The tort of conversion: a need for legislative reform?

Where the owner of goods gives possession to a bailee and the bailee then wrongfully pledges the goods to a third party, is that third party liable to the owner for conversion of the goods? Will mere possession and control of the goods suffice to establish conversion, or is something more required? The Court of Appeal in Sell Your Gold Pty Ltd v Australian Diamond Trading Corporation Pty Ltd[1] considered those questions and, in doing so, has raised concerns about the lack of clarity in the law and the pressing need for legislative reform.

The facts

The respondent, Australian Diamond Corporation Pty Ltd, was a diamond wholesaler. Pursuant to a bailment agreement it gave a diamond dealer five diamonds on consignment for sale. In breach of that agreement, the dealer pledged the diamonds to the applicant, Sell Your Gold Pty Ltd, as security for money which the applicant had lent to the dealer. At all times the dealer held himself out to the applicant as owner of the diamonds. When the diamonds were in the applicant’s possession its principal Mr Mendieta transferred them to a bank safety deposit facility.

When the dealer had repaid the loans the applicant returned the diamonds to him. The respondent, upon discovering the arrangement between the dealer and the applicant, sued the applicant for damages for conversion. It was the respondent’s case that the applicant had committed conversion by taking possession of the diamonds from the dealer with a right to sell them if the dealer did not repay his loans in a way that was repugnant to the respondent’s rights as owner.

At trial, the judge ruled the applicant guilty of the tort of conversion and awarded damages to the respondent equivalent to the full value of the diamonds. The applicant sought to appeal that decision.

On appeal

The Court of Appeal in a joint decision (Maxwell P, Hargrave and Ashley JJA) allowed the appeal. In doing so, the Court considered the parties’ submissions on case law relevant to the tort of conversion as well as the findings of fact which the trial judge had made.

The parties’ key submissions

The applicant argued that the trial judge had erred in holding that the applicant had converted the diamonds. The applicant’s principal argument on appeal was that possession of a true owner’s goods does not of itself amount to conversion and that there was nothing on the facts which took things beyond mere possession by the applicant of the diamonds.

In support of this contention the applicant relied on the English decision in Spackman v Foster.[2] In that case, a party had retained another’s title deeds (in a fashion similar to the diamond deal in the present case) and remained in possession for 23 years until the owner of the deeds demanded their return. The defendant in that case pleaded the statute of limitations as a defence to the conversion claim. The English Court of Appeal held in that case that there could be no claim for conversion until both a demand for return of the deeds and a refusal to comply had occurred and, hence, the limitation defence was unnecessary.

The respondent for its part argued that the applicant had not only possession of the diamonds but also, pursuant to clandestine arrangement entered between the applicant and dealer, the right to sell them if the dealer did not repay his loans. The respondent sought to distinguish Spackman on the basis its result was influenced by its limitation of actions context and that, as a consequence, liability in conversion did not anything require beyond unauthorised possession of an owner’s goods. The respondent’s case was put on the basis of what the Court of Appeal described as an action of ‘a strict, or perhaps more accurately [an] absolute, liability for conversion’.[3]

Something more than mere possession is required

The Court of Appeal examined applicable authority and held that the mere receipt of a bailee’s goods does not trigger conversion and that the recipient must do something with the goods which is inconsistent with the rights of the original owner.

The Court held that the limitation period aspect in Spackman was not sufficient to distinguish that case and that, as a consequence, Spackman stood as a good authority for the view that mere possession does not establish conversion. The Court of Appeal was bolstered in its position by the decision of the New South Wales Court of Appeal in Bunnings Group Limited v CHEP Australia Limited.[4] In that case, Allsop P held that:

‘Conversion can, of course, occur by retaining goods after a demand. The act of retention is one that is repugnant to the owner’s right to possession expressed by the call for making available or return of the goods. Mere unauthorised possession of another’s chattel is not a conversion of it. For possession or keeping to be a conversion a demand is required’.[5]

Returning to the present appeal, the Victorian Court of Appeal stated:

‘As the cases demonstrate, liability will attach where the innocent possessor either:

(1) deals with the property in the goods — such as by sale and delivery; or

(2) exercises acts of ownership over the goods — such as refusing a demand by the true owner for delivery-up; or using the goods as if they were his own, such as in Bunnings’. [6]

The Court agreed with the applicant’s submission that liability for conversion could arise where, for example:

  • the respondent had demanded return of the goods from the applicant and the applicant refused;

  • the applicant had sold the diamonds to a third party and had completed that sale by delivery; or

  • the applicant took steps to register itself as the owner of the diamonds.

The facts of the case did not establish any of those circumstances.

A need for legislative reform?

Having allowed the appeal, the Court commented on the need for legislative reform in the law of conversion. This was so, the Court considered, in light of the parties’ arguments about which particular cases — some of which dated to the early 19th century — ought be followed by the Court. The Court stated that ‘[i]n the absence of real clarity being introduced by legislation, courts and tribunals … will continue to be placed in the difficult position of undertaking … fine evaluations’ on questions of what actions might be considered repugnant to or inconsistent with the rights of an owner, and that there might be ‘significant likelihood of error, idiosyncratic results and consequent injustice’.[7]

The Court also noted the potential for the tort of conversion, if applied in terms of strict liability, to ‘work real injustice against innocent parties’.[8] The Court noted the decision of the UK Law Reform Committee in 1971 to reject a proposal that the tort of conversion be abolished as a tort of strict liability, and noted that ‘it seems appropriate that … important questions of legal policy be examined by an equivalent Australian body’.[9]

Comment

Bearing in mind the Court of Appeal’s call for legislative reform to the law of the tort of conversion,  the Court’s decision in Sell Your Gold Pty Ltd v Australian Diamond Trading Corporation Pty Ltd suggests that, for the time being, courts of Victoria ought apply a non-strict approach to the question of liability for conversion. As the Court held, the cause of action will not succeed simply because of possession of goods and that some particular dealing with, or treatment of, the goods in a way that is inconsistent with the rights of the true owner will need to be shown.


[1]: [2018] VSCA 355.

[2]: (1883) 11 QBD 99 (‘Spackman’).

[3]: Sell Your Gold Pty Ltd v Australian Diamond Trading Corporation Pty Ltd [2018] VSCA 355, [5].

[4]: (2011) 82 NSWLR 420.

[5]: Ibid 454–5.

[6]: Sell Your Gold Pty Ltd v Australian Diamond Trading Corporation Pty Ltd [2018] VSCA 355, [79].

[7]: Ibid [91].

[8]: Ibid [84].

[9]: Ibid [100].