Family law meets equity (website version) Law meets equity... · 2018. 9. 4. · 5. Today, equity...
Transcript of Family law meets equity (website version) Law meets equity... · 2018. 9. 4. · 5. Today, equity...
FAMILY LAW MEETS EQUITY
TIM NORTH QC AND SIMON FULLER
© Copyright 2018 This work is copyright. Apart from any permitted use under the Copyright Act 1968, no part may be reproduced or copied in any form without the permission of the Author. Requests and inquiries concerning reproduction and rights should be addressed to the author c/- [email protected] or T 613-9225 6387.
1
FAMILY LAW MEETS EQUITY
By Tim North QC and Simon Fuller
29 August 2018
The development of equity and its relevance to family law
1. Tracing the development of equity throughout history is an interesting yet significant undertaking.
Equity, as we know it today, developed separately and deliberately distinctly from the common law
and can be traced back to the middle ages, a time when the king was the source of all power. As a
gradual separation of powers and roles emerged over time, a system of royal justice developed in
competition to the existing common law courts, which were considered to be inflexible and too rigid.
Those with grievances which did not fit within the existing finite common law causes were able to
petition the king for relief. The system became formalised with the creation of the Court of Chancery
which provided for all petitions to be referred to the Lord Chancellor. The pivotal role of ‘good
conscience’ is highlighted in the plea which often formally concluded petitions to the Chancellor:
“May it please your most gracious Lordship…to grant writs summoning [X] to appear before you
in the King’s Chancery…there to make answer in this matter as is demanded by reason and
conscience otherwise the said petitioner shall be without remedy.”1
2. The equitable jurisdiction, like it is today, was not a body of defined rules but rather involved the
evaluation of conduct with societal norms. The attraction of the Court over the common law courts
was that it operated with a significant degree of flexibility and discretion and was able to adapt to the
peculiar factual scenario before it. In 1615 Lord Ellesmore of the Court of Chancery ordered an
injunction preventing enforcement proceedings of a judgment (given in a separate common law
action) which was said to have been procured by fraud and remarked:
“The Cause why there is a Chancery is, for that Mens Actions are so divers and infinite, that it is
impossible to make any general Law which may aptly meet with every particular Act, and not fail
in some circumstances.”2
3. With the import of English law at the time of Australia’s settlement, the principles and concepts of the
equitable jurisdiction became part of the law of the colonies and, eventually, the nation. Whilst there
1 G E Dal Pont, Equity and Trusts in Australia (Thomson Reuters, 6th ed, 2015) 2. 2 Earl of Oxford’s Case (1615) 1 Ch Rep 1; 21 ER 485 at 6 (Ch Rep), 486 (ER) as cited in G E Dal Pont, Equity and Trusts in Australia (Thomson Reuters, 6th ed, 2015) 3.
2
has been considerable debate in Australia whether there has been a ‘fusing’ of equitable and common
law principles or whether equity still retains its role as a separate and coherent body of law3, the role
of equity in Australian jurisprudence is well‐established and pivotal. Australian courts are largely all
invested with both legal and equitable powers and, whilst the distinction between the two jurisdictions
retains some importance when considering available remedies, precise classification of the equitable
world may best be confined to history.
4. In Australia, like the plea to the Chancellor, the notion of ‘good conscience’ remains central to the
concepts underpinning the equitable jurisdiction. The jurisdiction continues to focus on wrongs to the
person rather than the state (i.e. in personam) and continues to be relevant in circumstances where
developed common law causes of action or statutory actions may produce an unjustly rigid result. The
development of Australian case law in the area enjoyed a busy period in the 1980s and 1990s with a
number of prominent High Court decisions in the areas of fiduciary duties4, equitable estoppel5, and
constructive trusts6.
5. Today, equity continues to be the flexible saviour of those who have experienced acts ‘against good
conscience’. Its relevance stretches from partnerships, breach of confidence, fraud, appointment of
receivers, and specific performance. For relationships, it is most often employed in situations where
there has been an abuse of the particular dynamics of the relationship including those involving an
imbalance of power, unfair departure from promises relied upon, and to rectify imbalances in
contributions to asset purchases.
6. More relevantly, for relationship breakdowns, a number of prominent decisions in recent decades
about constructive and resulting trusts rapidly developed this area of law. The decisions provided an
attractive vehicle for former partners seeking their share of a property when the disparate state
regimes regulating de facto relationships were not‐existent or in their infancy. The various referrals
of state powers to the Commonwealth in the early 2000s7 and the subsequent inclusion in 2009 of the
de facto financial cause to the jurisdiction of the federal family law courts unfortunately slowed the
development of equitable proprietary doctrines in Australia.
7. Nonetheless, equity’s role in family breakdowns remains important. Increasing prices in property
markets in the major cities in Australia appear to have led to spouses purchasing property with the
3 See e.g. Michael Kirby, "Equity's Australian Isolationism" (2008) 8(2) Queensland University of Technology Law and Justice Journal 444. 4 See e.g. Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; Breen v Williams (1996) 186 CLR 71 5 See e.g. Giumelli v Giumelli (1999) 196 CLR 101 6 See e.g. Muschinski v Dodds (1985) 160 CLR 583; Baumgartner v Baumgartner (1987) 164 CLR 137 7 See e.g. Commonwealth Powers (De Facto Relationships) Act 2004 (Vic)
3
assistance of other family members, usually parents, or alternatively, living in properties for long
periods for which they are not the registered proprietor. These arrangements are, frustratingly but
unsurprisingly, often not recorded in writing. Families are increasingly using trust structures to buy
and sells assets and run businesses. For properties, controversies arise, for example, when the legal
ownership does not reflect the proportion of contributions made by a family member to the purchase
of a property or when a particular property has been ‘promised’ by a parent to a child. Property
disputes involving a spouse’s parents as a third party are becoming increasingly common. So too are
disputes regarding a spouse’s entitlement in a family trust. More recently, equity has played a role in
vitiating financial agreements made in circumstances involving fraud, unconscionable conduct, duress
or undue influence. The role of equity in these disputes will continue to evolve and change.
The exercise of the equitable jurisdiction
8. The word ‘equity’ is mentioned only five times in the Family Law Act, mostly in relation to the principles
involved in determining the validity of agreements made under the Act. Strictly speaking, the Family
Court of Australia is not a court of equity, although the Federal Circuit Court of Australia is.8 Unlike,
for example, the Supreme Court of Victoria, neither court however possesses a general equitable
jurisdiction. As creatures of statute, they derive jurisdiction from an enabling piece of legislation. The
source of the Family Court’s powers was considered by the High Court in DJL v The Central Authority
where it remarked the Court is:
“'unable to draw upon the well of undefined powers' which were available to those courts as part
of their 'inherent jurisdiction'. The Family Court is a statutory court, being a federal court created
by the Parliament within the meaning of s 71 of the Constitution. A court exercising jurisdiction or
powers conferred by statute 'has powers expressly or by implication conferred by the legislation
which governs it' and '[t]his is a matter of statutory construction'; it also has 'in addition such
powers as are incidental and necessary to the exercise of the jurisdiction or the powers so
conferred'”9.
9. For the family law courts to have jurisdiction, they require an empowering statute. For property
matters, jurisdiction is conferred on the courts for ‘matrimonial causes’10 and ‘de facto financial
causes’11. The adjudication of claims based in equity, which ordinarily would fall within the purview of
the state courts, relies on the exercise of the courts’ accrued jurisdiction. Practitioners will be familiar
8 See Family Law Act 1975 (Cth) s.12(2) and cf Federal Circuit Court of Australia Act 1999 (Cth) s.8(3). 9 DJL v The Central Authority (2000) 201 CLR 226, 240. 10 Family Law Act 1975 (Cth) s 39(1) 11 Family Law Act 1975 (Cth) s 39A(1)
4
with the importance of the decision of Warby v Warby and the requirements of a ‘single justiciable
controversy’ and a ‘common sub‐stratum of facts’12. Some of the procedural issues considered in
Warby have since been codified with the introduction of Part VIIIAA to the Act relating to third parties.
10. Jurisdiction issues aside, equitable remedies remain an important tool for relief in relationship
breakdowns. In addition to third party claims, equitable relief should be considered in the scenarios
involving family trusts, death of a spouse when proceedings have not been filed, bankruptcy, and
applications which are otherwise out of time.
Preliminary matters to consider
Legislative provisions
11. When a party is prosecuting or defending a claim for equitable relief, it is important to consider some
of the relevant legislative provisions, being sections 78, 79 and Part VIIIAA of the Act.
12. Part VIIIAA of the Act is a useful starting point as it is a recent addition to the statute and is specifically
enlivened when the rights, liabilities or property interests of third parties are relevant13. Sections 90AE
and 90AF extend the courts’ powers to make orders against a third party (to the marriage or de facto
relationship14). The orders can be s.79 orders altering proprietary interests or s.114 injunctive orders.
The court can only make orders if procedural fairness has been afforded, if it is just and equitable, and
if it is also “reasonably necessary, or reasonably appropriate and adapted, to effect a division of
property between the parties to the marriage”15, although it should be noted this provision does not
otherwise fetter the exercise of the courts’ accrued jurisdiction. The court is also required to consider
a number of matters when making third party orders including the taxation and social security effects,
the parties’ abilities to comply, and other matters raised by a third party16.
13. Section 79 of the Act empowers the Court to make an order altering the interests of a party of the
marriage (or a third party as extended by Part VIIIAA) ‘as it considers appropriate’17. The term
‘property’ is not expressly defined in the Act and takes its meaning from the general law. There are a
number of authorities which consider the meaning of the term, however in summary, it involves the
legal and equitable interests of the parties of a proprietary nature.
12 Warby v Warby (2001) 166 FLR 319 13 See e.g. Family Law Act 1975 (Cth) s.90AA. 14 Family Law Act 1975 (Cth) s.90TA 15 Family Law Act 1975 (Cth) s.90AE(3) 16 Family Law Act 1975 (Cth) ss 90AE(3) and (4) 17 Family Law Act 1975 (Cth) s 79
5
14. It is important to remember that section 79 empowers the Court to alter an interest. It does not define
an existing proprietary interest. The Court “…does not have discretion, pursuant to s 79 of the Family
Law Act 1975 (Cth) or indeed otherwise, to determine that a person is a beneficial owner of property.
The court may find and declare that to be the position but it will do so based on general legal and
equitable principles (Stanford v Stanford (2012) 247 CLR 108).”18
15. To the extent a purported proprietary right requires definition, prior declaratory relief is needed. It is
at this stage that, most often, the role of equity is triggered in family law proceedings. Declaratory
relief is made pursuant to section 78 of the Act upon the ordinary considerations of the common law
and equity. In the Full Court’s decision of Watson & Ling the Court said:
“The emphasis by the High Court in establishing the existing legal and equitable interests of the
parties as a precursor to answering the question required by s 79(2)/s 90SM(3) can be seen to
derive from the fact that s 79/s 90SM is concerned with rights in property which “…have their
source in [the] relationship…” but which “…are created by curial order…”19
Pleadings and preliminary challenges
16. The relatively recent decision of El Saeid & Masih And Ors20 illustrates the need to ensure claims
against third parties are grounded in fact and well supported by evidence and pleadings. The Court in
that case, after having required the wife to file a statement of claim, struck out parts of her claim
against third party entities for failure to identify the facts necessary to support the relief sought.
17. Rules 10.12 and 10.13 of the Family Law Rules 2004 (Cth) provide for summary consideration of
applications or separate issues when:
a. There is no jurisdiction;
b. The other party has no legal capacity to apply for the orders sought;
c. It is frivolous, vexatious or an abuse of process; or
a. There is no reasonable likelihood of success.
18. A strike out or summary dismissal application may be a useful preliminary challenge for third parties
who have, without cause, been joined as parties to family law proceedings. It is worthy of
consideration in these circumstances, particularly to avoid the costs of a trial.
18 El Saeid & Masih And Ors [2015] FamCA 516 per Aldridge J at [39]. 19 [2013] FamCA 57 per Murphy J at [15]. 20 El Saeid & Masih And Ors [2015] FamCA 516
6
19. Equitable claims for relief will often require a degree of particularisation that cannot be achieved from
an affidavit. Pleadings can fulfil this role and, whilst the family law courts are not courts of pleadings,
they are useful for applicants and respondents alike. For applicants, pleadings assist with ensuring the
evidence and facts alleged actually make out an equitable claim. For respondents, pleadings are
likewise useful to understand the particular equitable claim relied upon and the asserted entitlement
to relief. For respondents in particular, an order for the applicant to file a statement of claim should
be sought at an early stage.
Categories of equitable interests and remedies
20. There are many types of equitable claims and associated remedies. This paper is not intended to cover
them all.
21. Whilst it is a New South Wales authority, the case of Tory v Jones21 is a useful guide to the extent that
it helpfully summarises some of the relevant equitable considerations and principles which should be
considered when claims about property are involved22. Some of the considerations covered are:
a. The existence of an agreement that a particularly property would be held on trust;
b. The presence of any express, implied or constructive trust;
c. Compliance with statutory formalities for express trust;
d. An imbalance in contributions to the purchase price of a property and the presumption of
advancement; and
e. Whether a proprietary estoppel should be granted.
Resulting trusts
22. A resulting trust arises where a party confers legal title to property on another person but retains
equitable ownership of the property, the first party not intending to be the beneficial owner. Such a
situation usually arises in relation to real property but can extend to personal property.
23. The resulting trust exists as a presumption of equity irrespective of the parties’ intentions and is
implied by law. The presumption displaces the prima facie position that the beneficial ownership of
property corresponds with the legal ownership.23
24. The concept was succinctly explained by Deane J in the High Court decision of Calverley v Green:
21 Tory v Jones (1990) DFC 95‐095. 22 Ibid at 76230. 23 Currie v Hamilton (1984) 1 NSWLR 687 per McLelland J at [690].
7
“Where a person pays the purchase price of property and causes it to be transferred to another or
to another and himself jointly, the property is presumed to be held by the transferee or transferees
upon trust for the person who provided the purchase money. The second can properly be seen as
complementary of the first. It is: where two or more persons advance the purchase price of property
in different shares, it is presumed that the person or persons to whom the legal title is transferred
holds or hold the property upon resulting trust in favour of those who provided the purchase price
in the shares in which they provided it.”24
25. The composite elements of a resulting trust were considered by the Family Court in the matter of
Kawada & Kawada25. His Honour Justice O’Reilly, referring to Justice Palmer in the New South Wales
Supreme Court decision of Buffrey v Buffrey ([2006] NSWSC 1349) said:
“…The principles upon which the Court proceeds are now well settled and can be summarised thus:
(1) one begins with the presumption that the equitable title to the property is at home with the
legal title but that presumption, like all evidentiary presumptions, gives way to facts showing the
contrary; …
(3) the presumption of resulting trust may be rebutted by showing that there is a relationship
between the parties giving rise to the presumption of advancement so that the party who has
contributed less or nothing to the acquisition cost is nevertheless to have an interest in accordance
with the legal title;
(4) if a presumption of resulting trust or a presumption of advancement arises where one party
has contributed the whole of the acquisition cost of the property but the title to the property is
placed in the name of another party:
a) whether either presumption is rebutted depends upon the intention solely of the party who
provided the money because the question is whether that person intended to make a gift of
an interest in the property to the person who did not contribute to its acquisition;
b) evidence by the person making the payment as to his or her intentions at the time of the
transaction is admissible but the Court will treat that evidence with caution as the evidence
of an interested party;
c) the Court is more assisted in determining the subjective intention of the person making the
payment by evidence of that person’s contemporaneous statements of intention, subsequent
24 Calverley v Green (1984) 155 CLR 252 per Deane J at 266. 25 Kawada & Kawada And Ors [2012] FamCA 273.
8
admissions against interest, subsequent dealings with the property, and by evidence of other
relevant surrounding circumstances;
(7) for the purposes of the presumptions of both of resulting trust and of advancement:
a) the acquisition cost of property includes the costs, fees and disbursements incidental to its
acquisition;
b) a party contributes to acquisition cost by borrowing funds necessary to make up the
acquisition cost, whether or not that party subsequently contributes to payment of principal
and interest due on the borrowing;
c) parties borrowing jointly in order to make up the acquisition cost are treated as having
contributed the borrowed capital in equal shares;
d) a party who does not borrow funds to make up the acquisition cost but who subsequently
pays, or contributes to payment of, principal and interest on such a borrowing does not, by
that fact alone, make a contribution to acquisition cost.(authorities omitted; emphasis
added)”26
26. The presumption of a resulting trust is rebuttable by contrary facts. It is also displaced by the
presumption of advancement.
27. The contribution relied upon must be to the purchase price and is confined to the cost of the property
and related items such as legal fees and stamp duty. Contributions to a mortgage do not give rise to a
resulting trust. They may give rise to a constructive trust, but not to a resulting trust.27
Constructive trust
28. The constructive trust is distinct from institutional forms of trusts (e.g. express and resulting trusts).
The imposition of the trust is constructive in that it construed by the courts.28
29. “Viewed in its modern context, the constructive trust can properly be described as a remedial
institution which equity imposes regardless of actual or presumed agreement or intention (and
subsequently protects) to preclude the retention or assertion of beneficial ownership of property to
the extent that such retention or assertion would be contrary to equitable principle.”29
26 Ibid at 39. 27 See e.g. Dinsdale bht Protective Commissioner v Arthur [2006] NSWSC 809 per Brereton J 28 Giumelli v Giumelli (1999) 161 ALR 473 at 474. 29 Muschinski v Dodds (1985) 160 CLR 583 per Deane J at 614.
9
30. There are a number of recognised categories of constructive trusts. The relevant ones for family law
purposes are the common intention constructive trust and Baumgartner‐type trust.
31. A Baumgartner‐type trust comes from the High Court case of Baumgartner v Baumgartner30 and
requires a pooling of money or resources in a relationship or joint venture. In that case the Court
accepted the principle espoused by Justice Deane in Muschinski v Dodds31 that where a joint
relationship or endeavour fails, equity will not permit one party to assert or retain the benefit of the
property if it would be unconscionable for the party to do so.
32. The relevant elements to establish a Baumgartner‐type trust are32:
a. There be a joint relationship or endeavour;
b. In which expenditure is shared for the common benefit (i.e. a ‘pooling’ of resources) in the
course of and for the purpose of which an asset is acquired;
c. The substratum of that joint relationship or endeavour must have been removed or the joint
endeavour prematurely terminated “without attributable blame”; and
d. Requisite element of unconscionability ‐ it would be unconscionable for the benefit of those
monetary and non‐monetary contributions to be retained by the other party to the joint
endeavour.
33. The Full Court of the Family Court considered the principles involved in a constructive trust in Crafter
& Crafter33.
34. The common intention constructive trust is slightly different from the Baumgartner‐type trust in that
rather than requiring a pooling of resources for the benefit of a joint venture, it relies on the reliance
by a claimant in response to a common intention that that party will obtain a particular interest in
property.
35. The principle was succinctly summarised in the Victorian case of Sivritas v Sivritas where the Court
said:
“The “common intention constructive trust” is another species of constructive trust. It is
different from a Muschinski v Dodds constructive trust, but will often arise in similar
circumstances. A common intention constructive trust will arise where there is an actual or
inferred common intention of the parties as to their entitlements to the beneficial interest in
30 Baumgartner v Baumgartner (1987) 164 CLR 137. 31 Muschinski v Dodds (1985) 160 CLR 583 at 620. 32 Above n 30 at 148. 33 Crafter & Crafter [2012] FamCAFC 199 at 190.
10
the property, and there has been detrimental reliance on that common intention by the
claimant such that it would be an equitable fraud on the claimant to deny his or her interest in
the property. The onus of proving the parties had a common intention lies on the party
asserting the property is held on trust for his or her benefit.”34
36. The relevant elements to establish a common intention constructive trust are:
a. Actual common intention that claimant will have interest in the property;
b. The claimant acted to his/her detriment in reliance on common intention; and
c. It would be unconscionable for legal title holder to deny the beneficial interest.
37. Whilst equity is a flexible regime and seeks to do equity, fairness is not a criterion of the constructive
trust. Rather, the basis of a constructive trust is the prevention of a benefit from unconscionable
conduct.35
Recent authorities and potential issues
Thorne v Kennedy ‐ Unconscionability, undue influence and duress
38. Equity’s role in financial agreements was considered in late 2017 in the long‐awaited High Court
judgment in Thorne v Kennedy36. The case involved separated parties who had entered into two
financial agreements, one prior to marriage and one after they were married. The wife, Ms Thorne,
appealed the decision of the Full Court of the Family Court and sought to set aside the two agreements
arguing they were entered into as a result of duress, undue influence and unconscionable conduct.
39. The High Court found in favour of the wife and held, agreeing with the trial judge, that the agreements
should be set aside because she signed them in circumstances of undue influence and unconscionable
conduct. Of importance to the case was that the wife signed the agreement shortly before the parties’
wedding day, had no substantial assets, and had moved to Australia from the Middle East shortly prior
to the wedding.
40. The High Court agreed with the trial judge’s comments that the wife had been ‘powerless’ and that
she believed she had no other choice but to sign the agreements as they were presented to her. The
Court also agreed with the trial judge’s finding that the wife’s powerlessness was due to her financial
inferiority (when compared to the husband’s $18‐24m asset pool), her status as a temporary visa
holder in Australia, and that she was entirely reliant on the husband. Her impending marriage had
34 Sivritas v Sivritas (unreported) [2008] VSC 374 at 134. 35 See e.g. Muschinski v Dodds (1985) 160 CLR 583 at 608. 36 Thorne v Kennedy [2017] HCA 49
11
been publicised to her friends and family, many of whom had travelled from overseas to attend the
ceremony.
41. In relation to ‘unconscionability’, the High Court held the wife was under a ‘special disadvantage’37 in
the Amadio38 sense which impeded her ability to make a judgement regarding the agreement. The
Court held that in fact, her “special disadvantage had been, in part, created by him”39.
42. The decision is a timely reminder to consider the circumstances surrounding the execution of an
agreement, particularly when preparing financial agreements (whether pre or post nuptial) and indeed
when seeking that an agreement be set aside. The following factors are worthy of consideration:
a. Whether the agreement was offered on a basis that it was not subject to negotiation;
b. The emotional circumstances in which the agreement was entered into including any implicit
threat to end a marriage or terminate an engagement;
c. Whether there was time for the parties to engage in reflection of the terms of the agreement;
d. The nature and dynamics of the parties’ relationship;
e. The relative financial positions of the parties; and
f. The receipt of independent advice and the opportunity to adequately reflect on it.
Kobelt v ASIC [2018] FCAFC 18 – Unconscionable conduct
43. Whilst Kobelt v ASIC40 involved alleged breaches of financial services and credit legislation, the facts of
the case and their consideration are likely to be of utility to family law practitioners when considering
the types of conduct that can be said to be unconscionable. The case is particularly noteworthy given
that special leave was granted this month by the High Court for an appeal by ASIC against the decision
from the Full Court of the Federal Court. The substantive appeal has yet to be decided by the High
Court but its decision will likely to be of significance to the principles involved in unconscionable
conduct.
44. The case involved breaches of the National Consumer Credit Protection Act 2009 and the Australian
Securities and Investments Commission Act 2001 (‘ASIC Act’). At first instance, the Federal Court
granted an injunction against Mr Kobelt in finding that, amongst other things, he had engaged in a
37 Ibid, 64. 38 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 (‘Amadio’) 39 Above n 36, 65. 40 Kobelt v ASIC [2018] FCAFC 18
12
system of conduct or pattern of behaviour which was unconscionable, contrary to s.12CB(1) of the
ASIC Act41.
45. Mr Kobelt operated a general store which also sold second hand vehicles. He developed a ‘book up’
system to assist customers with credit to purchase the vehicles and had done so for some time.
Customers wishing to use book‐ups were required to provide Mr Kobelt with their debit card and pin
number which was kept until the debt was paid in full. There were two EFTPOS machines in the store
and Mr Kobelt used one of them to access the customer’s wages or Centrelink benefits once they were
paid into his or her account. Customers were required to provide details of their weekly or fortnightly
payments and the day it was paid so that Mr Kobelt could access the funds before the customers could
do so. The primary judge found that all but one of the customers who used the book‐up system were
indigenous persons. Mr Kobelt did extend credit to non‐indigenous persons but on different terms
and without security.
46. On appeal, the Full Court allowed the appeal against the trial judge’s decision that Mr Kobelt’s system
of providing book ups was unconscionable.
47. Not unlike Thorn v Kennedy, the case considered the issues of disparity of bargaining positions,
disadvantages, absence of choice, vulnerability and exploitation. These issues are likely be given
greater elucidation in the pending decision of the High Court.
41 Australian Securities and Investments Commission v Kobelt [2016] FCA 1327