Girotto v Phillips Fox

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 9791 of 2004

STEVEN GIROTTO	Plaintiff
v
PHILLIPS FOX (A FIRM)	Defendant
and
TSI OPERATIONS PTY LTD	Third party

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JUDGE:	HOLLINGWORTH J
WHERE HELD:	Melbourne
DATE OF HEARING:	12-16, 19-23, 27 April, 4-6 May 2010
DATE OF JUDGMENT:	30 June 2011
CASE MAY BE CITED AS:	Girotto v Phillips Fox
MEDIUM NEUTRAL CITATION:	[2011] VSC 293

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Solicitors – Whether defendant retained as plaintiff’s solicitor – Held that no such retainer existed – Whether defendant owed tortious duty of care in absence of retainer – Whether defendant owed fiduciary duties in absence of retainer – Held that no relevant duty owed to plaintiff

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr R Kendall QC Mr D Clough	Macpherson + Kelley
For the Defendant	Mr M Clarke Ms A Golding	TressCox
For the Third Party	No appearance

TABLE OF CONTENTS

Introduction......................................................................................................................................... 3

The Scott proceeding......................................................................................................................... 4

General observations as to the evidence........................................................................................ 6

The plaintiff and his witnesses....................................................................................................... 6

The family business...................................................................................................................... 6
Mr Girotto and Josh Girotto......................................................................................................... 8
Pietro Girotto............................................................................................................................... 11
Emanuela Girotto........................................................................................................................ 11
Frederick Toscher........................................................................................................................ 11
Geoffrey Missen.......................................................................................................................... 12
Andrew Fairchild........................................................................................................................ 13
Frank Paton.................................................................................................................................. 13

The Phillips Fox witnesses............................................................................................................. 14

Mark Burger................................................................................................................................. 14
Gerry Bean.................................................................................................................................... 15
Timothy Lyons............................................................................................................................ 15

The plaintiff’s claim......................................................................................................................... 15

The contract claim....................................................................................................................... 15
The negligence claim.................................................................................................................. 20
The fiduciary claim..................................................................................................................... 24

Dealings between the parties......................................................................................................... 26

The TSI business and its plans for expansion......................................................................... 26
The initial investment of $415,000............................................................................................ 33
Relationship between old TSI and Phillips Fox..................................................................... 35
The first PF meeting.................................................................................................................... 36
After the first PF meeting........................................................................................................... 44
The second PF meeting.............................................................................................................. 49
After the second PF meeting..................................................................................................... 52
The deposit of funds into the PF trust account...................................................................... 53
The setting up of the overseas companies and bank accounts............................................ 54
The release of the trust funds.................................................................................................... 58
Subsequent events...................................................................................................................... 60

Was there an express retainer?....................................................................................................... 68

Was there an implied retainer?...................................................................................................... 68

The relevant legal principles..................................................................................................... 68
There was no implied retainer.................................................................................................. 70

Was there any tortious duty?.......................................................................................................... 72

The relevant legal principles..................................................................................................... 72
No tortious duty of care arose.................................................................................................. 74

Did any fiduciary duty arise?......................................................................................................... 76

The relevant legal principles..................................................................................................... 76
No relevant fiduciary duty arose............................................................................................. 77

Remaining issues............................................................................................................................. 78

Reliance........................................................................................................................................ 78
The quantum of loss................................................................................................................... 79

Conclusion......................................................................................................................................... 80

HER HONOUR:

Introduction

“The Trader System” is computer software which was originally developed for use by options traders, and was purportedly able to predict market activity. The system was developed in Australia by persons involved with the third party (“old TSI”). By mid to late 1998, old TSI and the individuals who stood behind it (Anthony (“Tony”) Scott, William Boyd and Ashley Arandez) were interested in further developing the software, and restructuring and expanding the business overseas.

In late 1998, the plaintiff, Mr Girotto, became aware of an opportunity to invest in the Trader System business.

The defendant, Phillips Fox, is a firm of solicitors. In late 1998 and early 1999, Phillips Fox provided various professional services to old TSI in relation to the restructure. There were two particularly important meetings held at Phillips Fox on 3 and 17 December 1998 (“the first PF meeting” and “the second PF meeting”, respectively).

On 23 December 1998, a cheque for $2 million was deposited into a Phillips Fox trust account (“the PF trust account”). The drawer of the cheque was Girotto Precast Pty Ltd (“Precast”), a company of which Mr Girotto was one of the directors. On 20 January 1999, Phillips Fox transferred the $2 million from the PF trust account into a bank account in Delaware, USA, at the direction of Mr Girotto and Mr Scott. The $2 million was thereafter spent in various ways, which Mr Girotto says were not in accordance with his wishes or for his benefit.

Mr Girotto claims $2 million by way of damages from Phillips Fox, on the basis that he has lost his entire investment due to Phillips Fox’s breach of:

(a) A retainer to act for him, which was either partly oral and partly implied, or wholly implied; and/or

(b) Tortious duties of care; and/or

(c) Fiduciary duties.

Phillips Fox denies that it ever acted for Mr Girotto or owed him any relevant duty. Phillips Fox says that its only client in relation to the offshore restructure was old TSI, and everything it did was entirely explicable by reference to its express retainer with old TSI.

In so far as it received the $2 million from Precast, Phillips Fox says it did so as a bare trustee for Precast, and discharged its obligations as trustee by holding the funds and discharging them in accordance with the beneficiary’s instructions.

Although a third party notice was served on old TSI, alleging that it was a concurrent wrongdoer in respect of an apportionable claim under the Wrongs Act 1958, old TSI did not appear and played no role in the proceeding, as it had been deregistered in 2006.

The Scott proceeding

In early 2005, Mr Girotto issued a proceeding in this court against Messrs Scott, Boyd and Arandez (No 4211 of 2005). In the Scott proceeding, he pleads that Messrs Scott, Boyd and Arandez were joint venturers for the development and marketing of the Trader System, and that they invited him to join the joint venture, which offer he accepted. He pleads that they engaged in misleading and deceptive conduct, breached various fiduciary duties, and engaged in a conspiracy to defraud him, in connection with his investment in the TSI business.

In the Scott proceeding, he claims the sum of $2 million (which is also claimed in this proceeding), as well as further payments of $415,000, $200,000 and $500,000 (which additional payments are referred to, but not claimed, in this proceeding).[1]
[1]The Scott proceeding was not the first attempt to recover these further sums of $415,000, $200,000 and $500,000. On 22 July 2003, Precast (not Mr Girotto) lodged proofs of debt in respect of those amounts in the administration of TSI. The claim for $415,000 was described as being for “refund of monies paid, claimed due to total failure of consideration.” The other two sums were each said to be a “loan advance”.

Default judgment was entered against Mr Arandez in February 2006, with damages to be assessed later.

Mr Girotto made several applications to have the Scott proceeding and this proceeding heard and determined together. The remaining defendants in the Scott proceeding vigorously opposed that course. In December 2008, Master Kings dismissed Mr Girotto’s first such application in both proceedings. Appeals against those orders were dismissed on 6 April 2009 by Byrne J; his Honour also made various orders for the preparation of both proceedings for trial, but did not set any trial date in either proceeding.

On the application of Mr Girotto, the Listing Master set this proceeding down for trial, commencing on 12 April 2010. However, Mr Girotto did little to progress the Scott proceeding until around March 2010, when he applied again to have the two proceedings fixed for hearing at the same time.

On 7 April 2010, after hearing arguments as to the extent of any overlap of issues, and the state of readiness for trial of each proceeding, I determined that this proceeding should be heard by me first (commencing on 12 April 2010), and the Scott proceeding heard by me immediately afterwards (commencing on 4 May 2010).

Throughout the trial in this proceeding, it was anticipated that the trial in the Scott proceeding would commence as soon as this one had finished.

In the last few days of this trial, shortly before the trial of the Scott proceeding was due to commence, the two remaining defendants, Messrs Scott and Boyd, were declared bankrupt on their own application.

No doubt realising that nobody else was going to defend the claim, including the quantification of damages, Mr Arandez applied to set aside the default judgment, so he could defend the Scott proceeding. On 11 June 2010, Associate Justice Daly adjourned the further hearing of Mr Arandez’s application to set aside the default judgment, until after judgment has been delivered in this proceeding.

General observations as to the evidence

The evidence of the witnesses for both sides suffered to some degree, due to the fact that they were being asked to recall events which had occurred some 11 or 12 years before the trial, and in respect of which most of them had not kept notes. I have no doubt that the passage of time meant that memories were affected to some degree, and the evidence of most of the witnesses involved some degree of reconstruction (even when it was honestly engaged in).

Furthermore, for the professional witnesses on both sides, such as lawyers and accountants, this was obviously just one of many transactions they had been involved with over the years.

The Phillips Fox witnesses faced a further disadvantage, which was not of their making. This proceeding was commenced in late 2004, some 5-6 years after most of the relevant events had occurred. At no stage prior to the commencement of this proceeding had Mr Girotto ever suggested to Phillips Fox that he regarded the firm as having acted on his behalf in 1998-1999, or that he had any possible claim against the firm. Accordingly, there was no occasion for the Phillips Fox solicitors to take steps to record their versions of events, during those intervening years, when the relevant events would obviously have been fresher in their memories.

No doubt because of the impending trial in the Scott proceeding, none of Messrs Scott, Boyd or Arandez (or related parties, such as Mr Boyd’s brother, Mark Bayoud) were called to give evidence in this case. In the circumstances, the failure to call them does not give rise to any adverse inference against either party under the rule in Jones v Dunkel.[2] Nevertheless, their absence as witnesses left significant factual gaps in the evidence in this case.
[2](1959) 101 CLR 298.

The plaintiff and his witnesses
The family business

Mr Girotto’s father, Pietro Girotto, and Pietro’s brother, began a concreting business which eventually grew into a substantial family concern. Over time, their business activities were run through a large number of companies, which were variously referred to in court as the Girotto group of companies, or the family business. Further companies were added to the group as the business expanded, or for particular purposes, such as when a new product was being developed. The decision to set up new companies seems to have been largely driven by what the accountants or financial officers advised was appropriate or desirable.

Precast was one of a number of companies in the Girotto group. It was incorporated in 1989. Its principal business activity was the design and manufacture of prefabricated concrete panels, and it seems to have been the principal operating company within the group.

Over time, Mr Girotto and his siblings became directors and shareholders in numerous family companies, including Precast, particularly after Mr Girotto’s mother died in 1990.

In June 1998, Pietro Girotto resigned as a director of Precast. But, in late 1998, he was still the beneficial owner of the majority of shares in Precast (through his company, Paese Developments Pty Ltd).

Mr Girotto worked in the family business. His responsibilities were primarily on the production side. He was a construction manager at the time of the relevant events. Mr Girotto was the beneficial owner of all of the issued shares in a company called S & EG Investments Pty Ltd (“Steven’s company”). He was the sole director of Steven’s company from November 1997 until 10 March 1999.

Mr Girotto’s brother, Giuseppe (“Josh”) Girotto, was much more involved with the management and administrative side of the family business than his brother. In particular, he was the managing director of Precast between 1991 and 2006. Josh Girotto was also the sole director and beneficial owner of all of the shares in a company called JG Equity Investments Pty Ltd (previously called G & KG Investments Pty Ltd) (“Josh’s company”).

The shareholding in Precast changed over time, but at all times relevant to this proceeding, Steven’s company and Josh’s company (as well as Pietro’s company) owned shares in Precast.

Mr Girotto and Josh Girotto

Much time was spent exploring the issue of Mr Girotto’s previous business experience. On the one hand, the defence sought to portray Mr Girotto as a “sophisticated” businessman, well able to protect his own interests and used to obtaining advice from consultants, solicitors and accountants. On the other hand, the plaintiff’s case involved portraying Mr Girotto as somebody inexperienced in business, and unfamiliar with seeking professional help.

As at 1998, Mr Girotto had never owned or traded shares or options in any public company. Nor had he ever engaged lawyers or accountants to act on his own behalf (as opposed to on behalf of a family company). Apart from his shareholdings in the various family companies, his only other investment had been the purchase of his own home.

As at the end of 1998, Mr Girotto had been a director of 10, and a shareholder in 9, family companies, including Precast. (Since then, he has been appointed a director of another 13 family companies.) In 1998-1999, Precast alone had a turnover of about $20 million; this was not a small business. And while I accept that Josh Girotto, as managing director, had greater responsibility for business decisions than Mr Girotto, Mr Girotto eventually acknowledged in cross-examination that he had some experience in entering into business transactions, albeit primarily in the building industry.

Mr Girotto said that he could not recall all of the offices or shareholdings which he held in family companies, and was very vague about what role some of the companies played within the business. I accept that he did not have much interest in or understanding of corporate structures. I also accept that he often signed documents put in front of him by people he trusted, without reading or really understanding them. Whilst not a good example of the proper discharge of director’s duties, his conduct was perfectly understandable in the context of the family business and how it was run. Unfortunately for him, he carried that attitude and behaviour through to his dealings with Messrs Scott, Boyd and Arandez.

Mr Girotto was not somebody who was concerned with paperwork. He kept no contemporaneous notes of any relevant conversations, notwithstanding that he decided to invest almost $2.5 million, based largely on what three strangers, Messrs Scott, Arandez and Boyd, told him in a series of meetings over several months.[3]
[3]The only other information he appears to have relied upon was a rather sketchy business plan, which will be discussed later in these reasons.

Mr Girotto’s witness statement (carefully crafted by his lawyers) suggested that he had a much clearer recollection of events than his oral evidence actually demonstrated. After hearing his oral evidence, it was clear to me that he had very little independent recollection of many matters, and little head for detail.

Even after large portions of inadmissible material had been removed, his witness statement was still riddled with conclusionary statements, such as that something had been “agreed”.

Much of his evidence involved a large degree of self-serving reconstruction. For example, it was important to Mr Girotto’s case against Phillips Fox to try to establish that at the time of the first and second PF meetings: he had made no final decision to enter into the TSI investment; and he only authorised Phillips Fox to release the $2 million, in reliance on the assumption that they were looking after his interests, and that all necessary documentation had been prepared. That led him to give self-serving explanations about certain documents and events which I do not accept as accurate, for reasons that I will explain later.

In late 1998, Mr Girotto and Josh Girotto participated in an exercise which involved the rendering of $415,000 worth of false invoices by old TSI, and the payment of those invoices by Precast (“the sham transaction”). The precise details of what occurred will be considered later in these reasons. The sham transaction was structured so as to enable Precast to obtain a tax deduction, to which it was clearly not entitled. Even at the time of trial, some 12 years later, no attempt had ever been made to file an amended tax return.[4]
[4]Boral became the sole shareholder in Precast in late 2008, but there was no reason that the Girotto brothers could not have filed an amended tax return, while the Girottos still owned and controlled the company.

The way in which Mr Girotto dealt with this transaction in his evidence did not reflect well on his credibility as a witness. In his witness statement, Mr Girotto dealt at some length with the circumstances surrounding the transaction, and clearly tried to convey the impression that he thought this was all perfectly legitimate. For instance, he asserted that because Mr Scott was a solicitor “I figured … he must have been satisfied with the legality of proceeding in this manner.” Josh Girotto also said he relied on the fact that the payment method had been suggested by Mr Scott, a solicitor, whose professional advice he trusted.

Mr Girotto persisted for some time in cross-examination, in denying that he knew there was anything dishonest about the transaction, before finally conceding that he knew of the dishonesty at the time. But even the way he made that eventual concession was rather telling:

I suggest to you you knew at the time that this was dishonest? --- I guess – I am not sure how to answer that but perhaps the best answer for that is yes.

I came to the conclusion that, in much of his evidence, Mr Girotto was indeed trying to give “the best answer”, the one that best suited his case.

On the other hand, although he said he was “apprehensive” about the transaction at the time, Josh Girotto persisted in denying that he knew that there was anything wrong with the sham transaction. He was the managing director of a multi-million dollar business. His apparently less intelligent, and certainly less commercially experienced, brother knew at the time that it was dishonest to claim a tax deduction in respect of a payment made on false invoices. I found Josh Girotto’s denials of the obvious to be quite implausible, and to reflect poorly on his credit.

Pietro Girotto

Mr Girotto’s father, Pietro Girotto, gave very limited evidence, relating to discussions he had with Josh Girotto, in late 1998, about the possibility of investing in the TSI business. Whilst there were occasional problems with his comprehension of the English language or commercial concepts, I found him to be an honest and reliable witness.

Emanuela Girotto

Mr Girotto’s sister, Emanuela Girotto, also gave evidence. Until about 2000, Ms Girotto was also known by her married name, Emanuela Soba, and was referred to in some of the relevant documents by that name. Ms Girotto had no formal qualifications, and, until she started doing clerical work at Precast in 1998, had only worked in retail jobs.

She was involved in various discussions with her brothers about the possible TSI investment. In about November 1998, Josh Girotto had called her into his office and asked her to “assist Steven in relation to any investment he makes in TSI.” And in mid-1999, she was appointed a director of some TSI companies in Australia, at the request of Mr Girotto.

I had no reason to doubt her honesty as a witness. However, she did not have a sophisticated understanding of business matters, or a detailed recollection of relevant events.

Frederick Toscher

Frederick Toscher was a friend and business associate of the Girotto family. He worked as a consultant for Precast. His background was as a concreter, but he was heavily involved in advising Mr Girotto in relation to the proposed TSI investment.

Mr Toscher frequently tried to downplay the extent to which he was involved in assisting Mr Girotto, particularly in relation to financial matters and the TSI investment. But, Josh Girotto described Mr Toscher as “a resource” that he had made available to help Mr Girotto in relation to financial matters. And Mr Girotto himself said that Mr Toscher gave him advice as a friend, colleague and assistant.

Mr Toscher was the person who first learned about the Trader System and introduced Mr Girotto to it. He was present for many important meetings with Messrs Boyd, Scott and Arandez, at the first and second PF meetings, and in discussions with Mr Girotto about whether or not to proceed with the TSI investment. He also accompanied Mr Girotto overseas in January 1999, to attend to the incorporation of foreign companies. It is clear that Mr Toscher was somebody Mr Girotto trusted and depended upon.

Mr Toscher engaged in some blatant reconstruction, in relation to something allegedly said by him at the second PF meeting. In the witness box, he said he had “suddenly” remembered making a comment at the meeting, about ensuring that the investment was in the name of Mr Girotto, personally, rather than Precast. I do not accept that he did make any such comment at the second PF meeting. It was not referred to in his detailed witness statement, or the notes he made at the meeting. He could offer no convincing explanation as to why he had suddenly remembered this after 12 years. Nobody else present at the meeting suggested it was said, and there was no apparent reason for it to have been said, in terms of what else was being discussed at that meeting. I formed the conclusion that Mr Toscher was simply trying to assist his friend, Mr Girotto, to meet the Phillips Fox argument that Precast was the true investor. The way in which he gave this evidence did not reflect well on Mr Toscher’s overall credibility.

Geoffrey Missen

Geoffrey Missen was an accountant. Until around August 1997, he practised in Melbourne with the firm Alexander & Spencer. In that capacity, he started to act as accountant for Mr Arandez and companies associated with him.

In 1997, he became the accountant for old TSI and the TSI Unit Trust, of which old TSI was the trustee. He moved to the Queensland firm, Cash & Co, and continued doing old TSI’s accounts after he moved to Queensland. He later acted for some other TSI-related companies, after they were incorporated in February 1999.

Around March 1999, Mr Missen also started doing the accounts for Precast, Mr Girotto, Josh Girotto and their personal companies.

He came to Melbourne and attended the first and second PF meetings, as well as various meetings of the directors of old TSI, and meetings with Messrs Girotto and Toscher.

Mr Missen impressed me as a credible witness. Unfortunately, and understandably (given his role) he had little independent recollection of the detail of critical meetings.

Andrew Fairchild

Andrew Fairchild was a solicitor formerly employed at Phillips Fox. Initially, Mr Girotto proposed to call Mr Fairchild as a witness, to give evidence in relation to an allegation that Phillips Fox was aware, as at 20 January 1999, of some misconduct by Mr Boyd. However, that allegation was eventually abandoned during the course of the trial, so the plaintiff’s case closed without his having called Mr Fairchild.

Then, during the defence case, Mr Girotto’s counsel sought and obtained leave to re-open his case and call Mr Fairchild, for the sole purpose of proving a particular document. No issue arose in relation to his credibility.

Frank Paton

Mr Paton was a special counsel in the solicitors’ firm, Hunt & Hunt. A former president of the Law Institute of Victoria, he was called to give expert evidence about what a prudent solicitor would have done in certain factual circumstances.

The Phillips Fox witnesses

Phillips Fox called the following witnesses: Mark Burger, the commercial partner in charge of the relevant files; Gerard (“Gerry”) Bean, a tax partner, who had limited involvement with the restructure; and Timothy (“Tim”) Lyons, who worked as a senior associate with Mr Burger on the restructure file.

Mark Burger

Mr Burger joined Phillips Fox as a solicitor in 1987, became a senior associate in 1990, and a partner in 1998. His practice throughout his professional career has been in corporate and commercial work. He has considerable experience in corporate restructuring, including through the use of overseas entities.

Mr Burger was in the witness box over a period of four days, substantial parts of three of which were spent in cross-examination.

Mr Burger freely conceded that he had little independent recollection of many relevant matters, and was largely reliant on the Phillips Fox file to answer numerous questions. Given that fact, he was understandably cautious about agreeing to certain contentious propositions, without first refreshing his memory from the documents.

On some occasions, Mr Burger’s tone of voice or facial expressions appeared to demonstrate a degree of irritability or frustration, but that was invariably when he was being interrogated – yet again – on a topic which had already been the subject of vigorous and detailed cross-examination. I found his response in that regard perfectly understandable, given the manner of cross-examination, and not reflective of dishonesty or evasiveness.

Mr Girotto’s counsel was critical of Mr Burger’s evidence as to the meaning of certain words or expressions which he used in his file notes. Counsel cross-examined him as to the meaning and then, when counsel did not like the answers which Mr Burger gave, said his evidence should be rejected in favour of what counsel suggested was “the plain meaning” of the words. I found Mr Burger’s explanation for what he meant by certain words credible and plausible.

Gerry Bean

Dr Bean became a partner of Phillips Fox in 1997. He was asked to provide some specialist tax advice around 17-18 December 1998, but otherwise had no other involvement with the old TSI file.

I found him a credible witness.

Timothy Lyons

Mr Lyons is currently a partner at Phillips Fox. In 1998-9, he was a senior associate at the firm.

Mr Lyons was not present at either the first or second PF meetings. He was mainly involved after 4 January 1999, in assisting Mr Burger, primarily by drafting certain correspondence and agreements.

I found him a credible witness.

The plaintiff’s claim

Mr Girotto’s claim was amended numerous times throughout the proceeding, including several times during the trial. It is necessary to set out large parts of the pleading in detail, in order to understand why the plaintiff’s claim must fail.

The contract claim

Mr Girotto alleges that Phillips Fox were retained as his solicitors, as well as the solicitors for old TSI. Phillips Fox says the firm was only ever acting for old TSI.

The alleged retainer is pleaded in para [2] of the third further amended statement of claim, dated 27 April 2010 (“the final claim”), in which Mr Girotto alleges that in December 1998 he retained Phillips Fox to act on his behalf as his solicitors in relation to:

(a) the proposed acquisition by the plaintiff, directly or through an offshore nominee company, of a 5% share in the capital of an offshore holding company then yet to be incorporated but which was to be called TSI Holdings (“the offshore holding company”), which company was:

(i) to be the owner of all [intellectual property connected with “The TRADER System” software] (“the intellectual property”);

(ii) to own 100% of the issued capital of another company then yet to be incorporated which company was to be licensed by the offshore holding company to use [the intellectual property] for sales and marketing worldwide;

(b) his acquisition, directly or through an offshore nominee company of an option to purchase an additional 15% share in the capital of the offshore holding company;

(c) [Phillips Fox] taking custody of and holding in its trust account on trust for the plaintiff or his nominee the sum of $2 million which was to be paid by or on behalf of [him], on account of an initial 5% share to be acquired by [him] in the capital of the offshore holding company;

(d) advising upon and preparing and procuring the execution of documents governing the rights and entitlements of the plaintiff (or his offshore nominee company) as shareholder in the offshore holding company, including advising upon and preparing a shareholders’ agreement;

(e) pending the transfer of ownership of all of the intellectual property to the offshore holding company and the completion of the tasks referred to in sub-paragraph 2(d) above, advising upon the rights and entitlements of the plaintiff insofar as they would be affected by:

(i) the imminent restructuring of the business of developing and marketing “The TRADER System” which had, since in or after 16 June 1997 been conducted by [old TSI] or through [the TSI unit trust] with [old TSI] as trustee;

(ii) the winding up of the [TSI unit trust].

(f) advising of the circumstances under which and the time at which the plaintiff should release the money held in trust to any entity in connection with the proposed acquisition;

(g) the taking of all such steps and the doing of all such things as were required to ensure that when released from the [PF trust account] the said $2 million was to be paid to the entity (being the offshore holding company) which owned the intellectual property;

(h) advising upon and establishing an offshore company to be the nominee company for the plaintiff which would hold shares in the offshore holding company.

(The acquisition of the said shareholding in the offshore holding company and the establishment and the implementation of the shareholders agreement is hereinafter called “the restructured business”.)

The particulars to para [2] allege that the retainer was partly oral and partly to be implied, alternatively, it was to be implied from the facts and circumstances described in paras (i) to (ix) of the particulars. The particulars run for more than three pages. For present purposes, it is sufficient to note the following:

(a) In so far as the retainer was oral, it is alleged to have occurred at the first and second PF meetings, and in a phone call between Mr Girotto and Mr Burger on or about 20 January 1999;

(b) In so far as it is to be implied, Mr Girotto relies on various documents and events which are alleged to have been created or occurred at various times between the first and second PF meetings and April 1999.

The particulars will be considered in more detail later in these reasons.

Para [3] of the final claim pleads that there were terms of the retainer, alternatively a contractual duty, to:

(a) Exercise all reasonable skill, care and diligence in acting for Mr Girotto;

(b) Give proper and reasonable advice to him in relation to each of the matters pleaded in para [2];

(c) Protect his interests by all appropriate means;

(d) Take all such steps and give all such advice as was required to protect his investment of $2 million.

The final claim goes on to allege a number of steps taken by the parties. I have re-ordered them into chronological order, for ease of comprehension.

Para [7] of the final claim pleads that on or about 24 December 1998, Mr Girotto deposited the sum of $2 million into the PF trust account (“the trust money”), to be held by Phillips Fox “pending the implementation of and the completion of all transactions required to carry out the proposed investment, including the transfer of the intellectual property to the offshore holding company and the execution of a shareholders’ agreement to be executed by all parties to the venture.” The very extensive particulars to para [7] only deal with the question of where the trust money came from (whether from Mr Girotto personally, or Precast). The pleading does not allege that there was any specific discussion between Mr Girotto and Phillips Fox about the deposit (other than anything alleged to have been said at the first PF meeting).

Mr Girotto pleads that Phillips Fox did the following things:

(a) Arranged for four companies to be set up in the Turks and Caicos Islands on or about 8 January 1999, as the nominee companies of the following persons:

(i) Ebony Limited (“Ebony”) – Mr Scott;

(ii) Absolute Limited (“Absolute”) – Mr Boyd;

(iii) Boona Limited (the company will be called “Ivory” in these reasons, as that was the preferred name, and is the one mentioned more frequently throughout the relevant documents) – Mr Arandez; and

(iv) Shadows Limited (“Shadows”) – Mr Girotto (para [5]);

(b) Arranged for the offshore holding company, Wire Securities Limited (“Wire Securities”), to be incorporated in the Cayman Islands on or about 11 January 1999, with the following shareholding: Ebony, Absolute and Ivory, with 13,300 shares each; Shadows with 2,500 shares (para [4]);

(c) Arranged for a company, Trader Systems International, LLC (“the Delaware company”), to be incorporated in Delaware, USA, on or about 14 January 1999 (para [6]).

Mr Girotto pleads the following matters in relation to the payment into the PF trust account:

(a) On or about 20 January 1999, Mr Girotto telephoned Mr Burger, and asked him “whether Tony Scott needed to sign a document to authorise the transfer of the [trust money] plus interest from [the PF trust account] into another account in connection with the restructured business” (para [7A]);

(b) By a facsimile from Mr Girotto, countersigned by Mr Scott, Mr Girotto authorised Phillips Fox to transfer the trust money from the PF trust account to an account in Delaware belonging to the Delaware company. Mr Girotto pleads that, although the facsimile was dated 19 January 1999, it was not sent from the London hotel where he was staying until after the phone call referred to in the previous paragraph (para [7B]);

(c) On or about 20 January 1999, and without further consulting Mr Girotto and without providing any advice to him, Phillips Fox transferred the trust money plus accrued interest as directed (para [7C]);

(d) At the time of the transfer:

(i) The Delaware company was not the owner of and did not hold the intellectual property;

(ii) The Delaware company was not the offshore holding company;

(iii) No shareholders agreement had been prepared and executed (para [7D]).

Mr Girotto pleads that if, on 19 or 20 January 1999, Phillips Fox had informed him that:

(a) The Delaware company was not the owner of and did not hold the intellectual property;

(b) The Delaware company was not the offshore holding company;

(c) The shareholders agreement had not been prepared and executed; and

(d) Those facts and matters meant that after the trust money had been transferred, he would not be able to determine or control how the trust money was used or applied,

he would not have authorised Phillips Fox to transfer the trust money (para [7E]).

Mr Girotto alleges that Phillips Fox breached each of the contractual terms or duties in a number of respects, set out in para [8]. The particulars of the alleged breach include allegations of failure to advise Mr Girotto of Phillips Fox’s potential conflict of duty, failure to advise Mr Girotto to obtain independent legal advice, and failure to warn Mr Girotto of the risks of releasing the trust money in the circumstances. The particulars of breach run to almost 4 pages, contain a number of new factual matters, and are confusing in many respects. Given my finding that there was no retainer between Mr Girotto and Phillips Fox, it is not necessary to consider these matters further.

In para [8A], Mr Girotto pleads that had Phillips Fox warned him of the various matters pleaded in para [8], and advised him to get independent legal advice, he would not have authorised the release of the trust money and, would not have proceeded with his investment of $2 million.

Mr Girotto’s claim for loss and damage is deceptively simple: he alleges that he has lost the entire $2 million investment, plus interest on it, as a result of Phillips Fox’s breaches of contract.

The negligence claim

Although Mr Girotto pleads the existence of tortious duties “further and alternatively”, it was not really suggested that any tortious duty of care would be different from the relevant contractual duty of care. Accordingly, I will only consider the tortious duties as an alternative pleading, that is to say, whether Phillips Fox owed Mr Girotto any relevant tortious duty, in the absence of a retainer.

In para [10] of the final claim, Mr Girotto alleges that Phillips Fox owed a tortious duty, by reason of the following matters:

(a) The instructions given by him to Phillips Fox at the first and second PF meetings, concerning his proposed acquisition of shares in the offshore holding company;

(b) The instructions given by him to Phillips Fox to establish a separate company on his behalf, to acquire shares in the offshore holding company after it had acquired the intellectual property;

(c) The depositing by him of the trust money into the PF trust account, to be held by Phillips Fox pending the incorporation of the offshore holding company and the transfer of the intellectual property to it;

(d) The statement made by Mr Burger at the first PF meeting that he would attend to all things required to implement the proposed investment, including the incorporation of an offshore holding company and the transferring of the intellectual property to it, and that he would prepare a shareholders agreement for all the parties to the proposed venture;

(e) The arrangement made at the first PF meeting that Mr Scott would be the point of contact for Mr Burger, and that Mr Scott would liaise with Mr Burger “on behalf of all of the parties” including Mr Girotto;

(f) The assumption by Phillips Fox, through Mr Burger, of responsibility to carry out the instructions given to it by Mr Girotto;

(g) The 20 January telephone call, during which Mr Girotto asked Mr Burger whether Mr Scott needed to sign a document to authorise the transfer of the trust money out of the PF trust account into another account. At the end of the discussion, Mr Burger spoke to Mr Scott, who was with Mr Girotto when he made the telephone call from London;

(h) The sending of the 19 January fax, directing Phillips Fox to immediately transfer the trust money and interest from the PF trust account to an account with PNC Bank in Delaware for the Delaware company (which was not the offshore holding company nor the owner of the intellectual property);

(i) Phillips Fox holding the trust money in the PF trust account and by reason of the matters set out in sub-paras (c) and (h), Phillips Fox was in a position to prevent the risk of loss to Mr Girotto;

(j) Mr Girotto’s vulnerability to the risk of loss of the $2 million in the circumstances where he did not have independent legal advice. His vulnerability is said to arise from the matters set out in (c) to (h) above, and from Phillips Fox’s failure to advise him to seek independent legal advice, all of which induced him to take no steps to obtain independent legal advice to protect himself in respect of his investment in the restructured business. (However, there is no allegation that Phillips Fox knew of his alleged vulnerability, or that his vulnerability arose from his lack of business experience or knowledge.)

The alleged duty is said to be one to exercise all reasonable skill, care and diligence to ensure that:

(a) Mr Girotto’s interests were protected;

(b) The following things occurred:

(i) The intellectual property had been transferred to the offshore holding company;

(ii) All of the shareholders had executed a shareholders agreement containing appropriate safeguards to ensure that the intellectual property or other assets (including any part of the $2 million) could not be divested to the detriment of Mr Girotto; and

(iii) The trust money was not released from the PF trust account to an account of any entity other than the offshore holding company, and was not released to the offshore holding company, until the intellectual property had been transferred and a shareholders agreement had been executed.

Para [11] alleges that in the above circumstances, Phillips Fox well knew or ought to have known that Mr Girotto relied on the firm’s expertise as solicitors in:

(a) Preparing and procuring the execution of all necessary and proper documentation in connection with his proposed acquisition of shares in the offshore holding company; and

(b) Taking all steps necessary to protect his interests to ensure that the $2 million advanced by him to acquire a 5% shareholding was not released from the PF trust account to an account of any entity other than the offshore holding company and was not released to the offshore holding company until:

(i) The intellectual property had been transferred to it; and

(ii) A suitable shareholders agreement had been executed by all shareholders.

No particulars of knowledge are pleaded.

Para [12] pleads that Phillips Fox at all times knew or ought to have known that if it failed to exercise reasonable care and skill, Mr Girotto would suffer loss and damage. The particulars provided are not in fact particulars of Phillips Fox’s knowledge; they are in the following terms:

[Phillips Fox] was a firm of solicitors and [Mr Girotto] was relying upon its skill and experience in doing all things required to properly implement and complete the investment in accordance with the instructions given to it and in such a way that the investment made by [Mr Girotto] was secure and properly applied to the purpose for which it was to be made.

Para [13] of the final claim pleads that each of the contractual breaches pleaded in para [8] was also a breach of the tortious duty to exercise due skill, care and diligence.

There is then a further discrete breach pleaded in para [14], namely that Phillips Fox breached its duty of care by failing to prepare and procure the timely execution of a shareholders agreement in Wire Securities or any other company, which contained appropriate safeguards to ensure that the intellectual property and other assets owned (or which were to have been owned) by Wire Securities could not be divested to the detriment of Mr Girotto.

The pleadings of loss and causation are the same as for the contractual claim.

The fiduciary claim

The final claim alleges that Phillips Fox owed Mr Girotto certain fiduciary duties, from 3 December 1998 until at least the end of May 1999:

(a) Acting as Mr Girotto’s solicitors (implicitly, pursuant to a retainer)(para [16]); or

(b) “Alternatively”, in the absence of a retainer (para [16A]).

The alternative duties are said to arise in the absence of a retainer by reason of the following matters:

(a) In the circumstances described in the particulars to para [2], Phillips Fox undertook to act for and on behalf of Mr Girotto in doing all things to implement his investment as a joint venture party in the restructured TSI business;

(b) By undertaking to act for and on behalf of Mr Girotto, Phillips Fox assumed power to affect his interests in a legal or practical sense;

(c) By virtue of the above matters, Mr Girotto was reliant on Phillips Fox and was vulnerable to the exercise of that power by Phillips Fox; and

(d) Phillips Fox had the opportunity to exercise that power to Mr Girotto’s detriment.

The particulars to para [16A] allege that Phillips Fox had power, and Mr Girotto was vulnerable, in so far as:

(e) Phillips Fox had taken custody of the trust money;

(f) Phillips Fox undertook tasks in the restructuring of the TSI business that affected Mr Girotto’s interests;

(g) Phillips Fox assumed the role of solicitor with respect to Mr Girotto as client, thereby obviating the need for Mr Girotto to have independent legal advice.

As with the alleged tortious duty, it is not alleged that Mr Girotto was vulnerable by reason of his lack of business experience or acumen.

Although para [17] pleads seven alleged fiduciary duties, Mr Girotto’s counsel conceded in closing address that the last four were not maintainable. There remained a pleading of the following alleged fiduciary duties:

(a) A duty of loyalty and good faith;

(b) A duty to advise Mr Girotto of any conflict of duties which arose in the circumstances;

(c) A duty to advise Mr Girotto to seek independent legal advice regarding the matters the subject of the retainer.

The pleading of breach (para [18]) runs for some 3 pages and in general terms involve allegations that Phillips Fox preferred the interests of others (including Messrs Scott, Boyd and Arandez) to those of Mr Girotto.

The claim for equitable compensation is for the same amount as for the contract and tort claims, namely loss of the $2 million investment, plus interest.

Dealings between the parties
The TSI business and its plans for expansion

Old TSI was incorporated on 16 June 1997, under the name Trader Systems International Pty Ltd. The initial directors were Messrs Scott, Boyd and Arandez.[5] At all relevant times, the shareholders in old TSI were Mr Scott and Mr Arandez (30 shares each) and Mr Boyd (40 shares).[6]
[5]Although Mr Girotto has never been an officeholder of old TSI, his sister, Ms Girotto, was a director from 9 August 1999 until 15 November 2000.
[6]Mr Girotto was never a shareholder in old TSI.

The TSI Unit Trust was set up by a deed dated 18 June 1997, with old TSI as the trustee. The trust deed appears to have been prepared by Mr Scott, who was a solicitor. The initial unitholders were AV & LJ Holdings Pty Ltd (as trustee for the Arandez Family Trust), AJ Scott Pty Ltd (as trustee for the Scott Family Trust) and Bayoud Investments Pty Ltd (as trustee for the Bayoud Family Trust). The Arandez and Scott companies had 36 ordinary units each, and the Bayoud company had 48 ordinary units, out of the initial total of 120 units. In August 1997, the Bayoud company sold 10 of its units in the TSI Unit Trust, for $20,000, to Andrew Fairbank (as trustee of the Andrew Ian Fairbank Family Trust).

The ownership of the intellectual property in the Trader Systems software was not straightforward. By an agreement dated 27 June 1997, between Mr Boyd and old TSI, Mr Boyd as owner of the copyright licensed old TSI and the TSI Unit Trust to “use the Trader System to develop the software program for client to use and to sell the program to clients.” The agreement said that Mr Boyd at all times retained “the ultimate control in the use of the Trader System and how it is used.”

Old TSI owned some relevant trademarks. “The TRADER System” was registered as a world trademark on 12 October 1998, and old TSI and its logo were registered as a composite trademark on 15 January 1999.

Old TSI advertised free seminars about using the Trader System software for options trading, in August and September 1998. Mr Toscher learned of the seminars from a newspaper advertisement, and asked Mr Girotto if he would like to attend. Mr Toscher and Mr Girotto, along with about a dozen other people, attended such a seminar in Melbourne. Messrs Boyd, Scott and Arandez told the audience about the Trader System software, and how it was being developed to also cater for share trading.

Mr Girotto said that within a day or so after attending the seminar, at Mr Boyd’s invitation, he went to old TSI’s office in Melbourne and met with Messrs Scott, Boyd and Arandez. He said that during that meeting, he signed on as a subscriber for TSI’s options trading program on a trial basis. On 4 September 1998, he received a letter and invoice for $8,000, for the software and associated training and support.

In his witness statement, Mr Girotto said “having seen how the program worked I thought it would be a valuable tool for lots of people to use.” Now, Mr Girotto was someone who had never been involved in any share or option trading at all. And in his oral evidence, he conceded that he did not even trial the software himself (leaving it to Mr Toscher to test) or understand how it worked. His assessment that “this would be a valuable tool for lots of people” is typical of the misplaced confidence that Mr Girotto had in his own judgment and that of Mr Toscher.

Mr Girotto heard from Mr Toscher that Mr Scott was interested in having somebody come in as an investor to take the TSI business global.

Mr Girotto was not interested in active involvement, in a day-to-day operational sense, in the TSI business, but was prepared to put money in. Although he had initially enquired about just lending money, it became clear that old TSI was looking for an equity investment, not a loan. He was told that there was a 20% equity stake available for him, if he wanted it.

Between September and November 1998, Messrs Girotto and Toscher met on many occasions with Messrs Boyd, Scott and Arandez. The latter explained how the TSI business worked, their plans for further expansion, and how much a 20% share would cost.

It became apparent that Mr Girotto could not afford the $7 million US that was being sought for a 20% share. Over time, it was suggested that Mr Girotto initially acquire 5%, and have a right of first refusal to acquire an additional 15%.

At one particular meeting between Mr Girotto, Mr Scott, and either Mr Boyd or Mr Arandez, around early November, Mr Girotto was told that:

(a) The software and formulae used in the Trader System were owned by old TSI;

(b) If he invested venture capital, the TSI business would be restructured using his money; and

(c) The restructuring would involve the ownership of software and formulae being transferred to an off-shore holding company, of which he would be a shareholder.

A 22-page document headed “Summary Business Plan” was prepared for prospective investors, although there is no evidence before the court as to how many persons, other than Mr Girotto and Mr Toscher, actually considered or discussed the possibility of investing in the business.

Although that document bore the date “1^st July 1998” on its front page, it seems that different versions of the document may have been prepared on different dates. The version produced to the court, version 3.1, also bore a print date of 6 November 1998. This was the version which Mr Girotto was given by Mr Scott or Mr Boyd, under cover of a letter dated 6 November 1998 (“the offer letter”), which stated:

Briefly, our corporate structure will be headed by one world-wide holding company called TSI Holdings (TSIH). TSIH will own all copyrights and trademarks as assets and is intended to be incorporated offshore. We also have one development company called TSI Developments (TSID) that operates from Melbourne, Australia and presently services Australian customers. TSID will be 100% owned by TSIH. All promotions will be undertaken by separate companies (TSIP) set up in each country, structured as a “Master Licensee” for each country. The Master Licensee will have a 75% share in TSIP and TSIH the remaining 25% share in each of the companies (TSIP) that are established around the world.

The business plan submits an offer to a suitable venture capital partner to take up a maximum of 20% share in TSIH for $7,000,000 USD or the equivalent of $11,290,000 AUD at an agreed exchange rate average of 62 cents. Based on these figures, a 5% share in TSH represents $2,822,500 AUD. However, we confirm the proposal that you provide $2,415,000 AUD as venture capital for which you will receive 5% share in TSIH provided this amount is made available prior to the end of 1998. In addition, this share in TSIH entitles you to have one person sit on the Board of Directors. Also, we will give you the first right of refusal on the remaining 15% share provided for a venture capital partner.

The business plan described the Trader System in glowing terms:

The Trader System has a 90% average success rate in identifying where the security within a particular market is likely to go within specific time frames. Many regarded this as something that was not possible. The R&D funded by the Directors, had been achieved in a time frame and budget that many considered not possible.

It said that old TSI “no longer sees itself as just in the business of developing and supplying software products. Rather, it sees itself in the business of ‘cultivating a community of educated and self sufficient traders’.” The business plan was full of such positive sentiments.

It spoke about sales performance to date, the business vision, and the intention to market the product overseas through an offshore corporate entity. There was a diagram of the proposed organisational structure, which showed the holding company as a Dubai-based corporation, and various other entities in Australia and overseas. It was said that the holding company would own all the copyright and trademarks, as well as 100% of the Australian development company.

In order to carry out further research and development and to expand overseas, the business was looking for an investor who would inject $7 million US and receive 20% of the capital (although it was not entirely clear in which entity or entities the shareholding would be held). The business plan said that old TSI aimed to float the development company on the New York or London stock exchanges, or sell the development company, within 5 years of business operation.

The business plan promised very substantial profit returns to a potential investor. It predicted a net profit before tax over the next 5 years of “approximately $120 million for Australia/NZ”, meaning a return on investment in that market of around $24 million for the proposed investor. The return was even more extraordinary if one looked at the overseas markets, where the return was predicted to be in the billions of dollars; the business plan said that “based on current projections for the international markets, your estimated potential return is around $3,548 million”.

The business plan explained that the initial prototype of the software system had only been made available from October 1997; that is to say, at the time these extraordinary profit predictions were being made, there had only been about nine months of sales of the product anywhere in the world. There was no real attempt in the business plan to justify how the proposed 20% investor might receive the truly remarkable 5 year return of some $3.5 billion, on an investment of $7 million.

In summary, the business plan was long on marketing “spin”, and short on factual information.

In his witness statement, Mr Girotto said:

[40] In respect of financial projections that were set out in the business plan, the figures were much larger than anything I had ever come across. Nevertheless, at the time I saw those figures in November 1998 I considered that, even if the actual results fell short they were still going to be very attractive. …

[42] This was my first experience in looking at business plans.

I have not had the benefit of hearing Messrs Scott, Boyd and Arandez’s accounts of these initial meetings, and any representations they may have made. Given that the contents and outcome of these meetings may need to be the subject of findings in the Scott proceeding (if Mr Arandez is given leave to defend), I will be cautious in making specific findings about those matters. But it is clear on Mr Girotto’s own evidence that he perceived the opportunity to invest in the TSI business as a very attractive opportunity, a chance to make more money than he had ever thought possible.

Mr Toscher was also enthusiastic about Mr Girotto proceeding with the investment.

The fact that the offer letter offered a “discount” of $400,000 on a 5% stake, provided that the $2,415,000 was made available prior to the end of 1998, seems to have added to the attractiveness of the proposed deal, as far as Mr Girotto was concerned.

During the period between August and November, Mr Girotto had a number of discussions with Mr Toscher and Josh Girotto about the possibility of investing. He discussed with them the offer letter and business plan. As well as evaluating the figures, Mr Toscher provided assistance in terms of looking at the offshore structures. It is clear that all three thought the TSI business could be very successful, and the investment opportunity was very attractive. Emanuela Girotto was also involved in a number of these discussions.

Mr Girotto needed to work out how to fund the $2,415,000, as he did not have such a sum available from his own resources. He discussed the possibility of other members of the Girotto family investing in the business.

Josh Girotto told his father, Pietro Girotto, about the potential investment opportunity in or about November 1998. Josh told him that the Trader System was a software package for trading shares, and asked if he was interested in investing. Pietro Girotto told Josh Girotto that he was not interested in the stock market and believed that real estate was a much better investment. He also told Josh Girotto that Precast would not be involved in such an investment.

While Mr Girotto was considering his options, Mr Scott told him that old TSI needed $415,000 to attend to the payment of existing debts and to put towards the restructure (including establishing off-shore companies). The circumstances in which Mr Girotto came to arrange for the payment of that amount will be considered shortly.

Mr Girotto said in his witness statement that, at the time he arranged for the $415,000 to be paid, he did not consider himself to be in any binding agreement to become an investor; he thought he was doing nothing more than “expressing interest”, while he decided whether to invest or not. In his oral evidence, he said that Mr Scott had told him that there was another investor or investors interested in the business, so Mr Girotto saw the paying of $415,000 as “a way of keeping, I guess, my seat in the chair to keep my chances open.”

Although he said that Mr Scott told him that if he did go ahead and invest, then the $415,000 would be applied towards his 5% equity, it does not seem from Mr Girotto’s evidence that there was any discussion about whether or how the money would (or, indeed, could) be returned to Mr Girotto, if he decided not to proceed.

For present purposes, it is sufficient to note that Mr Girotto was so trusting of Mr Scott, so confident in his own judgment (aided by his brother and Mr Toscher), and so keen to become involved in the TSI business, that he paid nearly half a million dollars, and entered into the sham transaction, without any appropriate contract or paperwork to protect himself, and without seeking any independent advice as to the advisability of doing so.

Some time in late November or early December 1998, Mr Girotto sent a letter on Precast letterhead, signed by him as a director, to Mr Boyd at old TSI. The letter was in the following terms:

I would like to take this opportunity to thank you for this extraordinary offer in which I am sure together we will all benefit greatly.

Please acknowledge our acceptance of your offer and we look forward to receiving further documentations in order to bring this proposal closer to finalization.

Irrespective of whether or not the letter constitutes a formal acceptance of any binding offer made to Mr Girotto (or Precast), its terms are nevertheless illustrative of the degree of enthusiasm which Mr Girotto had for a business proposal about which he knew so little.

At no stage did Mr Girotto carry out what might be described as a proper due diligence investigation, before deciding to invest almost $2.5 million. Instead, he seems to have been motivated by the expectation of extraordinarily high profits and the idea of being involved in an international business. He seems to have, uncritically, accepted everything he was told by Messrs Scott, Boyd and Arandez.

Mr Burger and Phillips Fox were listed in the business plan as old TSI’s solicitors and barristers, and Mr Girotto had read and was aware of that fact. Some time in November 1998, Mr Scott told Mr Girotto that there would have to be some discussion with Phillips Fox about the particular off-shore locations to be selected and the transferring of old TSI’s assets to the new off-shore holding company. Mr Scott told him that he had already had some dealings with Phillips Fox in connection with old TSI.

In para [70] of his witness statement, Mr Girotto said:

Scott said to me that Phillips Fox would need to be involved for:

(a) transfer of the rights to The Trader System to happen;

(b) the set-up of company and personal structures;

(c) giving advice about the various off-shore locations being considered;

(d) the legal documentation, including a shareholders agreement.

He did not say on whose behalf Scott said they would “need to be involved”. Even in his carefully-crafted witness statement, Mr Girotto did not go so far as to suggest that Mr Scott told him that Phillips Fox would be acting on behalf of Mr Girotto. And in his oral evidence, Mr Girotto never said that he asked Mr Scott (or anyone else) to instruct Phillips Fox on his behalf.

The initial investment of $415,000

As mentioned earlier, during November, Mr Scott had asked Mr Girotto to make $415,000 available to old TSI for various purposes.

Under cover of a fax dated 23 November 1998, Mr Arandez sent 3 invoices to Mr Girotto. Each of the invoices was addressed to Precast, and purported to be for “management consulting and R&D services” provided by old TSI to Precast between July and November 1998. The invoices bore dates in July, September and November 1998, and were for three different amounts, which totalled $415,000.

On 25 November 1998, Mr Girotto signed a cheque for $415,000 on Precast’s bank account and sent it to old TSI, in purported payment of the three invoices. Josh Girotto was involved in the payment of the invoices, in so far as he was the person who had requisitioned the cheque at the request of his brother.

By letter dated 11 December 1998, addressed to Girotto at Precast, Scott referred to “our recent discussions” and confirmed receipt of the sum of $415,000. The letter did not indicate what the funds were for.

The invoices were a complete sham. Old TSI had not provided any such services to Precast. Mr Girotto said that Mr Scott advised him to make the $415,000 payment in this way, so that Precast could obtain a tax deduction.

As mentioned earlier, I am satisfied that Mr Girotto and Josh Girotto were both well aware at the time that the invoices were false and that Precast was engaging in an exercise to procure a benefit to which it was not entitled.

At no time was Phillips Fox ever informed of the sham transaction, and Mr Girotto does not seek to recover the $415,000 in this proceeding (although he does seek to do so in the Scott proceeding). Nevertheless, the transaction is potentially relevant to this proceeding in the following ways:

(a) The credibility of Mr Girotto and Josh Girotto is affected by the accounts they gave of the transaction;

(b) The payment details are relevant to Phillips Fox’s argument that the real investor was Precast and not Mr Girotto; and

(c) These events demonstrate just how trusting Mr Girotto was of Mr Scott (who he knew was a solicitor), and how keen he was to enter into what he perceived to be a very attractive business opportunity. Even accepting that it was solely Mr Scott’s suggestion to structure the payment in this way, Mr Girotto was prepared to knowingly engage in a highly irregular transaction, without seeking any independent professional advice as to the advisability of doing so, and without any documentation to protect his interests.

Relationship between old TSI and Phillips Fox

The corporate restructure was not the first occasion on which old TSI had engaged Phillips Fox to act as its solicitors.

In February 1998, the ASC informed Mr Scott that it considered that the way the Trader System software operated involved old TSI carrying on an investment advice business, without an appropriate licence. Mr Scott, on behalf of old TSI, sought advice and assistance from Phillips Fox. On 26 February 1998, Mr Burger opened a file for old TSI, with the matter description “Corporations Law”. Shanti Rubens was the Phillips Fox solicitor with principal responsibility for this file, under Mr Burger’s supervision.

On 1 September 1998, Mr Burger opened another file for old TSI, with a matter description of “Dealers Licence Application”. Phillips Fox continued to work on that file throughout the times relevant to this proceeding.

Then, on 11 November 1998, Mr Burger wrote to Mr Scott at old TSI about a new matter. The letter was a fairly standard-form solicitors’ fee agreement letter. It was headed “Corporate Restructure” and relevantly stated:

Thank you for asking us to assist you in relation to finalising a proposal to restructure the ownership of computer programs and related intellectual property which will arise on the implementation of corporate restructure.

Please read it carefully and if you would like to instruct us, sign it and return a signed copy to me.

…

At this stage, given that we have not together identified the scope of our instructions, it is not possible to give a definitive cost estimate. Once the scope has been established, I will endeavour to do so as soon as possible.

…

As promised, please find enclosed a copy of the paper on minimising the risk of shareholder disputes.

The letter accords with Mr Burger’s recollection that it was not clear at that time just what tasks Phillips Fox would be asked to perform in relation to the restructure.

On 11 November, Mr Burger also completed a matter instruction form, to open a new file for “Trader Systems International”. The matter description was “Corporate structure” and the client contact was listed as Mr Scott.

On 1 December 1998, Mr Scott signed the retainer letter on behalf of old TSI, and forwarded it to Phillips Fox.

The first PF meeting

There is no dispute that the first PF meeting was held at Phillips Fox’s offices on 3 December 2010, and was attended by the following people: Messrs Burger, Scott, Arandez, Boyd, Missen, Girotto and Toscher.

In the particulars to para [2] of the final claim, Mr Girotto alleges that the following matters occurred during the first PF meeting:

(a) He was introduced as the person contemplating investing $2 million as venture capital in the offshore holding company, joining Messrs Boyd, Arandez and Scott as shareholders in that company;

(b) He produced to Mr Burger the offer letter and the business plan which he had received from old TSI;

(c) Mr Burger discussed the proposed offshore corporate structure and the proposed restructuring of the old TSI business;

(d) Mr Burger said he would supply details of the PF trust account so that monies on account of any acquisition of shares in the offshore holding company by or on behalf of Mr Girotto could be held by Phillips Fox pending the completion of all steps necessary to implement the investment and to ensure that the intellectual property was transferred to the offshore holding company;

(e) Mr Burger “accepted instructions given to him by” Mr Girotto at the meeting:

(i) concerning his proposed acquisition of shares in the offshore company; and

(ii) to establish a separate company on behalf of Mr Girotto to acquire shares in the offshore holding company which, in turn, was to have acquired the intellectual property;

(f) Mr Burger said he would “attend to all things required to implement the proposed investment including the incorporation of an offshore holding company and the transferring of the intellectual property to it and the preparation of a shareholders agreement for all of the parties to the proposed venture”;

(g) In respect of providing advice about the proposed restructure and preparing documents in connection therewith, Mr Burger:

(i) stated in effect that he would handle all dealings “in connection with the restructure and that rather than obtaining instructions from, or providing advice to, the parties separately, he would for convenience for the most part liaise with them through Tony Scott;” and/or

(ii) accepted instructions that Tony Scott would be the point of contact “for all of the parties to the proposed agreement”.

Although many of the topics pleaded by Mr Girotto were indeed the subject of discussion at the first PF meeting, the pleading does not accurately reflect what actually occurred at the meeting. It does not even reflect Mr Girotto and Mr Toscher’s own evidence as to what occurred.

The only record of the meeting is contained in a file note prepared by Mr Burger on 4 December. The date on the file note seems to have led Mr Girotto and others to initially proceed on the basis that the meeting was on that date.

Much time was spent in examining the file note, and its contents are therefore reproduced in full:

At the request of Tony Scott I met with his colleagues including Ashley Rarandez [sic] and William (?) a current director.

We also met with Geoff Missen and two other gentlemen whose names I cannot recall who are likely to be the providers of the Venture Capital.

We met at our office at about 2.20pm and concluded the meeting at 3.15pm.

During the meeting we discussed the various corporate structure proposals which were presented to us.

I recommended that Geoff Missen, the accountant who provides advice to the company and its related parties should carefully analyse the corporate structure identifying just which companies were needed to be put in place.

He should then explain the rationale in detailed terms for implementing the structure so that Gerry Bean can provide some insight on the appropriateness or otherwise of what is being proposed.

Following this process, we would then seek to implement whatever structure was decided upon.

I agreed to make contact with various parties in both the Cayman Islands and if possible the Turks Islands and an attorney in the United States. They were wanting to establish the cost of registering Corporations in these three jurisdictions.

We also discussed the need to establish services namely secretarial and other services would be required by these parties.

I agreed to provide them with the information so that they could make an informed decision. At the same time, I would provide them with a cost estimate on the restructure involving sale documentation, shareholder agreement and the like.

I also agreed to provide them with our telegraphic transfer details for the $2 million of funds which were to be TT’d to our account in due course.

William made it clear that he wanted to travel to the Cayman Islands to establish appropriate banking arrangement and we didn’t discuss these in any details.

It was agreed by all that Tony Scott would be the primary contact for me in relation to all dealings on the restructure. I explain that all other parties were more than welcome to ring me at their convenience to discuss the progress made but for ease of dealing with the matter, Tony would be the primary contact.

On the typed file note, Mr Burger subsequently handwrote “Boyd” under the question mark after the name “William”, and “Steven Girotto and Frederick Tosher” underneath the words “whose names I cannot recall”.

There is no real dispute that Mr Girotto was introduced at the meeting as a likely provider of venture capital. Even though Mr Toscher gave evidence that he was not intending to invest personally at that time, it seems that he was also introduced at the meeting as a likely investor.[7]
[7]Mr Scott and Mr Missen clearly regarded Mr Toscher as a potential investor, as he was listed as such in a document they provided to Mr Burger on 8 December.

Mr Girotto said he had “some” recollection of the meeting, independent of what was in the file note. But when pressed for detail, it became apparent that he had more of an impression or understanding of what was said, rather than actual recollection.

Mr Burger stated that he did not have a clear recollection of the first PF conference, beyond what was in the file note. He described the conference as “purely an introductory meeting”, a label which I regard as an accurate description of the meeting, having regard to the evidence.

There was substantial agreement from all the witnesses present that Mr Girotto said little, if anything, on that occasion.

In his witness statement, Mr Girotto said “I did not do much talking at that meeting. Instead, I spent most of the time listening to the others so that I could learn more about what the project entailed.” He confirmed in cross-examination that he did not say “much at all” or “anything in particular”, and was observing and listening to others. When pressed as to what he did say at the meeting, he replied “I am sure I would have spoken. I just can’t remember what I said.” Mr Girotto agreed in cross-examination that he did not ask or tell Mr Burger to do anything at the first PF meeting.

I am not persuaded that at the first PF meeting Mr Girotto gave, or that Mr Burger accepted, any instructions to act for Mr Girotto.

It is clear that there was much discussion about the proposed offshore corporate structure, including about the possibility of incorporating companies in the Cayman Islands, the Turks Islands and the USA. During those discussions, various corporate structure proposals were drawn on a whiteboard, but it is not clear precisely what shape the possible structures took. Although it was put to several witnesses that the handwritten diagram which appears at CB 1558 was a print-out from the whiteboard at that meeting, I do not accept that was the case. Apart from the fact that no witness could positively identify the document as such, there is another copy of that diagram at CB 1512, which bears a fax header dated 9 November 1998 and Mr Arandez’s name. That is to say, this handwritten document must have been created at least some weeks before the first PF meeting, and could not be the whiteboard print-out.

I do not accept Mr Girotto’s evidence that the corporate structure was essentially “agreed” at the meeting. It is clear from the evidence of all the other witnesses, and from the file note, that there was still much work to be done in relation to the structure.

Nor do I find that Mr Burger was informed at the first PF meeting what form Mr Girotto’s possible participation in the project would take (beyond knowing that he was a likely provider of venture capital). In particular, I am not satisfied that Mr Burger was aware that Phillips Fox would be asked to establish “a separate company on behalf of Mr Girotto to acquire shares in the offshore holding company which, in turn was to have acquired the intellectual property” (as alleged in the particulars, although not really supported even by Mr Girotto’s own evidence).

Phillips Fox rendered a further interim invoice to old TSI on 23 February, in respect of providing draft agreements and liaising with international lawyers.

On 23 February 1999, the following companies were incorporated in Australia:

(a) TSI Development Pty Ltd (new TSI). Its initial directors were Messrs Scott, Arandez and Bayoud. Subsequently appointed as directors were Mr Fairbank (from 28/12/99) and Ms Girotto (from 9/8/99). The initial shareholding of 31,100 shares was held by the Delaware company;

(b) TSI Australia Ltd (“TSI Australia”). Its initial directors were Messrs Scott, Arandez and Bayoud. Subsequently appointed as directors were Mr Fairbank (from 28/12/99) and Ms Girotto (from 9/8/99). It is not clear from the ASIC records who initially held the 100 ordinary shares, but it was later converted to an unlisted public company;

(c) TSI Training & Support Pty Ltd (“TSI Training”). Its shareholder was the Delaware company. Its initial directors included Messrs Scott, Arandez and Bayoud. Ms Girotto was later appointed a director (from 9/8/99).

On 25 February, Mr Lyons sent Mr Scott what he described as a “rough draft” of a shareholder agreement, which was largely a standard-form precedent.

On 23 March, Mr Lyons emailed Mr Scott an amended asset sale agreement between old TSI and Wire Securities, and various agreements in relation to the intellectual property. Mr Lyons said “I await any specific instructions you may have in relation to the shareholders agreement to be entered into by each of the shareholders in [Wire Securities] and [the Delaware company].” The email also noted that old TSI would apply for a financial adviser’s licence and would issue licences of the Trader Systems software, but that all other services would be provided through new TSI. That is to say, old TSI was still envisaged in late March 1999 as having an ongoing role in the restructured business.

Phillips Fox rendered a further interim invoice to old TSI on 26 March, in respect of preparing draft agreements.

On 29 March, Mr Scott faxed Mr Lyons “letters from us and Steven Girotto concerning our agreement for his involvement. This is to be incorporated in the shareholder agreement.” The attachments to the fax cover sheet were: the offer letter and enclosed business plan; Mr Girotto’s undated acceptance letter; and three letters between old TSI and Mr Girotto/Precast, dated 11 December, all of which have been discussed earlier in these reasons. This seems to have been the first time these documents had been provided or shown to anybody at Phillips Fox.

On 19 April, Mr Lyons emailed Mr Scott TSI draft shareholders agreements for Wire Securities and the Delaware company. He said:

Please note that we have not provided any taxation advice in relation to the operation of [Wire Securities] and [the Delaware company] and we strongly recommend that the parties obtain independent tax advice in relation to the taxation effect of having each of these companies incorporated in those jurisdictions …

Mr Girotto complains that some of the trust money was used to make payments without his being consulted. But Mr Girotto had received notices of meetings of the directors of Wire Securities and the Delaware company, held in Melbourne on 20 April 1999. The agenda items included:

(a) The acquisition by Wire Securities of the intellectual property from old TSI;

(b) A licence agreement for Wire Securities to use the intellectual property from Ivory and Absolute;

(c) A licence agreement between Wire Securities and the Delaware company, to market and sell the Trader System from Wire Securities;

(d) A licence agreement between the Delaware company and new TSI, to develop and provide technical support for the Trader System;

(e) A licence agreement between the Delaware company and TSI Australia, to market and sell the Trader System; and

(f) A funding proposal, by which the Delaware company would lend new TSI AUD $1.23 million, with a statement as to how the money would be spent by new TSI. Some $400,000 was to be used by new TSI to obtain equipment finance or for initial cash flow. The proposal expressly noted that almost $830,000 would be “given” to old TSI as trustee of the TSI Unit Trust, in order for it to pay out creditors. Those creditors were said to include Messrs, Scott, Arandez, Boyd, Bayoud, Fairbank, or their family trusts, and the substantial payments were said to be for salary, bonuses, repayment of loans, redemption of unit-holdings and the like.

Notice of those meetings had only been given to Mr Girotto the day before they were held, and he was in Sydney at the time. So he sent Mr Toscher along to the meetings as his nominee. The documents clearly demonstrated that substantial amounts of money held by the Delaware company were going to be used to the benefit of Messrs Scott, Boyd, Arandez and related parties.

Mr Girotto said he was “shocked” to receive the notices of meeting, and instructed Mr Toscher not to give approval for any of the things put forward. He said that it was when he read these documents that he first learned about old TSI acting as trustee of the TSI Unit Trust, and that Messrs Scott, Boyd and Arandez were looking to be paid out of the money he was investing.

In fact, Mr Girotto did nothing once he learned of these things, which he said were so shocking to him. In particular, he did not immediately complain to Mr Scott and the others about what had happened. Nor did he contact Phillips Fox and ask how this could have happened. Instead, he continued to be involved in the TSI business and invested further money in the business later in 1999.

Phillips Fox rendered a further interim invoice to old TSI on 27 April, in respect of providing draft and amended agreements.

On 25 May 1999, Mr Lyons provided Mr Scott with further draft agreements: one was a distribution agreement between Wire Securities and the Delaware company; the other was a reseller agreement between the Delaware company and new TSI.

By mid-1999, there had been a serious falling out between Mr Arandez and the other directors and shareholders. At a meeting of the board of the Delaware company held in Melbourne on 3 June 1999, Messrs Scott, Boyd and Girotto resolved that Mr Arandez was no longer fit to hold office, and removed him as a director and officer of the company. The minutes record that another meeting had been convened by Mr Arandez on 31 May 1999, at which Mr Arandez had demanded that Mr Scott resign and that he be appointed president and CEO instead, “failing which Mr Arandez said he would leave and prevent the companies from operating or destroy the companies.” The Arandez proposal not having been accepted, Mr Arandez left the May meeting, taking the source codes and formulae for the Trader System, “thus preventing the companies from continuing to operate.”

On 24 May 1999, Mr Boyd had pleaded guilty in the County Court to various criminal charges, relating to dishonest conduct between May and July 1995, including obtaining property by deception, attempting to obtain a financial advantage by deception, and producing a false accounting document.

By July 1999, Mr Girotto was concerned by: the uncertainty created by Mr Arandez’s departure; having recently learned that Mr Boyd had been in a court case; and the lack of information he was getting. He called a meeting for 13 July 1999 with Messrs Boyd and Scott, and asked his siblings, Josh and Emanuela Girotto, to attend. According to the agenda, which Mr Girotto arranged to be typed, the topics to be discussed at the meeting included the structure of TSI, a business plan, communication and responsibilities. It seems that Mr Girotto felt that he had been left “in the dark” when it came to important decisions.

At the meeting, Messrs Scott and Boyd provided certain information, and gave certain assurances to the Girottos. Mr Girotto asked for his sister to be appointed to the board of the Australian companies to gain information about what was going on. Messrs Scott and Boyd agreed to this, and Ms Girotto was subsequently appointed a director effective 9 August 1999.

On 17 September 1999:

(a) Old TSI changed its name from Trader Systems International Pty Ltd to TSI Operation Ltd;

(b) New TSI changed its name from TSI Development Pty Ltd to Trader Systems International Pty Ltd;

(c) Mr Arandez was removed as company secretary of new TSI, TSI Australia, and TSI Training, and Mr Bayoud was appointed in his place.

On 27 September 1999, Mr Girotto invested a further $200,000, by drawing a cheque on Precast, payable to Wire Securities. On 15 October 1999, Mr Girotto invested a further $500,000 in the same manner.

During late 1999 and 2000, Mr Girotto and his sister continued to be involved in the TSI business.

By late 2000, Mr Girotto had retained his current solicitors, Macpherson & Kelley, to act for him in relation to his investment in TSI.[8] By letter to new TSI dated 7 December 2000, Macpherson & Kelley said as follows:
[8]Macpherson & Kelley had also acted for Mr Girotto in relation to the sale of his property in Berwick under a contract of sale dated 10 April 1999.

Our client holds 7% of a 20% allocation of shares in the TSI venture that have previously been promised to him.

On 22 November 2000, … your corporate legal counsel wrote to Mr Girotto and we understand that subsequently a meeting took place during which Mr Girotto indicated his interest to take up the opportunity to increase his overall holding to 20%.

As part of this process, our client has asked us to assist him by gathering further information from you so that he can fully consider the offer made by him to you.

So, notwithstanding his knowledge of all of the matters discussed above (including the way in which his earlier investment had been used, the internal troubles within the business, and the fact that he still did not have the protection of any shareholders agreement), Mr Girotto was still interested in investing additional millions of dollars into the TSI business. In fact, he ultimately decided not to do so. But the fact that he was even considering doing so, at a time when he had his own independent legal advice, tends to support the conclusion that he was not troubled at the time by the things of which he now complains.

Interestingly, when Mr Girotto engaged Macpherson & Kelley to act for him in relation to his TSI investment, neither he nor Macpherson & Kelley ever wrote to Phillips Fox advising them of the alleged “change of solicitor.” This is consistent with my finding that Mr Girotto never genuinely believed at the time that Phillips Fox were his solicitors.

Mr Girotto remained as Vice-President of the Delaware company until at least mid- 2003. He continued to attend meetings of officers of the company and remained a signatory to bank accounts.

At its peak, the TSI group operated a business which seems to have had up to 25 employees in Australia alone. Yet, by mid-2003, liquidators had been appointed to new TSI and TSI Australia.[9]
[9]TSI Training had been deregistered in June 2002.

After the TSI business had failed, Macpherson & Kelley made various attempts to obtain information for Mr Girotto about what had happened to his investment. By letter dated 16 July 2003, Mr Scott responded to one such request for information, in the following terms:

Steven Girotto had been invited to and has participated in all board meetings of the Trader System international group of companies. …

In this regard, he was provided with all reports and accounts pertaining to all the business activities of TSI. …

As advised the Australian companies are now under administration, as the business in Australia has no more money despite every effort to save the enterprise. In this regards Steven Girotto has been aware that the local companies have been in difficulties for some time. The reasons that the business had failed is due to undercapitalisation at the outset. In this regard, it may be noted that the original agreement for Steven Girotto to participate in the business was for him to provide capital of US$7 million but not more than one third was ever provided.

Given the state of the evidence before me, I am not in a position to make any findings as to why the TSI business ultimately failed.[10]
[10]That issue may require determination in the Scott proceeding.

Was there an express retainer?

As discussed earlier, there is simply no evidence that Mr Girotto asked Phillips Fox to do anything at either the first or second PF meetings. On the contrary, Mr Girotto accepted that he did not tell Mr Burger to do anything at those meetings, and that he had not authorised Mr Scott or anybody else to tell Mr Burger to do anything on his behalf.

In so far as the particulars to para [2] of the final claim allege that Mr Girotto gave any instructions to Phillips Fox, they have simply not been made out. That is to say, a partly oral and partly implied retainer has not been established.

Was there an implied retainer?
The relevant legal principles

A contract may be inferred from the acts or conduct of the parties, as well as or in the absence of their words. The question is whether the conduct of the parties, viewed in the light of the surrounding circumstances, shows a tacit understanding or agreement.[11]
[11]Integrated Computer Services v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117.

Where a contract is alleged to be inferred from conduct, it is necessary to show that the conduct is of such character as to necessarily lead to the inference that an agreement has been reached.[12] In Meerkin & Apel v Rossett Pty Ltd[13], Charles JA cited with approval the statement of McHugh J in the NSW Court of Appeal in Integrated Computer Services v Digital Equipment Corporation (Aust) Pty Ltd[14] that the conduct of the parties must be capable of proving all the essential elements of an express contract.
[12]Brambles Holdings Ltd v BathurstCity Council (2001) 53 NSWLR 153 at 195.
[13][1998] 4 VR 54 at 62 (“Meerkin”).
[14]Op cit.

As far as the implication of a retainer between solicitor and client was concerned, Mr Girotto’s counsel placed great weight on the decision of the Full Court of the Supreme Court of Western Australia in the case of Pegrum v Fatharly.[15] In particular, they relied upon the following passage:

When both parties to a transaction consult the same solicitor and together give him the information needed to prepare the documents in which their respective rights and obligations are to be set out and the solicitor accepts responsibility to prepare the documents without any indication that he cannot fully discharge his professional duties to them both there is a strong bias towards finding that the solicitor tacitly agrees to act for both parties and to undertake the usual professional responsibilities to them both. … In the absence of a clear indication by the solicitor that the solicitor does not accept one of the parties as his client it is natural in such a case to assume both are relying on him for professional advice and assistance. This follows from the mere fact that both have consulted him. There may be other circumstances which show that there is no reliance by one or other of the parties on the solicitor, but, if not, reliance should be inferred as a fact. [16]

[15](1996) 14 WAR 92 (“Pegrum”).

[16]At 102.

In Meerkin, Charles JA, with whom Callaway and Batt JJA agreed, referred to Pegrum and observed that it is well established that a professional engagement may be implied if it can be shown that the conduct of the parties demonstrated such a relationship had in fact been established.[17]
[17]At 62.

Phillips Fox does not dispute the correctness of those legal principles. But fundamental to the finding in Pegrum that a retainer existed, was the finding that both parties from the outset must have engaged the same solicitor, and together provided instructions and information necessary to prepare documents in which their respective rights were set out. In such a case, an inference may readily be drawn that the solicitor had agreed to act for both, unless he clearly indicated to one party that he did not accept him as his client.

It must be a question of fact in each case as to whether or not a retainer is to be implied, and, if so, as to its scope.

There is no dispute that the existence of a retainer is to be determined on the objective facts, and not on the subjective beliefs of the solicitor or the party alleging to have retained the solicitor.[18]
[18]Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at [227].

There was no implied retainer

The following objective facts point strongly against any finding that an implied retainer existed between Mr Girotto and Phillips Fox, in the terms pleaded by Mr Girotto:

(a) Mr Girotto was aware, after receiving and reading the business plan in early November 1998, that Phillips Fox were the solicitors for old TSI;

(b) Phillips Fox sent a retainer letter to old TSI dated 11 November 1998, which was signed by Mr Scott on behalf of the company and returned to Phillips Fox. The retainer was subsequently refined in the scope of works document;

(c) No retainer letter or scope of works document was ever sent to Mr Girotto, Precast, or any person other than old TSI;

(d) Phillips Fox only ever billed old TSI in respect of the work connected with the restructure;

(e) Mr Girotto never discussed legal fees with Phillips Fox (or Mr Scott), and was never billed, and never paid, for any work done by Phillips Fox;

(f) Mr Girotto attended the first and second PF meetings, essentially as an observer and prospective investor;

(g) Mr Girotto did not give any instructions to Mr Burger or Dr Bean at the first or second PF meetings. Indeed, he barely spoke at either meeting;

(h) Mr Girotto did not authorise Mr Scott, or anybody else, to give instructions to Phillips Fox, at the first or second PF meetings, to do anything on his behalf;

(i) Mr Girotto never asked Phillips Fox to give him advice about the proposed restructure;

(j) Phillips Fox never gave any advice about the restructure specifically addressed to Mr Girotto;

(k) Phillips Fox never sent copies of documents drafted by it to Mr Girotto for comment or execution, nor did he ever request that they do so;

(l) Apart from attending the first and second PF meetings, and the communications regarding the release of the trust money, Mr Girotto had no written or oral communication with Phillips Fox;

(m) At all relevant times, it was expected that old TSI would continue to exist after the restructure, even if its role might be different. At the very least, it was expected to receive money through the restructuring process. That is to say, there was a real purpose in old TSI retaining Phillips Fox to act on its behalf in relation to the restructure;

(n) Everything done by Phillips Fox, and the limited involvement of Mr Girotto with Phillips Fox, is able to be explained by reference to the express retainer with old TSI.

The fact that Mr Girotto and the other individuals may have benefited from some of the work ultimately performed by Phillips Fox at old TSI’s request (for example, from Phillips Fox’s communications with the overseas lawyers about the incorporation of the foreign companies), does not mean that Phillips Fox were acting for, or were retained by, those individuals.

As far as the solicitors themselves were concerned, I am satisfied that the Phillips Fox solicitors only regarded the firm as acting for old TSI.

As far as Mr Girotto was concerned, even if the test was a subjective one, not an objective one, I would not be satisfied that Mr Girotto actually believed at the time that Phillips Fox was acting for him. Commercially inexperienced as he was, he was so driven by the thought of making huge profits, so confident in the judgment of himself and his friend, so trusting of Mr Scott (who he knew was a lawyer, and upon whom he relied for at least some legal advice) and the others, that I doubt that it even occurred to him that he ought to seek legal advice in relation to the proposed investment.

Mr Girotto’s conduct, after the investment started to go wrong, tends to confirm that he did not believe that Phillips Fox were his solicitors. For example:

(a) Even when he learned of how his money had actually been spent, Mr Girotto did not ask Phillips Fox for advice about what he should do;

(b) Knowing in late 1999 that no shareholder agreement had yet been executed, and of the various problems within the business, he sought no advice from Phillips Fox before investing a further $700,000;

(c) When he engaged Macpherson & Kelly to act for him in December 2000 in relation to his investment, he did not contact Phillips Fox or ask Macpherson & Kelley to contact Phillips Fox, to notify them of any change of solicitors;

(d) Indeed, at no time prior to the commencement of this proceeding in late 2004 was it ever asserted to Phillips Fox that they had been retained by Mr Girotto.

In so far as Mr Girotto claims a wholly implied retainer, the claim must fail.

Was there any tortious duty?
The relevant legal principles

Given my finding that there was no retainer between Mr Girotto and Phillips Fox, it is not necessary to consider the various cases which discuss the extent of the tortious duty of care, where there is also a contractual duty of care.

In deciding whether a duty of care is owed absent any contractual relationship, courts focus on concepts of known reliance, assumption of responsibility and vulnerability. In Woolcock Street Investments Pty Ltd v CDG Pty Ltd[19], the majority of the High Court said as follows (citations omitted):

[23] Since Caltex Oil, and most notably Perre v Apand Pty Ltd, the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. “Vulnerability”, in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, “vulnerability” is to be understood as a reference to the plaintiff’s inability to protect itself from the consequences of a defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. So, in Perre, the plaintiffs could do nothing to protect themselves from the economic consequences to them of the defendant’s negligence in sowing a crop which caused the quarantining of the plaintiff’s land. In Hill v Van Earp, the intended beneficiary depended entirely on the solicitor performing the client’s retainer properly and the beneficiary could do nothing to ensure that this was done. But in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords, the financier could itself have made inquiries about the financial position of the company to which it was to lend money, rather than depend upon the auditor’s certification of the accounts of the company.

[24] In other cases of pure economic loss (Bryan v Maloney is an example) reference has been made to notions of assumption of responsibility and known reliance. The negligent misstatement cases like Mutual Life & Citizen’s Assurance Co Ltd v Evatt and Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] can be seen as cases in which a central plank in the plaintiff’s allegation that the defendant owed it a duty of care is the contention that the defendant knew that the plaintiff would rely on the accuracy of the information the defendant provided. And it may be, as Professor Stapleton has suggested, that these cases, too, can be explained by reference to notions of vulnerability.

[19](2004) 216 CLR 515.

The plaintiff’s counsel says that the relevant authorities demonstrate:

[T]hat for a solicitor to have a duty of care with respect to a party with whom he or she does not have a retainer, it must be shown that:

(a) The solicitor was aware that the plaintiff trusted him or her to give advice that would be the basis for action;

(b) The plaintiff’s loss was reasonably foreseeable.

No tortious duty of care arose

Although para [10] of the final claim purports to plead the existence of a tortious duty of care in the absence of a retainer, most of the particulars to that pleading are in fact predicated on the existence of a retainer or agreement between Mr Girotto and Phillips Fox:

(a) Sub-para (a) refers to “the instructions given by [Mr Girotto] to [Phillips Fox] at meetings”;

(b) Sub-para (b) refers to “the instructions given by” Mr Girotto;

(c) Sub-para (c) refers to the conditions upon which it is alleged that Mr Girotto deposited the $2 million into the PF trust account, and is based on an assumption that an agreement was made between Mr Girotto and Phillips Fox in the terms pleaded;

(d) Sub-para (d) refers to a purported agreement made at the first PF meeting to prepare an agreement “for all the parties to the proposed venture”;

(e) Sub-para (e) refers to an arrangement made at the first PF meeting that Mr Scott would liaise with Mr Burger “on behalf of all the parties including [Mr Girotto]”, which assumes that Mr Scott was authorised by Mr Girotto to give instructions on his behalf, and that a retainer existed;

(f) Sub-para (f) refers to instructions given by Mr Girotto to Mr Burger, and the assumption of responsibility by Phillips Fox to carry out those instructions;

(g) Although sub-para (j) refers to the alleged “vulnerability” on the part of Mr Girotto, the pleading is also predicated on the existence of a retainer as pleaded, in that it says: “The vulnerability of [Mr Girotto] arose from the matters set out in sub-paras (c), (d), (e), (f), (g) and (h) above”.

I have already indicated my factual findings in relation to the above matters. For the reasons given earlier, I am not satisfied that Mr Girotto ever gave any instructions to Phillips Fox (directly or indirectly) to act on his behalf in relation to the restructure, or entered into any retainer or other agreement as pleaded by Mr Girotto. Nor am I satisfied that Phillips Fox assumed responsibility to act on his behalf in relation to the corporate restructure. In so far as the alleged tortious duty is said to arise out of such instructions or assumption of responsibility, it must fail.

There are some parts of the particulars to para [10] which are not predicated on the existence of a retainer. Sub-paras (g), (h) and (i) concern the instructions given on 19 January 1999 by Mr Girotto to Phillips Fox, to transmit the trust money. But the pleading does not give rise to a duty of care, as pleaded by Mr Girotto. As the High Court noted in Youyang Pty Ltd v Minter Ellison Morris Fletcher[20], a firm may hold moneys on trust for a depositor without there being any relationship of solicitor and client.
[20](2003) 212 CLR 484 per Gleeson CJ, McHugh, Gummow, Kirby and Hayne JJ.

As mentioned earlier, although para [11] of the final claim concerns “known reliance” (in that it says that Phillips Fox well knew or ought to have known that Mr Girotto relied upon Phillips Fox’s expertise as solicitors to do the things pleaded), there are no particulars of any knowledge pleaded. None of the Phillips Fox solicitors gave evidence of any such actual knowledge. And in the circumstances that I have found to exist, I am not persuaded that Phillips Fox ought to have known that Mr Girotto relied upon them to take all steps to protect his interests.

In summary, I am not satisfied that any tortious duty would arise in this case because:

(a) I am not satisfied that Phillips Fox ever assumed responsibility to act on behalf of Mr Girotto;

(b) I am not satisfied that Mr Girotto actually relied upon Phillips Fox to act on his behalf to do the things alleged by him;

(c) In any event, there was no relevant knowledge on the part of Phillips Fox that Mr Girotto was relying on it to act on his behalf; and

(d) There was no relevant vulnerability on the part of Mr Girotto.

Did any fiduciary duty arise?
The relevant legal principles

Solicitors are frequently subject to fiduciary obligations, because the relationship of solicitor and client is one in which the solicitor undertakes or agrees to act for or on behalf of the client.

The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations … viz, trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.[21]

[21]Hospital Products Ltd v United States Surgical Corporation & ors (1984) 156 CLR 41 at 97 per Mason J.

Contractual and fiduciary relationships may co-exist, but they can arise independently.

I was referred to a number of authorities in relation to the fiduciary duties between solicitors and clients, including the Court of Appeal decision in Watson v Ebsworth & Ebsworth (A firm)[22], which was published after I had reserved my decision. In that case, in deciding that a fiduciary relationship did not come into existence between the particular parties, independently of any implied retainer, the court looked at whether there was any relationship of dependence or reliance between the parties.
[22][2010] VSCA 335.

Mr Girotto relied in particular on the case of Cameron v McMahon[23], particularly at [52]-[53]. That case involved a claim by a client against an accountant. Although in that case no claim was brought for breach of contract, there clearly was a contractual relationship between the parties. The client had expressly requested that documents be prepared; they were so prepared and then collected by the client; the client met individually with the accountant and raised specific concerns about the transaction; the accountant gave the client specific assurances; the accountant invoiced the client for the work. It is hardly surprising that, in those circumstances, fiduciary duties were held to exist in that case.
[23][2009] VSC 277 per Davies J.

No relevant fiduciary duty arose

As mentioned earlier, Mr Girotto purports to plead alternative cases, one predicated on the existence of a retainer (para [16]), and one which is not so predicated (para [16A]).

In so far as it is predicated on the existence of a retainer, it must fail for the reasons previously given.

But the “alternative” claim in para [16A] is really not an alternative at all; as pleaded, it still depends on the establishment of the solicitor-client relationship. The pleading refers to Phillips Fox “undertaking to act for Mr Girotto”, but that begs the question “act for as what, or in what capacity?” The only sensible answer in the circumstances is “act for as solicitor”.

For the reasons already given, I am not satisfied that Phillips Fox “undertook to act for and on behalf of [Mr Girotto] in doing all things necessary to implement [his] investment as a joint venture party in the restructured business”, or that any of the other matters alleged in para [16A] have been established.

It follows that I am not satisfied that any relevant fiduciary duty arose in this case.

Phillips Fox does not dispute that it owed the duties of a bare trustee to the depositor of the trust money. It paid the trust money out of the PF trust account at the direction of the beneficiary. There is no claim made against Phillips Fox based on breach of duty as bare trustee.

Remaining issues

Because I am not satisfied that Phillips Fox owed Mr Girotto any relevant contractual, tortious or fiduciary duty, it is not necessary to consider questions of breach, reliance, loss, contributory negligence or apportionment.

However, I do wish to make a few brief observations about some aspects of those matters.

Were it necessary to decide, I seriously doubt whether Mr Girotto would be able to prove his pleaded case on either reliance or the quantum of loss.

Reliance

As far as reliance is concerned, Mr Girotto alleges as part of both his contractual and tortious claims that he would not have authorised Phillips Fox to transfer the trust money if, on 19 or 20 January 1999, Phillips Fox had told him that:

(a) The Delaware company was not the owner of and did not hold the intellectual property;

(b) The Delaware company was not the offshore holding company;

(c) The shareholders agreement had not been prepared and executed;

(d) Those three facts and matters meant that after the trust money had been transferred, he would not be able to determine or control how the trust money was used or applied.

But Mr Girotto knew or ought to have been aware of at least some of those matters, at the time he authorised the transfer of the trust money:

(a) He knew that no shareholders agreement had been signed, and that he had not even seen a draft agreement by that time; and

(b) He knew that the various offshore companies had only just been incorporated in the week or so before he authorised the transfer, because he had been travelling with Mr Scott and the other directors to the various overseas countries, arranging for that to happen.

Mr Girotto continued to participate in board meetings for a period of more than 3 years, during which he became aware of many troubling aspects of the TSI business, including that:

(a) The money he had invested had been used to pay out unitholders in the old TSI trust and to pay other old debts, rather than to capitalise the new business;

(b) There was still no shareholders agreement in place to protect his rights;

(c) The intellectual property was still not owned by the Delaware company;

(d) Mr Boyd had a criminal conviction; and

(e) There had been a serious falling out with Mr Arandez.

At no stage did he turn to the firm who he now says he thought were his solicitors and ask them what he ought to do in relation to those matters.

In September-October 1999, he invested a further $700,000, at a time when he knew full well that a shareholders agreement had still not been signed, that the Delaware company was not the holding company and did not own the intellectual property, and that he did not have control over how his funds had been invested.

By late 2000, he had retained Macpherson & Kelley as his solicitors. At that time, he was still contemplating investing further substantial sums into the business, notwithstanding his knowledge of all of those matters.

The quantum of loss

As far as loss is concerned, the trust money was paid into the bank account of the Delaware company. Over time it was paid for a variety of purposes, some of which were for the benefit of other investors (in their capacity as old TSI directors, employees or unit-holders), and some for company purposes. Even if there had been a shareholders agreement, and the Delaware company had owned the intellectual property, it does not follow that Mr Girotto (as a minority shareholder) would not have lost some or all of his investment.

Mr Girotto invested in the TSI business as a whole. Just because he invested $2 million in a business that ultimately failed, it does not follow that the measure of loss and damage, for a contractual or tortious claim against Phillips Fox, is the amount of his investment.

Conclusion

For these reasons, even accepting that Mr Girotto and not Precast was the investor, I am not satisfied that Phillips Fox owed Mr Girotto any relevant contractual, tortious or fiduciary duty, as pleaded. It follows that the plaintiff’s case must fail.

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[2011] VSC 293

30 June 2011