Cassis v Kalfus

[2003] NSWSC 649

CITATION:	Cassis & Anor v Kalfus [2003] NSWSC 649
HEARING DATE(S):	23, 24, 25, 26, 27 June 2003
JUDGMENT DATE:	25 July 2003
JUDGMENT OF:	Cripps AJ
DECISION:	(1) As between the first-named plaintiff and the defendant there will be a verdict for the defendant; (2) As between the second-named plaintiff and the defendant there will be a verdict for the second-named plainitff in an amount of $18,000 together with interest calculated from June 1995 to the date of judgment; (3) The parties are to file short minutes to give effect to this conclusion; (4) The first-named plaintiff is to pay the defendant's costs of so much of the proceedings as is referable to the claim made by the first-named plaintiff to the defendant; (5) The defendant is to pay so much of the costs of the second-named plaintiff as is relevant to her claim.
CATCHWORDS:	Commercial transaction - one party a solicitor - negligence - breach of fiduciary duty - s 23 of the Limitation Act 1987.
CASES CITED:	Beach Petroleum v Kennedy (1999) 48 NSWLR 1; Cassis & Anor. v. Kalfus [2001] NSWCA 460; Marcolongo v Manattrussi [2000] NSWSC 834; Sheinkoph v Stone 927 F 2d 1259 (1991).
PARTIES :	Sami Alfred Cassis - First Plaintiff Gisele Cassis - Second Plaintiff Marcel Isador Kalfus - Defendant
FILE NUMBER(S):	SC 020589/96
COUNSEL:	P Roberts SC & M K Minehan - Plaintiffs G Lindsay SC & A R Ridley - Defendant
SOLICITORS:	Selby Levitt - Plaintiffs Mallesons Stephen Jaques - Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

CRIPPS AJ

Friday, 25 July 2003

020589/96 - CASSIS& ANOR v KALFUS

JUDGMENT

1 CRIPPS AJ: On the 12 June 1996 the first and second-named plaintiffs commenced proceedings against the defendant in the Common Law Division of the Supreme Court.

2 The first-named plaintiff claims an entitlement to common law damage (ordinary, aggravated and exemplary) for commercial loss and personal injury allegedly suffered by him by reason of the tortious negligence of the defendant and/or equitable compensation for breach of fiduciary duty – it being alleged that at all material times the relationship between the first-named plaintiff and the defendant was that of solicitor and client.

3 The claims arise out of a course of dealings between the first-named plaintiff and the defendant over a number of years commencing in 1988 and ending sometime in 1995.

4 The second-named plaintiff was, at all material times, the wife of the first-named plaintiff. She makes claims in law and in equity against the defendant arising out of the alleged failure of the defendant to register an executed transfer of a residential property from the first-named plaintiff to the first and second-named plaintiff as joint tenants.

5 The first round of the litigation between the parties commenced being heard in the Supreme Court in February 2000 and finished in the Court of Appeal in December 2001 with no resolution of any aspect of the dispute beyond the Court of Appeal ordering a new trial.

6 Although all members of the Court of Appeal were of the opinion that a new trial was necessary because the first trial had miscarried there was a divergence of opinion concerning one aspect of the appeal to which I will refer.

7 In the Court of Appeal a question arose concerning the application of s 23 of the Limitation Act 1969 to the cause of action for breach of fiduciary duty allegedly owed by the defendant to the first-named plaintiff. It arose in the assumed circumstance that the breach of fiduciary duty occurred in 1988 or 1989 at the latest and the claim for equitable relief was not made until some time in 1996. Although, as I would understand it, not expressing a concluded opinion about the matter Hodgson JA said -

“In relation to the application of the Limitation Act to causes of action for damages or compensation for breach of fiduciary duty, it would appear that s 23 means that the six year limitation period does not apply, except by analogy. Williams v. Minister, Aboriginal Land Rights Act 1983 (1994) 35 NSWLR 497 could be seen as authority for at least the proposition that the six year limitation should not automatically be applied to such a claim, and that it is necessary to consider factors relevant to the aptness of the analogy. One matter that might be relevant here is that the extension provided by s 55 of the Limitation Act for fraudulent concealment would not directly apply to such a claim, because in relation to such a claim there is no ‘limitation period fixed by or under this Act’ within the meaning of s 55(1): it might be that considerations relating to the appropriateness of applying the six year limitation by analogy would include matters which would go to fraudulent concealment of a claim to which the Limitation Act does apply. If that were so, then the absence of a reply might not be fatal to reliance on facts amounting to fraudulent concealment in relation to the equitable claims. The view of Deane J in Hawkins v. Clayton (1988) 164 CLR 539 at 589 might also have some bearing on this question. Although I am far from satisfied that it would not be appropriate to apply a six year period by analogy, I do not think this issue was adequately addressed by the primary judge.’”

8 Heydon JA agreed with the orders proposed by Hodgson JA and, except for the abovementioned matter, for the reasons advanced by Hodgson JA. His Honour said -

“The proposition there attributed to Williams v Minister, Aboriginal Land Rights Act 1983 (1994) 35 NSWLR 497 is supported by Kirby P, but it is far from clear that it is supported by Priestley JA in view of the tentative and cautious mode in which he expressed the basis of his concurrence with the orders proposed by Kirby P. It was not supported by Powell JA .”

9 Powell JA, also referred to the paragraph in the judgment of Hodgson JA and, after referring to authorities, concluded -

“The status to be accorded to the exception to the general rule as to the commencement of limitation periods suggested by Deane J in these passages, is, to say the least, unclear, if only because although in Hawkins v. Clayton each of Brennan J and Gaudron J concurred in the order proposed by his Honour, neither agreed with the basis upon which his Honour founded his Judgment, and each of them proceeded upon the basis that no cause of action accrued to Mr. Hawkins until after he assumed the office of executor.

10 Apart, however, from the abovementioned matter Powell and Heydon JJA agreed with the following observation of Hodgson JA -

“A large factor in causing the trial to miscarry has been the lack of precision in the appellants' pleading. It is not acceptable to plead a series of breaches occurring over many years, and then to make a global pleading of damage caused by all the breaches. While it may be appropriate to bring a claim arising out of an ongoing relationship, involving a number of breaches occurring over many years, and while it could be productive of complexity and repetition to require each individual breach to be explicitly linked to allegations of damage caused by that breach, a pleading should enable definition, in a way fair to both parties, of issues concerning breach, causation and quantum of damage in relation to each cause of action relied on. It may be possible to group causes of action where the damage involved in each of them are substantially the same, so long as this can be done without obscuring issues of causation and quantum of damages arising in relation to each of them. The pleading in this case was grossly inadequate in this regard, and in my opinion would be liable to be struck out.”

11 Heydon JA’s concurrence with the above observation was expressed to be on his understanding -

“ … that nothing in his [Hodgson JA] reasons for those orders is to bind the trial judge at the second trial in relation to any matter of fact or law relevant to the rights of the parties arising out of the allegations in the pleadings … “.

12 After the Court of Appeal published its judgment there were further amendments to the plaintiff’s statement of claim. The amendments generated a succession of applications to the duty judge for greater clarity and precision. When the hearing commenced I was informed that the plaintiff no longer claimed damages for breach of contract or for tortious misrepresentation. No claim was made for an account to be taken in equity and the plaintiffs conceded that any entitlement to damages for personal injury could arise only if they first established a case for damages for economic or commercial loss arising out of the transactions the subject of the common law and equitable claims.

13 At the new trial the affidavits previously tendered were admitted into evidence as was the transcript of evidence before the former trial judge. In addition, the two named plaintiffs and the defendant gave oral evidence and were cross-examined. At the request of both parties I have not read the reasons for judgment of the former trial judge.

14 Notwithstanding the exhortation of the Court of Appeal the issues, to my mind, remained clouded by reason, in large part, of the unwillingness or inability of the first-named plaintiff to articulate with clarity the connection, if any, between breaches of duty alleged against the defendant and damage suffered by the first-named plaintiff. So far as the second-named plaintiff’s claim is concerned her counsel appears to have adopted the observations of the Court of Appeal concerning the damage she suffered upon a finding, if made, that the defendant was in breach a of duty owed to her. I shall return to this matter in due course.

15 Although the plaintiffs have submitted that the remedies available to them differ depending upon whether the claim is successful in tortious negligence at law or in equity for breach of fiduciary duty arising from the relationship of solicitor and client, the nature and scope of the duties alleged to have been breached are, in essence, the same. It follows that although the plaintiffs have disowned any claim for damages for breach of contract or tortious misrepresentation the arrangements entered into by the parties (particularly those between the first plaintiff and the defendant) and the representations made in the course of those arrangements are relevant to the nature and scope of the duties said to be owed to the first-named plaintiff and breached by the defendant. The defendant has denied he was negligent, and has denied that he was in breach of any fiduciary duty he owed to the first and second-named plaintiffs.

Background

16 The uncontested evidence is that the plaintiff worked in France between 1970 and 1981 as an engineer for the firm Chaffoteaux et Mauri (CMF) at that time the world’s largest manufacturer of instant gas hot water heaters.

17 The first-named plaintiff migrated to Australia with his wife, the second-plaintiff, in 1981. In 1982 he began working for CMF through its subsidiary in this country Chaffoteaux et Mauri Pty Ltd (Australia) (CMA). The plaintiff was the managing director of CMA. The defendant acted as a solicitor for CMA and was an alternate director of it. A friendship developed between the first-named plaintiff and the defendant and the defendant undertook legal work on behalf of the first-named plaintiff in the acquisition of a residential property at Coogee in 1984.

18 In his statement of defence the defendant does not deny that from time to time he acted as a solicitor for the first-named plaintiff in respect of real estate transactions and that he acted for CMA between 1982 and 1989 but denied that he had any general retainer to act for the first-named plaintiff and that he failed to perform his duties.

19 CMA expanded its business between 1982 and 1988 due to the successful management of it by the first-named plaintiff. In 1983 its turnover was $425,824. In 1988 it was $1,986,985. By 1998 the first-named plaintiff was on a salary which was stated to be equivalent of $100,000 per annum, that being made up of a salary of approximately $85,800 per year, together with the provision of a car, and payment of superannuation.

20 In 1988 the first-named plaintiff and the defendant discussed the possibility of entering into a joint venture directed to them taking over the business conducted by CMA in Australia. The first-named plaintiff, when he was in Paris in 1988, raised the matter with M Eskander from CMF. There is a dispute as to who first suggested the joint venture. The first-named plaintiff says it was the defendant and the defendant says it was the first-named plaintiff. It does not seem to me to matter greatly who raised the matter first. Both were enthusiastic for the venture to proceed.

21 The plaintiff and the defendant agreed that if CMF allowed them to take over the business of CMA they would form a company, International Gas Corporation Pty Ltd (IGC), to buy out CMA and take over CMA’s distribution franchise in Australia. It was agreed between the two of them that they would both become directors and shareholders of IGC.

22 Although it is common ground that the first-named plaintiff and the defendant formed a company in which they had equal rights, there is a dispute concerning the conversations that preceded both the incorporation of IGC and the agreements IGC subsequently entered into to buy out CMA and to distribute CMF’s products throughout Australia.

23 According to the plaintiff in the first half of 1988 the defendant suggested to him that they enter into a joint venture to buy out and subsequently operate the business of CMA. (As I have said the defendant says it was the first-named plaintiff who first raised the matter.) In the course of that conversation as recounted by the first-named plaintiff, the first-named plaintiff said he proposed that his contribution to the joint venture would be 50 per cent of the profits of IGC over and above expenses (which included payment to him of $100,000 per annum). He alleges that the defendant, for his part, promised to contribute 50 per cent of the net profits of his law firm over and above $100,000 which he, the defendant, was entitled to keep because he was wholly responsible for the conduct of the law practise.

24 The first-named plaintiff has alleged that the defendant represented to him that his firm made a net profit of approximately $200,000 per year. The defendant has denied it.

25 In January the following year the defendant, at the request of the first-named plaintiff, provided the first-named plaintiff with what was described as a “letter of comfort” in which the joint venture agreement was set out.

26 The defendant executed a document on the letterhead of his legal practice as follows -

“Re: Legal Practice of MARCEL, KALFUS & CO
This letter is by way of confirmation of the agreement reached between ourselves concerning International Gas Corporation Pty Ltd and the above practice.
I hereby confirm and acknowledge that you shall as from 1 February 1989 be entitled to an one half share of the net profits of the above legal practice. In determining the net profits there shall be deducted from the gross fees received in any tax year or trading period, all operating expenses including wages, rent, equipment leasing charges and bank interest and other charges and income tax.
I hereby further confirm that the net profit from the legal practice and from International Gas Corporation Pty Ltd (IGC) and all other jointly related companies or businesses operated by us jointly are, to be pooled or aggregated and then shared by us on an equal basis.
I also confirm that you shall be entitled during an annual period of operation of IGC and related entities to draw the sum of $100,000 as an annual salary as managing director of the company.
Similarly I shall be entitled to draw the sum of $100,000 as from the gross fees received by Marcel, Kalfus & Co on account of my share of such profits.
Our respective advance drawings against profits may exceed the sum of $100,000 but in the absence of express agreement between ourselves the same shall not in any year exceed the total of the permissible advance on drawings by more than twenty-five per cent, ie in the first year such advance drawings must not exceed $125,000. We may by agreement, at any time vary the amount of advance drawings in any year. All amounts paid by way of advance drawings shall be debited to the account of share of profits of yourself and myself respectively. If the amount of advance drawings of either of us in any accounting period exceeds a half share of the net profit of IGC (and its related entities) and the legal practice, then shall excess will be debited against such person’s account for share of profits in the ensuing year.
I trust this letter provides you with the comfort you desire concerning our new and exciting venture.”

27 There is no mention in this letter of any representation by the defendant that his legal practice netted $200,000 per year and I am not persuaded that this was a representation made by the defendant to the first-named plaintiff. However, it is fairly clear from the terms of the above letter that the defendant was representing, or at least implying, that his legal practice was netting, or could be netting, an amount in excess of $100,000 per year, sufficient to make a contribution to the ‘pool’ that was said to be established by the joint venture.

28 In fact the defendant said in evidence that his earnings at that time never rose above $70,000 per year before tax.

29 The defendant, while admitting that he had acted for the first-named plaintiff on real estate transactions in the past, denied there existed between him and the first-named plaintiff a relevant “solicitor and client” relationship. The defendant told CMF towards the end of 1988 that he would not be acting for CMA in the transactions designed to advance the interests of the joint venturers, because he had a vested interest in the outcome and that he was acting “on behalf of Sami [the first-named plaintiff] and myself as co-venturers”.

30 It was put to the first-named plaintiff that from at least mid-1988 onwards he was proposing himself to take over the operations of CMA and that the defendant’s participation in IGC was no more than that of a shareholder and director. The first-named plaintiff agreed that he was proposing to take over the operation of CMA but denied that the participation of the defendant was to be as a shareholder and director of IGC only. He has said that if he had known he was, as it were, on his own, he would never have entered into the transaction. As I have said I think it more probable than not that representations were made concerning the ability of the defendant to contribute to the pool referred to in the letter set out above. I would infer, in the light of all the circumstances that, the reference to the “pool” was intended to be a reference to be moneys that might be needed as capital for the continued operation of the company. The joint venture agreement contemplated, in my opinion, that the defendant had to be more than just a director and a 50 per cent shareholder contributing nothing other than day to day legal work and to be entitled by reason of his shareholding to 50 per cent of the profits after expenses. In my opinion I am entitled to infer that the defendant agreed to contribute not just to the day to day legal work, but also the capital, if needed, and which he represented would be available out of the profits of his law firm.

31 As events turned out, the defendant never contributed any money to the joint “pool” and neither did the first-named plaintiff. In fact for the first three years IGC was successful under the first-named plaintiff’s management. It re-paid the debt it owed in respect of its “buy out” of CMA (an amount in excess of $1,000,000) in slightly under two years. The debt was paid out in October 1991. During the three year period the plaintiff had a gross salary of $68,723 in 1990, $56,000 in 1991 and $56,000 in 1992. From that package was deducted moneys for superannuation and the provision of a car, maintained by IGC. The first-named plaintiff also had his wife and one of his sons on the company’s payroll.

32 In January 1989 the defendant wrote to M. Eskander in Paris concerning the terms and conditions of the buy out by IGC of CMA’s business. The negotiations were directed largely to the price CMF was asking and to the period of the sole agency agreement CMF was prepared to grant to IGC.

33 In the course of these negotiations two matters were raised of relevance to this litigation. The first, was in a letter sent by M. Eskander to the defendant and the first-named plaintiff. He referred to a statement in the draft heads of agreement that had been forwarded to him, in which it was said that the term of the sole agency agreement had been agreed in 1988 as being an initial term of three years with a right to the local distributor to renew for a further three years. M. Eskander did not deny that the matter had been discussed as alleged, but claimed that -

“ … the renewal period, however, is a different story and we cannot accept nor did we ever accept renewals for more than one year. As for your proposal of leaving the renewal to the decision of just the purchaser is totally unacceptable. The right of cancellation must be reciprocal.”

34 Eventually it was agreed that the period of the sole agreement should commence on 1 February 1989, and remain in force until 31 December 1991, and thereafter to continue in force unless and until cancelled by six months notice in writing given by either party to the other, and expiring at the end of such period or any time thereafter. (In fact the period was extended to December 1992 and thereafter, by reason of notice given in January 1992, the sole agency agreement was terminated.)

35 The second matter to which attention should be directed was the insistence by CMF that -

“This whole Agreement is conditioned on Mr SAMI CASSIS being the Managing Director of the Distributor. Any modification of Mr SAMI CASSIS’S role will automatically allow Principal to immediately terminate this Agreement, if he so wishes, without the Distributor being entitled to any indemnity”.

36 Prior to finalising the “buy out” and sole agency agreements the first-named plaintiff and the defendant had discussions concerning the period of the sole agency. The defendant was concerned that, bearing in mind that the purchase price (as I have said, in excess of $1,000,000) had to be repaid within two years (commencing in October 1989), the sole agency period was not long enough. However, the first-named plaintiff was confident that by reason of his relationship with relevant people in CMF in Paris, the term of the agency insisted upon by CMF would not be a problem. It is to be remembered that the first-named plaintiff had run the distributorship on behalf of CMF for at least five years before the joint venture and at CMF’s insistence he was to continue being the Managing Director of IGC.

37 An important aspect of the first-named plaintiff’s claim is that he was not adequately advised concerning the “sole” agreement entered into by IGC with CMF. This was because, he alleges, originally be believed the sole agreement would last for three years with an enforceable option by IGC for a further three years at least. (In fact the first-named plaintiff has stated in evidence his understanding was that IGC was to be given sole distributing rights for three years with two further periods of three years at the option of IGC, although there does not appear to be any written evidence to support his claim).

38 If I understand the first-named plaintiff’s submission correctly it is that by failing to be advised of the consequences of entering into the buy out agreement (which was said to be “inter-dependent” on the sole agency agreement) the first-named plaintiff was put in a position that he had no option but to accept whatever CMF offered as a term of the sole agency agreement. I do not accept that this submission accurately reflects the effect of the evidence. As I have mentioned, the first-named plaintiff was a successful businessman. He was confident that his relationship with CMF was such that the joint venturers need have no concern about the period of the directorship. I do not accept the submission, on his behalf, that he did not understand what the word “inter-dependent” meant in the buy out agreement. In my opinion it was plain to the first-named plaintiff that the buy out agreement was subject to a sole agency agreement then being negotiated, and that the plaintiff with full knowledge of all relevant circumstances was prepared to accept CMF’s terms.

39 As I find the plaintiff knew perfectly well that the agreement lasted for only three years, whatever else might have been said previously. He did not need the defendant to tell him that if CMF refused to renew the sole agency agreement IGC could do nothing about it. As I have said, at the time of entering into the agreement, he was confident that such an eventuality would not happen in the foreseeable future because of the importance he believed the French company attached to his ability to sell its product in Australia – where he had been so successful between 1982 and 1988.

40 As I have said IGC traded profitably for almost three years. It paid off the purchase price it had agreed to pay within a period of two years without, it appears, any difficulty.

41 The real cause of the collapse of IGC (and hence losses suffered by the first-named plaintiff) was (as he admitted to the liquidator and, in fact, alleged in his statement of claim) that IGC lost the French distributorship. That occurred in December 1992. This finding is of importance because it has been submitted that I should find the business failed because of the failure by the defendant to provide capital funds as promised. On the material before me I am unable to agree with this submission. The business failed because the distributorship was lost.

42 Later I will refer to the allegations of the first-named plaintiff concerning the alleged breaches of duty of the defendant arising out of the transactions referred to above. However, for the present time it is necessary for me to refer to other matters in respect of which, it is alleged, the defendant was also in breach of his duty to the first-named plaintiff.

43 IGC commenced trading in or about March 1989. It raised working capital by having an overdraft facility of $200,000 with Bank Nationale de Paris (BNP). The first-named plaintiff and the defendant were guarantors of the overdraft facility and their obligations were secured by mortgages over their properties – the first-named plaintiff mortgaged his residential property at Leeton Ave Coogee and the defendant, his residential property at Double Bay.

44 In February 1991 the first-named plaintiff and the defendant entered into a shareholders’ deed conferring mutual rights of first refusal in relation to the shares each had in IGC. It is to be recalled that at this time IGC was functioning efficiently and making profits sufficient to pay off its debt to CMA and to pay the first-named plaintiff his salary. It is also to be noted that on this occasion the defendant insisted that the first-named plaintiff be independently advised concerning the proposed transaction.

45 In September 1991 BNP was paid out and National Australia Bank (NAB) took over the facility previously granted by BNP. It also advanced $70,000 to pay out a loan previously advanced by the Advance Bank and secured over the Leeton Avenue property. It advanced a further $100,000 to pay out BNP. It granted an overdraft facility of $150,000 and it took a first mortgage over the Leeton Avenue property as security and a third mortgage over the defendant’s house at Double Bay. The defendant acted as solicitor for IGC and the first-named plaintiff, as well as on his own behalf with respect to these transactions.

46 It appears the first-named plaintiff was concerned that he was exposed to a greater potential loss than the defendant because of the greater equity he had in the Leeton Avenue property, when compared with the equity the defendant had in his Double Bay property. In October 1991, and at the request of the plaintiff, the defendant signed a letter promising to indemnify the plaintiff (not IGC) for 50 per cent of any personal loss to him in respect of the liability incurred to NAB.

47 On 12 December 1993 (that is, twelve months after the period of the distributorship’s expiry) the defendant signed another letter addressed to the first-named plaintiff promising to indemnify him as to 50 per cent of any personal liability the first-named plaintiff might have to third party creditors.

48 On 23 December 1993 NAB was paid out from advances by two new lenders which have been referred to as the “White” and “Vesaro” transactions. The “White” transaction concerned an advance of $280,000 arranged through Mr White, a solicitor, and which was secured by a mortgage given by the first-named plaintiff over the Leeton Avenue property. The second was an advance arranged from a mortgage broker, Mr Vesaro, for $40,000, which was also secured by a second mortgage over the Leeton Avenue property. With respect to these transactions the first-named plaintiff alone was the borrower - not IGC or the defendant. However, although the defendant did not provide security over real estate owned by him, he gave a personal guarantee. He acted for the first-named plaintiff and charged a fee with respect to these transactions.

49 Although IGC made certain repayments under the mortgages, it was unable to continue to do so. By about mid-1994 the first-named plaintiff came to an arrangement with a Mr Roden, and a new company called International Gas Appliance Pty Ltd (IGA) was formed. Mr Roden had 50 per cent of the shares of IGA, the first-named plaintiff had 42.5 per cent of the shares, and another shareholder had 7.5 per cent of the shares. IGA acquired the assets of IGC for $45,000.

50 An advance by Mr Roden of $220,000 was secured by a charge over the assets of IGA and 50 per cent of the loan facility was guaranteed by the first-named plaintiff. These transactions were completed in July 1994. The plaintiff received legal advice concerning them from the defendant. The defendant said that it was a “bad deal” and advised the plaintiff not to enter into it. The defendant did not, as is alleged in the statement of claim, tell the plaintiff he had no option but to go ahead. Nonetheless the plaintiff himself felt he had no option and proceeded with the transactions notwithstanding the advice received.

51 The business of IGA continued to decline, and in April 1995 Mr Roden gave notice requiring the plaintiff to pay an amount of $106,250 being the amount secured by the guarantee. It was not paid, for the reason, I surmise, that the first-named plaintiff had no funds. On 17 November 1995 Mr Roden, after a contested hearing, obtained judgment in the Supreme Court for this amount plus interest. (I should also mention that the Vesaro mortgage was discharged from the $45,000 paid to IGC by IGA).

52 Later the Leeton Avenue property was sold to a son of the plaintiff for $450,000 of which $288,000 was paid to discharge the White mortgage. The defendant acted as a solicitor on the transaction and was paid legal fees. The first-named plaintiff assigned his interest to the second-named plaintiff being the sum of $162,000 balance of purchase money. After the sale the first and second-named plaintiffs continued to live in the property although they were living apart.

53 Arising out of these transactions, and in particular, the joint venture agreement, the first-named plaintiff makes a number of allegations of tortious breach of duty at law and breaches of fiduciary duty in equity.

54 So far as the negligence claim is concerned it is alleged that the defendant -

(a) Had a duty to advise the plaintiff to obtain legal advice before committing himself to it;

(b) Had a duty to document the joint venture agreement;

(c) Had a duty to advise the plaintiff that the joint venture agreement would have been in breach of s 119 of the Legal Practitioners’ Act and hence illegal and/or unenforceable;

(d) Had a duty not to mislead the plaintiff as to his true financial position; and

(e) Had a duty to advise the plaintiff to have an independent check made of his (the defendant’s) financial worth.

55 In his statement of claim, the first-named plaintiff alleges that had the defendant not breached the above duties (and had the first-named plaintiff known of the true financial position of the defendant and the true earnings from his legal practice and that the proposed agreement was unlawful and/or unenforceable), the first-named plaintiff would not have proceeded with the joint venture. The claim for common law damages consequent upon the breaches set out in paras 20A, 20B and 21 of the statement of claim. In essence it is that if the plaintiff had not proceeded with the joint venture -

(i) he would not have left his previous employment and become a director and shareholder of IGC;

(ii) he would not have borrowed money and mortgaged his property;

(iii) he would not have entered into the White and Versaro transactions;

(iv) he would not have given a guarantee to Mr Roden;

(v) he would not have been liable to pay the creditors of IGC.

56 He has alleged that if he had not proceeded with the joint venture he would have remained in the employment of the French company until 2001 when he turned 65.

57 In paragraph 25 of the statement of claim the plaintiff has alleged that by reason of the breaches of common law duty to the first-named plaintiff, the first-named plaintiff suffered the following recoverable loss and damage:

(a) Loss of salary he would have earned at CMA (between 1 July 1993 and 15 October 2001 being $664,000 plus interest from 1 July 1993;

(b) All monies paid or payable by the first-named plaintiff consequent on the collapse of IGC and in particular:

(i) Moneys paid in December 1993 with respect to the White and Versaro mortgages - $6,745;
(ii) Monies paid in March 1995 to discharge the White mortgage ($288,675 less $70,000 attributable to home loan mortgage) – loss $218,675;
(iii) Payments made pursuant to the White mortgage by the first-named plaintiff during late 1994 – approx $7000;

(iv) The Roden judgment debt - $106,250;

(v) Interest payable on unpaid portion of the Roden judgment - $36, 735 as at March 1999 and continuing;

(vi) Roden’s legal costs, estimated at $30,000;

(vii) The first-named plaintiff’s legal costs “defending the Roden judgment” - $7000; and
(viii) Monies paid by the first-named plaintiff to creditors of IGC - $48,000 and interest thereon (at 10%).

58 So far as the claim for compensation for breach of fiduciary duty is concerned, the first-named plaintiff makes the same claim as that referred to above.

59 The first-named plaintiff has also maintained, as it would seem to me, quite independently of his other allegations of breach of duty, that the defendant breached a duty of care owed to him because he negotiated “and entered into on behalf of himself the first plaintiff and IGC, an agreement with the French Company of 27 February 1989 for the buy out of CMA which, inter alia, made inadequate provision for the sole distribution in Australia of the French Company products” and “he failed to secure a formal agreement with the French Company (inter alia in relation to sole distribution) as contemplated in the agreement of 27 February 1989.”

60 He asserts that had he, the first-named plaintiff, been aware of these breaches of duty “and their ramifications” he would not have agreed to the buy out of CMA and, as a result, would not have suffered the losses and damage previously set out - that is, all losses suffered by him up to and including defending of the proceedings in equity brought against him by Mr Roden.

61 The first-named plaintiff also makes a number of allegations of breach of duty against the defendant arising out of the various loans made to the first-named plaintiff and secured by the first-named plaintiff over his property. He claims, for example, that the defendant ought to have prevented him from entering into the White and Vesaro transactions because the defendant knew that the money advanced was to be used for the business of IGC (which of course was also known to the first-named plaintiff and which was the reason why he entered into the transactions). He has alleged also that the defendant was in breach of an obligation to him because he would not “inject some cash into the business”. It is alleged that all the losses suffered by the first-named plaintiff arising out of the personal loan under the “Roden” transaction were the fault of the defendant, in that although the defendant told him the proposed transaction was “a bad deal”, he also told him that he had no choice but to enter into it, however, as I have said, it was the first-named plaintiff himself who made the decision to proceed with the transaction.

The Joint Venture

62 The terms of the joint venture are not easy to discern. In my opinion the “letter of comfort” does not fully set out the matters agreed between the parties. On one view of the matter not a great deal turns on this, because the first-named plaintiff is not suing in contract, and he is not making any claim for tortious misrepresentation. However, doing the best I can, I would conclude that, as I have said above, the defendant represented to the first-named plaintiff that there were profits from his practice over and above the $100,000 which would be available to the “pool” and that the purpose of the “pool” was to provide a fund from which money could be made available to the company intending to take over the business of CMA or if capital were not needed both the first-named plaintiff and the defendant would share the “pool” equally. The defendant was contributing no capital to the proposed new company, and the profitability of it would depend in large part on the performance of the first-named plaintiff. It was assumed between the parties that such legal work as was necessary to give effect to the joint venture would be undertaken by the defendant.

63 But, in my opinion, the obligation of the defendant went beyond that. He promised to contribute to the “pool”. Indeed, the defendant must have believed that his obligations went beyond merely undertaking routine legal work because on at least two occasions (in October 1991 and December 1993) he personally undertook to indemnify the first-named plaintiff for 50 per cent of his personal liability.

64 An attempt has been made to cast the defendant in a more villainous light than simply misrepresenting the profitability of his practice and failing to contribute money to meet some of the debts of the first-named plaintiff. It was submitted that, over a period of time, the defendant manoeuvred the first-named plaintiff into a position from being 50 per cent responsible for the debts of IGC to having to bear the whole of the losses himself. Thus it was submitted that, in respect of the transactions referred to above, the defendant moved from allowing his property to be mortgaged to secure overdraft facilities etc (even though the first-named plaintiff was more exposed than the defendant by reason of the greater equity he had in the property) through to merely guaranteeing (without security) the debts of the first-named plaintiff and finally, as in the Roden transaction, leaving debts incurred by the first-named plaintiff entirely on his own shoulders.

65 I do not accept this submission. I find the defendant did not contribute moneys to IGC, because he had none. I do not think the defendant manoeuvred the first-named plaintiff into any position, as alleged by him. Throughout all the transactions the first-named plaintiff knew perfectly well what he was committing himself to do, and was prepared to undertake obligations to keep IGC afloat. He accepted in the case of the White and Vesaro transactions that the defendant could provide a guarantee only and in the case of Roden transaction he was providing no support at all.

66 The first-named plaintiff was, as I have already said, a successful businessman. He made his own decisions concerning whether to proceed with these transactions or not. He was at all relevant times anxious that the company should succeed. That it didn’t was not due to a fault on the part of the defendant. It was due, as I have said, to CMF taking away the sole agency agreement.

67 I do not accept, for example, that the defendant committed the first-named plaintiff to an agreement with CMF which made inadequate provisions for the sole distribution in Australia of CMF’s products, or that he failed “to secure a formal agreement with the French company (inter alia in relation to sole distribution) as contemplated by the agreement of February 1989”. As I have earlier mentioned, the three year period with a possible three year option was discussed by the first-named plaintiff and the defendant. The first-named plaintiff was fully apprised of all relevant circumstances and determined to proceed with the venture.

68 On my understanding of the joint venture, it may have been open to the plaintiff to have maintained an action in breach of contract, by reason of the defendant failing, when requested, to contribute money to the “pool” which both parties accepted was to be used by IGC. At least that was a possibility. However, the first-named plaintiff is not suing the defendant in contract or, as I have said, in tortious misrepresentation.

69 Were there any aspects of the relationship between the first-named plaintiff and the defendant that gave rise to fiduciary obligations and which were breached by the defendant?

70 A solicitor does not necessarily incur fiduciary obligations when entering into a joint venture agreement simply because, by profession, he happens to be a solicitor. Nor, in my opinion, does the relevant relationship of solicitor and client exist when, as in the present case, and as part of the joint venture agreement a solicitor undertakes to carry out certain legal work on behalf of both joint venturers. However, such a relationship could arise, in my opinion, in circumstances where by reason of the solicitor’s special knowledge, he may find himself committing his co-venturer to a transaction that may be unenforceable or illegal.

71 In Marcolongo v Manattrussi [2000] NSWSC 834, Young J had occasion to review the law concerning the nature of a duty owed in contract, negligence and breach of fiduciary duty, where one party to a commercial transaction was a solicitor.

72 At p 11 of the judgment his Honour cited with approval the observations of the first circuit of the United States Court of Appeal in Sheinkoph v Stone 927 F 2d 1259 (1991) where it was said -

“Human beings routinely wear a multitude of hats. The fact that a person is a lawyer, or a physician, or a plumber, or a lion tamer, does not mean that every relationship he undertakes is or can reasonably be perceived as being, in his professional capacity. Lawyers/physicians/plumbers/lion tamers, sometimes act as husbands, or wives, or fathers or daughters, or sports fans, or investors, or business men. The list is nearly infinite. To imply an attorney client relationship, therefore, the law requires more than an individual’s subjective, unspoken belief that the person with whom he is dealing who happens to be a lawyer, has become his lawyer. If any such belief is to form a foundation for the implication of a relationship of trust and confidence, it must be objectively reasonable under the totality of the circumstances.”

73 Young J, in Marcolongo v Manattrussi found no fiduciary duty but had occasion to make the following observation -

“Fiduciary duties have become a bit of a slogan these days. If a plaintiff cannot think of any other reason for suing a defendant, often breach of fiduciary duties seems to be the way in which the plaintiff puts his or her case. The present case involves the idea that because the first defendant was a solicitor, and because there are a number of utterances in leading cases as to the very arduous duties that lie on solicitors in the fiduciary sense, and because the solicitor/client is one of those relationships from which one can usually presume a fiduciary duty, ergo the defendant must be liable. However, as Hayne J said when speaking extra judicially recently, cases such as the present are to be decided by principle and not by slogans.”

74 Later still when referring to the identification and characterisation of duties arising from legal and equitable obligations said -

“The problems are not met by some adherence to a formula but to considering whether, on the whole of the material, there has been an unconscious use by the solicitor who is a party to the transaction of his or her position of advantage in circumstances where the person in the position of the client was reasonably expecting a person in the position of a solicitor to act solely on his or her behalf.”

75 I have already referred to what I understand to be the terms of the joint venture between the parties. I have come to the conclusion that, with the exception of the possible claim for breach of fiduciary duty with respect to the operation of s 119 of the Legal Practitioners Act there was no relevant duty of care either in law or as a fiduciary that was breached by the defendant as claimed in these proceedings. The first-named plaintiff and the defendant entered into a business relationship. When it was appropriate (with the exception of s 119 of the Legal Practitioners Act) the defendant advised the plaintiff to get independent advice – as, for example, with respect to the share option agreement.

76 In the present case I have come to the conclusion that, with the exception of one matter, there was no aspect of the relationship between the first-named plaintiff and the defendant which gave rise to a relevant solicitor and client relationship. The exception I am referring to is the claim of the first-named plaintiff, if made out, that he was not adequately advised concerning the potentially illegal or unenforceable obligation assumed by the defendant with respect to sharing the proceeds of his practice with another person.

77 In 1988-9 section 119 of the Legal Practitioners Act 1987 provided as follows -

“119.(1) It is professional misconduct for a solicitor to share with another person the receipts of a business of the kind usually conducted by a solicitor unless -

(a) the other person holds a current practising certificate issued by the Law Society Council; or

(b) the Law Society Council has first given its consent.
(2) If a solicitor is employed under a contract of service, subsection (1) does not operate to limit any right of the employer to recover costs in relation to the conduct of business by the solicitor on behalf of the employer.”

78 It is to be recalled that in the “Letter of comfort” the defendant confirmed that the net profit from his legal practice and that of IGC would be “pooled or aggregated and then shared by us on an equal basis”.

79 In evidence defendant has denied he undertook this obligation. I am satisfied, however, that he did. Mr Lowey, accountant, has given evidence that he told the first-named plaintiff that the defendant could not commit fifty per cent of his profits, after expenses, because to do so would be in breach of s 119 of the Legal Practitioners Act. On behalf of the first-named plaintiff, Mr Roberts SC, has submitted that the advice given by Mr Lowey was wholly inadequate, and that the first-named plaintiff should have been referred to another independent lawyer particularly as he had difficulty in believing that there could be any prohibition on a solicitor sharing the profits of his practice with another person. But, the illegality or potential illegality to which his mind was directed by Mr Lowey seems to have had little impact on the first-named plaintiff. The first-named plaintiff after being told by Mr Lowey continued with the transaction believing, as I would infer, that the promise of the defendant to allow him 50 per cent of the profits of the defendant’s practice after expenses had been met could and would be honoured.

80 If it be the fact that the defendant was in breach of the fiduciary duty to the first-named plaintiff by reason of his failure to ensure that he received independent legal advice concerning the potentially unenforceable promise by the defendant to share with him the profits of his firm and that what was proposed contravened s 119 of the Legal Practitioners Act 1987, then, as it would seem to me, a question arises whether the claim is barred by operation of s 23 of the Limitation Act 1931. Section 14 of the Limitation Act relevantly provides -

“(1) An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims:

(a) the cause of action founded on contract (including quasi contract) not being a cause of action founded on a deed);

(b) a cause of action founded in tort, including a cause of action for damage for breach of statutory duty, and
(c) …
(d) …”

81 Section 23 provides -

“Sections 14, 16, 17, 18, 20 and 21 do not apply, except so far as they be applied by analogy, to a cause of action for specific performance of a contract or for an injunction or for other equitable relief.”

82 It is the claim of the first-named plaintiff that the defendant was in breach of his fiduciary obligation towards him by not insisting that he obtain independent legal advice. It is the same claim he makes in tort and, in my opinion, by analogy s 23 operates to impose a limitation period of six years from the running of the date on which the cause of action first accrues. Leaving to one side the question of causation, the breach of fiduciary duty, if it occurred, occurred in 1989 and the damage suffered by the first-named plaintiff, ie the potentially unenforceability of the defendant’s promise occurred at that time. Moreover, on any view of the matter, the first-named plaintiff was told by Mr Lowey of problems associated with the defendant’s promise. Accordingly, I would find, that even if the claim of breach of fiduciary duty were made out with respect to the failure by the defendant to ensure the first-named plaintiff received independent legal advice, concerning the enforceability of his promise to make part of his profits from his legal practice available to the “pool” the claim was statute barred by the end of 1995.

83 As I have said the plaintiff may have been (and probably was) liable in contract but no claim is made in contract for the reason I surmise, that any such claim would be statute barred. To my knowledge there is no case which establishes that, in commercial dealings between two parties at arms length there is a relevant duty of care on one party to the other simply because the party on whom the obligation is alleged to lie happens to be a lawyer. It is true that the relationship of solicitor and client raises obligations in law as well as in equity but I know of no case where the principle is extended to purely commercial dealings as in the present case (with, as I have said, the exception I have found with reference to s 119 of the Legal Practitioners Act).

Causation

84 The plaintiffs’ case appears to be (whether in tort or for breach of fiduciary duty) that had the breaches (all of them) not occurred, the first-named plaintiff would not have entered into the joint venture agreement, and would have remained for another fourteen years in the employ of CMA earning approximately $100,000 per year.

85 If, contrary to my earlier finding the defendant was in breach of a fiduciary duty to the plaintiff in failing to ensure he had independent advice before entering into an agreement with him that involved the defendant making available profits from his practice to be paid into the “pool”, question still aarises, as I have said, as to whether that breach of fiduciary obligation had any connection with the losses claimed by him.

86 The primary purpose of equitable damages is compensatory. Statements have been made in the books to the effect that an obligation imposed on a fiduciary is not limited or influenced by common law principles governing the remoteness of damage, foreseeability or causation. However as was pointed out in Beach Petroleum v Kennedy (1999) 48 NSWLR 1 at 93 it is not the law that where breach of fiduciary duty is established the court is not permitted to determine what would have happened if the duty had been performed. As I have found in this case the first-named plaintiff was made aware from Mr Lowey at least of the provisions of s 19 of the Legal Practitioners Act.

87 I understand the authorities to adopt the view that although foreseeability and causation may not be readily transposed into claims for breach of fiduciary duty there must, however, be a commonsense view of causation. Even if I accept the second-named plaintiff’s assertion that had he been given the independent advice it was said he should have been given he would not have “gone out on his own” the question still remains whether the losses claimed by him were relevantly caused by the assumed breaches of fiduciary duty.

88 The first-named plaintiff has pitched his case upon the basis that his losses are the result of all the breaches said to have been committed by the defendant. That is to say that all losses that he has suffered between the time IGC collapsed and the time when he was compelled by court order to repay Mr Roden these losses were the result of all these breaches referred to above.

89 As I have said, what brought the business of IGC to a halt was the loss of the distributorship. It may have been the case (although I am by no means satisfied that this is so) that had there been some money in the “pool”, the business of IGC may not have collapsed as it did, or may have survived for longer than it did. It would seem to be the first-named plaintiff’s case that even if the business had continued to be profitable for ten or twenty years and thereafter ran into financial difficulties the defendant was responsible for any losses sustained by him because of the breach of fiduciary duty to advise the first-named plaintiff that he should seek independent advice before entering into an arrangement which involved the defendant’s sharing with him the profits of his practice.

90 As I have said the plaintiff has elected to pitch his case upon the basis of the combined totality of breaches in 1988 and 1989 had the consequence that all losses sustained by the first-named plaintiff in any way connected with the operation of IGC are the responsibility of the defendant. As have said the only breach I have found was his failure to advise the first-named plaintiff that he should get independent advice concerning the operation of s 119 of the Legal Practitioners Act but, as I have also said, he had that advice from Mr Lowey, an accountant, and elected to proceed notwithstanding it.

91 Because I have come to the conclusion, that the defendant is not liable to the first-named plaintiff it is unnecessary for me to pursue further the first-named plaintiff’s claims for aggravated and exemplary damages or his claim that he is entitled to damages for personal injury consequent upon his commercial loss. I am prepared, however, to express the view that an action in law in negligence in the present circumstances, even if successful, did not avail the plaintiff of a claim for aggravated or exemplary damages. Nor do I think, even if the first-named plaintiff were successful, he would be entitled to damages for personal injury said to arise as a consequence of his economic loss.

The case for the second-named plaintiff

92 In the middle of 1989 the second-named plaintiff, having previously expressed her concern to the first-named plaintiff, that he had given up a secure and well paid position as managing director, to go out on his own, was anxious that she should be legally recognised as the half owner of the Leeton Avenue property.

93 On the first-named plaintiff’s instructions, the defendant prepared a transfer of the first-named plaintiff’s interest in the Leeton Ave property to the first-named and second-named plaintiffs as joint tenants. The transfer was executed but not registered. The defendant has said that it was not registered because the first-named plaintiff told him not to do so. The second-named plaintiff does not assert that she was led to believe that the transfer was registered. In an unchallenged statement by way of affidavit the defendant’s secretary swore that she told the second-named plaintiff that her husband had said that the transfer was not to be registered and that she, the second-named plaintiff said she would speak to her husband about it. That was in 1989. The second-named plaintiff has denied the conversation.

94 Mr Roberts has submitted that I should not accept the evidence of Ms Kremastos, the defendant’s secretary. However, as I have said she was not cross-examined about the matter. I was told from the bar table that the second-named plaintiff had some difficulty when giving evidence in the first proceedings. When she gave evidence before me she appeared unable to cope with the stress of being in the witness box. It is for that reason that, on this issue, I do not find her evidence to be reliable – not because she is consciously untruthful but because in all the circumstances I have doubts as to whether she is able objectively to state what happened in 1989.

95 Mr Roberts has submitted that I should find that it was in fact the defendant himself (and not the first-named plaintiff) who gave Ms Kremastos instructions not to register the transfer. That is to say it was submitted that the entire fault was that of the defendant and the first-named plaintiff had nothing to do with it. I do not accept this submission.

96 Contrary to the submission of the defendant I have come to the conclusion that the he did have a fiduciary obligation to the second-named plaintiff notwithstanding that the work undertaken for her was undertaken upon the instructions of the first-named plaintiff. The defendant has admitted that he did not register the transfer because he was told not to do so by the first-named plaintiff. But in my opinion he had an obligation to the second-named plaintiff and that obligation was not discharged simply because the first-named plaintiff asked him not to register the transfer which, I find, is why it was not registered in 1989. After all the defendant knew the first-named plaintiff was not particularly anxious for the property to be transferred from his name into the names of himself and his wife. To discharge the obligation he had to the second-named plaintiff the defendant should have obtained her (not the first-named plaintiff’s) instructions not to register the transfer and to advise her that if he did not do so her interests in the future may not have been protected in the absence of lodging a caveat over the property. But this advice was not given to her. Unlike the transaction between the first-named plaintiff and the defendant the relationship between the second-defendant was one where confidence was reposed in the defendant by the second-named plaintiff. It was not a commercial transaction. There was no express retainer by the second-named plaintiff but the defendant knew he was acting for her to give effect to the transferring of the Leeton Avenue property from the first-named plaintiff to the first and second-named plaintiffs as joint tenants.

97 I regard the obligation of the defendant as a continuing obligation and certainly the obligation was in existence when the Leeton Avenue property was being offered by the first-named plaintiff as security against loans entered into by him in 1991 when the defendant acted for the first-named plaintiff and the advance from NAB was secured over the Leeton Avenue property.

98 Accordingly, I find the second-named plaintiff has succeeded in establishing that the defendant was in breach of the fiduciary duty he owed her and the loss she is now claiming is directly attributable to that breach. These are not, however, the losses set out in the Statement of Claim. In final submissions on her behalf it has been submitted that Hodgson JA correctly formulated the claim she was making. His Honour said -

“The written submissions put it at around $288,000.00, namely the difference between the value of the house and the $162,000.00 which the second appellant received from the sale proceeds of the house. In my opinion, at the very highest the second appellant's claim would be for one-half the value of the house ($225,000.00) less one-half the $70,000.00 or thereabouts still owing from the finance used to obtain the house, less the $162,000.00 which the second appellant [the second-named plaintiff] actually received, giving a figure of $28,000.00. Indeed, the claim would probably be less than this: the evidence did not show any realistic chance of getting rid of the BNP's $200,000.00 charge, so that this $200,000.00 plus the first appellant's share of the $70,000.00 ($235,000.00 in all) also had to come out of the property. $225,000.00 of this would come from the first appellant's share, leaving $10,000.00 to come from the second appellant's share, reducing her claim to about $18,000.00.”

99 In written submissions the second-named plaintiff has adopted that formulation of her claim and seeks that amount of money together with $15,888.28 being interest calculated from 1995 to the date of hearing of the suit. In my opinion she is entitled to a verdict in that amount.

100 She has also claimed past economic loss consequent upon physical injury the result of her commercial loss in the amount of $137,500 being the loss of her earnings due to personal illness from January 1995 to June 2000 together with interest on past economic loss of $60,684 with a “cushion” for future economic loss consequent upon personal injury. She has also claimed for aggravated and exemplary damages in an amount unspecified. I am of the opinion that she is not entitled to aggravated or exemplary damages. In my opinion there is nothing in the circumstances that calls for either exemplary or aggravated damages. I have found the defendant should have attended more closely to the interests of the second-named plaintiff but, bearing in mind that he had received instructions from the second-named plaintiff’s husband, the first-named plaintiff, I do not think his conduct, should be characterised as conscious wrong-doing in contumelious disregard of the second-named plaintiff’s rights. Nor do I think she is entitled to damages for personal injury much less aggravated or exemplary damages.

101 My conclusions accordingly are as follows -

1. As between the first-named plaintiff and the defendant there will be a verdict for the defendant.

2. As between the second-named plaintiff and the defendant there will be a verdict for the second-named plaintiff in an amount of $18,000 together with interest calculated from June 1995 to the date of judgment.

3. The parties are to file short minutes to give effect to this conclusion.

4. The first-named plaintiff to pay the defendant’s costs of so much of the proceedings as is referable to the claim made by the first-named plaintiff to the defendant.

5. The defendant to pay so much of the costs of the second-named plaintiff as is relevant to her claim.

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Last Modified: 07/28/2003