawford on account of dividends, carried interest. These sums were also the subject of agreement, with the House of Lords leaving it to the parties to agree on the amounts due “including interest where properly payable”.[21] Whilst it is not clear, it seems that the parties may not have charged interest on the compensation and the dividends.[22]

Even though it was the subject of agreement, an award of interest on the £1,350 sale price was plainly justifiable lest Mr Spence be left unjustly enriched, if not also to compensate Mr Crawford for loss of use of the £1,350. It could certainly be inferred or presumed that 4% was earned by Mr Spence. But given the agreement of Counsel there was no need for the Court to consider whether a mercantile rate was justified. Most likely 4% was appropriate. The report discloses no evidence that Mr Spence was in trade. He did have his stake in the company that he had sold to Mr Crawford, but there was presumably no evidence that Mr Spence was otherwise in trade or that he had used the £1,350 to earn further profits. Given that Mr Spence was not a fraudster, but the innocent victim, it could not be presumed that he earned a mercantile rate.

Looking at matters from a compensatory angle, the report does not refer to any evidence that Mr Crawford (the purchaser) had borrowed to pay the £1,350. He may have funded at least the £1,350 out of the £4,067 in dividends he received on the shares the subject of the action for which he had to account and/or out of a similar amount he would have received on his own (previously held) shares. Mr Crawford was in trade, given his own previously held shares in the company. But it was not necessary to explore whether he would otherwise (but for the fraud) have invested the money in the company to earn further profits, and even if he would have done so he only would have earned one-half of the profits. Or perhaps it was not appropriate to award higher than 4% given the extremely low interest rate environment at the time. [23]

Mercantile Interest

It is now convenient to turn to some cases where mercantile interest was awarded. In two older cases where the vendor claimed rescission on the ground of fraudulent misrepresentation, the vendor was required to repay the purchase price received at 5%.[24] Whilst the reports of these cases are unclear, both seemed to involve income producing real properties. In those circumstances, it may have been inferred or presumed that the purchasers would have used the money in business if they had not made the particular purchases that were set aside; perhaps by buying an alternative business. It was not clear whether the purchaser had borrowed to fund the purchase price. So the decisions are justifiable by adopting a compensatory path to interest. There was nothing in the reports that would have justified a conclusion that the vendors (the innocent parties) made 5% on the purchase money.

There are also a number of cases involving claims to set aside usurious bonds[25] or “catching bargains” with expectant heirs and reversioners,[26] where the plaintiff’s relief was conditioned on restoring monies obtained by way of loan together with interest at the then mercantile rate of 5%. In an 1898 Victorian catching bargain case, 6% was allowed having regard to the higher rates then prevailing in that Colony.[27] In cases where the borrower seeks rescission, a condition of relief is typically restoration of the money borrowed and interest. In this respect, it would not usually be reasonable to apply the trustee rate because the lender is in the business of lending money at commercial rates, and the borrower has had the benefit of the use of the money, a benefit which otherwise they would have had to pay for. In these circumstances, fair value for the use of the money (restitution measure) or fair compensation for the loss of the benefit of it (compensation measure) requires a commercial rate, in the older cases typically 5%.

In one case, the lender was not in the business of lending, but a mercantile rate was still appropriate because the borrower would have had to pay commercial rates to get the money on the market. [28] That was a case where a solicitor was a chargee of the client, and had acquired the property of his clients at a court-ordered sale in breach of the purchasing rule, and by using fraud and pretence.

The tenor of these loan cases was endorsed by the High Court in 1997, as shall be seen below.[29]

The next example of an award of mercantile interest is a 1917 English case.[30] There, a stockbroker, pretending to execute a mandate to buy shares in a specific company for a client, sold his own shares in that company to his client. The broker had acquired those shares in virtue of him having been a promoter in that company. The broker did not obtain the client’s fully informed consent. The client elected to rescind upon discovering the fraud, the shares having since fallen in value. The broker was ordered to refund the purchase price, together with interest at 5%, less a credit for dividends which the plaintiff had received in the meantime. In return, the plaintiff had to re-transfer the shares to the broker. Reasons were not given for applying the mercantile rate, but it was clearly correct. The stockbroker was in the business of stock speculation and he had also acted fraudulently. In the absence of countervailing evidence, it was therefore appropriate to presume that the broker used the purchase price in his trade and earned mercantile interest on it. It is not clear why compound interest was not ordered.

Alati v Kruger

Another example of mercantile interest is the well-known High Court decision in Alati v Kruger, a 1955 appeal from Queensland.[31] This was a case of rescission by the purchaser. Mr Kruger was induced to buy Ms Alati’s fruit business at a cost of £700 in reliance on fraudulent misrepresentations including one that the average takings were £100 per week. The takings immediately proved to be much less than that, but proceeded to get even worse in part because a supermarket opened across the road (a fact of which Ms Alati had been aware). In many weeks Mr Kruger made losses, even without allowing wages for himself. Upholding Mr Kruger’s prompt rescission of the purchase, the High Court ordered (inter alia) that Ms Alati (the vendor) restore the purchase price of £700, and Mr Kruger was to restore chattels and an inquiry was ordered into what sum if any Mr Kruger should pay to Ms Alati by way of allowance for stock-in-trade and other benefits received by Mr Kruger under the contract which could not be restored. The High Court ordered Ms Alati to pay interest at 5% on £700 from the date of payment until repayment (as had the trial judge).[32]

No reasons were given by either the High Court or the trial judge as to why 5% was selected as the rate of interest. Ms Alati had never actually received the £700, as Mr Kruger had paid the purchase money to the real estate agent, who paid £657 into Court after deducting agent’s commission.[33] It is hard to imagine that 5% would have been earned on those moneys in the court’s trust account. That payment into court was about one month after settlement of the purchase contract.[34] Therefore, Ms Alati did not profit from the use of the purchase money, and the award of mercantile or any interest could not be justified on the basis that she did. It could only be justified on the ground that Mr Kruger needed to be compensated for having been held out of the £700. The various reports do not say whether Mr Kruger had borrowed to fund the purchase. Nor do they refer to any evidence as to whether he was otherwise in trade. He had not run fruit businesses before. But Mr Kruger was in trade because of the purchase that he had been deceived into making. The case should probably be seen as one where it was inferred or presumed that Mr Kruger would have bought another (profitable) business if he had not made this purchase. In that way, he would have earned mercantile interest on his money but for this purchase, assisted by a presumption that he would have made the best use of the money available to him.

An interesting question is why compound interest was not ordered. The matter may not have been argued. The contract was made on 15 June 1954 and presumably settled about a month after that. The moneys were paid directly into Court by the agent around the time proceedings were commenced in July 1954. Judging by the High Court’s order, that is where the moneys remained until the High Court’s judgment on 29 November 1956. As Ms Alati never had the use of the moneys, it could not be presumed that she earned compound interest. As for Mr Kruger, there was presumably no evidence that he incurred borrowing costs at compound rates. Perhaps it was thought that there was insufficient evidence of the activity he would have carried on to support a presumption that he would have earned compound interest. It was probably also relevant that it was only a little over two years since Mr Kruger paid the purchase price.

Munchies Management Pty Ltd v Belperio

A somewhat unusual set of facts arose in a 1988 Full Federal Court case, Munchies Management Pty Ltd v Belperio.[35] This matter, which originated in the South Australian District Registry, concerned s 87 of the then Trade Practices Act 1974. It was a case, like Alati v Kruger, where the plaintiffs had purchased a business, in this case a restaurant, bar and cafeteria business, in reliance on misrepresentations from the vendor which were fraudulent in the Derry v Peek sense (although fraud was not necessary to be shown to make out a case for contravention of s 52). In setting aside the contract under s 87, the Full Federal Court required the refund of the purchase price, together with interest at 10% from the date of payment to the date of court orders. It did so because such orders “may properly be considered as reducing the loss or damage suffered within the sense of s 87 of the Act”.[36] But that does not mean that the case is unhelpful in regard to interest awards in equity; on the contrary, the Court seemed to regard it useful to derive assistance from rescission in equity in its approach to s 87.[37]

The Court did not describe the rate in terms of the language of mercantile versus trustee rate. The Court noted that this was the rate adopted by the trial judge.[38] Forster J (the trial judge) did not explain why he selected 10% either.[39] Yet the fact that interest was limited to 10% was squarely in issue in the appeal. At that time, interest rates were very high. In the writer’s view, this rate was the result of a choice that had to do with the somewhat unusual facts of the case and the legislative confines within which s 87 of the Trade Practices Act operated.

If the claim had been brought in equity, it could have been presumed that the vendor earned a commercial rate of interest on the money, as he had been fraudulent. However, a profit-stripping approach may not be appropriate for s 87. In like manner, it may not have been appropriate to presume in a s 87 case that the vendor earned compound interest. But even in equity, compound interest may not have been awarded anyway, for two reasons. First, the purchasers acted quickly in rescinding. The contract was dated 14 November 1986. Settlement occurred in January 1987. The purchasers rescinded on 24 April 1987. Proceedings were commenced on 12 August 1987. It appears that the purchase price was repaid with interest on about or shortly after 9 June 1988, the date of the judgment of Forster J. The vendors had therefore only been kept out of their money for 1.5 years. Second, about one-half of the purchase price represented the discharge of a chattel lease. This constituted a saving to the vendor, not ready cash. It was not explored whether the vendor saved itself compound interest.

On the other hand, one would have thought that a mercantile rate of interest was justified based on compensatory reasoning. The Belperio’s were in trade in the sense that they purchased the business the subject of the proceedings. They already had other business interests, namely residential property investments and a market garden.[40] They had borrowed virtually the entirety of the purchase price for the business, at rates of up to 17.5% and no doubt paid compound interest. It was found that the Belperio’s, to their knowledge, could not have serviced the borrowings out of the revenue from the restaurant business even if the representations had been correct. Those facts were enough to warrant an inference that the Belperio’s would have purchased some other business and would have earned profits for which a mercantile rate of interest was proper compensation.

The Belperio’s had sought the full amount of interest they had paid on the borrowings. This was sought either as damages under s 82 (by analogy to deceit) or by way of an indemnity for trading losses under s 87 (by analogy to indemnity in equity). That claim was rejected as lacking the appropriate causal connection or too remote:[41]

The indemnity thus was limited to detriments suffered as “a direct consequence of the fraud”; accordingly, supervening causes such as an error of business judgment by the plaintiff in the arrangement of his affairs by, for example, borrowing from a third party greater sums than he could repay or service, may take a loss beyond the scope of an indemnity: cf Gould v Vaggelas (1985) 157 CLR 215 at 221—2 ; 56 ALR 31; Yorke v Ross Lucas Pty Ltd 69 FLR at 136; Milner v Delita Pty Ltd (1985) 61 ALR 557 at 581…. [I]t is apparent that the purchasers made a decision to borrow a very high proportion of the purchase price in the knowledge that even if the representations as to the turnover of the business, upon which they relied, had been made good, the prospective profits of the business would have been insufficient to service the purchasers’ borrowings. The interest charges were a cost that the purchasers were prepared to bear and were not (in the sense we have earlier explained) an item of loss suffered by reason of or as a result of the falsity of the representations. The purchasers must have carried the hope that they had the capacity to meet these costs from their other resources or by improving the performance of the business.

The Belperio’s loss was ameliorated but only in part by the Court’s decision to award interest on the unrefunded purchase price, which was allowed at 10% simple interest. As noted above, neither the trial judge nor the Full Court explained the choice of 10% simple interest.[42] If it was appropriate to compensate the Belperio’s for losing the opportunity to make commercial profits from another viable business, or even to allow compensation for the borrowings, 10% seems below commercial rates at that time. The practice of the Federal Court at that time, when awarding interest under s 51A of the Federal Court of Australia Act 1976, was generally to apply the rates adopted by the courts of the State in which the Court sat.[43] There was no reason why a similar practice could not apply in cases under s 87 of the Trade Practices Act. But, at that time, the Supreme Court of South Australia adopted 18-19% as the rate for statutory pre-judgment interest.[44] The Supreme Court adopted 10% as the rate for overdue legacies, more akin to a trustee rate.[45]

In the writer’s view, the rate of 10% simple interest was adopted as a kind of “rough and ready” rule to mould the remedy to fit the facts. The Belperio’s were partly to blame because they borrowed too much. It was clear they could not get mercantile interest on the whole sum borrowed. The calculation of interest would be different if they had paid a lower price for another suitable business, and all the more so if they had borrowed a lesser proportion of the overall purchase price of that notional business. If they had to pay interest to a commercial lender on those borrowings in a lesser principal amount, the interest paid by them would be less than the interest they in fact paid. On the other side, there would presumably be a question of interest foregone on the increased cash they would have had to put in to lower the gearing of the investment. It could also be looked at in terms of the profits the Belperio’s could be expected to earn if they had bought another viable business. It would be very difficult to quantify all these imponderables as an exact science. In the writer’s view, what the Court did was take a lower rate, 10% simple interest, and apply it to the whole of the purchase price in fact paid instead of working out a discounted purchase price and applying a mercantile rate to that discounted amount. As part of that exercise, simple interest was probably sufficient to compensate the Belperio’s, especially given the brevity of the period between the settlement of the contract and repayment.

An alternative explanation is that it was inferred that the Belperio’s lost simple interest at the trustee rate, and 10% was regarded at that time as an appropriate trustee rate.

The case re-affirms that the purpose of an award of interest is not to punish a wrongdoer, and that interest can be limited by reference to considerations of causation and remoteness. It also an example of interest being awarded to compensate a party for the cost of borrowing.[46]

Compound Interest

Some rescission cases will now be mentioned where compound interest was awarded. In a 1994 decision of the Full Federal Court, it was recognised that a purchaser of a truck induced by innocent misrepresentation could, on setting aside the sale, have repayment of the purchase moneys together with interest at 12.25% (a rate agreed at trial), calculated at compound rates, because the purchaser incurred compound interest on borrowings used to purchase that truck.[47] However, interest was not allowed for the whole period from the time of purchase in 1989, but only from the time of the election to rescind one year later. That is because the purchaser had the opportunity to use the truck in its business for one year, which offset any right to interest during that period.

A leading case where a fiduciary was required to pay compound interest as a condition of rescission was Maguire v Makaronis, a 1997 appeal from Victoria.[48] There, the High Court held that borrowers could rescind a mortgage for breach of fiduciary duty, but only on terms that they repay the loan amount together with reasonable interest. The loan was an interest-only loan by way of bridging finance to enable Mr and Mrs Makaronis to purchase a poultry farm. The mortgagee was Messrs Maguire and Tansey, the solicitors in the purchase transaction for Mr and Mrs Makaronis. The solicitors did not disclose to their clients that they were the mortgagees. Mr and Mrs Makaronis had believed that the mortgage had been given to the Commonwealth Bank. The bank was the ultimate source of the bridging finance, but the solicitors had interposed themselves in the transaction and gave guarantees to the bank. The Mortgage, which was dated in 1990, provided for interest at 24% reducible to 22% if paid on time. This was not out of line with prevailing interest rates at the time.

The High Court held that, as a condition of relief, the purchasers should pay the sum outstanding under the Mortgage together with interest at commercial rates as allowed from time to time by the Supreme Court of Victoria, calculated at half yearly rests. The matter was remitted to the Victorian Court of Appeal to work that out.

The solicitors had argued that the Mortgage rate of 22% should be applied. The Court rejected this argument. Even assuming that 22% was evidence of commercial rates in June 1990, “it is a matter of common knowledge that interest rates have fallen since”. If 22% were applied, there was a risk that the solicitors would profit. Brooking J, the dissenting judge in the Victorian Court of Appeal with whose reasons the High Court substantially agreed, adopted 9% calculated with half yearly rests based on the analogy of the trustee rate and what was obtainable from authorised trustee investments. As to that, Brooking J had directed an inquiry before the Senior Master. The High Court however thought that analogy was inappropriate and that such a rate could disadvantage the solicitors, and preferred commercial rates as allowed from time to time by the Supreme Court of Victoria calculated at half yearly rests.

In requiring Mr and Mrs Makaronis to submit to terms, the primary consideration for the High Court was the ascertainment of what was fair value for, or compensation for, the use of the money by Mr and Mrs Makaronis over a period of (by that time) seven years from June 1990, having due regard to the nature of the mortgage transaction of which they had received the benefit.[49] In working that out, the Court looked for what was “practically just”: that which would not allow the solicitors to profit from their breach of fiduciary duty, but also would not punish them for it or give the borrowers a windfall. The Court considered that a mercantile rate of interest was required, applying the analogy of the loan cases discussed above. Here, however, practical justice also required compound interest, presumably because the solicitors themselves would have had to pay compound interest to the Commonwealth Bank.

Discretion

Finally, doing what is just or “practically just” also means that interest is discretionary in the sense that the Court will do nothing that is unreasonable in the particular circumstances.[50] Examples where interest was declined or limited to achieve justice between the parties have already been given.[51] Delay could be relevant, but would not usually justify a refusal to award any interest unless it was so excessive as to be inequitable to allow interest.[52] In that respect, interest will probably stand or fall with the decision on whether delay requires a refusal of rescission.

It militates against interest and especially compound interest if the party claiming interest benefitted from the use of the money. This is hardly surprising given that one of the purposes of an award of interest is to compensate a party for having been kept out of money. Fuller v Meehan is an example of this, discussed in the earlier article in the context of constructive trusts as a proprietary remedy. [53] A rescission example is a 1985 English decision, O’Sullivan v Management Agency Ltd.[54]

Mr O’Sullivan was a musician. From about 1970, when he was 23, he entered into management, publishing and recording agreements with Gordon Mills and companies associated with him. Pursuant to those agreements, Mr O’Sullivan was to use exclusively the services of the defendants and assigned copyright in compositions and recordings for 50 years. The royalty payable to Mr O’Sullivan was less than would have been secured had he obtained independent advice (which he had not obtained). As a result of the relationship, he gained worldwide fame and enjoyed significant financial success, due in significant part to the endeavours of the defendants. Some ten years on, he claimed rescission of the agreements, and delivery up of the compositions and recordings. He succeeded, and the defendants were required to account for the profits made under the agreements, subject to an allowance for skill and labour including a profit element though less than the profit they would have derived if Mr O’Sullivan had received independent advice. The Court of Appeal allowed interest on the profits, but not compound interest (subject to an exception which was conceded).[55] Although the defendants had used the profits in trade, the profits were used to promote Mr O’Sulliivan and he enjoyed the fruits of that.

Conclusion

The cases discussed in this and the earlier article show that interest, like other equitable relief, is ultimately informed by the nature of the particular equity and what is “practically just”. These things will, of course, depend on the evidence. However, the power to award interest must be exercised for proper purposes. Those purposes are to prevent an unjust enrichment or to compensate for loss.

Stephen Lee, Barrister

Footnotes

1. It is beyond the scope of this article to consider allowances for occupation rent or improvements. But in principle, interest could apply to such allowances as well.
2. Kerr on Fraud and Mistake 6th ed 1929 (SE Williams ed) pp473-4, 476, 477, 481, 494; Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,320-2 .
3. In the writer’s view, this presumption ought not to be limited in its application to beneficiaries. In any event, parties against whom rescission is sought are constructive trustees.
4. (1878) 3 App Cas 1218.
5. (1888) 13 App Cas 308.
6. [1939] 3 All ER 271.
7. (1878) 3 App Cas 1218. For the decree see (1877) 5 Ch D 73,125.
8. Some of the shares seem to have been sold since, and the defendants had to account for the proceeds of the sales with interest at 4% from the time of receipt.
9. 1977) 5 Ch D 73, 75-6, 104-5.
10. (1877) 5 Ch D 73, 105.
11. But that was dealt with by the order referred to in footnote 7.
12. The syndicate members also lost the use of their cash (assuming they had not borrowed), but the correlative account of profits against the company would remedy that.
13. (1878) 3 App Cas 1218, 1222, 1253. It is also not clear from the judgment what Baron Erlanger had done with the profits after making the offer. He might have set it aside in an account bearing interest at 4%.
14. If it were resolved to wind up the company, it would not lie in the mouth of fiduciaries to contend that interest should only run until the time when the available surplus would have been ascertained and ready for distribution to shareholders.
15. (1888) 13 App Cas 308.
16. The orders are summarised at Newbigging v Adam (1886) 34 Ch D 582, 585.
17. Another innocent misrepresentation case where there was not enough to presume mercantile interest was earned by the defendant or was lost by the plaintiff is Root v Bradley [1960] NZLR 756, 763 which allowed 4% simple.
18. (1886) 34 Ch D 582, 589.
19. [1939] 3 All ER 271.
20. The purchaser could not have complained about loss of the £ 900, or the loss of its use. That was presumably a loan to the company on interest free terms intended to provide working capital for the company. The purchaser was perfectly free to call in that loan from the company at any time. Also, the purchaser no doubt received a benefit from that loan as he would have received dividends on his own (previously held) shares. He had held 2295 shares of his own prior to the transaction.
21. At p284.
22. See the table at p284.
23. Forrest Capie & Alan Webber, A Monetary History of the United Kingdom, 1870-1982 (George Allen & Unwin 1985), vol 1, Table III (10), pp494-5.
24. Donovan v Fricker (1821) Cas in Chan 165; Turner v Harvey (1821) Cas in Chan 169, both referred to in Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,321-2.
25. Referred to in Maguire v Makaronis (1997) 188 CLR 476-7, and Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,322.
26. Referred to in Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,320-2.
27.  Moloney v The Trustees Executors and Agency Co Ltd (1898) 24 VLR 297, 303.
28.  Popham v Exham (1860) Ir Chancery Rep 440, referred to in Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,321-2.
29. Cf also the observations of Lord Goff in Westdeutsche Landesbank Girozentral v Islington LBC [1996] AC 669, 691C-F.
30.  Armstrong v Jackson [1917] 2 KB 822.
31.  Alati v Kruger (1955) 94 CLR 216.
32. (1955) 94 CLR 216, 239; [1956] St R Qd 306, 311.
33. [1954] QWN 40.
34. [1954] QWN 40; (1955) 94 CLR 216, 221.
35.  Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274.
36. (1988) 58 FCR 274, 288B.
37. (1988) 58 FCR 274, 288C.
38. (1988) 58 FCR 274, 291B.
39. [1988] FCA 189 [49].
40. (1988) 58 FCR 274, 277C.
41. (1988) 58 FCR 274, 285B-C, 290C-D. For a similar case, see Yorke v Lucas [1982] FCA 180 (decided under the law prior to s 51A of the Federal Court of Australia Act 1976).
42. (1988) 58 FCR 274, 291B.
43. See eg Elsinora Global Ltd v DCT [2006] FCAFC 156 [66]. But see now Practice Note CM 16. Section 51A of the Federal Court of Australia Act 1976 had been inserted by Act No. 165 of 1984, Schedule 1.
44. Supreme Court Rules (SA) 1987 rule 84.19 and Third Schedule. The Rules were dated 12th August, 1986, and came into operation on 1st January, 1987. Even if those Rules did not apply because of “accrued rights” reasoning, which is not certain as pre-judgment interest may be characterized as procedural, it is still unlikely that the practice of the Supreme Court under the prior 1947-1986 Rules would have been to award only 10% for statutory pre-judgment interest, if the case law in other states is any guide.
45. Supreme Court Rules (SA) 1987 rule 85.23.
46. In Haydon v Jackson [1987] FCA 491, the Full Federal Court cited Fitzgerald J’s observations concerning s 87 in Sanrod Pty Ltd v Dainford Ltd [1984] FCA 154, (1984) 54 ALR 179, 191: “… when money is paid in consequence of misleading conduct, the loss suffered by that conduct includes not only the money paid but also the cost of borrowing that money or the loss from its investment, as the case may be…”.
47.  JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378.
48. (1997) 188 CLR 449.
49. For use of the concept of compensation, see also Re Dawson [1966] 2 NSWR 211, 218; Automobile and General Finance Co Ltd v Hoskins Investments Ltd (1934) 34 SR (NSW) 375, 391 per Long Innes J. See also Spence v Crawford [1939] 3 All ER 271, 279-80.
50. O’Sullivan, Elliott & Zakrzewski, The Law of Rescission OUP p402. See also Kerr, supra, p479, which suggests that that interest will not be allowed if there was negligence on the part of the claimant. That suggestion might be overbroad.
51. See eg JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378.
52. Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218, 1282.
53. [1999] QCA 37.
54. [1985] 1 QB 428.
55. At 473-4.