Haines Bros Earthmoving Pty Ltd v Rosecell Pty Ltd  NSWCA 112 (16 May 2016)
• A businessman handed over control of his companies’ assets after a gang-bashing and threats to his wife and children. He did not report the attacks or the theft to the police. Yet he was afterwards able to recover assets from an innocent third party who had bought them from the extortioner in good faith.
• This appellate decision clarifies an important point about the exception in section 26 of the Sale of Goods Act 1923 (NSW). This exception is also part of the law of the United Kingdom, as well as of other Australian States and Territories. Its terms are set out below.
• The decision reinforces the need to check the bona fides and authority of anyone selling large company assets, such as construction plant and equipment.
Background – bashing and extortion
Mr Abboud and Mr Doughty were friends and fellow members of a motorcycle gang. Their business interests were complementary: Mr Doughty’s activities were in excavation and earthmoving; whereas Mr Abboud was engaged in haulage and transport. They conducted their respective businesses through several companies controlled by each individual at shared premises in western Sydney.
The relationship ended abruptly on 2 February 2008 when Mr Doughty was severely bashed by a group of men, while Mr Abboud looked on. They fractured his arm, left him temporarily unable to walk, and inflicted third-degree burns removing his motorcycle gang tattoos.
Immediately after the attack, Mr Abboud threatened Mr Doughty and his wife with further dire consequences (including the killing of Mrs Doughty, her children and her brother) unless they “got out of town” and surrendered to Mr Abboud all records and assets of their companies which ran the business.
Mr Doughty and Mrs Doughty complied with Mr Abboud’s demand. They gave him the passwords of the companies’ bank accounts and computers and they explained the companies’ bookkeeping and office procedures to Mr Abboud’s wife. Mrs Doughty even attended the office over a period of three days for this purpose.
Mr and Mrs Doughty did not report the attack to the police due to fear of reprisals. They and their children left their home and went to stay with relatives. A few months later they moved to another State.
Sale of the assets to innocent purchaser
Mr Abboud then sold off several assets of the business to two innocent third parties. JP Haines paid $243,000 to acquire two Komatsu excavators, an Ingersoll Rand 10T roller, a Mitsubishi canter and a Bomag 120AD roller. Right Price paid $129,520 to acquire a Mack Fleetliner tipper, a Hamelex tipping trailer and a fuel tank.
In negotiating the sale of the equipment to the appellants, Abboud dealt with Mr Haines, a director of each buyer company. Mr Haines had been told by a third party that “Trent’s Excavation” was closing down and wanted to dispose of its equipment. Mr Abboud told Mr Haines that his “partner” had departed, leaving him “in the lurch”, and that he needed to “sort this mess out and sell this machinery and equipment”.
Mr Haines assumed that Mr Abboud was authorised to arrange the sale of the equipment, based on the facts that: the equipment was located at the premises of the business; Mr Abboud had possession and control of the premises and the equipment; Mr Abboud acted as if he owned the equipment; Mr and Mrs Abboud had control of the office and the business records relating to the equipment and knew about the equipment; the equipment had the distinctive markings of other equipment that he had seen used by the owner companies; and he had heard that George Abboud had a lot to do with the business from truck drivers who had done subcontracting work for it.
However, Mr Haines made no inquiry as to Mr Abboud’s actual authority to sell the equipment.
Mr Doughty returns and want his goods back
In February 2009, Mr Doughty found that many key assets of his companies were now in the possession of Mr Haines’ companies. He caused his companies to sue for their return. Mr Haines’ companies resisted this claim. At first instance, a judge found that Mr Doughty’s companies were entitled to receive back its property. Mr Haines’ companies appealed to the NSW Court of Appeal.
The statutory provision
It was not disputed that Mr Abboud did not have actual authority of the two companies to sell their assets, nor (on appeal) that he did not have ostensible authority to do so. However, Mr Haines’ companies relied on the exception in section 26(1) of the Sale of Goods Act 1923 (NSW) which provides: “Subject to the provisions of this Act, where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by the owner’s conduct precluded from denying the seller’s authority to sell.”
This section and the exception derives from the original Sale of Goods Act 1893 (UK), and remains in force in Sale of Goods legislation in the UK and several other countries, including various Australian States and Territories.
Mr Haines’ companies argued that Mr and Mrs Doughty and their companies knew that the assets were in the hands of an extortionist and thief who was in a position to represent to the world that the equipment was available for purchase; and that he had the means to generate fraudulent invoices and signatures apparently consistent with genuine sale. In these circumstances, they argued that the Doughtys were under a duty to take steps to warn potential purchasers that Mr Abboud did not have the right to sell the assets. In particular, they were obliged to at least go to the police and report that their assets had been stolen.
The Court of Appeal disagreed. They held that the owner companies had failed to prove that Mr and Mrs Doughty or their companies were under any duty to warn others against a possible fraudulent sale, for the following reasons:
(1) The exception in section 26 of the Sale of Goods Act was governed by common law principles of estoppel, not by “just and equitable” principles or as an independent statutory right. “The Sale of Goods Act 1923 (NSW) is based closely on the Sale of Goods Act 1893 (Eng), one of the three great commercial codifications of the late nineteenth century. …From at least the fourteenth century, the common law recognised concepts of estoppel founded on conduct of a plaintiff binding him to his disadvantage, as a matter of procedure, without creating a real title in the defendant. Those concepts were well-established by 1893 and extended to conduct in the form of negligence or omission. … [The original English Sale of Goods Act intended] both to import existing common law rules of preclusion and to accommodate the inherent capacity of the common law to develop them”.
(2) Estoppel requires that a specific duty be shown to lie upon the owner;
(3) The circumstances were that the owners were aware that Mr Abboud was an extortioner and a thief who was now in control of their business, and had the opportunity and means to issue false invoices if he wished. However, this was too general to found an estoppel. Mr Abboud’s control of the company was equally consistent with him continuing to run the business for his own benefit, particularly when it was complementary to his haulage business, rather than destroy the business by selling off its key assets.
(4) In order for the owner companies to fall within the exception to section 26, it must be shown that they had some knowledge that he had engaged or would engage in dishonestly misleading conduct towards the particular buyers. But they had no knowledge that he was talking to those buyers, or indeed to any buyers at all.
(5) Although it was not necessary to decide, the Court of Appeal also appeared to agree with the trial judge that, if a duty had been proven, there was no breach of it because the Doughty’s had refrained from going to the police due to duress, i.e. a well-founded fear of danger to themselves or their children, not due to negligence or mere neglect.
Therefore the exception in section 26 of the Sale of Goods Act had not been made out, and the Doughtys’ companies remained the owners of the assets.
The Court of Appeal agreed with the judge at first instance who said that the manner in which they left Mr Abboud in charge of the company might convey that he had authority to act for each company in the ordinary course of business, but sales of assets such as these could not be so defined The situation would be different where a wrongdoer had taken single assets such as a motor vehicle, or securities. But where the wrongdoer has taken possession of the whole business, the dispossessed owner cannot be expected to anticipate every possible action that the wrongdoer may take.
• Anyone purchasing assets from a business should be careful to check the authority of the person selling. Mr Haines’ assumptions as to Mr Abboud’s authority to sell the assets would be regarded as reasonable by many engaged in business, but this was not sufficient
• The decision of the Court of Appeal provides important clarification on the nature of the duty imposed on a dispossessed owner, which is that required to found a common law estoppel. Therefore, specific knowledge of an impending or likely transaction, and of the parties or potential parties, is required before an owner can be precluded from denying the seller’s authority to sell.