Break Fast Investments Pty Ltd v Rigby Cooke Lawyers
[2022] VSCA 118
•23 June 2022
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2021 0090 |
| BREAK FAST INVESTMENTS PTY LTD (ACN 090 648 990) | Applicant |
| v | |
| RIGBY COOKE LAWYERS (A FIRM) (ABN 58 552 536 547) | Respondent |
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| JUDGES: | KYROU, McLEISH and WALKER JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 12 May 2022 |
| DATE OF JUDGMENT: | 23 June 2022 |
| MEDIUM NEUTRAL CITATION: | [2022] VSCA 118 |
| JUDGMENT APPEALED FROM: | [2021] VSC 398 (Macaulay J) |
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EQUITY – Fiduciary duties – Conflict of interest – Solicitor-client relationship – Solicitor acted for company and others in defending proceeding in which plaintiff alleged company held property on trust – Company actively defended proceeding and paid legal fees on behalf of itself and other defendants – Court found company held property as trustee – Company unable to recover legal fees from other defendants due to their insolvency – Company sought equitable compensation from solicitor calculated by reference to legal fees paid to solicitor – Whether company should have adopted passive role in proceeding – Whether interests of company conflicted with interests of other defendants – Whether duties owed by solicitor to company conflicted with duties owed to other defendants – In company’s interest to actively defend proceeding – No conflict of interest or duty – Leave to appeal granted – Appeal dismissed.
EQUITY – Alleged breach of fiduciary duty by solicitor – Claim for equitable compensation – Causation – Leave to appeal refused.
EQUITY – Knowing receipt of trust funds under first limb of Barnes v Addy (1874) LR 9 Ch App 244 – Solicitor acted for company in defending proceeding in which plaintiff alleged company held property on trust – Solicitor’s legal fees paid from such property – Solicitor aware of conflicting evidence on trust issue – Tangible risk Court would find company was trustee – Whether solicitor’s knowledge of adverse evidence and possible adverse outcome sufficient to satisfy fourth knowledge category discussed in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 – Knowing receipt claim not established – Imobilari Pty Ltd v Opes Prime Stockbroking Ltd (in liq) (2008) 252 ALR 41 distinguished; Carl Zeiss Stiftung v Herbert Smith & Co [No 2] [1969] 2 Ch 276 applied – Leave to appeal refused.
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| Counsel | |||
| Applicant: | Mr P W Collinson QC with Ms E L-A Dias | ||
| Respondent: | Mr S R Horgan QC with Ms G S J Berlic | ||
Solicitors | |||
| Applicant: | Sinisgalli Foster Legal | ||
| Respondent: | Lander & Rogers | ||
TABLE OF CONTENTS
Introduction and summary
The Ambridge Proceeding and preceding and subsequent events
Caveat removal proceeding
Commencement of Ambridge Proceeding
Trial of the Ambridge Proceeding and relevant findings of Vickery J
Aftermath of Ambridge decision of Vickery J
Trial of the RC Proceeding and overview of findings by Macaulay J
Grounds of appeal
Grounds 1 and 2: Breach of fiduciary duty of loyalty
Macaulay J’s reasons relevant to grounds 1 and 2
Parties’ submissions on grounds 1 and 2
Decision on grounds 1 and 2
Grounds 3 and 4: Equitable causation
Macaulay J’s reasons relevant to grounds 3 and 4
Parties’ submissions on grounds 3 and 4
Decision on grounds 3 and 4
Grounds 5 to 7: Claim for knowing receipt of trust funds
Applicable legal principles
Macaulay J’s reasons relevant to grounds 5 to 7
Parties’ submissions on grounds 5 to 7
Decision on grounds 5 to 7
Grounds 8 to 10: Defence of unclean hands
Conclusion
KYROU JA
MCLEISH JA
WALKER JA:
Introduction and summary
This application for leave to appeal concerns a claim by the applicant, Break Fast Investments Pty Ltd (‘Break Fast’), for equitable compensation from the respondent, the legal firm Rigby Cooke Lawyers (‘RC’). The quantum of the claim was calculated by reference to the legal fees that Break Fast had paid to RC in acting for it and other defendants in long running litigation about a commercial property at 176 Wellington Parade, East Melbourne, of which Break Fast was the registered proprietor (‘Property’). Break Fast relied upon various causes of action, including breach of the fiduciary duty of loyalty and knowing receipt of trust funds. In order to understand Break Fast’s claim, it is necessary to consider in some detail the litigation that gave rise to it and the various participants in that litigation.
On 12 March 2010, in Ambridge Investments Pty Ltd (in liq) v Baker,[1] Vickery J decided that Break Fast held the Property on trust for four joint venture partners. The four joint venture partners and the beneficial interests in the Property that Vickery J decided they held were: Careerpath Australia Pty Ltd (‘Careerpath’),[2] 40 per cent; C&O Voukidis Pty Ltd (‘C&O Voukidis’), 25 per cent; Ambridge Investments Pty Ltd (‘Ambridge’), 25 per cent; and IMF Pty Ltd (‘IMF’), 10 per cent. Break Fast had acquired the Property on 24 November 1999 for $6,000,000 for the purpose of refurbishing it and selling it for a profit.
[1][2010] VSC 59 (‘Ambridge decision of Vickery J’).
[2]Careerpath is erroneously referred to as ‘Career Path Pty Ltd’ in some documents.
In the period relevant to the Ambridge decision of Vickery J:
(a)Break Fast was controlled by Chris Voukidis and Theodore Baker; Careerpath was controlled by Baker; C&O Voukidis was controlled by Voukidis; Ambridge was initially controlled by Mark Stanley and later by Gregory Taylor; and IMF was controlled by Tod McGrouther.
(b)Break Fast’s directors were Voukidis and Baker. Initially, Stanley was also a director but he resigned on 12 December 2002 at Voukidis’ request after Voukidis and Baker discovered that Stanley had used Break Fast’s funds for his own purposes.
(c)The shareholding in Break Fast was as follows: Baker held 2 shares on trust for Careerpath and IMF; Voukidis held 1 share on trust for C&O Voukidis; and Oxley Group Finance Pty Ltd (‘Oxley’) held 1 share.[3] Oxley, which was controlled by Voukidis, acquired its shareholding from Stanley.
(d)Break Fast’s company secretary was Voukidis.
[3]Vickery J held that notices of beneficial ownership concerning the shares held by Voukidis and Baker had been backdated. That finding is not presently relevant.
Ambridge had a commercial arrangement with Headland Pty Ltd (‘Headland’), a company controlled by Taylor, in relation to the interest Ambridge claimed in the Property. On 18 August 2004, a day after a liquidator was appointed to Ambridge, H2O Company Pty Ltd (‘H2O’), another company controlled by Taylor, appointed Gregory Andrews as receiver of Ambridge.
The proceeding which culminated in the Ambridge decision of Vickery J (‘Ambridge Proceeding’) was commenced by Ambridge on 31 January 2005. The proceeding was funded by H2O, and Taylor was the driving force behind it. The defendants were Baker, Voukidis, Stanley, Careerpath, C&O Voukidis, Oxley, IMF and Break Fast. We will refer to all the defendants other than Stanley and Break Fast as ‘the Voukidis Defendants’ and to the Voukidis Defendants together with Break Fast as ‘the Break Fast Defendants’.
RC acted for the Break Fast Defendants from the commencement of the Ambridge Proceeding. RC took instructions from Voukidis and Baker (in their personal capacities and their capacities as directors of Break Fast and the other companies they controlled) and from McGrouther on behalf of IMF. Most of the instructions were from Voukidis.
In the Ambridge Proceeding:
(a)Break Fast and the Voukidis Defendants argued, unsuccessfully, that there was an incorporated joint venture, with Break Fast being the operating company of the joint venture and absolute owner of the Property. Their position was that neither Break Fast’s shareholders (representing the joint venture partners) nor the joint venture partners themselves had an equitable interest in the Property and that Ambridge was neither a joint venture partner nor a shareholder of Break Fast.
(b)Ambridge argued (and Vickery J found) that it was a partner in an unincorporated joint venture, with Break Fast being the manager of the joint venture and the trustee of the Property and each joint venture partner having an equitable interest in the Property.
In the aftermath of the Ambridge decision of Vickery J:
(a)RC ceased acting for the Break Fast Defendants in March 2010.
(b)Taylor and his son became directors of Break Fast on 31 October 2011.
(c)Taylor assumed effective control of Break Fast from at least May 2013.
(d)Voukidis ceased being a director of Break Fast on 2 November 2012 and Baker ceased being a director on 15 April 2014.
(e)Under Taylor’s control, Break Fast commenced the current proceeding against RC on 30 May 2013 (‘RC Proceeding’).
As we have already stated, in the RC Proceeding, Break Fast sought equitable compensation from RC, calculated by reference to the fees it had paid to RC in acting for the Break Fast Defendants in the Ambridge Proceeding. Break Fast relied upon various causes of action, including breach of the fiduciary duty of loyalty and knowing receipt of trust funds under the first limb of the rule in Barnes v Addy.[4] RC relied upon a number of defences, including unclean hands.
[4](1874) LR 9 Ch App 244. Barnes v Addy is discussed at [112]ff below.
The issues in the RC Proceeding were:
(a)Did RC breach its fiduciary duty of loyalty to Break Fast to avoid a conflict, or a real and sensible possibility of a conflict, between the duties it owed to Break Fast on the one hand and the Voukidis Defendants on the other hand in acting for both of them in the Ambridge Proceeding (Issue 1)?
(b)Assuming that RC faced such a conflict, did Break Fast consent or acquiesce to RC acting in the circumstances (Issue 2)?
(c)Did RC have sufficient knowledge of the trust alleged in the Ambridge Proceeding, and later found by Vickery J, to become liable for knowing receipt of trust funds (Issue 3)?
(d)If RC breached its fiduciary duty, or was liable for knowing receipt of trust funds, was Break Fast entitled to equitable compensation for payments of legal fees made to RC and for Break Fast’s liability to pay costs pursuant to the adverse costs order made against it in the Ambridge Proceeding (ie causation) (Issue 4)?
(e)If RC was liable to pay equitable compensation, what was the quantum of that compensation (Issue 5)?
(f)Did any of the following defences otherwise disentitle Break Fast from relief:
(i)unclean hands (Issue 6);
(ii)laches or statutory limitations periods by analogy (Issue 7);
(iii)contributory negligence and s 26 of the Wrongs Act 1958, or mitigation (Issue 8);
(iv)advocate’s immunity (Issue 9); or
(v)estoppel and a counterclaim pleaded by RC as to its fees (Issue 10).
On 2 July 2021, Macaulay J decided Issues 1, 3, 4 and 6 in RC’s favour and Issues 2, 5 and 7 to 10 in Break Fast’s favour.[5] He therefore dismissed Break Fast’s claims. His quantification of the equitable compensation to which Break Fast would be entitled, if it had succeeded in its claims against RC, is not presently relevant.
[5]Break Fast Investments Pty Ltd v Rigby Cooke Lawyers (a Firm) [2021] VSC 398 (‘Reasons’).
Break Fast seeks leave to appeal against Macaulay J’s judgment, and in particular his conclusions on Issues 1, 3, 4 and 6.
For the reasons that follow: the application for leave to appeal will be granted in respect of grounds 1 and 2 (which deal with Issue 1), but otherwise refused; and the appeal will be dismissed.
The Ambridge Proceeding and preceding and subsequent events
Caveat removal proceeding
On 17 November 2004, Ambridge (under the control of the receiver appointed by Taylor’s company, H2O) lodged a caveat over the Property, claiming an interest in it as a party to a joint venture. On 1 December 2004, Break Fast retained RC to commence a proceeding to remove the caveat on the basis that Break Fast did not hold the Property subject to the joint venture upon which Ambridge relied (‘caveat removal proceeding’).
On 2 December 2004, RC sent a retainer letter to Break Fast. The terms of the retainer were not confined to the caveat removal proceeding, but extended more broadly to advising Break Fast in relation to claims made against it by Ambridge. The retainer required RC to undertake the usual tasks performed in a litigious matter. The retainer did not expressly refer to the provision of advice about how Break Fast should fund any litigation with Ambridge.
On 9 December 2004, RC commenced the caveat removal proceeding on behalf of Break Fast. In that proceeding, Ambridge’s receiver, Gregory Andrews, filed an affidavit on 16 December 2004 in support of the interest Ambridge claimed in the Property. That affidavit exhibited a number of documents which would have been brought to the attention of RC. Those documents included the following:
(a)A fax dated 12 April 2000 from Graeme Jacobs (Ambridge’s general manager) on Ambridge letterhead to Headland that referred to the ‘joint venture’ and expenditure to be paid by Ambridge to AXIA. AXIA was an architectural company that was assisting with the refurbishment of the Property.
(b)A fax dated 13 September 2001 from Jacobs on Ambridge letterhead to a property investment broker, Ashe Morgan Winthrop. The fax attached the ‘draft management accounts for the above named joint venture for the year ended 30th June 2001’. The accounts referred to C&O Voukidis, Ambridge, McGrouther and Careerpath under the heading ‘Partners’ Equity’.
(c)A fax dated 23 August 2002 from Jacobs on Ambridge letterhead to Voukidis attaching Break Fast’s draft financial statements for the year ended 30 June 2002. The accounts referred to C&O Voukidis, Ambridge, McGrouther and Careerpath under the heading ‘Partners’ Equity’.
(d)A fax dated 8 October 2002 from Stanley on Ambridge letterhead to Powerlan Technologies Ltd (Baker’s company) attaching an undated joint venture agreement that had been signed by Stanley ostensibly on behalf of Break Fast and Ambridge. The agreement referred to Voukidis’, Baker’s and McGrouther’s corporate nominees (C&O Voukidis, Careerpath and IMF, respectively) and Ambridge as the ‘Joint Venturers’, and Break Fast as the ‘Venture Manager’. It stated that Ambridge would hold a 25 per cent interest in the joint venture as a tenant in common and that the other joint venturers would hold a combined 75 per cent interest as tenants in common. It also stated that the venture manager would ‘manage the Joint Venture and … hold the Property on behalf of the Joint Venturers as nominee’.
(e)A fax dated 6 February 2003 from John Esquivel (an accountant at the accounting firm Mason Voukidis) to Jacobs attaching some of Break Fast’s account transactions which described Break Fast ‘as manager for Wellington [P]arade Joint Venture’.
(f)A fax dated 1 May 2003 from Voukidis to Taylor attaching ‘copies of draft accounts for Break Fast’. The accounts stated that they were for Break Fast ‘as manager of The Wellington Pde, East Melbourne Joint Venture’ and referred to Ambridge, Careerpath, C&O Voukidis and IMF under the heading of ‘Joint Venture Capital Accounts’.
(g)Ambridge’s financial statements prepared by Stannards Accountants and Advisers, which referred to ‘Equity in Joint Venture’ and listed ‘Wellington Parade Joint Venture’ and ‘P’ship (Break Fast Inv)’.
(h)An email dated 21 July 2003 from Voukidis to Stanley copying (amongst others) Baker, Taylor and Jacobs, which implied that Ambridge was part of the ownership structure of the Property.
The joint venture agreement referred to at [16(d)] above was ultimately found by Vickery J to be legally operative and to contain the terms of the trust upon which Break Fast held the Property.
The caveat removal proceeding was resolved on 20 December 2004 by Ambridge removing the caveat upon an undertaking being given by Break Fast and its directors, Voukidis and Baker, not to dispose of or encumber the Property without giving Ambridge 30 days’ written notice. Ambridge also undertook to commence proceedings by 31 January 2005 to substantiate its claimed interest in the Property.
Commencement of Ambridge Proceeding
As we have already stated, the Ambridge Proceeding was commenced on 31 January 2005. In its statement of claim, Ambridge alleged that the parties to the joint venture agreement upon which it relied were Careerpath, C&O Voukidis, IMF, Ambridge and Break Fast, and that there were terms of the joint venture that Break Fast would: hold the Property as bare trustee for the joint venturers; act as joint venture manager; and hold any assets as nominee for the joint venturers as beneficial owners to the extent of their respective interests. Ambridge alleged that Baker, Voukidis, Careerpath, C&O Voukidis and IMF breached the joint venture agreement. Ambridge did not allege that Break Fast committed any breach of duty as trustee or any other legal duty. Although the statement of claim was subsequently amended to allege breaches of duty by Break Fast, in the hearing before us, it was common ground that the issues on appeal are to be determined by reference to the initial version of the statement of claim. Accordingly, we will focus on that version.
In its initial statement of claim, Ambridge sought the following relief:
(a)A declaration that it had an equitable interest in the Property as tenant in common with Careerpath, IMF and C&O Voukidis.
(b)A declaration that Break Fast held the Property as bare trustee for the joint venturers, including Ambridge as to 25 per cent.
(c)A declaration that at all material times Stanley held and continues to hold his share in Break Fast on trust for Ambridge.
(d)A declaration that Ambridge was a member of Break Fast.
(e)An order that Ambridge be registered as a member of Break Fast.
(f)In the event that Oxley was a registered member of Break Fast, a declaration that Oxley held such share on trust for Ambridge.
(g)A declaration that Taylor was validly appointed as a director of Break Fast and remained a director of Break Fast.
(h)Such further or alternative relief as the Court deemed fit.
(i)Costs.
As RC was already retained to act for Break Fast in the caveat removal proceeding, in February 2005 it was asked to act for the Voukidis Defendants, in addition to Break Fast, in the Ambridge Proceeding. At this time — and when RC was initially asked to act for Break Fast in the caveat removal proceeding — on Voukidis and Baker’s version of the parties’ relationship, they were the only directors of Break Fast and they controlled all of its shares.
RC and Break Fast treated the retainer letter used in the caveat removal proceeding in December 2004 as extending to the defence of the Ambridge Proceeding on behalf of Break Fast. A separate retainer letter was not sent to the Voukidis Defendants. In February 2005, RC sought instructions from them to accept service in the Ambridge Proceeding on their behalf and, in February 2006, sent costs agreements to each of Voukidis, Baker and McGrouther. The communications between RC and the Voukidis Defendants concerning their representation by RC in the Ambridge Proceeding did not refer to the provision of advice by RC as to how they should fund the defence of that proceeding.
RC received instructions on behalf of the Break Fast Defendants predominantly from Voukidis and Baker, with Voukidis generally having the most active role in providing instructions.[6] Initially, Michael Markowitz, the RC partner who had acted for Break Fast in the caveat removal proceeding, had carriage of the Ambridge Proceeding on behalf of the Break Fast Defendants. In early September 2005, another partner, Maria Nemeth, took over that role.
[6]Reasons, [262].
In the context of an application for security for costs in the Ambridge Proceeding, Ambridge’s receiver swore an affidavit on 24 February 2005 (‘Andrews’ second affidavit’), which exhibited many of the documents referred to in his first affidavit in the caveat removal proceeding.[7] Andrews’ second affidavit exhibited the following additional documents:
(a)A letter dated 31 July 2002 from Stanley on Ambridge letterhead to Taylor, which referred to previous ‘discussions regarding the financial structure of the Wellington Parade Joint Venture’ and acknowledged Taylor’s ‘request for an account of the conduct of the joint venture to date and the relationship between the joint ventures being 176 Wellington Parade, St Leonards and Clarence Street’.
(b)An email dated 3 December 2002 from Voukidis to Baker and Stanley attaching a draft minute of meeting relating to the sale of the Property which stated that it was resolved that Break Fast ‘in its capacity as Manager of the Break Fast Joint Venture proceed with the sale of the [Property]’.
(c)A fax dated 10 December 2002 from Voukidis to Meerkin & Apel, solicitors, attaching the above minute of meeting in final form signed by Voukidis, Stanley and Baker.
(d)An email dated 23 August 2003 from Voukidis to Stanley which referred to an earlier fax from Stanley ‘regarding the Ambridge Investments Pty Ltd Capital Account in the Break Fast Investments Joint Venture’.
[7]See [16] above.
On 18 March 2005, RC filed a defence on behalf of the Break Fast Defendants, which was consistent with the position summarised at [7(a)] above.
RC rendered a number of invoices to the Break Fast Defendants for RC’s legal fees in acting for them in the Ambridge Proceeding. RC was aware that its invoices were paid solely by Break Fast using funds which, on Ambridge’s case in that proceeding, constituted trust funds.
This arrangement was one of expediency rather than necessity in that, as at the commencement of the Ambridge Proceeding, Voukidis and Baker had substantial financial resources available to them.[8]
[8]Reasons, [193].
On 15 November 2005, Ambridge applied for an injunction to restrain Break Fast from paying the fees of the Break Fast Defendants in the Ambridge Proceeding. It was common ground that any legal fees paid by Break Fast would necessarily be paid from assets which Ambridge claimed were subject to the joint venture trust arrangements. The application was refused by Whelan J on 25 November 2005 in the course of the following exchange with counsel for Ambridge:
[WHELAN J]: [Break Fast] maintains it is the owner of the property, and you say [its] trustee. If it transpires that it is a trustee then it might have difficulty justifying to the beneficiaries the costs it’s spent in trying to prove it wasn’t one, but until I decide that, how can I stop [Break Fast] that wants to contend that it is the owner, from running the case that it is that?
…
[COUNSEL]: The numerous cases … propound the general principle that the company’s funds should only be used for proper corporate purposes and the like.
[WHELAN J]: And when it really is a fight between shareholders, yes, that’s — even then companies are typically not restrained from using funds to conduct the case. Typically the minority then allege another active oppression, namely using the company’s funds to defend the case.
[COUNSEL]: Yes.
[WHELAN J]: Though they could perhaps get an injunction in a circumstance like that, but here it does seem to me to be different, but if there’s a case that says no, this is the sort of case where you could — well, I’ll change my mind — but it does seem different, and I mean, if at the end of the day as I say, it transpires that Break Fast is a trustee and it has been defending, it’s been expending trust money seeking to establish incorrectly that it is the beneficial owner, then it would have trouble justifying that as an expense, I would have thought. Of course your point is by then it will all be too late, it has no assets except the trust assets, so — but I’m sure that can all be dealt with. If it’s a joint venture I’m sure that can all be taken into account one way or another in your relief.
…
[COUNSEL]: [We seek] an order restraining [Break Fast] from making any further payments [on] account of legal costs.
[WHELAN J]: Right. Well, I’m not going to do that … If there was some authority for it I would consider it, but it amounts to an order that [Break Fast] cease defending itself, and I’m not prepared to do that in the current circumstances.[9]
[9]Transcript of Proceedings (25 November 2005) 5.29–6.5, 7.3–7.29, 8.17–8.30.
On 30 November 2005, Nemeth emailed Voukidis suggesting that Break Fast should offer inspection of Break Fast’s ‘books’ including registers, financial records and other records of information, and stated that ‘we need to start scoring some points in this case if we are going to successfully defend it’. Voukidis queried in that context ‘what is this “IF” stuff??’
The trial of the Ambridge Proceeding was listed to commence on 28 February 2006. However, the trial was adjourned because Ambridge was granted leave to amend its statement of claim. There was evidence that, prior to the 2006 trial, Voukidis and Baker were willing to contribute to the costs of defending the Ambridge Proceeding.
On 13 April 2007, Ambridge sought to restrain Break Fast from further encumbering the Property.[10] On 3 May 2007, Williams J made an order by consent permitting Break Fast to increase its loan facility, secured against the Property, by $890,620.48. The order required that $340,000 of the drawn down amount be paid into a trust account and only be withdrawn ‘for legal fees and disbursements incurred by [Break Fast] in defending [the Ambridge Proceeding]’.
[10]RC gave notice of Break Fast’s intention to further encumber the Property pursuant to the undertaking referred to at [18] above.
On 1 August 2007, in contravention of Williams J’s order, Voukidis used the sum of $340,000 to pay security for costs in a separate proceeding in which he and Baker were parties. RC and counsel for the Break Fast Defendants repeatedly requested Voukidis to provide proof of his compliance with Williams J’s order. They expressed concern that a contempt of court application would be brought by Ambridge and adverse inferences might be drawn against Voukidis’ credit at trial. Voukidis did not admit he had contravened Williams J’s order until he swore two affidavits on 24 August 2009 in the context of Ambridge pressing for further discovery and issuing subpoenas to obtain Break Fast’s bank statements.[11] That contravention was ultimately the subject of adverse findings by Vickery J, who described Voukidis’ conduct as ‘wilful, contumelious and dishonest’.[12]
[11]Reasons, [72]–[73].
[12]Ambridge decision of Vickery J, [144].
On 22 February 2008, Ambridge amended its statement of claim to add, as part of the relief sought, an order for the taking of accounts and adjustment of the parties’ interests.
On 5 May 2008, Nemeth prepared a file note of a conversation with junior counsel for the Break Fast Defendants. The file note recorded that counsel told Nemeth that he had met with Voukidis and had told him to settle the Ambridge Proceeding and that ‘he is going to [lose] the case’.
Nemeth prepared a file note in May or June 2009 of a conference she attended with Voukidis, Baker and counsel in which she recorded: ‘We think the Judge is likely to find a [joint venture]’ and ‘[w]e think it is likely the Judge will find that [Stanley] was given a ¼ interest in the project’.
Break Fast continued to fund the defence of the Ambridge Proceeding until about October 2009, when it essentially ran out of rental income and lost the ability to take out further loans. From around that time, Voukidis and Baker funded the litigation. They paid at least $900,000 towards the legal costs of the defence of the Ambridge Proceeding, including the costs of the trial which commenced on 6 October 2009.
Trial of the Ambridge Proceeding and relevant findings of Vickery J
On the first day of the trial of the Ambridge Proceeding, Vickery J made an order that the issue of liability (which included the question whether there was a joint venture agreement between the parties) be determined as a preliminary issue. This order meant that other issues in the proceeding, including orders for the taking of accounts, breach of the alleged joint venture agreement and damages, were to be determined separately.
At trial, Taylor, Stanley and Jacobs gave evidence on behalf of Ambridge, and Voukidis, Baker and McGrouther gave evidence on behalf of the Break Fast Defendants.
Vickery J found that Taylor and McGrouther were truthful witnesses, although McGrouther’s recall of the details of his involvement in the joint venture was described as ‘hazy’.[13] Vickery J determined that Stanley and Jacobs’ evidence was ‘central’ to Ambridge’s case, but Stanley was an unreliable witness and he approached Jacobs’ evidence with caution.[14] Vickery J found that Voukidis’ evidence was ‘central’ to the case of the Break Fast Defendants, and that Voukidis was an ‘unreliable witness’.[15] Vickery J held that some key aspects of Baker’s evidence were unsatisfactory.[16]
[13]Ambridge decision of Vickery J, [119], [156].
[14]Ambridge decision of Vickery J, [102]–[103], [107]–[108].
[15]Ambridge decision of Vickery J, [145]–[146].
[16]Ambridge decision of Vickery J, [125].
As we have already mentioned, on the substantive issues before him, Vickery J found:
(a)The joint venture agreement referred to at [16(d)] above was legally operative and contained the terms of the trust upon which Break Fast held the Property.
(b)In accordance with that joint venture, Break Fast held the Property on trust for Careerpath as to 40 per cent, C&O Voukidis as to 25 per cent, Ambridge as to 25 per cent and IMF as to 10 per cent.
It is common ground that Break Fast made payments to RC for the defence of the Ambridge Proceeding totalling $1,637,439.59.
Aftermath of Ambridge decision of Vickery J
As we have already stated at [8] above, in the aftermath of the Ambridge decision of Vickery J:
(a)RC ceased acting for the Break Fast Defendants in March 2010.
(b)Taylor and his son became directors of Break Fast on 31 October 2011.
(c)Taylor assumed effective control of Break Fast from at least May 2013.
(d)Voukidis ceased being a director of Break Fast on 2 November 2012 and Baker ceased being a director on 15 April 2014.
(e)Under Taylor’s control, Break Fast commenced the RC Proceeding on 30 May 2013.
Additionally, the following relevantly occurred after Vickery J’s decision in Ambridge:
(a)Baker engaged Mason Sier Turnbull to file an appeal against the Ambridge decision of Vickery J. The appellants were Baker, Break Fast, Careerpath, IMF and Oxley and the respondents were Ambridge, Stanley, C&O Voukidis and Voukidis. The appeal was filed on 26 March 2010 and was dismissed by this Court on 4 November 2011.[17]
(b)In 2012, the Property was sold for approximately $22,000,000 by receivers. That sum was exhausted by the payment of debts and various expenses.
(c)On 28 April 2012, Break Fast entered into a loan agreement with Taylor’s company, Headland, to borrow $1,000,000. Taylor signed the agreement on behalf of Headland and he and his son signed it on behalf of Break Fast. By the agreement, Break Fast agreed to mortgage the Property as security for the proposed advance. The agreement provided that Break Fast must apply the proceeds of any recovery from court proceedings in first priority to the repayment of the loan. By a short termination deed dated 2 September 2016, Break Fast and Headland agreed that no loan was made, no mortgage was given, no debt was created and the loan agreement was terminated with effect from 2 September 2016. In cross-examination in the RC Proceeding, Taylor was not able to say whether he had obtained the consent of the joint venture partners to enter into the loan agreement.
(d)On 4 July 2014, Elliott J ordered Break Fast to pay Ambridge’s costs of the Ambridge Proceeding from its commencement until 12 March 2010.
(e)By 2016, C&O Voukidis had been wound up, and Voukidis and Baker had declared bankruptcy.
(f)On 6 October 2020, Almond J made orders dismissing the Ambridge Proceeding and requiring Voukidis to pay Ambridge’s costs of the trial insofar as they had not already been recovered from the other defendants. The dismissal order meant that an accounting between the joint venturers and related parties to the proceeding could not be made.
[17]Baker v Ambridge Investments Pty Ltd (in liq) [2011] VSCA 334.
Trial of the RC Proceeding and overview of findings by Macaulay J
As we have already stated, the RC Proceeding was commenced by Break Fast on 30 May 2013, after Baker had assumed effective control of Break Fast. The proceeding was heard in February 2021, by which time Baker had acquired 90 per cent of the shareholding in Break Fast and an entitlement to 90 per cent of the joint venture assets which Break Fast held as trustee.
At the trial of the RC Proceeding, Taylor gave evidence on behalf of Break Fast, and Markowitz and Nemeth gave evidence on behalf of RC. Macaulay J did not make any adverse credit findings in relation to any of these witnesses.
Break Fast did not allege that RC had acted dishonestly or that the manner in which it conducted the defence of the Ambridge Proceeding was negligent. Macaulay J described Break Fast’s contentions in the RC Proceeding as follows:
In essence, … Break Fast contended that [RC] had been caught in a conflict of duties in acting for Break Fast, who was alleged to be a trustee, at the same time as acting for the Voukidis Defendants against whom no such allegation had been made in the Ambridge Proceeding. Break Fast claimed that [RC] breached its fiduciary duty of loyalty to Break Fast by not advising it to adopt a passive role and not to pay any fees towards the defence of the claim, beyond providing discovery, in the Ambridge Proceeding. Further, in receiving fees from Break Fast allegedly known to have been sourced from alleged trust assets, in the face of allegedly mounting evidence that demonstrated that Break Fast was in fact a trustee as had been claimed by Ambridge, Break Fast also contended … that [RC] had knowingly received trust monies which Break Fast had paid to [RC] in breach of trust.[18]
[18]Reasons, [13] (emphasis in original).
In their agreed summary for this Court, the parties summarised Macaulay J’s findings on the 10 issues set out at [10] above as follows:[19]
[19]Citations and emphasis in original.
Issue 1 (breach of fiduciary duty): the judge held that while the interests of Break Fast and the Voukidis Defendants in the outcome of the Ambridge Proceeding were different, they were not adverse or opposed in any sense relevant for the determination of a conflict of duty and duty for the lawyer representing them both.[20] The judge held that Break Fast had a real and substantial interest in defending the proceeding rather than being a passive participant.[21] The judge held that Break Fast had not established that [RC] faced any real or sensible possibility of having conflicting duties by acting concurrently for Break Fast and the Voukidis Defendants in the Ambridge Proceeding.[22] Accordingly, [the] judge held that Break Fast failed on its claim that [RC] breached a fiduciary duty.[23]
Issue 2 (informed consent): the judge held that, assuming a conflict was found and Break Fast had no real interest in defending the Ambridge Proceeding, he would not have concluded that Break Fast gave fully informed consent to [RC] in acting in such a conflict.[24]
Issue 3 (knowing receipt): the judge was not persuaded that Break Fast had established that [RC] had sufficient knowledge of the fact that Break Fast was a trustee of the Property to impose recipient liability under the first limb of Barnes v Addy. The judge held that [RC] did not know any fact that would put an honest and reasonable person on notice that Break Fast was the trustee of the Property and that the outcome of the question whether Break Fast was a trustee was uncertain and therefore unknowable.[25] The judge was not satisfied that [RC] knew that Ambridge was ‘likely to be successful’ in its claim.[26] The judge said that, at the highest, [RC] held an opinion, fluctuating from time to time, about Ambridge’s likely prospects of success, and that an opinion about a likelihood of the outcome of litigation is not knowledge of a fact.
Issue 4 (right to equitable compensation): the judge held that there was no obstacle to awarding equitable compensation to Break Fast for loss caused by a fiduciary acting in a conflict of duty and duty.[27] The judge held that, if [RC] did breach its fiduciary duty, its breach did not cause Break Fast to suffer the loss for which it claimed equitable compensation.[28] The judge held that, on the assumption that Break Fast had no interest of its own in actively defending the Ambridge Proceeding, an independent solicitor would probably have advised Break Fast to adopt a passive role and not spend potential trust funds in defence of the Ambridge Proceeding.[29] However, the judge was affirmatively satisfied on a balance of probabilities that Voukidis and Baker (then in control of Break Fast) would not have accepted such advice[30] and therefore Break Fast had failed to establish that but for [RC’s] (hypothesised) breach of fiduciary duty, Break Fast would not have suffered loss.[31] The judge further held that, if recipient liability was imposed for knowing receipt, he would have found that [RC] caused Break Fast to suffer loss and that Break Fast would be entitled to equitable compensation for such loss.[32]
Issue 5 (quantum of equitable compensation): the judge held that if Break Fast was entitled to equitable compensation for a breach of fiduciary duty, he would award $1,637,439.36 less the discovery costs (to be taxed), plus the adverse costs liability in respect of the Ambridge Proceeding (also to be taxed), plus interest on those amounts.[33] The judge also noted that a possible adjustment, in relation to a sum received by Ambridge from TressCox as part of a settlement, would need to be considered in any assessment of the adverse costs liability on taxation.[34] The judge held in respect of the knowing receipt claim that he would have awarded equitable compensation in the amount of $1,637,439.36 less the discovery costs (to be taxed), plus interest on that amount;[35]
Issue [6] (unclean hands): the judge held that even if Break Fast had established an entitlement to equitable compensation, it had unclean hands by reason of its misapplication of trust monies.[36] The judge held that Break Fast’s breach of trust duties had an immediate and necessary connection with the equity it sought and that, by the proceeding, it had made no real effort to clean its hands of the inequity.[37] The judge declined to exercise discretion against upholding the defence of unclean hands.[38]
Issue [7] (laches or statutory limitations periods by analogy): the judge held that the defence of laches should not be upheld.[39]
Issue [8] (contributory negligence): the judge held that the defence of contributory negligence was not applicable to either of Break Fast’s claims.[40]
Issue [9] (advocate’s immunity): the judge held that the defence of advocate’s immunity was not applicable.[41]
Issue [10] (estoppel and counterclaim): the judge rejected the defence of estoppel and [RC’s] counterclaim for fees.[42]
[20]Reasons, [178].
[21]Reasons, [168]–[174]
[22]Reasons, [211].
[23]Reasons, [394].
[24]Reasons, [231].
[25]Reasons, [302].
[26]Reasons, [314], also [315].
[27]Reasons, [235].
[28]Reasons, [394].
[29]Reasons, [258].
[30]Reasons, [257]–[266].
[31]Reasons, [267].
[32]Reasons, [317].
[33]Reasons, [329], [394].
[34]Reasons, [329].
[35]Reasons, [394].
[36]Reasons, [355].
[37]Reasons, [355].
[38]Reasons, [355].
[39]Reasons, [368].
[40]Reasons, [385]–[386].
[41]Reasons, [389].
[42]Reasons, [392].
As Break Fast is seeking to challenge Macaulay J’s findings on Issues 1, 3, 4 and 6, we will discuss his reasons in detail only in relation to those findings.
Prior to addressing the substantive issues in the RC Proceeding, Macaulay J discussed the background to the Ambridge Proceeding, the evidence adduced in that proceeding and the findings of Vickery J. Macaulay J also summarised the key indicia as to whether Break Fast was a trustee of an unincorporated joint venture, and consequently whether it held the Property on trust for the joint venturers. As these indicia are relevant to the grounds of appeal, we set them out below.
For an unincorporated joint venture
The following were the key indicia that Break Fast was a trustee of an unincorporated joint venture:
(a)Joint venture agreement: in March 2000, Ambridge gave instructions to Tress Cocks Maddox to draft a joint venture agreement. In 2002, the joint venture agreement was partially signed by Stanley on behalf of Break Fast and Ambridge. By October 2005 at the latest, [RC] was aware of the draft agreements;
(b)Financial statements: many of Break Fast’s financial statements (including balance sheets, profit and loss statements, tax returns) referred to Break Fast as ‘manager’ of the Property joint venture, the ‘Partners’ Equity’, used the term ‘joint venture’ and named Voukidis, Baker and later also McGrouther (and/or their respective corporate nominees) along with Ambridge (rather than Stanley);
(c)Correspondence referring to ‘joint venture’: there were numerous communications between Voukidis, Baker, Jacobs and others which contained references to accounts being prepared on the basis of an unincorporated joint venture with Break Fast as its manager and there was no credible correspondence correcting any of those communications;
(d)Pre-purchase and pre-settlement work: Ambridge identified the Property as a potential investment, conducted pre-purchase work such as engaging AXIA and Meerkin & Apel, continued to engage AXIA and purchased café furniture paid for by Ambridge. There was correspondence that showed that Ambridge would receive a $500,000 management fee that would be considered as its capital contribution to the joint venture;
(e)Voukidis’ Family Trust: the records of Voukidis’ Family Trust listed C&O Voukidis’ interest as [an] interest in the Property rather than in a share, which Vickery J considered to have been an admission by Voukidis;
(f)McGrouther’s financial reports for IMF from 2000 to 2003: IMF’s reports showed Break Fast as a property investment in a way indicating an investment structure such as an unincorporated joint venture as opposed to displaying it as an investment in shares of an unlisted company;
(g)[Careerpath’s] tax return: in [financial year] 2000, Baker’s company [Careerpath] claimed a loss in a joint venture that was likely the loss sustained in the Property joint venture. Such a claim would not have been possible if the interest in the Property was held by way of shareholding in Break Fast; and
(h)Decreasing credibility of Baker and Voukidis: in February 2006, [senior counsel for the Break Fast Defendants] raised concerns with [RC] that some documents indicating a joint venture could not be satisfactorily explained by Voukidis. As of late 2007, [RC] became aware that there was a dispute about Voukidis’ and Baker’s compliance with [Williams J’s order of] 3 May 2007 … with [RC] pointing out the effects of such non-compliance on Voukidis’ and Baker’s credibility as witnesses. Further, in or around November 2008, [RC] became aware that Ambridge alleged that some documents supportive of the Break Fast Defendants’ case had been falsified.
Against an unincorporated joint venture
The following were the key indicia against Break Fast being a trustee of an unincorporated joint venture:
(a)Instructions: from beginning to end throughout the Ambridge Proceeding, Voukidis and Baker provided instructions denying that Break Fast was a trustee and that documents that indicated the contrary only reflected a proposed structure that had been abandoned;
(b)Joint venture agreement: there was no fully executed joint venture agreement;
(c)Notices of beneficial ownership: notices of beneficial ownership in Break Fast existed for Voukidis and Baker (albeit held by Vickery J to have been backdated) and no such notice existed for Stanley;
(d)Deed of acknowledgment: the 2004 deed of acknowledgment between Break Fast, Voukidis, Baker and Stanley purported to evidence an agreement that Break Fast was the legal and beneficial owner of the Property;
(e)Emails/facsimiles: there was an email chain between Baker, Stanley and Voukidis in December 2002 in which Baker purportedly instructed Stanley to delete reference to Break Fast as manager of the joint venture, and a letter fax of September 2001 from Jacobs to Ashe Morgan Winthrop that referred to ‘company’ instead of ‘joint venture’, ‘shareholders’ instead of ‘partners’ and ‘Stanley’ instead of ‘Ambridge’. By November 2008, [RC] became aware that Ambridge contended the September 2001 letter fax and other documents to have been falsified;
(f)Stanley’s mortgage over his Break Fast share: Stanley mortgaged his share in 2002, implying that the share in Break Fast was held by him beneficially (and not for Ambridge) and was of real commercial value — [RC] knew this in 2005;
(g)Stanley misappropriating funds: Stanley had misappropriated funds, which was known to [RC] from 2005, supporting an inference that a contest between the word of Voukidis and Baker on the one hand, and that of Stanley on the other, would likely favour the Break Fast Defendants;
(h)Stanley’s and Jacobs’ lack of credibility: Stanley and Jacobs had both been convicted of dishonesty offences and therefore [RC] considered them to lack credibility as witnesses for Ambridge, supporting the same inference set out in the previous subparagraph;
(i)Unsuccessful application to restrain Break Fast from paying legal fees: in 2005, Ambridge had unsuccessfully applied to restrain Break Fast from paying legal fees from the Property assets to [RC], supporting an inference that the proposition that Break Fast was a trustee was genuinely contestable;
(j)Appearance of Voukidis as reliable witnesses: initially, [RC] perceived Voukidis as impressive, well-presented and articulate, supporting the inference set out in subparagraph (g);
(k)Amendments of the statement of claim: commencing in 2006, Ambridge amended the statement of claim six times, with changes of substance, supporting an inference that Ambridge’s claim that the parties had agreed on an unincorporated joint venture lacked cogency; and
(l)Opinion of counsel: counsel’s memoranda of advice pointed out the uncertainty of litigation and the significance of the Court’s findings on the credibility of the witnesses to the determination of the case.[43]
[43]Reasons, [83]–[84] (citations omitted).
Grounds of appeal
Break Fast relied upon 10 grounds of appeal,[44] which may be summarised as follows:
(a)Grounds 1 and 2 sought to impugn Macaulay J’s finding on Issue 1 set out at [47] above, namely, that RC had not breached its fiduciary duty of loyalty to Break Fast.
(b)Grounds 3 and 4 sought to impugn Macaulay J’s finding dealt with as part of Issue 4 set out at [47] above, namely, that, even if RC had breached that duty, such a breach would not have caused any loss to Break Fast.
(c)Grounds 5 to 7 sought to impugn Macaulay J’s finding on Issue 3 set out at [47] above, namely, that Break Fast had not made out its knowing receipt claim against RC.
(d)Grounds 8 to 10 sought to impugn Macaulay J’s finding on Issue 6 set out at [47] above, namely, that, if Break Fast had succeeded in either its breach of fiduciary or knowing receipt claims against RC, RC could rely upon the defence of unclean hands.
[44]In these reasons, proposed grounds of appeal are referred to as grounds of appeal.
The terms of the grounds of appeal are set out below under the headings to which each ground relates.
Grounds 1 and 2: Breach of fiduciary duty of loyalty
Grounds 1 and 2 were in the following terms:
1The judge erred in holding that [RC] did not breach its fiduciary duty of loyalty owed to Break Fast to avoid a conflict between its duties to Break Fast and its duties to the Voukidis Defendants because the respective interests and risks of Break Fast and the Voukidis Defendants in the Ambridge proceeding, whilst different, were not relevantly adverse or opposed.
2The judge should have held that there was an actual, or real and sensible possibility of, conflict between [RC’s] duties owed to Break Fast and the Voukidis Defendants by reason of the following:
(a)in the context of a proceeding where the Voukidis Defendants intended to actively [defend] the proceeding, Break Fast had no separate interest of its own in expending alleged trust funds in defending the proceeding, whether in respect of its own legal costs or the legal costs of the Voukidis Defendants, or exposing itself to the risk of adverse costs orders;
(b)the Voukidis Defendants had an opposing interest in favour of Break Fast actively defending the proceeding so that Break Fast would pay the legal costs of the defendants and incur joint liability for adverse costs;
(c)the conflict of duties owed by [RC] was to be considered on the state of the facts known at the commencement of the Ambridge proceeding.
Macaulay J’s reasons relevant to grounds 1 and 2
At trial, Break Fast submitted that there was a real and sensible possibility of a conflict between the duty that RC owed to Break Fast in acting for it in the Ambridge Proceeding and the duty RC owed to the Voukidis Defendants in acting for them in that proceeding. Break Fast contended that this possible conflict was evident from the allegations Ambridge pleaded in its statement of claim. Break Fast argued that, because of this possible conflict, RC was duty-bound to cease acting for Break Fast and to advise it to obtain independent legal advice. The subject of that legal advice was said to concern whether Break Fast should actively defend the Ambridge Proceeding and continue to spend alleged trust money in the payment of legal costs. According to Break Fast, the independent advice that Break Fast would have received would probably have been that it should not actively defend the proceeding but simply agree to abide by the outcome.
Break Fast relied upon the following propositions in support of its submissions summarised at [53] above:
(a)The Ambridge Proceeding in substance involved a contest between Ambridge, which alleged that it was one of the joint venture partners who had a beneficial interest in the Property, and the Voukidis Defendants, who alleged that Break Fast held the Property absolutely and for their benefit to the extent of their shareholdings in the company. The determination of the question whether Break Fast held the Property on trust for the joint venture partners or absolutely for the benefit of its shareholders would not adversely affect Break Fast itself as a separate legal entity and therefore it did not have any real interest in the outcome of the Ambridge Proceeding, and thus in actively defending that proceeding. On the contrary, Break Fast had an interest in taking a passive role in that proceeding, by agreeing to abide by the outcome, and not using assets which were alleged to be trust assets in paying for the defence of that proceeding.
(b)Break Fast was in a similar position to a company caught up in litigation between shareholders, such as an oppression action. The authorities dealing with those situations indicate that, ordinarily, the company should not adopt an active role in the litigation.
(c)The determination of the question of the capacity in which Break Fast held the Property would resolve whether the Voukidis Defendants had a beneficial interest in the Property or only an indirect financial interest to the extent of any shareholding in Break Fast, and therefore the Voukidis Defendants had an interest in defending the Ambridge Proceeding. The Voukidis Defendants also had an interest in Break Fast taking an active role in the defence of the Ambridge Proceeding and paying the defence costs of all of the Break Fast Defendants.
(d)By actively defending the Ambridge Proceeding and paying the defence costs of all of the Break Fast Defendants, Break Fast risked breaching its trust duties whereas the Voukidis Defendants did not face such a risk. The payment of legal costs was of no benefit to Break Fast, or the trust of which it was alleged to be trustee, but only advantaged the interests of the Voukidis Defendants.
(e)As the interests of Break Fast and the Voukidis Defendants in relation to the defence of the Ambridge Proceeding were adverse to one another, RC was placed in a situation where its duty to Break Fast was in conflict with its duty to the Voukidis Defendants, or at least there was a real and sensible possibility of such a conflict.
Macaulay J summarised the principles that guided his analysis as to the existence of a conflict of duty and duty as follows:
(a)in the context of a duty and duty conflict, the objective of the conflict rule is to prevent a fiduciary of one principal being swayed from observing the duty to that principal by considerations of a duty to another;
(b)although there is a view that the applicable standard for determining whether a duty and duty conflict exists is to ask whether an actual conflict exists, the better view is that the same standard applies as for interest and duty conflicts, namely whether there is a real and sensible possibility of conflict;
(c)to find a real and sensible possibility of conflict requires being able to identify, in a practical way, the potential for a real conflict to arise. A merely theoretical or remote possibility of an ill-defined conflict will not suffice;
(d)a duty and duty conflict requires, first, the identification of the duties owed to the fiduciary’s principals and, secondly, a practical articulation of how those duties do or may conflict in the sense of disabling the fiduciary from discharging the duty to one because of the requirement to observe a duty to the other;
(e)the existence of different, non-aligned or even adverse interests between two principals of a fiduciary is not sufficient in itself to show that the fiduciary has a duty and duty conflict when acting for them both; but
(f)in order to find that the fiduciary’s duties are in conflict it is usually necessary to identify interests of the principals (1) which the fiduciary is duty-bound to protect or advance and (2) which are opposed to one another.[45]
[45]Reasons, [135].
Macaulay J stated that the principle set out in (c) above was of particular significance in the case of solicitors, otherwise the application of the fiduciary duty of loyalty to solicitors ‘risks imposing an unjustifiable constraint on the freedom of clients to retain legal services, [which is] a countervailing public interest’.[46] In relation to the principles set out at (d) and (e) above, Macaulay J said:
[T]he interests of the client-principals must generally be opposed or adverse to one another, not merely ‘different’ or ‘not coincident’ or ‘not aligned’. What is required is that they lead in different directions. It is the inconsistent, opposed or adverse nature of the principals’ interests which creates the problem. A fiduciary, duty-bound to serve both, may be ‘swayed’ by the duty to one against the interest of the other. ‘Swayed’ connotes the fiduciary being induced or led away from serving the interests of the principal which the fiduciary is duty‑bound to protect. As Deane J explained in Chan v Zacharia, it is the objective of the conflict rule to prevent the fiduciary from being so induced.
…
[T]he opposing interests of clients are not of themselves necessarily indicative of any adverse or conflicting duties on the part of a solicitor who acts for both of them. For there to be adverse or conflicting duties the opposing interests of the clients must be interests that the fiduciary is duty-bound to protect or advance and that the fiduciary cannot protect or advance at the same time.[47]
[46]Reasons, [122].
[47]Reasons, [130], [134] (emphasis in original).
Macaulay J rejected Break Fast’s submissions summarised at [54(a) and (b)] above that it did not have any real interest in the outcome of the Ambridge Proceeding and was in a similar situation to a company in a shareholder dispute. His reasons were as follows:
Break Fast was not only an alleged active participant in the factual events which were said to have taken place, but it had real, consequential stakes as an individual legal person in the findings to be made on the contested events.
… Break Fast was itself alleged [by Ambridge in its pleadings] to have been a party to the joint venture agreement. It denied having entered that agreement. … If it was proven, against Break Fast’s denial, that it did in fact enter the joint venture agreement, the consequences for Break Fast were significant and onerous. Rather than being the beneficial owner of the Property, as it contended, Break Fast would only hold a legal interest in the land. Put another way, instead of having a valuable asset on its balance sheet, Break Fast would have none (save a right of indemnity against the Property for liabilities properly incurred). Further, if, against its denial, Break Fast held the Property on trust, it would be subject to the onerous duties of a trustee rather than being free of such duties. And if it were found to be a party to the alleged joint venture agreement, Break Fast would be subject to other enforceable contractual obligations to which it would not be subject if it were not party to such an agreement.
In my view, it is simplistic and incorrect to equate the Ambridge Proceeding with a shareholders dispute or an oppression action as Break Fast contended in the current proceeding. …
In the Ambridge Proceeding, Break Fast faced allegations which, once determined, would determine the capacity in which it held property, what were or were not its own assets and what legal or equitable duties it was or was not subject to. Break Fast was no mere spectator in a dispute between rival shareholders. The dispute went to the very question whether the protagonist, Ambridge, was in fact a shareholder or otherwise a participant in a venture in which Break Fast was said to be both manager and trustee. In my view, if, on the instructions of its directors, Break Fast had arguable grounds to dispute the factual allegations being made, it had a real and substantial interest in defending the claims made against it based upon those facts. Given what was at stake for Break Fast, it was necessary and expedient in the interests of the company as a whole to defend the proceeding.
…
Had Break Fast been the only defendant in the proceeding, and its directors were neither shareholders nor stakeholders in the joint venture itself, in my view, there would be nothing amiss if solicitors acted on the directors’ instructions to dispute the claims made against the company if, on those instructions, there was a viable defence to the allegations made. Break Fast, as a separate legal person, would have had all the interests I have identified above in denying the existence of the trust and its role as trustee if, on those instructions, there was an arguable case that it did not enter the joint venture agreement or relinquish its beneficial ownership of the Property.
The question is whether anything changes in that analysis because the directors were also either shareholders or stakeholders in the joint venture and, thus, had personal interests as co-defendants as well. In my view, the various attempts to posit conflicting personal interests by reason of their status as shareholders, stakeholders or co-defendants failed ...[48]
[48]Reasons, [170]–[173], [188]–[189].
Having determined that Break Fast had an interest in defending the Ambridge Proceeding, Macaulay J found that the Voukidis Defendants also had an interest in defending that proceeding. He said that their interests lay in defeating Ambridge’s claim for a 25 per cent interest in the joint venture which, if successful, would have reduced the value of their own stake in the project.[49]
[49]Reasons, [176].
Macaulay J accepted that the interests of Break Fast in the outcome of the Ambridge Proceeding were different to those of the Voukidis Defendants. However, he held that those different interests ‘were not adverse or opposed in any sense that is relevant for determining whether there was a conflict of duty and duty for the legal practitioner representing them both’.[50] His reasons were as follows:
Ambridge’s claims that Break Fast held the Property on trust, and that Ambridge held a 25% interest in the joint venture with the Voukidis Defendants, both stemmed primarily from the one allegation that the Break Fast Defendants had entered into the joint venture agreement with Ambridge. Break Fast’s defence as to the trust and the Voukidis Defendants’ denial of the Ambridge stake in the project both lay in disputing that allegation. …
This was not a situation where the defence for one defendant, if advanced, compromised the defence of another. Nor were there allegations of apportionment or contribution which set one defendant against another.
Several defendants having different interests in, or experiencing different impacts from, the outcome of the same proceeding does not of itself mean that those defendants have opposing interests in the proceeding. The outcome of a claim may impact different defendants in different ways. But where both impacts stem from the same outcome and each defendant relies, commonly, on pressing or resisting that same outcome, their interests are in fact aligned.
In my view, that is the proper analysis of the positions of Break Fast and the Voukidis Defendants in respect of the claims made in the Ambridge Proceeding. Each faced somewhat different impacts and consequences from a potential finding that they had concluded a joint venture agreement with Ambridge along the lines alleged. Those impacts differed because of their different roles and relationships to the subject matter of the Ambridge Proceeding. But those differences did not cause their individual interests in defending the Ambridge Proceeding to be in conflict with one another.[51]
[50]Reasons, [178].
[51]Reasons, [179]–[182].
Macaulay J then considered a contention by Break Fast that it faced only risk, without benefit, in spending money that was potentially sourced from trust assets in defending a claim in which it had no interest; whereas the Voukidis Defendants faced only benefit, without financial risk, in having Break Fast paying the defence costs for the Break Fast Defendants from potential trust assets. He stated that he did not accept the first limb of this contention for the reasons he had already given. He also did not accept the second limb for the following reasons:
The second limb … may appear true at a superficial level. On close analysis, however, it is of no significance in this particular case, for a number of reasons.
First, there was no evidence that the Voukidis Defendants could not fund their own defences. In fact, the opposite appeared to be true. As counsel for Break Fast in this proceeding pointed out, and was accepted by Nemeth, Baker himself was extremely wealthy. Voukidis himself was an accountant with apparent financial resources of his own. Later in the Ambridge Proceeding, in October 2009, the Voukidis Defendants funded the costs of the trial from their own resources. In other words, although it might have been expedient to have Break Fast pay their legal costs, it was not essential that Break Fast would do so for the Voukidis [Defendants] to have their interests protected.
Furthermore, it was not the case that the Voukidis Defendants had no personal stake in the fund under the control of Break Fast from which the legal costs were being paid. Either that fund was the asset of the company of which they were the three shareholders, or it was the property of the trust in which, collectively, they held the largest interest subject only to adjustment between themselves and Ambridge.
There was potential for there to be some future adjustment between the joint venture participants because of expenses that had been paid to or on behalf of those participants from Break Fast’s funds. Such potential future adjustment was something which was readily contemplated by all the parties to the Ambridge Proceeding. Such an adjustment had been contemplated as the practical solution to the problem that would arise if it later transpired that Break Fast had been spending trust money, against the interest of one of the beneficiaries (namely, Ambridge), in defending the Ambridge Proceeding.
The possibility that there might be the need to adjust the beneficiaries’ interests if Ambridge succeeded in the action was discussed on numerous occasions between [RC] and the Voukidis Defendants. It was also the subject of Break Fast’s counsel’s submissions to the Court in response to the restraint application brought by Ambridge in November 2005. Justice Whelan himself alluded to it as a likely solution in his remarks during that application. [Senior and junior counsel for the Break Fast Defendants] advised on 17 February 2006 that for the purpose of any distribution among joint venturers, should it be found Break Fast was a trustee of a joint venture, Break Fast would first need to reimburse to the trust all legal costs paid to defend the proceeding because Break Fast would not have been entitled to indemnify itself out of trust funds to deny it held the Property on trust. Such a reimbursement would, logically, have had to come from the pockets of the Voukidis Defendants, or an equivalent sum would have had to be deducted from their interests in the trust assets. …
It follows that it is simply wrong to say that the Voukidis Defendants faced no risk, but only benefit, by having Break Fast pay the legal costs of the Ambridge Proceeding.
Finally, and significantly, even if (contrary to what I have found) there was a conflict between the interests of the Voukidis Defendants in having their defence costs paid by Break Fast, on the one hand, and of Break Fast in avoiding the risk of being in breach of trust by paying fees out of trust assets, on the other, this scenario did not produce any conflict between the duties owed to them by [RC]. Saying that the Voukidis Defendants had an interest in having their defence costs paid is not the same thing as saying that [RC] had a duty to pursue that outcome for them.
[RC] had no duty to obtain a free litigation service for the Voukidis Defendants or to have Break Fast pay their defence costs. Ensuring that Break Fast pay the Voukidis Defendants’ defence costs was not part of the terms of [RC’s] retainer or otherwise a general law duty owed by [RC] to the Voukidis Defendants. [RC] did not advise its clients how the fees were to be paid. The clients decided that for themselves and it was not suggested otherwise. [RC] was not ‘disabled’ from performing its duty to give proper legal advice to Break Fast owing to any conflicting duty to the Voukidis Defendants to secure for them payment of their defence costs out of the funds at Break Fast’s disposal ─ because there was no such conflicting duty. Put another way, the Voukidis Defendants would have had no cause of action against [RC] for failing to advise Break Fast that it must or should pay the Voukidis Defendants’ defence costs. On this particular matter, there was no prospect of [RC] being swayed by its duty to one against performing its duty toward the other.
If, contrary to my view, [RC] breached a duty owed to Break Fast for failing to advise it to take a passive role only in the Ambridge Proceeding and not to spend money from the Property assets on the defence of the proceeding, such a breach was not a manifestation of any conflict of duties owed to several clients. It was not submitted that [RC] declined to give such advice to Break Fast because it was disabled or swayed from doing so by a conflicting duty owed to the Voukidis Defendants. At the highest, it would have been the breach of a unilateral duty owed to Break Fast alone which would sound in either negligence or breach of retainer. It would not have been a breach of a fiduciary duty [of] loyalty.[52]
Parties’ submissions on grounds 1 and 2
[52]Reasons, [192]–[200] (emphasis in original) (citations omitted).
Break Fast submitted that the best course for it in the Ambridge Proceeding would have been to adopt a neutral posture, for the following reasons:
(a)If it was unsuccessful in the proceeding and the Court decided that it held the Property on trust, it would not be entitled to an indemnity from trust assets and would have to pursue its then directors, Voukidis and Baker, for compensation for causing it to breach the trust (including for paying defence costs from trust funds). There was a risk that those claims might be resisted or, as transpired, Voukidis and Baker might not be able to satisfy the claims if their financial circumstances changed.
(b)The Voukidis Defendants would have defended the Ambridge Proceeding in any event. The Voukidis Defendants had significant financial resources to fund the defence of the proceeding themselves, which they offered to do in 2006 and ultimately did from October 2009. According to Break Fast, Macaulay J had found that Voukidis and Baker were indifferent as to whether they or Break Fast funded the defence of the Ambridge Proceeding and that the arrangement whereby Break Fast paid the costs was made purely as a matter of expediency.
(c)Contrary to Macaulay J’s finding, Break Fast did not have an interest in its status as a trustee. The difference between beneficial ownership and trusteeship does not matter for a corporation in the way that it does for a human being. Analogous to oppression or trust cases where the shareholders/beneficiaries are the true protagonists, Break Fast was merely an entity in the middle of the litigation and had no interest in actively defending proceedings to advance the interests of others.
Break Fast argued that the single-minded and undivided duty which RC owed to it was to act in its best interests, and its best interests lay in passivity due to the risks it faced if it were found to be a trustee. According to Break Fast, Macaulay J erred in not finding that RC’s duty to act in its best interests conflicted with RC’s duty to act in the best interests of the Voukidis Defendants. That was said to be because the latter’s best interests lay in Break Fast adopting an active defence. Break Fast submitted that the conflict related to the different risks faced by the defendants in the event that Break Fast was found to be a trustee, as opposed to a risk of the defendants providing conflicting instructions. It contended that an implied term of engagement that RC only incur reasonable costs gave rise to a further conflict of duties because the Voukidis Defendants would benefit if Break Fast contributed to the costs.
Break Fast argued that, as the alleged trustee in the Ambridge Proceeding, it was entitled to undivided and undistracted advice from an independent lawyer as to what position it should adopt in the proceeding. It was said that there was every prospect that solicitors acting for six defendants (the Voukidis Defendants) who wanted to vigorously defend the proceeding would not give proper consideration to the separate question whether the alleged trustee (Break Fast) should adopt a different course because it faced different risks.
Break Fast contended that the question of conflict was to be assessed at the time the retainer commenced — namely, when RC was asked to act for the Break Fast Defendants in February 2005 — and on the basis of the allegations in Ambridge’s initial statement of claim which was served at that time. Break Fast submitted that Macaulay J erred by adopting an overly narrow view of RC’s duties to Break Fast and in not confining his consideration of the conflict issue to the pleaded claims and documents in the possession of RC at the commencement of the retainer in February 2005.
In response to questions from the Bench, senior counsel for Break Fast conceded that the fact that a solicitor does not take a step which is prudent, of itself, does not constitute a breach of fiduciary duty. However, senior counsel contended that the fact that Break Fast would have to take steps to recover compensation from co-defendants if it were found to be a trustee, of itself, gave rise to a risk of non-recovery which created a real and sensible possibility of conflict. That was said to be so even though Voukidis and Baker were very wealthy at the commencement of the retainer.
In response to further questions from the Bench, senior counsel agreed that, in essence, the suggested conflict of interest[53] in the present case arose because Break Fast faced two risks in actively defending the Ambridge Proceeding and paying the defence costs of the Break Fast Defendants. The first risk was that Ambridge would succeed in establishing that Break Fast held the Property as trustee. The second risk, which followed from the first risk materialising, was that Break Fast would not be able to recover from Voukidis or Baker the trust funds used to pay the legal costs. Senior counsel contended that, even if the second risk was minimal, its existence was sufficient to create a conflict of interest and that only the existence of certainty that the legal costs could be recovered — such as by a bank guarantee for the legal costs — would eliminate the conflict of interest.
[53]Although senior counsel used the expression ‘conflict of interest’ rather than ‘conflict of duty’, the context indicates that he intended the former to embrace the latter.
RC submitted that Break Fast’s contentions on grounds 1 and 2 erroneously focused upon the interests and risks of Break Fast and the Voukidis Defendants, rather than the duties owed by RC.
In any event, RC contended that, even on the basis of the allegations in Ambridge’s initial statement of claim, Break Fast had an interest in adopting an active role in the Ambridge Proceeding. That was said to be because Break Fast had an interest in the allegation that it was a party to the joint venture agreement and in clarifying to whom it owed obligations and the nature of those obligations. RC argued that, given Voukidis and Baker controlled both Break Fast and the Voukidis Defendants, Break Fast and the Voukidis Defendants had the same interests in the Ambridge Proceeding.[54]
[54]RC relied upon Reasons, [170]–[173]. See [57] above.
RC submitted that an important factor in the counterfactual was that Break Fast was RC’s original client, having retained RC to act in the caveat removal proceeding. RC contended that, in these circumstances, if RC had been prevented from acting for all of the Break Fast Defendants due to a conflict, Break Fast would have continued to retain RC while the Voukidis Defendants found alternative representation.
Decision on grounds 1 and 2
In our opinion, grounds 1 and 2 are not made out.
In reaching this conclusion, we have used the principles applied by Macaulay J — which are summarised at [55] above — as the legal framework for our analysis. Those principles were not challenged by Break Fast before us and are clearly correct. We also agree with Macaulay J’s further statements of principle set out at [56] above.
The essential issue in the Ambridge Proceeding was whether Break Fast held the Property on trust for the joint venture partners. The Court’s determination of that issue would have important legal consequences, not just in terms of Break Fast’s legal status in relation to the Property, but also the character of the legal duties it owed and to whom. There is a material difference in Break Fast being held to own the Property absolutely, with duties to its shareholders in relation to its dealings with the Property, and Break Fast being held to hold the Property as trustee for the joint venture partners and owing more onerous duties as trustee to those partners. It follows that we agree with Macaulay J’s analysis, which is set out at [57] above, as the basis for concluding that Break Fast had a real and substantial interest in defending the Ambridge Proceeding.
RC represented Break Fast in the caveat removal proceeding in which Break Fast disputed Ambridge’s claims that Break Fast held the Property as trustee for the joint venture partners and that Ambridge had an equitable interest in the Property as one of the joint venture partners. It has never been suggested that Break Fast should not have sought to challenge Ambridge’s claims by seeking the removal of its caveat or that RC had a conflict of interest in acting for Break Fast in such a challenge.
The Ambridge Proceeding can be seen as a continuation of the caveat removal proceeding. That is because Ambridge and Break Fast agreed that the key issue in the caveat removal proceeding — namely, the status in which Break Fast held the Property — would not be resolved in that proceeding but in the Ambridge Proceeding, which Ambridge undertook to commence as part of the resolution of the caveat removal proceeding.[55] As we have seen, in its statement of claim in the Ambridge Proceeding, Ambridge squarely raised the issue of the status in which Break Fast held the Property and sought relief against Break Fast in the form of a declaration regarding that status. In these circumstances, because Break Fast had an interest in actively participating in the resolution of the key issue of its status in the caveat removal proceeding, it continued to have that interest in the Ambridge Proceeding.
[55]See [18] above.
In our opinion, cases dealing with litigation between shareholders of a company, including oppression claims, or litigation between the beneficiaries of a trust can be readily distinguished. In litigation between shareholders where the company is also a party, the status in which the company holds its assets is ordinarily not in issue. In litigation between beneficiaries of a trust where the corporate trustee is also a party, the status of the company as trustee is ordinarily not in issue. Accordingly, it makes sense that, in this type of litigation, it may not be appropriate for the company or the corporate trustee to actively defend the litigation and incur costs in doing so. In the present case, as we have already emphasised, the key issue was whether Break Fast had the status of trustee in relation to the Property, and thus it had an interest in the resolution of that key issue. It was therefore not inappropriate for Break Fast to actively defend the Ambridge Proceeding and to incur legal costs in doing so. The fact that the Voukidis Defendants were also defending the Ambridge Proceeding — and could be described as contradictors in respect of Ambridge’s claims — does not alter that conclusion.
We note, in this regard, that Break Fast was not able to refer to any case in which a court has held that a company which is a defendant in a proceeding seeking to determine whether it held its key asset absolutely or as a trustee should not actively defend the proceeding but agree to abide by the outcome.
It is not in dispute that the Voukidis Defendants had an interest in actively defending the Ambridge Proceeding, even though that interest may not have been identical to Break Fast’s interest in doing so. It may be accepted that it was in the interests of the Voukidis Defendants for Break Fast to actively defend the Ambridge Proceeding and to pay the defence costs of all of the Break Fast Defendants. We agree with Macaulay J’s conclusion that, whilst Break Fast and the Voukidis Defendants may not have had exactly the same interests in actively defending the Ambridge Proceeding, their interests were not in conflict. We also agree with his conclusion that any divergence in the interests of Break Fast and the interests of the Voukidis Defendants in actively defending the Ambridge Proceeding did not result in a conflict in the duties RC owed to Break Fast on the one hand and to the Voukidis Defendants on the other hand in the defence of that proceeding.[56]
[56]Macaulay J’s reasons for these conclusions are set out at [59]–[60] above.
Sachs LJ framed the question for the Court as whether, ‘[u]pon the facts as alleged in the present statement of claim, had the defendant solicitors at the date of action brought such cognisance of the true ownership of the property or of the trusts as would make an ordinary stranger a constructive trustee of the relevant moneys?’[93] He concluded that the East German foundation could not ‘establish that the defendant solicitors were cognisant either of the relevant trusts or of the moneys being employed in breach thereof’.[94] He elaborated as follows:
[W]hatever be the nature of the knowledge or notice required, cognisance of what has been termed ‘a doubtful equity’ is not enough. … The rule, as I understand it, is that no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properly assess. Here it has been rightly conceded that no one can foretell the result of the litigation even if the plaintiffs were to prove all the facts they allege.[95]
[93]Carl Zeiss [1969] 2 Ch 276, 295–6.
[94]Carl Zeiss [1969] 2 Ch 276, 299.
[95]Carl Zeiss [1969] 2 Ch 276, 296.
Danckwerts, Sachs and Edmund Davies LJJ stated that it was not necessary for them to decide the correctness of the trial judge’s reliance upon public policy considerations. However, Danckwerts LJ observed that there was ‘a good deal to be said’ for the trial judge’s approach.[96]
[96]Carl Zeiss [1969] 2 Ch 276, 293.
In Eagle Trust plc v SBC Securities Ltd,[97] Vinelott J stated that Carl Zeiss was not a case where the defendant solicitors had failed to make inquiries which they ought reasonably to have made. He said that the solicitors ‘knew as much about the case made by the East German foundation as anyone could know’ and ‘[w]hat they did not know was whether or not the claim would succeed’.[98]
Macaulay J’s reasons relevant to grounds 5 to 7
[97][1993] 1 WLR 484 (‘Eagle Trust’).
[98]Eagle Trust [1993] 1 WLR 484, 499.
Break Fast’s pleaded claim against RC for knowing receipt of trust funds relied upon the following reasoning:
(a)by applying the Property to pay RC’s legal fees for defending the Ambridge Proceeding, Break Fast breached the trust;
(b)RC knew that Break Fast applied income and borrowings made against the Property to pay RC’s legal fees;
(c)from the commencement of the Ambridge Proceeding, alternatively from about September 2005, RC knew from documents in its possession that Ambridge was likely to be successful and the Court would declare the existence of the trust; and
(d)thus, RC knowingly received assets of the trust in payment of its legal fees so that Break Fast is entitled to equitable compensation.
It was not in dispute in the RC Proceeding that RC knew at the time of receiving payment of its legal fees that at least some of those fees were paid from income or borrowings made against the Property. At the time of the RC Proceeding it was known, as a result of the Ambridge decision of Vickery J, that Break Fast held the Property on trust. However, RC denied that, at the time of receiving the payments, it knew that they were being made out of trust funds and in breach of trust. Macaulay J noted that Break Fast did not plead that RC knew that its fees were paid out of trust money (in breach of trust) but only that RC knew that Ambridge was ‘likely to be successful’ in the Ambridge Proceeding so that the Court would declare the existence of the trust.[99] Macaulay J stated that the question for determination by him was whether RC knew at any time prior to the Ambridge decision of Vickery J that Ambridge was ‘likely to be successful’ and, even if it did, whether that was sufficient knowledge of the trust (and, consequentially, sufficient knowledge of the misapplication of trust assets) to establish RC’s liability for knowing receipt of trust funds.
[99]Reasons, [272].
Macaulay J referred to the concern expressed by Lord Selborne LC in Barnes v Addy and Danckwerts LJ in Carl Zeiss about the prospect that the imposition of liability for knowing receipt of trust funds upon solicitors who receive fees acting in good faith in relation to litigated claims ‘admitting of doubt’ would undermine the safe discharge of the office of solicitor. He further referred to ss 41 and 42 of the Civil Procedure Act 2010 (‘CPA’) and rr 21.1 and 21.3 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (‘Solicitors’ Conduct Rules’) which require solicitors to have a proper basis for a claim or a defence. He also referred to the common law principles that impose personal costs liability upon solicitors if they pursue a manifestly hopeless claim or defence. He stated that, by virtue of these mechanisms, ‘there are existing constraints upon a solicitor who may act for a client where the claim or defence has no proper basis or real prospect of success’.[100]
[100]Reasons, [296].
Macaulay J stated that, because of these constraints, the fact that RC was a firm of solicitors receiving fees, for value, for representing defendants in a contested legal proceeding is a circumstance which should provoke caution about applying any Baden knowledge category in a rigid or formulaic way without regard to the character of the task that a solicitor in that situation is undertaking.[101] He also stated that the imposition of equitable liability upon a solicitor which has the effect of deterring solicitors from fulfilling their role to advocate or defend their client’s position would seem to represent some incoherence in the law.[102]
[101]Reasons, [298].
[102]Reasons, [297].
Macaulay J stated that Break Fast’s pleaded allegation that RC knew from documents in its possession that Ambridge was ‘likely to be successful’ in establishing that Break Fast held the Property on trust was ‘little different to the argument put by the plaintiffs in the Carl Zeiss case’.[103] By reference to his summary of the documents and facts supporting Ambridge’s case and those supporting the Break Fast Defendants’ case in the Ambridge Proceeding set out at [49] above, he stated that, although many of the documents in RC’s possession supported Ambridge’s claim, there were key documents and facts which appeared to support Break Fast’s defence.
[103]Reasons, [300].
Macaulay J said that RC did not know of any specific ‘fact’ that would put an honest and reasonable person on notice (as opposed to mere inquiry) that Break Fast was the trustee of the Property. He said that RC knew and came into possession of many facts — some in favour of Ambridge’s case, and others against — which, in combination, made the outcome of the question whether Break Fast was a trustee uncertain and therefore unknowable.
Macaulay J stated that RC’s role as the solicitor for the Break Fast Defendants in the Ambridge Proceeding was to review the available information and assess its clients’ prospects of successfully defending the proceeding, but, unlike Vickery J, its function was not to adjudicate the question whether Break Fast held the Property on trust. He added that it was difficult to imagine how RC could have arrived at a state of ‘knowledge’ about whether Break Fast was a trustee when RC and counsel were of the view that the case would depend upon the credibility of Voukidis and Baker on the one hand, and Stanley and Jacobs on the other hand.
Macaulay J found that RC had acted appropriately in obtaining instructions from its clients and reviewing the available documents and thereby ‘came to know as much as anyone could know’ about Ambridge’s claim, save that it could not know whether Voukidis and Baker would be believed by the Court.[104] He said that, whilst certain events — such as Voukidis’ noncompliance with the order of Williams J of 3 May 2007 — were of concern, the defence of the Break Fast Defendants was neither unarguable nor manifestly hopeless and appeared to have prospects of success.
[104]Reasons, [307].
Macaulay J did not consider that Finkelstein J’s ‘refinement’ to Baden knowledge category (iv) in Imobilari (see [118] above) was appropriate in the context of a solicitor acting in litigation for a client over a disputed claim for the following reasons:
I refer to his Honour’s reference to notice ‘of a real and not remote risk’ that the transfer of property was involved in the application of trust property. In my view, in the context of a solicitor acting in litigation for a client over a disputed claim, that expression may be inapt to identify the solicitor whose ‘moral obtuseness’ justifies imposition of personal liability. Almost by definition, in any piece of litigation ‘admitting of doubt’ there is likely to be a ‘real and not remote risk’ that the case may fail. That is intrinsic to the nature of litigation. I do not think it is appropriate to rigidly apply that refinement to Baden [knowledge category (iv)] as a means for determining whether to impose personal liability upon a solicitor who, otherwise in good faith, has received fees from a client who continuously denied the existence of a trust in contested litigation.[105]
[105]Reasons, [313].
Macaulay J summarised his reasons for rejecting Ambridge’s claim for knowing receipt of trust funds as follows:
I am not satisfied that [RC] knew that Ambridge was ‘likely to be successful’ in its claim. At the highest, [RC] held an opinion, fluctuating in strength from time to time, about Ambridge’s likely prospects of success. At times, [RC] appeared to hold an opinion that Ambridge would probably win. However, on the premise that its clients were believed by the trial judge, [RC] was of the opinion that Ambridge’s claim would fail. Put shortly, opinion about a likelihood of the outcome of litigation is not knowledge of a fact.
Further, an opinion about the likelihood of success of a disputed claim about the existence of a trust amounts to no more than knowledge of a claim of an uncertain outcome. In the words of Sachs LJ in Carl Zeiss, it is no more than cognizance of a doubtful equity, and in the words of Danckwerts LJ, claims are not the same as facts.[106]
Parties’ submissions on grounds 5 to 7
[106]Reasons, [314]–[315] (citations omitted).
Break Fast submitted that RC knowingly received trust property because, by the time of Andrews’ second affidavit of 24 February 2005,[107] RC was in possession of documents which all pointed to the existence of the joint venture and trust. It contended that, from this time, RC’s knowledge satisfied Baden category (iv), as formulated by Finkelstein J in Imobilari, because RC knew of facts that would put an honest and reasonable person on notice (but not merely inquiry) of a real and not remote risk that receipt of payments from Break Fast was in breach of trust.
[107]See [24] above.
Break Fast argued that Macaulay J, without explanation, declined to apply Finkelstein J’s formulation in Imobilari of the test for Baden knowledge category (iv). According to Break Fast, this formulation provided greater specificity as to what constitutes knowledge for the purposes of Baden category (iv) by reference to the conscience of the defendant. It submitted that Macaulay J erred by effectively equating Baden knowledge category (iv) with category (i) (actual knowledge) and by attempting to analyse RC’s subjective thinking, rather than what an honest and reasonable solicitor in RC’s position would have concluded from the objective facts.
Break Fast contended that the legal fees in defending the Ambridge Proceeding should have been paid by the Voukidis Defendants, rather than Break Fast, because there was a real and sensible risk that the trust alleged by Ambridge would be upheld.
Break Fast argued that Macaulay J was impermissibly guided by policy considerations, namely, a concern to protect the office of solicitor. Break Fast also argued that Carl Zeiss was distinguishable because the defendant solicitors in that case were only aware of the East German foundation’s pleaded claim whereas, in the present case, RC was also aware of the evidence indicating the existence of a trust.
The Bench asked senior counsel for Break Fast whether, notwithstanding that Break Fast had an arguable defence to Ambridge’s claim that Break Fast held the Property on trust, the mere existence of a risk that Break Fast might be found to be a trustee meant that RC could not act for Break Fast and the Voukidis Defendants unless the legal costs could be paid from other resources. Senior counsel agreed with this proposition.
RC submitted that Break Fast’s knowing receipt claim failed because it was inconsistent with precedent, and the facts did not support a finding of knowledge on the part of RC. It contended that it was appropriate and consistent with the authorities that the doctrine of knowing receipt be applied to solicitors in litigation by reference to policy considerations. That was said to be because solicitors’ professional conduct is governed by legislation and solicitors owe professional duties to their clients.[108]
Decision on grounds 5 to 7
[108]RC relied upon Carl Zeiss [1969] 2 Ch 276, 251–2, 293; Maguire v Makaronis (1997) 188 CLR 449, 465–6.
In our opinion, grounds 5 to 7 are not made out.
Like Carl Zeiss, the present case is unusual because, at the time of the events which are said to give rise to liability for knowing receipt, the existence of a trust was not an established fact but the very issue in the proceeding in which the solicitor against whom a knowing receipt claim is made was acting for the party disputing the existence of the alleged trust. Like the defendant solicitors in Carl Zeiss, RC did not have knowledge that their client held property on trust; they only had knowledge that the other party to the litigation claimed in that litigation that the property was trust property.
RC knew that there was evidence from which the Court could accept Ambridge’s contention that Break Fast held the Property on trust. However, RC was also aware of evidence which was consistent with the contention of the Break Fast Defendants that Break Fast did not hold the Property on trust. Both contentions were arguable on the evidence and it was not possible to predict with any accuracy what the Court might decide. However, it could be confidently said that the known evidence and the instructions of the Break Fast Defendants provided a proper basis for RC to defend the Ambridge Proceeding on behalf of the Break Fast Defendants.
In these circumstances, it could not be concluded that Baden knowledge category (iv) was satisfied. That is because RC did not have knowledge of circumstances which would indicate to an honest and reasonable person the existence of two facts that were essential for the establishment of liability, namely: that Break Fast held the Property on trust and that payment of defence costs out of that Property constituted a breach of trust. At the time that the defence costs were paid, the Ambridge Proceeding was on foot and the existence of the trust, as claimed by Ambridge, was one of the key competing contentions for determination by the Court rather than an established fact. As Danckwerts LJ stated in Carl Zeiss, ‘claims are not the same thing as facts’.[109]
[109]See [124] above.
It is not necessary for us to consider the formulation of Finkelstein J of Baden knowledge category (iv) in Imobilari.[110] That is because, irrespective of the appropriateness or otherwise of that formulation in other contexts, it is not apt in the case of a solicitor acting for a defendant to litigation where the issues are whether it held property on trust and committed a breach of trust, and where there is a proper basis for defending the proceeding.
[110]See [118] above.
In such a case, it would not be unusual for the solicitor to acquire knowledge of evidence which gave rise to a real and not remote risk that the solicitor’s client may be held to act as trustee and to have committed a breach of trust. That knowledge may arise from the plaintiff’s statement of claim, documents considered during discovery, affidavits and witness statements. If Baden knowledge category (iv) were held to apply as soon as the solicitor acquired such knowledge then, even though the Court has not yet decided whether there is a trust and whether that trust has been breached, the solicitor could not continue to receive payment of his or her legal fees out of funds that the plaintiff claims are subject to the trust.
In a case where the defendant’s only source of funds for the payment of defence costs is the property the subject of the alleged trust, the defendant is likely to have difficulty in persuading the solicitor to continue to act for it or to find any other solicitor willing to represent it, if the proceeding could not be funded from that property. This consequence would arise notwithstanding that the Court has not yet determined whether a trust exists and, if it does, whether it has been breached, and notwithstanding that the defendant has a proper basis for arguing that there is no trust or breach of trust. The result may well be that the defendant may not be able to obtain legal representation to properly defend the litigation and the plaintiff may succeed in the litigation in circumstances where, with proper legal representation, the defendant may have successfully defended the plaintiff’s claim. It is difficult to see how such an outcome could be justified as a matter of public policy, or why equity would prevent a solicitor from undertaking his or her professional obligations in such circumstances.
We reject Break Fast’s submission that public policy considerations are not relevant for the purpose of determining the extent to which solicitors defending a proceeding on behalf of a defendant who is alleged to be a trustee may be liable in a knowing receipt case if their legal costs are paid from funds said to be subject to the alleged trust. As appears from [124] above, both Lord Selborne LC in Barnes v Addy and Danckwerts LJ in Carl Zeiss made reference to such considerations in that context. That is not surprising, as the law provides sufficient safeguards to ensure that solicitors in such a situation act appropriately. Those safeguards include the following: solicitors are officers of the court and owe duties to the court that override their duties to their client; and ss 18 and 42 of the CPA and rr 21.1 and 21.3 of the Solicitors’ Conduct Rules require solicitors to have a proper basis in respect of any defence upon which they rely. There are disciplinary consequences for solicitors who breach these professional obligations.
We accept that there are some differences between Carl Zeiss and the present case. In particular, as the action against the solicitor defendants in Carl Zeiss was resolved by way of determination of a preliminary question prior to the trial of the main action between the foundations, it is not clear how much of the evidence relating to the alleged trust (as distinct from the pleaded allegations of a trust) was before the solicitor defendants. In the present case, RC was aware of evidence supporting the allegations of trust. However, we note that Sachs and Edmund Davies LJJ were prepared to assume that, in the main action, the East German foundation would ultimately succeed in establishing the existence of a trust. We also note that, in both cases, it was common ground that the solicitors in question could not know whether the Court would ultimately find the existence of a trust. Overall, we are of the opinion that the present case has important similarities to Carl Zeiss such that Carl Zeiss is capable of providing considerable assistance in the application of the relevant principles to the present case. Accordingly, we reject Break Fast’s submission that Macaulay J was wrong to rely upon Carl Zeiss.
It follows from the above analysis that we reject Break Fast’s submission that Macaulay J failed to correctly apply Baden knowledge category (iv).
For the above reasons, Macaulay J did not err in finding that RC was not liable to Break Fast for knowing receipt of trust funds.
Grounds 8 to 10: Defence of unclean hands
Grounds 8 to 10 were in the following terms:
8The judge erred in finding that Break Fast had unclean hands and was (or would otherwise be) disentitled from equitable relief for both equitable claims.
9The judge erred in finding that Break Fast had not ‘washed its hands’ within the meaning of the unclean hands doctrine because he was ‘not convinced’ that Greg Taylor, one of Break Fast’s new directors, intended to restore the original trust for the benefit of all of its beneficiaries because:
(a)the loan facility agreement entered into in 2012 between Break Fast and Mr Taylor’s company, Headland Properties Pty Ltd did not yield an inference supporting the judge’s finding; and
(b)the dismissal of the Ambridge proceeding and lack of orders for an accounting between the beneficiaries and related parties in the Ambridge proceeding did not yield an inference supporting the judge’s finding;
(c)it was not put to Mr Taylor in the course of evidence that Break Fast or he would not, or did not intend to, distribute the proceeds of a successful claim against [RC] to the beneficiaries;
(d)any concerns relating to the disposition of the proceeds of a successful claim against [RC] could be addressed by appropriate conditions on relief.
10The judge should have held that Break Fast did not have unclean hands and was entitled to equitable relief in respect of both equitable claims by reason of the following:
(a)the control of Break Fast had changed and the new controllers’ hands were clean, making irrelevant any past ‘unclean hands’;
(b)the unclean hands defence could not apply to Break Fast’s claim arising from a breach of the fiduciary duty of loyalty because Break Fast’s ‘breach of trust’ was caused by [RC’s] breach of that fiduciary duty;
(c)there was no ‘immediate and necessary connection’ between the impugned conduct and the equity sued for in respect of both of Break Fast’s claims.
Our conclusion under grounds 1 and 2 that Macaulay J did not err in finding that RC had not breached its fiduciary duty of loyalty to Break Fast and our further conclusion under grounds 5 to 7 that RC had not knowingly received trust funds mean that it is not necessary for us to consider the defence of unclean hands which is raised by grounds 8 to 10.
Of necessity, any discussion of grounds 8 to 10 would be hypothetical because it would be based upon the incorrect assumption that RC had breached its fiduciary duty of loyalty to Break Fast or the incorrect assumption that RC had knowingly received trust funds, or both. It would also involve a further incorrect assumption that RC had caused Break Fast’s loss. We are of the opinion that a consideration of those grounds on this hypothetical basis would be artificial, strained and unhelpful.
Conclusion
As grounds 1 and 2 were arguable, the application for leave to appeal will be granted in respect of those grounds, but will otherwise be refused. Our conclusion in respect of grounds 1 and 2 means that the appeal must be dismissed.
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