Blythe v Northwood

[2005] NSWCA 221

Reported Decision: 63 NSWLR 531

Court of Appeal

CITATION:	BLYTHE v NORTHWOOD [2005] NSWCA 221
HEARING DATE(S):	14, 15 December 2004
JUDGMENT DATE:	8 July 2005
JUDGMENT OF:	Mason P at 1; Giles JA at 208; Bryson JA at 209
DECISION:	Appeal dismissed with costs

CATCHWORDS:	EQUITY - fiduciary duty of solicitor - execution of mortgage - conflict of interest - duty of disclosure - benefit from transaction - liability to account for unauthorised benefit - knowledge of circumstances giving rise to conflict. (D)
LEGISLATION CITED:	Fair Trading Act 1997
CASES CITED:	Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 Bendigo Central Freezing and Fertiliser Co v Cunningham [1919] VLR 387 Birtchnell v Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384 Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 389 Breen v Williams (1996) 186 CLR 71 Chan v Zachariah (1984) 154 CLR 178 Clark Boyce v Mouat [1994] 1 AC 428 Eden v Ridsdales Railway Lamp and Lighting Co (1889) 23 QBD 368 Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 Keech v Sandford (1726) Sel Cas Ch 61; 25 ER 223 Maguire v Makaronis (1997) 188 CLR 449 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 Phipps v Boardman [1967] AC 46 Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 Prince Jefri Bolkiah v KPMG [1999] 2 AC 222 Reading v Attorney General [1951] AC 507 Swindle v Harrison [1997] 4 All ER 705 Triffitt Nurseries v Salads Etectera Ltd [2000] 2 Lloyds Rep 74 Warman International Ltd v Dwyer (1995) 182 CLR 544 Wendt v Northwood [2004] NSWSC 23 Youyang Pty Ltd v Minter Ellison (2003) 212 CLR 484
PARTIES:	Hetty BLYTHE Kenneth Edward NORTHWOOD
FILE NUMBER(S):	CA 40284/04
COUNSEL:	Appellant: J C Kelly SC/ S A Benson Respondent: S D Robb QC
SOLICITORS:	Appellant: Kenneally & Co, Oatlands Respondent: Acuiti Legal

LOWER COURT JURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S):	SC 20172/00
LOWER COURT JUDICIAL OFFICER:	Shaw J

CA 40284/2004
SC 20172/2000

MASON P
GILES JA
BRYSON JA

Friday 8 July 2005

Hetty BLYTHE v Kenneth Edward NORTHWOOD

BACKGROUND

The appellant is the executrix of the estate of Roy Wendt (the deceased). The deceased executed a mortgage over his property, in relation to which the defendant/respondent acted as the deceased’s solicitor. The deceased on-lent the proceeds of the mortgage to a company in which the defendant held certain positions (ACG). This money was partly used to repay debts owed by the company to the defendant. The company subsequently went into liquidation. The plaintiff alleged that the defendant had knowingly profited from his retainer and claimed a breach of s42 Fair Trading Act 1997.

At trial, the defendant was acquitted of the allegations of knowingly profiting from his retainer and the Fair Trading Act claim was dismissed. The trial judge also dismissed the deceased’s claim for equitable compensation and/or an account of profits based on breach of fiduciary obligation by the defendant in relation to the mortgage transaction.

In the Court of Appeal, the appellant’s case was confined to breach of fiduciary duty. The appellant challenged the credibility-based findings of the trial judge that the defendant was unaware of the deceased’s intention to lend the borrowed money to ACG, arguing that the findings were contrary to the evidence. The appellant further contended that even if the defendant did not intentionally or knowingly profit from the transaction, the fact that he subsequently derived a benefit from the transaction is sufficient grounds for compensation. He relied on the dictum of Deane J in Chan v Zacharia (1984) 154 CLR 178 at 199.

HELD:

Per Mason P, Giles and Bryson JJA dismissing the appeal:

1. The judge’s conclusion on the defendant’s state of knowledge was not glaringly improbable. Rather, the evidence generally corroborated the defendant.

2. The duty of disclosure of a conflict of interest only extends to a solicitor’s knowledge of circumstances giving rise to a conflict. The duty to account for a benefit obtained does not apply to a fiduciary that does not know of the facts that give rise to the conflict.

3. The appellant could not lead evidence to contradict the transcript, where no such challenge had been made at trial.

Discussion of the application of Keech v Sandford (1726) 25 ER 223 to non-trustee fiduciaries.

Discussion of interrelationship between Equity and the unjust enrichment concept.

Appeal dismissed with costs

CA 40284/2004
SC 20172/2000

MASON P
GILES JA
BRYSON JA

Friday 8 July 2005

BLYTHE v Kenneth Edward NORTHWOOD

JUDGMENT

1 MASON P: The appellant is the executrix of the estate of the late Roy Wendt (the deceased). The deceased died on 30 October 2004, after judgment in the court below and shortly before the appeal was argued.

2 The appeal challenges orders made by Shaw J dismissing the deceased's claim for equitable compensation and/or an account of profits stemming from an alleged breach of fiduciary obligation by the respondent as the deceased's solicitor.

3 His Honour's judgment (Wendt v Northwood [2004] NSWSC 23) is sparse in its outline of the primary facts. References to paragraphs of that judgment herein will be designated J1, J2 etc. Since there is a challenge to findings acquitting the solicitor of the allegations of dishonesty and dishonourable conduct it will be necessary to set out the evidence in detail.

4 On 11 November 1997 the deceased executed a Mortgage over certain land at Vaucluse. The respondent, who had not been involved in arranging that mortgage, agreed to explain it and associated documents to the deceased and to witness his signature on them. He was told that the deceased’s solicitor was away and he did the work involved in this specific and finite retainer without rendering a fee. The lending transaction was settled over a week later without the respondent’s participation. Unbeknown to the solicitor (it was found), the deceased lent the borrowed money to a company, Australian Commercial & General Pty Ltd (ACG) in which the solicitor held certain positions, effectively on trust for a Mrs Howard. The solicitor was also a creditor of ACG. The money lent by the deceased to ACG was used (in part) to repay him and his company. It is not suggested that ACG was insolvent at the time, but subsequently that company went into liquidation, causing both the deceased and the solicitor to lose substantial sums of money.

5 One branch of the case at trial charged the solicitor with profiting knowingly from his retainer in the sense that he intended or at least perceived that moneys owing to him and his family company were to be repaid with the on-lent proceeds of the loan transaction he was explaining to his client. The respondent was acquitted of these serious allegations and a claim for damages for breach of s42 of the Fair Trading Act 1987 was dismissed accordingly. For reasons developed later, the appellant’s attack on his Honour’s credibility-based findings in this regard is rejected. The appellant nevertheless contends (as the deceased did below) that the unyielding approach of Equity should still produce an order in favour of the estate. It is said to be enough that the solicitor subsequently derived a benefit from the transaction, albeit unintended and unknown at the time he gave the explanation.

Factual overview

6 The key participants in the transactions giving rise to these proceedings were:

- The deceased Mr Wendt was 71 at the relevant time. He owned a property consisting of a shop and three flats in New South Head Road, Vaucluse until it was sold to ACG in 1997-1998 in the transaction referred to below. Shaw J described him as an intelligent person, but unsophisticated in commercial affairs, conveyancing or mortgage transactions. The deceased was a friend of Mrs Howard and prepared to do much of her bidding, including acting as secretary of ACG and lending money to it.

- The respondent, Mr Northwood , has been a solicitor since 1965. Between 1980 and 1987 he was a partner in the suburban law firm in which Mrs Howard was a conveyancing secretary. Thereafter he returned to full time service in the Australian Army until 2000. He held the rank of colonel. He was a Defence Force Magistrate throughout the 1990s and also spent considerable time, much of it in Canberra, on projects and inquiries concerning the Defence Force. He was introduced to the deceased by Mrs Howard as an "army solicitor". From time to time he did legal work for Mrs Howard, even when stationed in Canberra. Mr Northwood also had private business interests. Like the deceased, he did much of the bidding of Mrs Howard including lending money to her company throughout 1997-1998. In October 1997 he made advances totalling $145,000 to ACG. He was a director and shareholder of ACG and the sole signatory of that company's cheques. He held his share in trust for Mrs Howard under a Declaration of Trust executed in 1996 at a time when Mrs Howard was involved in a property dispute with her de facto husband.

- Maken Pty Ltd (Maken) was the solicitor's family company. It lent $100,000 to ACG in 1997 subject to security.

- Mrs Howard was an experienced conveyancing secretary who bought and sold residential properties for investment purposes. She dealt directly with the deceased and persuaded him to enter various dealings referable to his Vaucluse property, including its ultimate transfer to ACG with part of the purchase price still unpaid. She used the legal services of the solicitor as required from time to time, often bringing him in to attend to conveyancing formalities well after she had negotiated the relevant transaction. She or her companies (including ACG) made several borrowings on mortgage from clients of Molloy & Schrader, solicitors in the years 1997-1998. She organized these loans with Mr Derek Molloy of that firm. The loans were used to acquire investment properties and/or refinance existing loans over those properties as the market rose. As indicated, Mrs Howard was the beneficial owner of ACG’s shares. Mrs Howard met the deceased prior to 1997. In the deceased’s words “we met and became friendly and on one occasion we went out to dinner. She represented herself to me as being a successful property developer and business woman” (Blue 2). By the time proceedings were commenced, she was hopelessly insolvent. She did not give evidence. Shaw J said, based on evidence so stating, that she sat next to the deceased’s solicitor during the cross-examination of the respondent and inferred that she was at that stage in the deceased’s “camp”. The deceased’s failure to call her led to the conventional inference being drawn (J56).

- ACG was correctly regarded by Mr Northwood and the deceased as Mrs Howard’s company. It was effectively controlled by the solicitor, albeit as trustee for Mrs Howard who made all investment and management decisions. Mr Northwood served as a director, at times as sole director of the company, and he was the sole signatory of company cheques as one of the terms under which he agreed to become a director. Bank statements were addressed to him. The cheque book was usually kept under Mrs Howard’s control, and she would prepare cheques and bring them to him to sign (Blue 21, 28). The deceased assumed the role of company secretary at Mrs Howard’s request and signed several documents in that capacity.

7 Two purchase transactions involving ACG form the backdrop to the mortgage transaction that the deceased signed on 11 November 1997 which represents the single retainer as between the deceased and the solicitor. The primary facts about those sales will be set out, with the caveat that it would be wrong to infer that the solicitor or the deceased were necessarily privy to all of them at any particular time. What they knew and believed on 11 November 1997 will be examined in the context of recounting the events of that day.

ACG's purchase of the Vaucluse property from the deceased

8 Mrs Howard discussed purchasing the Vaucluse property from the deceased well before the time in 1997 when she introduced the deceased to Mr Northwood, referring to the latter as "my solicitor" (Blue 3). A Deed of Option as between the deceased and Mrs Howard personally was prepared in 1996 but it was not executed (Blue 154). Interestingly, it refers to the deceased agreeing that, if required, he would provide a mortgage in respect of the property in the sum of $350,000.

9 The deceased subsequently granted ACG a 12 month option to purchase the Vaucluse property for $700,000 for an option fee of $7,000. The Deed of Option was prepared by the deceased’s solicitor Mr Barry Beilby of the firm of Beilby, Foulden, Costello, solicitors. It appears that Mr Beilby negotiated the terms of the Option directly with Mrs Howard (Blue 1258). The Option was presented by Mrs Howard to Mr Northwood for execution on behalf of ACG as a director of that company (Blue 27-8). The cheque for the option fee was also signed by Mr Northwood and returned to Mrs Howard, who attended to exchange (Blue 42, 1133).

10 Mr Beilby gave the deceased advice about the Option and he acted for him throughout the sale transaction until shortly before settlement in June 1998 (Black 16). At times Mr Beilby warned the deceased about Mrs Howard (Black 47). The deceased did not call him as a witness at the trial.

11 The Deed of Option was signed by the deceased on 27 March 1997, but was not exchanged until about 20 August 1997, after Mr Beilby and Mrs Howard had attended to formalities touching the cooling off period (Blue 1265-1277). Correspondence between Mr Beilby and the deceased shows that the deceased was kept apprised of these developments (see esp Blue 1277). The $7,000 option fee was sent by Mr Beilby to the deceased on 26 August 1997 (Blue 1283, Black 24).

12 Mrs Howard and Mr Beilby agreed that there would be no cooling off period in relation to the Option. To this end, Mrs Howard provided Mr Beilby with a statutory declaration sworn by Mr Northwood. That declaration disclosed that he was a solicitor and a director of ACG. It was given to Mr Beilby and a copy of it was forwarded to the deceased on 5 August 1997 (Blue 1274). The deceased admitted he read this and that he knew that Mr Northwood was a director of ACG (Black 24).

13 The deceased knew at all relevant times that ACG was in reality Mrs Howard’s company and that Mr Northwood was her and her company’s solicitor.

14 In about early October 1997 the deceased and Mrs Howard discussed a loan transaction whereby the deceased would borrow from clients of Molloy & Schrader and lend to Mrs Howard a sum representing half of the purchase price ($350,000), secured by way of mortgage over the property. The loan would be for up to 12 months. The money was to be used by Mrs Howard to develop the property and enhance its value by increasing the size of the existing apartments. Mrs Howard told the deceased that this would enable her to sell the property and then pay him out completely. The deceased in the meantime would continue to live rent-free in his flat at the property and collect the rent money on the shop there, in lieu of interest (Blue 5, Black 135). These matters were negotiated between the deceased, Mrs Howard and Mr Derek Molloy without the involvement of Mr Beilby or Mr Northwood. This is the transaction that culminated in the Mortgage executed by the deceased in Mr Northwood’s presence on 11 November 1997 and settled on 19 November 1997.

15 The Mortgage was executed on the day that the Option was exercised and it was part and parcel of the sale transaction (as far as the deceased and Mrs Howard were concerned). I shall return to the details of this mortgage transaction later in these reasons. One thing, however, is clear. As between Mrs Howard and the deceased, the option would not have been exercised unless the deceased was prepared to enter into the mortgage transaction pending settlement of the sale and lend ACG the borrowed money in the meantime.

16 ACG exercised the option on 11 November 1997 with formal contracts being exchanged on 19 November 1997 (Blue 612). The Contract for Sale shows Beilby, Foulden, Costello as the vendor's solicitors and Mr Northwood as the purchaser's solicitor. The common seal of ACG is witnessed by Mr Northwood as a director and the deceased as secretary. The deposit of $63,000 was paid directly to the deceased by Mrs Howard who handed him an ACG cheque (signed by Mr Northwood), this money being covered by a $70,000 advance by Mr Northwood to ACG (see below). The completion date was on or before 21 March 1998 and the Contract provided that the balance of the purchase price was $630,000 payable by ACG to the deceased at settlement.

17 The events of 19 November 1997 are revealing as to the relationship between the deceased and Mrs Howard, and the deceased’s apparent involvement in ACG. They show Mrs Howard attending to conveyancing matters. They also confirm the non-involvement of Mr Beilby in the mortgage negotiations. And they attest to the deceased’s willingness to lend ACG the money he would borrow (later that day) on the security of his property.

18 A woman called Anita from Mr Beilby's firm made the following record (Blue 1545):

I attended on Mr Wendt and Ms Howard in Christine’s room this morning to exchange Contracts. I received the cheque for the deposit in the sum of $63,000.00 and handed it directly to Mr Wendt as per his instructions. (There is no agent) Ms Howard then provided a direction that we uplift the certificate of title B/305892 and give it to her.
I asked Barry [Beilby] about this and he was adamant that the title was not to be given to her now but as usual, at settlement.
Barry spoke to Mr Wendt in private and advised him that this is highly irregular and abnormal. The title must not be handed over to her.
Upon return to Christine’s room Ms Howard argued this was a purely commercial transaction and Mr Wendt as director of the purchaser company was obtaining an advance from Australian & Commercial General Pty Ltd (the purchaser company) and using the property as security. Mr Wendt confirmed this.
I suggested that they wait until Barry finishes his meeting. Ms Howard claimed she had to attend the settlement in relation to the mortgage and could not wait.
She then handed the title to Mr Wendt and said it was his to do as he wishes and they both left the office. Apparently he was also attending the settlement.

19 Mr Beilby's own file note reads (Blue 1546):

MEMO TO FILE 19 November 1997
File No. 8549/97 WENDT
I further attended on Mr Wendt today by telephone querying the position regarding the title deed. I gave clear and unequivocal advice to seek the return of his title deed until the appropriate documentation had been prepared and his interests protected.
I expressed great concern that he seemed to know nothing about what his interest in the transaction would be.
Barry Beilby.

20 On 20 November 1997 Mr Beilby confirmed in writing his advice to his client, the deceased. He said (Blue 1565):

We note that at exchange you provided a direction that we uplift the title deed and give it to Ms Howard, who attended at the exchange on behalf of the Purchaser. We understand that the abovementioned property is the security in relation to a loan from [sic] the Purchaser. The writer expressed great concern and suggested that we retain the title deed. He advised that it was highly irregular to hand over the title deed before settlement. You declined to follow his advice and left our offices with Ms Howard. Later that day he advised that you seek the return of the title deed until the appropriate documentation had been prepared and your interests protected. We await to hear further from you in relation thereto.

21 These documents show that the title deeds to Vaucluse were uplifted and made available by the deceased to Mrs Howard on 19 November (see also Black 69, 73). Other evidence confirms that the mortgage transaction was settled later that day, presumably at the office of Molloy & Schrader with Mrs Howard (and possibly the deceased) in attendance.

22 Returning to the sale transaction, Mr Beilby provided ACG with particulars of title on 20 November 1997 (Blue 1567) and he continued to act for the deceased as vendor. On 14 April 1998 he wrote to ACG noting that the matter was due to settle on 21 March 1998. The letter called urgently for an appointment for settlement (Blue 1629).

23 In late October 1997 Mrs Howard was contemplating selling the property in February 1998 for between $1.1 and $1.5 million (Blue 1310). She later obtained a detailed valuation report as at 12 May 1998, showing a market value of $1.2 million (Blue 1643).

24 On 6 May 1998 Mr Molloy wrote to his clients Mr and Mrs Fraser informing them that the mortgagor (ie the deceased) wished to discharge the mortgage to them on about 7 June 1998. A Variation of Mortgage was prepared which extended the mortgage for one month (Blue 1630ff). Mr Molloy wrote directly to the deceased forwarding the documentation for execution (Blue 1634).

25 There is a telephone note dated 20 May 1998 in which someone (apparently from Molloy & Schrader) recorded a telephone call from Mrs Howard (Blue 797). The note reads:

Tel fr Eleanor
Wendt has transferred Vaucluse to the company
[therefore] change mtge to Australian Commercial & General Corp P/L ACN
Will he still reside there?
For a short while and then move to Bellevue Hill
Any lease? No
Will it be leased again? No it will be developed
When is money required? Soon she will advise
Advised Armin if change of mtgor OK

[Armin is Armin Borgert, the Molloy & Schrader client who apparently controlled one of the lender clients. Mrs Howard used to deal directly with him at times (Blue 1309). “Bellevue Hill” was the Streatfield Rd property by then acquired by ACG/Howard and apparently then used as Mrs Howard’s residence.]

26 The sale of the Vaucluse property was not completed until 5 June 1998. But instead of the balance of the purchase price being paid to the deceased, the deceased agreed to leave a portion of the purchase price unpaid as part of an arrangement then negotiated between himself and Mrs Howard that included him staying in possession of his flat. Contrary to the appellant’s submission qua causation, the deceased unequivocally authorized this significant change in the contractual arrangements.

27 The Transfer (Blue 795) was signed by the deceased before a witness named Parshotam. The deceased as transferor acknowledged receipt of the consideration of “purchase price pursuant to Contract for Sale dated 6th April 1998” (sic). Mr Northwood signed as the solicitor for the transferee.

28 The $450,000 Mortgage granted by the deceased to Molloy & Schrader clients on 19 November 1997 was discharged on 5 June 1998 with the proceeds of a secured ACG borrowing (Blue 1630, 1676).

29 ACG executed a fresh Mortgage under its common seal, apparently affixed in the presence of Mr Northwood as director and the deceased as secretary (Blue 387. Epitome of Mortgage at Blue 1674). The mortgage sum is $770,000 apportioned between Mr Derk Molloy and two clients of Molloy & Schrader one of whom had been one of the lenders under the November mortgage to the deceased. This borrowing was arranged by Mrs Howard (Blue 40).

30 A letter dated 5 June 1998 on ACG letterhead signed by Mr Northwood as director and addressed to Mr Derek Molloy authorised him to pay cheques as follows:

R Wendt $180,000.00
Molloy & Schrader $ 3,395.00
J & P Fraser $128,128.00
Aust Commercial & General $138,477.00
$450,000.00

The letter continued:

We further note receipt of all funds from this Mortgage advance of $770,000.
Please be advised that Mrs E Howard is authorized to make amendments, alter and complete whatever matters or documents are necessary to effect this settlement.

31 J and P Fraser were two of the parties to the original contributory mortgage (to the deceased) who were being paid out at this stage.

32 Mrs Howard attended to settlement in Sydney, apparently representing both vendor and purchaser. The deceased may well have been present also. He certainly signed a copy of the direction to Mr Molloy (Blue 582), understanding from Mrs Howard that he would get the balance of his money when Vaucluse was sold. Presumably Mr Molloy attended to the interests of the mortgagees. Why Mr Beilby was not apparently involved in unclear. He was not called as a witness and Shaw J drew the conventional inference adverse to the deceased (J56).

33 Mr Northwood was in Canberra at the time (Blue 41). Mrs Howard prepared the abovementioned ACG direction and faxed it to him for signature. Mr Northwood noticed that the deceased was being paid only $180,000. At that time he believed that was less than the amount he had thought was due to the deceased. He then telephoned Mrs Howard to enquire about this. In response to his “Why is Roy only receiving $180,000?” he was told “Roy is staying on in the property until it is sold and he wants to leave some money in ACG for the moment”. Mr Northwood was satisfied with this explanation. He signed the direction and faxed it back to Mrs Howard. (It was not alleged that Mr Northwood represented the deceased in 1998.)

34 By the completion of this sale transaction the deceased had directly received from ACG the option fee/deposit totalling $63,000 (Blue 369) and the $180,000 paid on settlement out of the funds advanced to ACG under the new mortgage (Blue 391). The balance remained effectively held by ACG pursuant to unsecured arrangements made between Mrs Howard and the deceased that are not the subject matter of these proceedings, but that are highly relevant to the causation issue found in the respondent’s favour. These arrangements included the arrangement for the deceased to continue living in his flat and to receive the rents from the shop (Black 28).

35 In cross examination, the deceased accepted that the borrowings under the mortgage granted by him on 11 November 1997 had been repaid and that that mortgage had been discharged. However he added: “But I didn’t get the money” (Black 155). He agreed that he was out of pocket because he did not obtain the full purchase price originally contracted for (Black 156).

36 Ten days after settlement of the purchase, ACG granted a second mortgage for $250,000 in favour of further Molloy & Shrader clients (Blue 16, 579). The common seal of ACG was affixed in the presence of Mr Northwood as director and the deceased as secretary. The deceased signed this at Mrs Howard’s request (Blue 16).

37 On 19 July 1999 Mr Beilby wrote to the deceased, noting that he had not heard from him for some time. The letter stated:

We understand you have made your own arrangements with the purchasers and in the circumstances have delayed finalising this matter. (Blue 1744).

Mr Beilby enclosed a Memorandum of Fees.

38 The following year ACG defaulted under these two registered mortgages resulting in the deceased’s eviction, the sale of the property and ACG’s liquidation. This left the deceased and other unsecured creditors out of pocket (see below). These creditors included Mr Northwood and Maken, each of whom had made further advances to ACG in 1998.

ACG's dealings with 45 Streatfield Road,Bellevue Hill

39 This was a further ACG investment found by Mrs Howard, who hoped to profit from resale within about 12 months (Blue 28). It too was the subject of Molloy & Schrader mortgages that defaulted in 1999. This transaction is relevant to Mr Northwood’s belief as at 11 November 1997. It also reflects on ACG’s capacity to pay its way at that time.

40 On 21 August 1997 ACG contracted to purchase this property for $1.3 million. The contract for sale is not in evidence (cf Blue 856). A $65,000 deposit was paid on exchange out of $100,000 lent to ACG by Maken.

41 Mrs Howard intended to borrow from clients of Molloy and Schrader to enable ACG to complete this purchase, but also as a means of raising money during a rising market. To that end, a valuation report as at 12 October 1997 was obtained. It showed a fair market value of $1.8 million (Blue 281, 853), a tidy profit on the face of things.

42 Mrs Howard showed Mr Northwood the $1.8 million valuation report (Blue 134). She formally applied for a $1.3 million advance by letter to Molloy & Schrader dated 27 October 1997, the same day she wrote to them about the deceased borrowing $450,000 (Blue 1303-4). Molloy and Schrader prepared the mortgage documents and Mr Northwood signed them on ACG's behalf on 27 October 1997 before setting off to Canberra to work there for several weeks (Blue 133-4, 137). At that stage the intended borrowing was $1.3 million, although by the following day Mrs Howard was proposing directly to Mr Molloy’s lending client a borrowing of $1.5 million on the security of the property (Blue 1309).

43 Mr Northwood did not dispute that “as things transpired” (ie with the benefit of hindsight) the deceased’s $450,000 that went to ACG was required to repay the $250,000 to Mr Northwood (Black 291). However, he swore that when he was shown the $1.8 million valuation, he believed that Mrs Howard intended to increase the borrowing on the Bellevue Hill property, thereby realising sufficient funds in ACG for Mrs Howard, via ACG, to repay at the time of settlement of the Bellevue Hill purchase/mortgage the earlier loans totaling $245,000 made to ACG by himself and Maken (Blue 134, Black 324).

44 The Bellevue Hill purchase was settled on 31 October 1997 (Blue 860) at a time when Mr Northwood was in Canberra. $1.3 million was advanced by contributory Mortgage from two clients of Molloy and Schrader, Mrs Deakin and Mrs Woodward. This Mortgage had been executed under the common seal of ACG affixed in the presence of Mr Northwood as director and the deceased as secretary (Blue 609). The Transfer was accepted by Mr Northwood as solicitor for ACG (Blue 798).

45 The settlement cheques referable to the $1.3 million loan included a cheque for $46,435.86 in favour of ACG after all other directed payments were made (Blue 1337). This sum was banked into the ACG account on 31 October 1997 (presumably by Mrs Howard), bringing its credit balance that day to $108,149 (Blue 724).

The loan transaction executed on 11 November 1997 and finalised on 19 November 1997

46 The loan transaction negotiated between the deceased, Mrs Howard and Molloy & Schrader concerning the deceased's interest in the Vaucluse property was documented on 11 November 1997 when the deceased signed the Mortgage and other documents in Mr Northwood’s presence. This was the date on which ACG exercised the option to purchase.

47 Formal contracts were exchanged and the $450,000 loan was drawn down on 19 November 1997.

48 Previously, on 27 October 1997, Mrs Howard on behalf of ACG applied to Molloy and Schrader for the deceased to borrow $450,000 on the security of the Vaucluse property (Blue 761). A contributory mortgage was arranged by Molloy and Schrader on behalf of their clients Mr and Mrs Fraser, Mrs Woodward and LV Deakin Pty Ltd (Blue 762). It appears that Mrs Howard told Molloy & Schrader that Mr Northwood would be acting as solicitor for the deceased. There is a letter from the firm addressed to him dated 3 November 1997 (Blue 762). He swore that Mrs Howard picked up the letter and that he never saw it until late 1999, when addressing a complaint to the Law Society (Black 317-8). This evidence was implicitly accepted by Shaw J (J29).

49 In an early affidavit the deceased had made claims against Mrs Howard and Mr Northwood to the effect that he did not understand the documents he signed on 11 November 1997. He also alleged that Mr Northwood gave him advice about the desirability of the borrowing transaction. In cross-examination, the deceased was effectively forced to concede that he had negotiated the loan privately with Mrs Howard, that Mr Northwood was only brought in by her on 11 November to explain the legal effect of the documents to him and to witness his signature, and that he understood the nature and effect of the mortgage documents. It would have been obvious to all that his credibility was effectively destroyed. At the start of the third day of the trial the deceased’s counsel applied for leave not to proceed with the existing case and propounded for the first time a much narrower case based on breach of fiduciary duty by Mr Northwood. The gravamen of the new case was that Mr Northwood had not made full disclosure of his conflict of interest and/or likely benefit when he explained the mortgage documents to the deceased on 11 November 1997.

50 On 11 November Mr Northwood had explained the mortgage to the deceased, including the fact that it secured an advance of $450,000, witnessed his signature, and signed the appropriate certificate as to independent advice (see Blue 764, 769, 793, 1016-7, Black 61).

51 The Mortgage was in favour of Molloy & Schrader clients as tenants in common for their respective shares of the lending. The principal sum was repayable on 7 May 1998. The $450,000 that was advanced (in law) to the deceased as mortgagor (on 19 November) was paid at his direction directly to ACG (cf Blue 762, J7). Thereafter ACG paid interest directly to the lenders by periodical payments from its bank account that were authorized by Mr Northwood on forms signed by him on 11 November 1997 (Blue 361-3, 787-790. See further below.). The Mortgage was discharged on 5 June 1998 out of the proceeds of an ACG mortgage executed when the purchase of Vaucluse was settled.

52 The mortgage was negotiated directly between Mrs Howard, the deceased and Molloy & Schrader, without the prior knowledge of Mr Beilby or Mr Northwood (see eg Blue 1292). Mr Northwood had only met the deceased casually on one or two occasions before 11 November 1997 and he had had no prior discussion about the mortgage (Black 17, 58). Belated involvement on Mr Northwood’s part would not of course relieve him from the consequences of any breach of fiduciary duty stemming from his actual participation and/or the positions he held as solicitor for and as an officer of ACG in the very transaction.

53 Mr Northwood has always denied that he knew on 11 November 1997 that the deceased intended to lend the borrowed money to ACG. He stated this in a letter of 5 November 1999 to the Law Society in response to a complaint made by the deceased (Blue 1013). His evidence at trial was to similar effect. It was accepted by the trial judge (J18, 29).

54 Mr Northwood said that on 11 November 1997 he went at Mrs Howard’s request to a property in Bourke Street, Surry Hills intending to deal with some matters of routine administration on behalf of ACG (Blue 30-1, Black 332). To his surprise, the deceased was there (by arrangement with Mrs Howard: Black 54). The deceased described the premises as Mrs Howard’s office, a place he frequented at least once a week (Black 50).

55 Mr Northwood was asked by Mrs Howard to sign cheques to pay ACG bills that she had already prepared (Blue 31). He was also presented with and signed on behalf of ACG banker’s orders authorizing periodical payments of $975 per month in favour of clients of Molloy & Schrader (Blue 31, 787, Black 312). Mr Northwood swore that he believed at the time that the payees were the mortgagees who had advanced moneys against ACG’s Streatfield Road purchase (above) that had been settled on 31 October 1997. In his oral evidence Mr Northwood said that to the best of his recollection Mrs Howard told him that the banker’s order related to Streatfield Road. He agreed that this would have been a lie on her part (see Black 313-4). For her to have said this and to have presented the periodic payment form early in the meeting before asking Mr Northwood to witness the deceased’s signature on the mortgage documents would have been quite deceptive and dishonest.

56 Mr Northwood was challenged strongly on this evidence and asked to explain why it had not appeared in his affidavit (Black 314). He acknowledged that, if he had known at the time that ACG was paying the interest on the deceased’s Mortgage (executed on 11 November), this would have put him on notice of the role actually played by that Mortgage.

57 The deceased gave no credible evidence on this particular matter (cf Blue 11) and he did not call Mrs Howard, despite having access to her at trial.

58 According to Mr Northwood, Mrs Howard then told him in the deceased’s presence (Blue 32):

Roy is borrowing some money on the security of Vaucluse. Roy’s solicitor, Barry Beilby, is away at the moment and Roy needs some documents signed. I have the documents here, will you witness them and give the usual certificates?

He agreed to do so.

59 He read through the documents handed to him by Mrs Howard. He then explained the documents to the deceased (Blue 32), witnessed the deceased’s signature on the Mortgage and signed an independent Solicitor’s Certificate (Blue 327-332). Mr Northwood also witnessed the deceased’s signature on a statutory declaration concerning various inquiries from the mortgagors (Blue 360). Mr Northwood also signed a document addressed to him on behalf of the mortgagor providing answers to requisitions from the mortgagors (Blue 354). He obtained the necessary information by questioning the deceased on the spot (Blue 35). The deceased also signed a declaration in the context of the Consumer Credit Code that the $450,000 received from Molloy and Schrader’s clients was to be applied for business and/or investment purposes (Blue 359). No charge was rendered.

60 According to his evidence, at one stage Mr Northwood asked the deceased if he had sought any financial advice about the matter. He was told: “I don’t need it, it’s quite straight forward” (Blue 34).

61 Early in his explanations of the mortgage, Mr Northwood pointed out to the deceased that he was borrowing $450,000. The deceased said that he thought it was $350,000, while looking at Mrs Howard. She said "No Roy, it’s $450,000 - you will need that much." He said: "Oh, all right." (Blue 32). In an early affidavit the deceased swore that Mr Northwood participated in a conversation in which Mrs Howard spoke of a mortgage back to her company and that he promised to make sure that the deceased’s interests were protected (Blue 9). These allegations were not pressed, but this evidence of Mr Northwood confirms a general impression that the deceased was prepared to do Mrs Howard's bidding and that Mr Northwood had a general awareness of the relationship between the two other persons.

62 Mr Northwood said in cross-examination that he did not consider it relevant to have revealed to the deceased at the meeting on 11 November that he was a guarantor to $1million worth of ACG liability (Black 326). I am unaware of the transaction to which this refers, but Mr Northwood did not dispute its existence. It is one of a number of conceded facts that show that he would have been acting most dishonourably if he had realised the deceased’s intentions on 11 November 1997 and not disclosed his own interest as an ACG creditor. Mr Northwood swore that, had he known that the deceased intended to make a $450,000 loan to ACG, he would not in the circumstances have agreed to it (Black 311).

63 Mr Northwood swore that he drew no connection between the mortgage transaction that the deceased was entering into and the arrangement whereby ACG had an option to purchase the Vaucluse property, this option having been assigned to Maken to secure ACG's indebtedness to Maken. Pressed by the cross examiner, Mr Northwood stated (Black 326):

You keep trying to suggest there is some link between ACG and Mr Wendt borrowing the moneys. On 11 November when I saw Mr Wendt I believed that Mr Wendt was borrowing the moneys for investment purposes for himself. There was no suggestion by anyone that Mr Wendt was doing other than borrowing moneys for an investment for himself.

64 Mr Northwood swore that he had no knowledge (until 1999, when addressing a complaint made to the Law Society by the deceased) that the deceased intended to advance the mortgage sum to ACG or Mrs Howard. He said that letters from Molloy and Schrader addressed to him at DX 330 Sydney (ACG’s document exchange number: see Blue 342, 582) that disclosed that the mortgage settlement cheque would go to ACG were collected by Mrs Howard, who shared access with him to ACG’s DX (document exchange box) and used it for all ACG matters (Blue 39, Black 316-8, 321). Mrs Howard emptied the box more often than Mr Northwood did, especially since she lived in Sydney and he lived in Canberra for extended periods (Blue 23). This was consistent with other evidence showing that Mr Northwood spent most of his time away from Sydney attending to Army business, and the evidence about Mrs Howard attending to ACG's business affairs and to some of its conveyancing affairs.

65 Mr Northwood could not and did not dispute that he had attended to the formalities relating to the settlement of the mortgage on 11 November 1997. But he said that he did not realise that the $450,000 was in effect about to be handed over by the deceased to ACG. He did not ask the deceased what he proposed to do with the money. His impression, such as it was, was that the deceased was going to use the money in acquiring an investment property recommended to him by Mrs Howard (Black 319-20). Pressed with direct cross-examination suggesting that he knew of ACG's involvement all along, he told deceased's trial counsel (Black 321):

Mr Haffenden, in this matter I believe both Mr Wendt and myself were duped by Mrs Howard to enable Mrs Howard to obtain funds for other purposes for ACG.

66 Later, when pressed about whether he thought in the circumstances it would be wise for him to advise the deceased to seek the services of another independent solicitor, Mr Northwood said (Black 326):

So far as I was aware - and bear in mind there was no mention whatever by anybody at that meeting of Mr Wendt lending moneys to ACG - so far as I was aware, at a time when Mr Wendt was about to sell his property - and it seems perfectly reasonable to me - he was borrowing moneys to buy some other investment property. So far as I was aware, and the general tenor of the meeting, he was relaxed and confident - my understanding was that he was simply purchasing another property for himself.

67 Mr Northwood pointed to the fact that the deceased confirmed that the loan was for investment purposes, signing a declaration to that effect.

68 The deceased agreed that he understood at the time that Mr Northwood was a solicitor for ACG (Black 62). He perceived Mr Northwood as “Mrs Howard’s company solicitor” on 11 November 1997 (Black 53, 171). The deceased also knew at the time that Mr Northwood was a director of ACG.

69 Nevertheless, as the deceased pointed out, Mr Northwood indicated that he was acting for him that day (Black 66) and the independent solicitor’s advice Certificate was signed on that basis. It followed, according to the deceased, that Mr Northwood “should have been looking after both” clients’ interests (Black 66). Undoubtedly, Mr Northwood assumed various duties towards the deceased by virtue of his conduct on 11 November 1997. The heart of this appeal is determining whether his fiduciary duties extend so far as to require disgorgement of a benefit flowing indirectly, subsequently and in circumstances in which the solicitor had no knowledge at the time of the potential impact in his favour of the transaction he was assisting.

70 The deceased said he relied upon his discussions with Mrs Howard (not in the presence of Mr Northwood) to the effect that ACG would keep the payments up to date and do everything necessary to ensure that the mortgage did not fall into default (Black 98).

71 There was the following exchange during cross-examination (Black 151):

Q. You understood at the time that you were not going to get a mortgage back from ACG, didn’t you?
A. But I was told I was guaranteed that the money was safe, by ACG.
Q. You knew that you weren’t going to get a mortgage back by ACG? You knew the transaction was that you were going to give the mortgage to other people?
A. Yes, but ultimately when the place was sold I was going to get my money and that’s the only interest I had in this infernal thing.

72 The deceased agreed that nothing was said by either Mr Northwood or Mrs Howard about borrowing money to pay to ACG on 11 November 1997 (Black 169, 172). Mr Northwood gave sworn evidence to similar effect (Blue 136).

73 The deceased agreed that he knew on 11 November that the money he was borrowing was being provided to ACG (Black 55). He said that “the loan wasn’t really for me. Ultimately it was for AC&G…. It wouldn’t have even touched my pockets at one stage” (Black 63. See also Black 133, 171, 184). “She said she needed [the title deeds] to raise the finance” (Black 187). His purpose in entering into the mortgage was to provide ACG with $450,000 (Black 56, 136). At one stage he described the documents that he signed on 11 November in the following terms (Black 165):

As far as I was concerned this was part of the deal to enable the sale … I realised that [I was signing mortgage documents] but this was part of the sale, as far as I was concerned.

74 His understanding was that ACG intended to use the money to renovate the Vaucluse property and to buy another property, this being based on what Mrs Howard had told him (Black 56). Later he said that he understood the money was to do the extensions and renovations (at Vaucluse) (Black 131, 137). I have already indicated that it should be inferred that Mrs Howard’s willingness to exercise the option to purchase on 11 November must have been contingent upon the deceased’s willingness to lend her the $450,000 raised on the mortgage that would be extant at least until settlement of the sale.

75 At that stage the deceased was admittedly prepared to give Mrs Howard “whatever she needed within reason” and she had told him that she needed as much as $450,000 (Black 175, 185). He said, however, that he would never have agreed to granting a mortgage if aware that some of the funds would be used to repay a loan to Mr Northwood (Blue 115); and that it was only through the process of discovery that he learnt in 2003 that some of the ACG funds were used to repay loans to Mr Northwood (Black 186). He said that he did not know at the time that Mr Northwood had “invested” any money in ACG (Black 185). Had he known this he would have been concerned because the transaction would have involved Mr Northwood “bailing out his own company” (Black 185).

76 I am highly doubtful about accepting the deceased’s claim that he would not have entered into the borrowing and on-lending had he known of the true position of ACG’s finances (on 11 November 1997).

77 In November 1997 Mr Northwood and his family company were creditors of Mrs Howard’s company to the tune of $245,000. In early December 1997 ACG repaid all of the money it then owed to them, using much of the on-lent $450,000. But, as I demonstrate below, ACG’s balance sheet at the time was positive and ACG did not become insolvent until well after 1997. Reference to “bailing out” implies a note of desperation and/or that the Northwood/Maken funds were at risk. In November 1997 they were not at risk (see further below).

78 Evidence by interested parties as to what they would have done if additional information was present at the time of a transaction into which they willingly entered always needs to be closely scrutinised. Here the evidence came from the mouth of a confused and significantly discredited witness. The judgment contains no finding accepting the deceased on this particular testimony. I would not be prepared to infer the causal impact of the respondent’s non-disclosure in light of the deceased’s readiness to do Mrs Howard’s bidding at the time, ACG’s solvency at the time (see below) and the significant damage to the deceased’s credibility inflicted in the cross-examination that led to the abandonment of the original case against the respondent. I am aware of the extensive debate amongst Equity scholars about the extent to which common law and Equity causation rules coalesce in relation to fiduciary dealings. However, I am unaware of any suggestion that would throw onto a defendant the burden of disproving the causal impact of a relevant non-disclosure. In Youyang Pty Ltd v Minter Ellison (2003) 212 CLR 484 the High Court referred with approval (at 502[44]) to statements by Mummery LJ in Swindle v Harrison [1997] 4 All ER 705 at 733, 734 that “[t]here is no equitable by-pass of the need to establish causation” and that “[I]n questions of causation it is important to focus on the relevant equitable duty”.

79 I point out below that the deceased’s case on causation failed by reference to the events of June 1998. These legal principles assume importance in that context.

80 The deceased agreed that the reality of the matter was that so long as he thought that his mortgage was facilitating the sale process and was likely to give rise to a concluded sale, he would have agreed to provide the mortgage (Black 186). What he regarded as improper was that Mr Northwood “should have taken money out of the account” (Black 186) in circumstances where ACG later became unable to meet its later unsecured obligations to himself and others. The elision in this process of reasoning is patent.

81 Mr Northwood was not asked to play any role in the settlement of the Mortgage transaction that took place on 19 November 1997.

82 On 18 November the deceased signed a letter confirming Mrs Howard’s authority in completing whatever documents or actions that were required to effect the Mortgage (Blue 12, 368).

83 Mr Molloy obtained an estimate of the value of Vaucluse property as at 18 November 1997. A registered valuer who undertook an external inspection of the property estimated a fair and reasonable price for it to be in the order of $750,000 (Blue 1412).

84 On 19 November 1997 the deceased uplifted the title deeds from the custody of his solicitor Mr Beilby and handed them to Mrs Howard, contrary to Mr Beilby’s advice (Black 7. See also the Beilby firm diary notes of that date set out above). This enabled settlement to take place, presumably at the office of Molloy & Schrader. The Mortgage was stamped on 19 November 1997 (Blue 769) and was registered soon after. The $450,000 was received and banked by ACG (Mrs Howard) that day (Blue 701).

85 As indicated, this Mortgage was discharged on 5 June 1998. But the transaction then negotiated between the deceased and Mrs Howard meant that the deceased permitted settlement of the sale to ACG without securing effective payment of the balance of the agreed purchase price. One of the terms of this arrangement was that the deceased would continue to reside at Vaucluse (Blue 1659), which he did until late 1999. Mr Northwood bore no responsibility for this transaction. Shaw J concluded that the events of June 1998 were the effective cause of the deceased’s ultimate loss (J31, 59-60 set out below). It is unclear to me whether this conclusion, with which I agree, is under attack in the way that the appeal was ultimately pressed. It will be seen that attention is now focused exclusively upon the benefits received by the respondent and Maken (see below). If that benefit was at most the $250,182.79 received on 1 December 1997, then the failure to press or make good the claim for compensation in the sum of $450,000 assumes at least monetary significance.

86 An affidavit sworn by the deceased early in the proceedings raised a number of issues as to his understanding and/or memory as to the true import of the mortgage transaction and the explanation given by Mr Northwood on 11 November 1997. This case was destroyed in early cross-examination and was formally abandoned on the third day of the trial. It should however be recorded that no version of the pleadings raised a case based upon Mr Northwood being in some way privy to Mrs Howard having exercised influence that was undue in its technical, equity sense. (I am not suggesting that any such case could or should have been run.) The case ultimately pressed against Mr Northwood turned solely upon Mr Northwood's role in acting as the deceased's solicitor on 11 November 1997 and upon what he did not disclose on that occasion about his interest in the proposed borrowing by the deceased from the mortgagees.

Did the solicitor benefit from the retainer? In what way?

87 In this Court, the appellant confined the case to one involving an unauthorised benefit, claiming in the alternative that the benefit was the full $450,000 paid to ACG or the $250,182.79 that ACG repaid the solicitor and Maken on 1 December 1997.

88 The deceased pleaded that Mr Northwood obtained a benefit from the mortgage transaction because the $450,000 was lent by him to ACG and ACG used this money to repay Maken its advances totalling $245,000 and to repay Mr and Mrs Northwood their advance totalling $5,000 (Red 51).

89 Contrary to this pleading, the appellant proved that the advances came from Maken (as to $100,000) and Mr Northwood (as to $145,000). Nothing turns on this discrepancy.

90 There is some uncertainty as to whether there was an additional $5000 advanced by Mr Northwood in 1997. Documentary evidence suggested that this occurred in 1998. The sum is so small compared to the $245,000 that it presents no separate issue to be decided in the appeal.

91 At the deceased’s direction, but unknown to Mr Northwood, the $450,000 borrowed by the deceased on 19 November 1997 was immediately on-lent by him to ACG. This was achieved by directing the Molloy & Schrader lenders to make their settlement cheques in favour of ACG (cf Blue 762 and J7). Settlement occurred on about 19 November 1997, presumably at the office of Molloy & Schrader in the presence of Mrs Howard and possibly the deceased.

92 The deceased was not the only unsecured creditor of ACG at this time. There had also been financial dealings between the solicitor (or his company, Maken) and ACG in 1997.

93 Details of various loan transactions were admitted on the pleadings (Red 50, 66) and pursuant to a Notice to Admit Facts. The relevant cheques and bank statements were also in evidence.

94 Certain facts were admitted formally, pursuant to a Notice to Admit Facts (Blue 664-670). Mr Northwood admitted that he banked an ACG cheque in his favour in the sum of $100,000 on about 21 November 1997 and that the cheque was dishonoured shortly afterwards. The evidence showed that this cheque or a replacement cheque in the same amount was honoured on 1 December 1997.

95 Mr Northwood also admitted that he banked a further ACG cheque for $150,182.79 on or about 21 November 1997 and that this cheque was dishonoured shortly afterwards. A further ACG cheque in the lastmentioned amount was issued on about 1 December 1997 and that cheque was cleared. Mr Northwood admitted that the latter cheque repaid the advances of $15,000, $60,000 and $70,000 referred to in par 10 of his Defence.

96 The two cheques were handed by Mrs Howard to Mr Northwood in blank on 27 October and banked after Mrs Howard told Mr Northwood that it was appropriate to do so (Black 282, 296).

97 Mr Northwood further admitted that Maken was repaid the $100,000 referred to in par 10 of the Northwood Defence. This money came from ACG’s business banking account “into which the sum of $450,000 had been deposited and added to an existing credit balance” (Blue 668). He further admitted that Maken was paid the $15,000, $60,000 and $70,000 by ACG from its business banking account into which the sum $450,000 “had been deposited and added to an existing credit balance”.

98 On about 19 August 1997 Maken advanced $100,000 to ACG. Mrs Howard told Mr Northwood that the money was for the deposit and renovation work at Streatfield Road, a property that she intended to keep for about 12 months. “With a bit of work I believe that I can get nearly $2 million for it” (Blue 131-3). This loan was repayable with interest on 19 November 1997 and was secured by ACG granting Maken an assignment of its option to purchase the deceased’s Vaucluse property (Blue 116). Mr Northwood had witnessed the affixing of the common seals of ACG and Maken to the Assignment. He was also the controller of the ACG bank account into which the $100,000 was deposited (Blue 722).

99 Mr Northwood also personally made unsecured advances repayable on demand to ACG totalling $145,000 on about the following dates, these moneys also going into the account (Blue 697, 723-4, 752):

10 October 1997 $15,000
24 October 1997 $60,000
27 October 1997 $70,000

100 Mr Northwood believed that the first two advances were related to expenses arising out of the Streatfield Road purchase. Mrs Howard represented to him that the $70,000 was to cover the deposit payable on Vaucluse (Blue 133-4). He said that he was confident that all of the advances then made to ACG would be repaid shortly after the settlement of Streatfield Road on 31 October 1997, because he was aware of Mrs Howard’s intention to raise additional borrowings on the security of that property in view of the valuation report of $1,800,000 for Streatfield Road that she had shown him (Blue 134-5).

101 There were insufficient funds in ACG’s account to meet the cheques drawn on 21 November and they were dishonoured that day (Blue 696-7, 702). A letter dated 30 March 2000 from Mr Northwood to the solicitors representing the liquidator of ACG stated that there were insufficient funds to meet these cheques because “a cheque deposited on 19 Nov 97 had not been cleared” (Blue 696-7). This is a reference to the cheque for $450,000 representing the on-lent proceeds of the mortgage transaction that the deceased settled on 19 November 1997 (see ACG bank statement at Blue 126-7). The letter also conceded that the two dishonoured cheques were met by freshly drawn cheques that were banked and paid on 1 December 1997 (Blue 697, 726, 754).

102 By 2000 at the latest Mr Northwood knew that the source of the ACG money used to fund repayment of the advances by Maken and himself had been the mortgage he had witnessed on 11 November 1997 and that had been settled (in his absence) on 19 November 1997. He was however accepted by the primary judge as having been ignorant of the intended destination of the deceased’s borrowing pursuant to the documents witnessed on 11 November 1997.

103 Mrs Howard represented to Mr Northwood in late November 1997 that the advances were repaid out of funds coming from the completion of the Streatfield Road acquisition (Blue 137-8). Mr Northwood swore that it was only in January 1998 that he opened and examined the ACG bank statements for the relevant period (Blue 139). He had not expected that there would be a deposit of the size of $450,000 on 19 November 1997. He spoke to Mrs Howard about the matter on about 27 January 1998 and was told (Blue 139):

Roy’s deal fell through. He parked the funds from his mortgage in ACG.

104 The following conversation ensued (Blue 139-40):

Northwood: Why didn’t you ask me about that or at least tell me what he intended to do?
Howard: What’s the problem?
Northwood: Well firstly I understood that the monies payable to me were coming from the funds from the Streatfield Road settlement and secondly it now looks as though Maken and I were repaid from Roy’s funds. What if Roy needs his money urgently?
Howard: Roy is quite happy. He won’t need the money unless another deal comes up. If it does it can be settled when I settle Vaucluse. Vaucluse is worth more than I’m paying for it. Vaucluse will be settled within a few months and if no other deal comes up Roy will be repaid. I’ll need to do it then to discharge the mortgage. Anyway with the holidays over I expect to sell Bourke Street.

105 Mr Northwood swore (Blue 140):

In late January 1998 while the account balance at ACG’s business banking account was just over $200,000, I was aware that Howard proposed to mortgage the Vaucluse property for the maximum amount possible and she had previously indicated that the valuation of Vaucluse was expected to be in excess of $1,000,000. I therefore expected that the mortgage advance would be a figure in excess of the $700,000 purchase price and I believed that upon settlement of Vaucluse there would be sufficient funds to pay the balance of purchase money, for Wendt to withdraw his parked funds and repay his mortgage.

106 The trial judge accepted this evidence (J19-20, set out below).

Did payment of ACG’s debts to Northwood and Maken contribute to the appellant’s loss?

107 Shaw J held (at J31):

Even in circumstances where a breach has occurred, in this instance no loss is occasioned by this transaction. In my opinion the loss suffered by the plaintiff came about because he released the certificate of title to Ms Howard and allowed the property to be transferred to ACG without receiving the full purchase price. The mortgage transaction has little to do with this loss. The mortgage transaction involved the plaintiff using his property to leverage borrowing for ACG, a debt subsequently discharged by ACG on 5 June 1998, immediately prior to their registration as owners of the property. Thus, before June 1998, the plaintiff had not suffered any loss. It is only after the transfer of the property that the plaintiff could be seen to have been detrimentally affected by the option agreement and the resulting sale.

184 The emphasis in Pilmer upon the proscriptive or prohibitory nature of the rules is reinforced by the universal recognition of the deterrent and prophylactic functions of those rules. Equity, though sometimes coy of admitting punitive intent (cf Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298), has long been anxious to proclaim a deterrent role for its stringent rules in this area. In Bray v Ford [1896] AC 44 at 51-2 Lord Herschell observed:

It does not appear to me that this really is, as has been said, founded upon principles of morality. I regard it rather as based upon the consideration that, human nature being what it is, there is danger of a person holding a fiduciary position being swayed by interest rather than duty, and thus prejudicing those whom he was bound to protect. It has, therefore, being deemed expedient to lay down this positive rule.

185 See also Warman International Ltd v Dwyer (1995) 182 CLR 544, where the Court said (at 557-8):

A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves “at a level higher than that trodden by the crowd”. The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage.

186 If the conduct and conscience of the fiduciary are to be moulded by these considerations, it is difficult to see any guiding principle that would apply these duties to the fiduciary who does not know critical facts that trigger the duty while acting in the matter at hand or whose conscience is otherwise untainted.

187 Further support for viewing things this way can I think be derived from the requirement that a court must first carefully delineate the subject matter over which the fiduciary obligation extends (Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 408).

188 Applying these guidelines to the present case, the respondent's retainer and the relationship he entered into with the deceased on 11 November 1997 were concerned (only) with the deceased’s role and interests as a borrower. The solicitor was required to ensure that the deceased fully understood the mortgage transaction he was entering into. Equity precluded the solicitor from deriving any unauthorised profit from that transaction and from allowing himself to be placed in any situation where his undivided loyalty to the client in the matter at hand was put at risk.

189 Shaw J concluded that this was all that Equity required of the solicitor in the circumstances (J69). His Honour appears to have concentrated on the conflict of duty/interest issue, probably because this was the thrust of the case at first instance. This said, I agree with the conclusion, even in the context of the current thrust of the appellant’s case.

190 No case that has come to my notice goes as far as the proposition advanced by the appellant.

191 Keech involved a lease held on trust. Upon the expiration of the lease, the trustees sought a renewal of it for the benefit of the beneficiary. This was refused, and the trustee then sought and obtained a renewal of the lease for his own benefit. King L C held that the trustee should rather have allowed the lease to run out than to have the lease to himself. He added:

This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequence of letting trustees have the lease, on refusal to renew to cestui que use.

192 In other words, the trustee had a conflict between his interest in obtaining a lease for himself and his duty to obtain a renewal for the trust. This conflict triggered the duty not to seek the lease for the trustee's own benefit, at least without the informed consent of all beneficiaries. Chan v Zachariah was a conflict of interest case in both its trustee and fiduciary aspects.

193 The learned authors of Meagher, Gummow & Lehane's Equity Doctrines and Remedies (4th ed by RP Meagher, JD Heydon & MJ Leeming) point out (at [5-040]) that real difficulties arise at the point where Keech v Sandford is applied to non-trustee fiduciaries, both in point of principle and in relation to the rigour with which Keech has been applied in later caselaw.

194 Phipps v Boardman [1967] AC 46 illustrates the rigour of Keech v Sandford, but in a context falling short of the present facts on a number of fronts. The reasoning of the majority turned upon an arguably strained finding of conflict of duty and interest and a finding that those who purported to represent the trust obtained details and valuable information from this role which they turned to their own profit by active sharetrading (see generally, Meagher, Gummow & Lehane at [5-050]). The particular decision has had qualified acceptance in this country by judicial and academic scholars, and it undoubtedly stretches to the uttermost the accommodation of equitable principle and practical reality in commercial dealings (see Finn, Fiduciary Obligations (1977) at §561ff; Meagher, Gummow & Lehane at [5-065]; Chan at 204-5). Phipps v Boardman does not advance the appellant's case. Indeed, it contains statements of principle that caution acceptance of it. The decision does not contradict the proposition (well-established in Australia: see Birtchnell) that the scope of the equitable obligation depends on the precise nature and scope of the relationship in each individual case. The fiduciary is not accountable for profits derived outside the scope of the relationship or required, outside that scope, to prefer the principal's interests over those of the fiduciary (see Phipps at 130 per Lord Upjohn, admittedly in dissent) and the cases that establish that a partner is not accountable for profits derived from a business in which he or she is interested but which is outside the scope of the partnership business (Birtchnell at 408)).

195 It has recently been held in the House of Lords that the fiduciary relationship between solicitor and client comes to an end with the termination of the retainer. "Thereafter the solicitor has no obligation to defend and advance the interests of his former client. The only duty to the former client which survives the termination of the client relationship is a continuing duty to preserve the confidentiality of information imparted during its subsistence." (Prince Jefri Bolkiah v KPMG [1999] 2 AC 222 at 235 per Lord Millett. See also Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at 48.). These remarks were in cases involving allegations of breach of the duty not to enter into an unauthorised position of conflict, but in my opinion the principles stated reflect a proper understanding of the extent to which Equity acts on the conscience of a fiduciary.

196 Shortly before the presently critical passage in Chan, Deane J referred to a passage in the judgment of the High Court in Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 where their Honours said (at 350):

The doctrine of Keech v. Sandford (1726) Sel Cas Ch 61 (25 ER 223) is shortly stated by saying that a trustee must not use his position as trustee to make a gain for himself: any property acquired, or profit made, by him in breach of this rule is held by him in trust for his cestui que trust . The rule is not confined to cases of express trusts. It applies to all cases in which one person stands in a fiduciary relation to another: it has been applied as between partners, as between principal and agent, and as between master and servant: see, e.g., Re Biss; Biss v. Biss (1903) 2 Ch 40 ; Prebble v. Reeves (1910) VLR 88 and Wicks v. Bennett (1921) 30 CLR 80 . The case of Birtchnell v. Equity Trustees Executors and Agency Co. Ltd . (1929) 42 CLR 384 may be regarded as an instance of the application of the same rule.

197 This passage is undoubted authority for the proposition that the principle in Keech v Sandford may extend to non-trustee fiduciary relationships. But it does not extend that proposition beyond fiduciary relationships where there is abuse of the duty to avoid a conflict of interest. The cases cited in Keith Henry are all of this character.

198 Senior counsel for the appellant was asked if he knew of any case supporting or explaining the critical dictum in Deane J’s reasons in Chan outside a conflict of interest scenario. None were cited, apart from Reading v Attorney General [1951] AC 507 and Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 389. Yet as counsel acknowledged, these are cases of solicited payments where the defaulting fiduciary placed himself in a position of conflict and actively participated in the abuse of the principal's interests. At the time when the benefit was received the fiduciary was or clearly should have been conscious of his wrongdoing.

199 Reading and Boston illustrate the proposition that a fiduciary may not retain a bribe solicited in the course of and/or corrupting the proper performance of the relationship. Bribery can assume an infinite variety of forms. Nevertheless, Professor Finn (as he then was) was surely correct when he observed (Fiduciary Obligations at §494):

...a tip will not be a bribe if it was not promised or given while there were any matters outstanding in the dealings between the donor and the fiduciary (or his beneficiary). However, a court would most likely hold that a substantial present given ostensibly on account of past dealings but which could possibly influence likely future dealings, amounted to a general bribe.

200 The learned author cited as authority for the first sentence Eden v Ridsdales Railway Lamp and Lighting Co (1889) 23 QBD 368 at 372 per Lindley LJ and Bendigo Central Freezing and Fertiliser Co v Cunningham [1919] VLR 387. These two cases provide indirect support to the proposition cited by Finn. Eden was a case in which the gratuity was held accountable because it had been received while a relevant contract for sale was uncompleted and while therefore, in Lindley LJ’s words, "questions [were] open" that meant the fiduciary was in a position of conflict between duty and interest. In Bendigo Central, the conversation about the (secret) commission "admittedly took place at a very delicate stage of negotiations" (Cussen J at 392). The analysis of the facts surrounding the fiduciary relationship in Chan proceeded on a similar basis (see the passages esp at 182, 197 and 206 referring to the ongoing process of realisation of partnership assets).

201 Enthusiastic restitution scholars are anxious for Equity to acknowledge that some of its doctrines and remedies give effect to the unjust enrichment concept that has achieved widespread acceptance in the highest appellate courts as a useful conceptual tool. The concept is offered as a framework for understanding the existing case law and assisting in the principled development of the general law by proper application of analogy. Some of these scholars chafe at "Equity's" reluctance to come in from an unduly self-referential, non-analytical late 19th century "cold" in which it placed itself in the pre-Judicature era. These broader debates do not call to be addressed in the present case.

202 Not even the most ardent (or misguided, depending on one's point of view) restitution scholar seeks to divert "Equity" from its own paths of principle, if they can be discerned and can stand consistent with precedent and the coherent development of legal doctrine. I mention this, because some of the appellants’ submissions strike me as no more than a demand to account for an enrichment, without attempting to grapple with either or both of the existing corpus of fiduciary law or the proper application of the unjust enrichment concept.

203 A fiduciary's liability to account for unauthorised benefits does not depend on proof of dishonesty or lack of bona fides (Boardman; Warman International at 557), but it is not the free-standing product of judicial discretion or appeal to “idiosyncratic notions of what is fair and just might dictate" (Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256 per Deane J).

204 Mr Kelly submitted that Deane J's dictum would apply if the Molloy and Schrader mortgagees lending to the deceased had written to Mr Northwood in January 1998 enclosing an unsolicited cheque for $1000 under cover of a letter thanking Mr Northwood for his help in persuading the deceased to borrow from them. Possibly this does no more than restate the critical legal proposition in a different factual context. On the other hand, as Giles J A pointed out during argument (CA Tr p24), the example is distinguishable from the instant facts, because the only reason why Mr Northwood would have received that $1000 would have been because of what he had previously done in the course of his fiduciary duty. Perhaps this was the type of situation that Deane J had in mind. Perhaps his Honour was thinking of conflict of interest situations involving rectitude (as in Phipps v Boardman). By contrast, in the present case there was no entry into a position of conflict. Furthermore, there was an independent, genuine reason for ACG to pay what it owed, particularly when it had the means to do so.

205 Mr Northwood's advice to the deceased was a part of the history of the transaction, without which ("but for which") the deceased would not have had the money available to on-lend to ACG. But in no sense did Mr Northwood act in a way that calls forth reproof or a sense of unconscientious dealing or in contravention of the moral principles that lie behind equitable intervention in these matters. Nor does the present case suggest the need for the application of the deterrent principle acknowledged in the case law to lie behind the Keech v Sandford line of cases.

206 I am driven to conclude that Deane J’s dictum finds no support in the caselaw, and that if it was intended to go beyond a situation such as the $1000 gratuity it should not be followed.

207 The appeal should therefore be dismissed with costs.

208 GILES JA: I agree with Mason P.

209 BRYSON JA: In these proceedings Mr Northwood has been beset with an array of purported bases for equitable claims, presented with contrived complexity so as to be markedly difficult to deal with forensically.

210 Equitable claims arising out of fiduciary relationships are so encrusted with diffuse scholarship as to give colour to claims with little discernible relationship to the deeply underlying basis of jurisdiction in equity, in which the court has power to prevent reliance on legal rights and to remedy consequences of so doing in cases where such reliance is unconscionable. Outside well-worn paths of equitable relief this power is only available for exercise to redress enormities. Idiosyncratic or otherwise excessively ready exercises of the power threaten its existence.

211 Designation of a relationship as fiduciary is not a signal for exercise of judicial bounty. Fiduciaries characteristically have areas of responsibility which have boundaries, and are free to act in their own interests in all matters outside those boundaries. The boundaries of the fiduciary responsibilities which Mr Northwood incurred to Mr Wendt were very narrow. Being a solicitor and having advantages which his knowledge brought him, he agreed to explain a mortgage and associated documents to Mr Wendt without fee, and he did so, and he witnessed Mr Wendt’s signatures: and he left the documents with Mr Wendt. Mr Northwood took no part in Mr Wendt’s later dealings with the documents or with the money he raised with them. He took no part in Mr Wendt’s earlier business either. That there was no fee does not mean that the relationship was not one of trust and confidence, but helps to illustrate how narrow the area of trust and confidence was. When Mr Northwood had completed all he undertook to do and had given Mr Wendt his executed documents, Mr Northwood was free of any further responsibility.

212 Mr Wendt sought and failed to make out a case that Mr Northwood was engaged in some contrivance to put money raised on Mr Wendt’s credit into the hands of Mrs Howard’s company ACG so that the company could repay moneys it owed to Mr Northwood and interests related to him. This case was never far from the fantastic, and was ornamented with falsehoods in Mr Wendt’s evidence, but it had some slight basis in inferences which a hostile tribunal of fact could have drawn against Mr Northwood from later circumstances in which ACG did obtain money through Mr Wendt and did repay Mr Northwood and interests connected with him. This case was dispelled by Mr Northwood’s evidence of his state of mind and knowledge at the time, which Shaw J believed as he was well entitled to do. There, I think, any real grounds for debate ended.

213 If it had not ended there Mr Northwood may have been accountable for any profit or advantage he derived from use (or from abuse) of his fiduciary position, but there is no basis on which his being paid out by ACG, at a time when ACG had sufficient resources to meet its obligations whether or not it had any money from Mr Wendt, could be seen as a profit or advantage. There could only have been an element of profit or advantage if ACG could not or was otherwise less able to meet its own obligations, and the profit or advantage could not simplistically be equated with the amount ACG paid to it.

214 Mason P dealt elaborately with elaborate contentions made by Senior Counsel for Mr Wendts executrix. In my opinion counsel’s contentions infused the appeal with apparent complexity which the facts do not yield: there was simply no basis for a decision that Mr Northwood behaved unconscionably in collecting and retaining money which was due to him from ACG.

215 In my opinion the appeal should be dismissed with the observation that Mr Wendt’s false case, the case which he claimed was true and the appeal have been presented with contrived complexity which the facts do not truly support and have thereby imposed a considerable injustice on Mr Northwood.

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