On 20 December 2018, the Victorian Supreme Court – Court of Appeal handed down its decision in Sell Your Gold Pty Ltd v Australian Diamond Trading Corporation Pty Ltd [2018] VSCA 355, which considered, at least in one aspect, the outer limit of the tort of conversion of goods.

The goods said to have been converted in this case were diamonds.

Two of the central characters were gold and gem dealers, Alejandro Mendiata Bianco and Ronnie Ben-Simon. Mr Mendieta, in particular, has recently gained some notoriety in Australia for his ostentation on social media of an opulent lifestyle.

This case concerned some loans made by Sell Your Gold Pty Ltd (SYG), a company controlled by Mendieta, to Ben-Simon.

Ben-Simon had given five diamonds to SYG as security for the loans. Unknown to Sell Your Gold, Ben-Simon was not the owner of the diamonds. In fact, the diamonds belonged to Australian Diamond Trading Corporation Pty Ltd (ADTC), and Ben-Simon held them on bailment from ADTC. What is more, by using the diamonds as security for the loans from SYG, Ben-Simon breached the terms of the bailment.

SYG had returned the diamonds to Ben-Simon when the loans were repaid. However, Ben-Simon then failed to return the diamonds to ADTC and subsequently declared bankruptcy.

Having no luck getting the diamonds back from Ben-Simon, ADTC sued SYG, claiming that SYG had converted the diamonds to SYG’s own use by taking the diamonds as security for the loans made to Ben-Simon.

SYG’s defence to this claim was that, while it had taken possession of the diamonds without authorisation from ADTC, the true owner of the diamonds, this was not enough to constitute conversion of the diamonds to SYG’s own use.

The trial judge, Associate Justice Efthim, found that SYG’s unauthorised possession of the diamonds did amount to conversion, and ordered SYG to pay the value of the diamonds, being USD 145,658.

The Court of Appeal, in a joint and unanimous decision, allowed the appeal by SYG.

The decision of the Court of Appeal involved lengthy analysis of (among other things) two competing nineteenth century English decisions – Spackman v Foster and M’Combie v Davies – about conversion of goods received as security in the hands of a third party, who was unaware of the true ownership of the goods. Did the mere receipt of the goods constitute a conversion, or was something more required, such as the refusal to return the goods upon demand by the true owner?

The Court of Appeal decided that something more than mere receipt of the goods was required, and that in this case SYG had to “do something” with the diamonds that was inconsistent with the ownership rights of ADTC. Merely holding the diamonds as security and then returning them to Ben-Simon upon repayment of the loans from SYG was not enough.

ADTC had not informed SYG that it was the true owner of the diamonds, or made any demand upon SYG to hand over the diamonds, while they were in SYG’s possession.

Interestingly, at the end of the decision, and after its lengthy analysis, the Court of Appeal suggested that some legislative reform of the tort of conversion in Australia was required, to avoid uncertainty in the application of the current law, and the related injustice that might result.