Sewell v Zelden - [2010] NSWSC 1180

No judgment structure available for this case.

CITATION: Sewell v Zelden [2010] NSWSC 1180

HEARING DATE(S): 5-8 July 2010

JUDGMENT DATE :
3 September 2010

JURISDICTION: Equity Division

JUDGMENT OF: Rein J

DECISION: Held that the first defendant breached his fiduciary duty to the plaintiff.
Held that the second and third defendants are liable for "knowing assistance" under the second limb of Barnes v Addy.
Matter stood over for orders to be prepared based upon the findings contained in the reasons for judgment.

CATCHWORDS: EQUITY - fiduciary duties - breach - conflict of interest - defences to breach - disclosure and informed consent - where solicitor acted for client on sale of property owned by solicitor's wife's company, and proceeds of sale used to discharge mortgage on home of solicitor and solicitor's wife - whether solicitor breached fiduciary duty to client - EQUITY - second limb of Barnes v Addy ("knowing assistance") - whether solicitor's wife and company owned by her had knowledge of solicitor's dishonest and fraudulent breach of fiduciary duty to client - EQUITY - remedies - breach of fiduciary duty - account of profits - "profit" or "benefit" received by solicitor, solicitor's wife and company owned by her

LEGISLATION CITED: Uniform Civil Procedure Rules 2005 (NSW)

CATEGORY: Principal judgment

CASES CITED: Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279
Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 147
Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1
Boscauer v Bajwa [1996] 1 WLR 328
Briginshaw v Briginshaw (1938) 60 CLR 336
Chan v Zacharia (1984) 154 CLR 178
Clark Boyce v Mouat [1994] 1 AC 428
Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574
Consul Development Pty Limited v DPC Estates Pty Limited (1974) 132 CLR 373
Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68
Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89
Farrington v Rowe McBride & Partners [1985] 1 NZLR 83
Fitzpatrick v Waterstreet [2000] ANZ ConvR 15
Foskett v McKeown [2001] 1 AC 102
Hamilton v Whitehead (1988) 166 CLR 121
Heperu v Belle (2009) 258 ALR 727
Hospital Products Ltd v United States Surgical Corporation (1983) 156 CLR 41
In re Head, Head v Head (No. 2) [1894] 2 Ch 23
John Alexander’s Clubs Pty Limited v White City Tennis Club Limited; Walker Corporation Pty Limited v White City Tennis Club Limited [2010] HCA 19
Jones v Dunkel (1959) 101 CLR 298
Kation Pty Ltd v Lamru Pty Ltd; Lewis v Nortex Pty Ltd (in liq) (2009) 257 ALR 336
Kennedy v Wallace (2004) 142 FCR 185
King Network Group Pty Ltd v Club of the Clubs Pty Ltd (2008) 69 ACSR 172
Magafas v Carantinos [2007] NSWSC 416
Magafas v Carantinos [2007] NSWSC 917
Maguire v Makaronis (1997) 188 CLR 449
Manly Council v Byrne [2004] NSWCA 123
Nocton v Lord Ashburton [1914] AC 932
O’Reilly v Law Society of New South Wales (1988) 24 NSWLR 204
Payne v Parker [1976] 1 NSWLR 191
Phipps v Boardman [1967] 2 AC 46
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Rejfek v McElroy (1965) 112 CLR 517
Robins Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286
Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309
Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691
Tozer Kemsley & Millbourn (Australasia) Pty Ltd v Collier’s Interstate Transport Service Ltd (1956) 94 CLR 384
Tyrell v The Bank of London (1862) 10 HLC 26
Warman International Limited v Dwyer (1995) 182 CLR 544

TEXTS CITED: M Hapgood, Paget’s Law of Banking (13th ed., 2007), LexisNexis Butterworths, London
A Stafford and S Ritchie, Fiduciary Duties: Directors and Employees (2008), Jordan Publishing Ltd, Bristol
P W Young, C Croft and M L Smith, On Equity (2009), Thomson Reuters, Sydney

PARTIES: Phillip Malcolm Sewell (plaintiff)
Boris Zelden (first defendant)
Henamast Pty Limited (second defendant)
Elena Zelden (third defendant)

FILE NUMBER(S): SC 2009/287105

COUNSEL: G M Drew (plaintiff)
S A Kerr SC, D A Hughes (first defendant)
D E Baran (second and third defendants)

SOLICITORS: Williams & Co Solicitors (plaintiff)
Colin Biggers & Paisley (first defendant)
Colin Daley Quinn Solicitors (second and third defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Rein J

Date of Hearing: 5-8 July 2010
Date of Judgment: 3 September 2010

2009/287105 Phillip Malcolm Sewell v Boris Zelden and ors

JUDGMENT

REIN J:

Background

1 In March 2005, Mr Sewell, the plaintiff, entered into a conveyancing transaction by which he purchased for $315,000 an apartment in Eastwood, Sydney (“the Eastwood property”) from Henamast Pty Limited (“Henamast”), the second defendant. Mr Zelden, the first defendant, is a solicitor admitted to practice in New South Wales and acted for Mr Sewell on the transaction. Henamast is a company the shares in which were at all times owned by Mrs Zelden, the third defendant, who is the solicitor’s wife.

2 Mr Sewell alleges that Mr Zelden breached the fiduciary duties owed to him by Mr Zelden, for reasons which I shall detail below. Mr Sewell claims that Mrs Zelden and Henamast were involved in the “dishonest and fraudulent design” of Mr Zelden and that all three defendants are liable to disgorge to him all of the profits and benefits which they received by virtue of their acts and omissions. Mr G Drew of counsel appeared for the plaintiff. Mr S Kerr SC appeared with Mr D Hughes of counsel for Mr Zelden. Mr D Baran of counsel appeared for Mrs Zelden and Henamast.

3 The plaintiff relies on the matters asserted in paragraph 49 of the Second Further Amended Statement of Claim, namely that Mr Zelden:

PARTICULARS

The particulars at paragraph 35(c) are repeated.

The first defendant had actual knowledge that the second defendant had purchased the Eastwood Property less than 12 months previously (ie on or about 29 March 2004) for $255,000 because he acted as the second defendant’s solicitor in relation to that transaction.

(i) the second defendant -

(iii) the sale by the second defendant of the Eastwood Property.

4 The plaintiff’s case was, on the pleadings, based upon a multiplicity of causes of action. At the hearing, all but breach of fiduciary duty and knowing receipt and assistance were abandoned. However, the plaintiff, although no longer pressing a claim in contract against Mr Zelden, maintained that there has been a breach of the solicitor’s retainer and that this was relevant in considering the breach of fiduciary duty.

5 Another major change in the case which occurred during the hearing related to the relief sought. At the outset, the plaintiff sought equitable compensation and an account of profits; subsequently, through his counsel, he seemed to accept that he could not obtain both, and on the last day of the hearing, he indicated through his counsel an election for an account of profits (see T264.19-23), using the term “account of profits” broadly.

6 There was an acceptance by Mr Zelden that he owed fiduciary duties to Mr Sewell – this was an appropriate concession: see Maguire v Makaronis (1997) 188 CLR 449 at 463, citing Hospital Products Ltd v United States Surgical Corporation (1983) 156 CLR 41 and Clark Boyce v Mouat [1994] 1 AC 428 at 437. The fiduciary obligations required him to act in utmost good faith for the benefit of Mr Sewell, to avoid conflicts between his duties to Mr Sewell and his personal interests or the interests of a third party, not to use improperly his position to gain an advantage for himself or for any other person or to cause detriment to Mr Sewell, and not to apply Mr Sewell’s property for the benefit of anyone other than Mr Sewell: see Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at 46 ([196]) and 47 ([201]) per Spigelman CJ, Sheller and Stein JJA.

7 The plaintiff also relied on the Law Society of New South Wales Professional Conduct and Practice Rules (“the Rules”), including rule 10.1, which states:

“10.1 A practitioner must not, in any dealings with a client -

10.1.1 allow the interests of the practitioner or an associate of the practitioner to conflict with those of the client”

In the Rules, a reference to an associate of a practitioner is defined to include a reference to a member of the practitioner’s immediate family (which expression includes the spouse of a practitioner).

8 Mr Zelden accepted in cross-examination that he had failed to tell Mr Sewell at least the following things:

9 I should note that the Selling Agency Agreement with LJ Hooker Eastwood signed by Mr Zelden on behalf of Henamast on 1 October 2004 shows that the price at which the property was to be offered was $335,000 and that the agent’s opinion as to the current estimated selling price, as expressed on the document, was $300,000.

10 Mr Zelden strenuously resisted the characterisation of his conduct as part of a dishonest and fraudulent design. There were three elements to that defence:

11 Mrs Zelden and Henamast joined in the attack on the plaintiff’s case that there had been a fraudulent and dishonest design, and in addition, they attacked what they described as the insufficiency of evidence to support the claim of knowledge asserted against them. I should note that there was nothing said against the proposition that Mrs Zelden’s knowledge, such as it was, could be imputed to Henamast. In my view, there can be no doubt about that: see Hamilton v Whitehead (1988) 166 CLR 121 at 127; Kation Pty Ltd v Lamru Pty Ltd; Lewis v Nortex Pty Ltd (in liq) (2009) 257 ALR 336 at 366, [2009] NSWCA 145 at [117] per Basten JA; and Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68.

12 There was a significant dispute on the issue of the quantum of liability of all three defendants should liability, contrary to their respective contentions, be established.

13 Before dealing with the matters to which I have adverted, it is necessary to recount so much of the factual matters as are not in dispute, outline the areas of dispute and express my views on the credibility of Mr Sewell and Mr Zelden. Mrs Zelden did not give evidence either on her own behalf or on behalf of Henamast or her husband. Mr Baran did not put any questions to Mr Zelden: see T148.21-23. There was expert evidence relied upon, but as a result of concessions made during the hearing, neither expert was called. The concessions were that as at the date the Eastwood property was purchased by Mr Sewell in March 2005, it had a market value of $280,000 and that as at the date of the hearing, it had a market value of $365,000.

The facts not in dispute

14 Mr Sewell is a landscape gardener with his own business. He was previously in partnership with another person, Mr Scully, operating through a company, T&S Australia Wide Pty Ltd. As at 2004, he had never owned real estate, and in late 2004, he commenced looking for a property to purchase as his residence. He found a unit he liked at Surry Hills (“the Surry Hills property”), but when he made an offer for it, he discovered that another offer had already been made and accepted by the vendor. He attempted to invite the vendor to sell the unit to him by increasing the amount offered, but to no avail. Subsequently, the successful purchaser was unable to proceed, and Mr Sewell secured the unit at the price at which the vendor had agreed to sell it to the earlier purchaser. I mention this detail because it was one of the matters relied upon by the defendants in asserting that Mr Sewell was not unsophisticated.

15 In connection with the prospective purchase of the Surry Hills property, Mr Sewell had sought a recommendation from Mr Scully for a solicitor who could act for him on the purchase of the unit: see T48.34-38. Mr Zelden’s name was given to him, and he met with Mr Zelden at Mr Zelden’s office in Bondi Junction.

16 Mr Sewell, in connection with his proposed purchase of the Surry Hills property, had obtained an offer of finance from the ANZ Bank for up to $430,000 on a principal and interest basis. On his second visit to Mr Zelden, Mr Sewell asked him if he thought that ANZ’s interest rate was a “bad deal”. Mr Zelden’s evidence (at paragraph 23 of his affidavit sworn 3 September 2009) of what he said in reply is:

17 There is no dispute that what Mr Zelden said in the conference led Mr Sewell to consider and accept the idea that instead of simply purchasing the Surry Hills property with a loan on a principal interest repayment basis, as he had intended to do, he should buy two units and borrow most of the purchase price for both units on an interest only repayment basis.

18 There is some uncertainty on the evidence about the timing of the next salient matter. On Mr Zelden’s evidence, it was in the same conversation as the one set out in [16] above, but on Mr Sewell’s evidence, there was a gap between the statement as to what Mr Zelden’s and his family’s approach to real estate was and the mention of the Eastwood property. There is no dispute that Mr Zelden informed Mr Sewell that he knew of a property for sale and that it could be purchased by Mr Sewell for $315,000.

19 There is no dispute that Mr Zelden subsequently told Mr Sewell that he could put Mr Sewell in touch with someone who could help him obtain the loan monies required and that Mr Zelden rang a Mr Wang of Trustar Mortgage Pty Limited (“Trustar”) and arranged for he and Mr Sewell to visit Mr Wang. Trustar is a mortgage broker.

20 Mr Sewell and Mr Zelden visited Mr Wang, and Mr Wang indicated that a loan sufficient to enable Mr Sewell to purchase the two properties would be available. Mr Zelden had some involvement in the loan process as Mr Sewell’s solicitor, and in due course two loans were given: one by Perpetual Trustee Limited in respect of the Surry Hills property and one by Perpetual Trustee Limited in respect of the Eastwood property, to a total of $517,000.

21 Mr Sewell entered into a contract of retainer with Mr Zelden for the conveyance of both the Surry Hills property and the Eastwood property, and both transactions proceeded to completion.

22 Mr Zelden did not, on the face of the matter, purport to act for Henamast on the conveyance of the Eastwood property to Mr Sewell. It is agreed that Ms Abrahams, a solicitor, acted for Henamast on that conveyance. Mr Zelden, however, drafted the special conditions of sale for Henamast, even after speaking to Mr Sewell (see T161.21-162.30), and he discussed the requisitions he had sought on behalf of Mr Sewell with his wife: see T150.50-151.9. He continued to act for Henamast in relation to its dealings with LJ Hooker: see Exhibit B1 at page 201 and Exhibit B4 at pages 198-200.

23 The contract for sale of the Eastwood property contains a reference to East Point Real Estate Pty Ltd (“East Point Real Estate”) as the vendor’s agent. East Point Real Estate is a company of which Mr Zelden and his parents are directors. In his affidavit, Mr Zelden states that he is a licensed real estate agent (as well as being a solicitor). In cross-examination, Mr Zelden agreed that East Point Real Estate was not the vendor’s agent on the sale to Mr Sewell. I will describe later Mr Zelden’s explanation for having included this statement, which he admits was a false statement: see T153.17-25.

24 Mr Zelden, in his evidence both in his affidavit and in cross-examination, asserts that he informed Mr Sewell that the vendor of the Eastwood property was a company owned by his wife and that he had acted for the company. He deposes to having taken Mr Sewell to visit the property and to have:

25 Mr Sewell, in his affidavit and in his oral evidence:

26 I set out the account given by Mr Sewell (in his affidavit sworn 7 April 2009 and using the headings contained in his affidavit) of his conversations with Mr Zelden after the initial meeting at which Mr Sewell explained that he was proposing to buy the Surry Hills property and wanted Mr Zelden to act as his solicitor on the conveyance:

“24. The next day I telephoned Mr Zelden and had a conversation to the effect of:

Zelden: I’ll get everything in order. You can then come in and see me to sign the contract.”

Second meeting with Mr Zelden

25 In or about early February 2005 I had a second meeting with Mr Zelden. At this meeting I signed the Contract for the Sale of Land in relation to the Surry Hills Property.

26 During this meeting Mr Zelden did most of the talking and he said to me words to the effect of:

27 I recall saying to him during this meeting words to the effect of:

“I don’t think I earn enough money to buy two properties.”

28 He drew a diagram of pyramids or blocks showing how the number of properties increased and said words to the effect of:

29 I recall saying to Mr Zelden words to the effect of:

“I’ll leave it all up to you.”

30 While Mr Zelden was talking he appeared to me to be very laid back and relaxed and spoke to me like a friend.

…

Third meeting with Mr Zelden

“

”.

42 During this meeting I had a conversation with Mr Zelden to the following effect:

Me: Yes, I want to buy another property.

…

57 Sometime during February 2005, Mr Zelden telephoned me and we had a conversation about the investment property I was going to buy to the following effect:

58 During this conversation he told me the owner’s name, which I do not now recall but to me sounded like a Japanese or Chinese name. In or about late 2006 I saw the name “Elena Semiatitski” for the first time. Neither that name nor “Henamast” sound anything like the name that Mr Zelden told me.

…

64 When I went into the meeting, Mr Zelden said to me words to the effect of:

“This is the property that you’re buying. It’s located in Eastwood.”

While he was saying this, I observed Mr Zelden to be manipulating his computer in a way that led me to believe that he was attempting to show me the property on the Internet. However, he was apparently unable to do so and shortly thereafter abandoned those efforts. He said words to the effect of:

“Well, I’ll take you over and show you sometime.”

65 During this meeting Mr Zelden and I had a conversation to the following effect:

Fifth meeting with Mr Zelden

67 A couple of days later, Mr Zelden telephoned me and said words to the effect of:

“The contract’s here. When can you come in to sign?”

After settlement

83 About ten minutes later Mr Zelden telephoned me and said words to the effect of:

“I just rang LJ Hooker and I told them that they had got it all wrong.”

84 In late 2006 interest rates were rising and I had difficulties in making the loan repayments. I telephoned Mr Zelden and we had a conversation to the following effect:

27 I set out Mr Zelden’s versions of these conversations in his affidavit:

…

PS: I want to proceed with the interest only option. I am happy with the repayments.

…

Conversation after settlement

28 It will be observed that there are, in addition to the major points identified in [25] above, other divergences. For example, Mr Sewell describes the detail into which Mr Zelden descended in respect of how he and his family approached purchasing real estate in response to Mr Sewell’s expressed concern about being able to afford a loan sufficient to buy both the Surry Hills property for $332,000 and another property for $315,000, a total of $647,000. Mr Sewell also says that Mr Zelden did not mention the location of the second property at first, but Mr Zelden says that he did.

29 Mr Kerr and Mr Baran launched a vociferous attack on Mr Sewell’s credibility. I will deal with the points that were made, but I should record that having heard and observed Mr Sewell in the witness box, neither his demeanour nor his evidence left me with the impression that he was not doing his best to recount truthfully what had occurred in his dealings with Mr Zelden. Some of what he admitted suggests that he is a naïve and somewhat gullible person, and I think he became confused about some aspects of what occurred, particularly the timing of events. I found his evidence that he had never sought to inspect the property that he was buying (that is, the Eastwood property) as surprising, but on his evidence, his solicitor, in whom he clearly placed considerable trust, had told him that:

and it is consistent with the naivety to which I have referred. Further, Mr Sewell says that even after the purchase, he has never visited the property, and his failure to do so is not of any assistance to his case.

30 The first defendant’s attack on Mr Sewell’s credibility has these components (see paragraphs 16-19 of Mr Kerr’s submissions dated 7 July 2010):

31 The second and third defendants attack on the plaintiff’s credit had these elements (see paragraphs 107-115 of Mr Baran’s submissions dated 7 July 2010), continuing the numbering from [30]:

Again, the appropriate inference needs to be drawn that the evidence of Mr. Wang would not necessarily have assisted the plaintiff’s case.”

32 I will deal with each of these points raised by the defendants seriatim.

(1) Notes

33 There is no inconsistency between the assertions by Mr Sewell that he did not make notes of his conversation with Mr Zelden and that Mr Zelden gave him the name of Trustar and its address, on which Mr Sewell added a description of Mr Wang. Nor was it put to Mr Sewell that there was.

(2) Discovery of Mrs Zelden’s ownership

34 Strictly, of course, Mrs Zelden did not own the Eastwood property; it was owned by Henamast, and Mrs Zelden owned the shares and controlled Henamast. Mr Sewell said in his affidavit sworn 7 April 2009 that he learned after settlement from Mr Lee of LJ Hooker that Mr Zelden owned the Eastwood property (see paragraph 81) and that following this conversation, he rang Mr Zelden: see paragraph 82. Paragraph 81 was objected to by the defendants and not read in the plaintiff’s case. In cross-examination, Mr Sewell became unsure as to whether it was Mr Lee or Rena from the same office who had told him that Mr Zelden owned the property. There was confusion in his evidence about when he learned that it was Mrs Zelden, not Mr Zelden, who owned Henamast, but it is not surprising that he did not appreciate the legal nuances. At the time, I thought that the cross-examination demonstrated a lack of familiarity with these sorts of matters (particularly in a context where, on his evidence, he had contacted Mr Zelden after the purchase and put to him what he had been told by LJ Hooker and Mr Zelden had denied it), rather than any untruthfulness, and having revisited the transcript, I remain of that view.

(3) Explanation of the contract

35 Mr Sewell did assert in his affidavit that Mr Zelden had not explained the contract of sale of the Eastwood property to him (see paragraph 72), and in cross-examination there was the following exchange (see T78.50-79.13):

“Q. You see, it’s the case, isn’t it, that before you signed the contract Mr Zelden sat with you and he took you through the contract and explained it to you?
A. No he didn't.

Q. He explained that you were the purchaser; correct?
A. I knew that, yes.

Q. No, but I want to suggest to you that with the contract in front of the two of you, he said that and he pointed to your name as being the purchaser?
A. Oh he talked me through the contract, yes.

36 It will be observed that the cross-examiner sought Mr Sewell’s agreement to the proposition that Mr Zelden had taken him through the contract and “explained it” to him.

37 I accept that “talking through the contract” or being taken through the contract may amount to an explanation, but Mr Sewell agreed that Mr Zelden had talked him through the contract, not that Mr Zelden had explained the contract to him. Considering that Mr Zelden’s own affidavit says only that “Consistent with my standard practice I recall explaining the content of the Eastwood property Contract to Sewell” (at paragraph 67), there is far less in this point than the defendants seek to make of it.

(4) Reconstruction

38 Without specifics, it is difficult to understand to which portions of the evidence the first defendant is making reference, and it is not at all “clear” that in cross-examination the plaintiff was giving a reconstructed account of what occurred. No specifics were given in the written submissions. In oral submissions, reference was made to the evidence Mr Sewell gave about never having visited the Eastwood property and having seen from an internet search a year after he bought it what it looked like, evidence which it was submitted was “grossly unrealistic”: see T223.12-13. I do not think that it was established that he could not have seen the unit on the internet by searching a real estate site well after the sale (that the unit was advertised for rent is one possibility, the possibility of material being cached from an earlier listing is another). I am not sure that the evidence that Mr Sewell saw the property on the internet after the purchase advances his case – if he were going to be untruthful on this topic, he could simply have said that he had never seen the property, rather than asserting that he had seen it.

(5) and (7) Other witnesses

39 This seems to amount to a Jones v Dunkel (1959) 101 CLR 298 point. The rule well known to lawyers was restated most helpfully in Manly Council v Byrne [2004] NSWCA 123 at [51] by Campbell J (as his Honour then was), with whom Beazley JA and Pearlman AJA agreed:

“Thus, if a witness is not called two different types of result might follow. The first is that the tribunal of fact might infer that the evidence of the absent witness, if called, would not have assisted the party who failed to call that witness. The second is that the tribunal of fact might draw with greater confidence any inference unfavourable to the party who failed to call the witness, if that witness seems to be in a position to cast light on whether that inference should properly be drawn.”

At [53], his Honour quoted with approval the words of Glass JA in Payne v Parker [1976] 1 NSWLR 191:

O’Donnell v Reichard

Regina v Burdett

Earle v Castlemaine District Community Hospital

Cafe v Australian Portland Cement Pty Ltd

Earle v Castlemaine District Community Hospital

Steele v Mirror Newspapers Ltd

O’Donnell v Reichard

40 The defendants’ contention (the second and third defendants make the same point) seems to conflate the ability to issue a subpoena with an important, but different, element of Jones v Dunkel that the witness is someone who, it would be expected, would be called by the party against whom the rule is sought to be relied on. Mr Wang, Ms Abrahams, Mr Lee and Rena were not persons whom Mr Sewell would be expected to call.

41 There are further problems with the defendants’ argument, however:

42 I do not think that any inference can be drawn against Mr Sewell by reason of his failure to call any of these witnesses.

(6) No inspection: “completely nonsensical”

43 It is surprising that Mr Sewell did not inspect the Eastwood unit before the purchase, but Mr Sewell’s evidence as to what Mr Zelden said about the unit, about visiting the unit and about his confidence in his solicitor is an makes this less remarkable than would otherwise be the case. The submissions ignore that evidence. I have also referred to Mr Sewell’s lack of experience in property and his general naivety.

(8) and (9) That the plaintiff did not know that the lender had a valuation of the property at $280,000 (the Megaw & Hogg valuation)

44 The irony about this submission is that Mr Zelden did not assert that he knew that the lender had such a valuation and he denied that the figure of $280,000 had been present on the loan application when he signed the document as Mr Sewell’s solicitor. No evidence other than the loan application was led by the defendants to support the contention that the plaintiff knew of the valuation. I think that the likelihood is that if, contrary to Mr Zelden’s evidence, the valuation amount was on the loan application, it was not drawn to Mr Sewell’s attention.

(10) and (11) Non-disposal of the property

45 Mr Sewell was taxed with his failure to sell the Eastwood property. His evidence was to the effect that, at times, he found it difficult to meet the mortgage repayments because the rent he received fell short of the repayments, but later when the interest rates went down, he found it easier to meet the mortgage repayments. He also mentioned that he has been wanting to see what happened in this case. He explained that he has been in two minds about whether or not to keep the property. There is no dispute that he came under sustained pressure from the lender at an earlier time, but it appears that he has managed that crisis. Mr Sewell does not have a large income, and it is surprising that he has been able to manage to service the two loans. I do not accept the defendant’s submission that Mr Sewell’s failure to sell the unit establishes that Mr Sewell is “opportunistic” or that he can be criticised because he has not been sure what to do.

(12) The plaintiff’s failure to mention his complaint about Mr Zelden to the lender

46 Mr Baran cross-examined Mr Sewell on the basis of the lender’s note of a conversation recorded by the lender’s agent: see T127.35-128.24 and Exhibit 2D5. According to the note, Mr Sewell asserted that he had been “ripped off” to the extent of $60,000 “in his [business]”, and he later refers to his “previous [solicitors]” having “obtained a loan worth [an] extra [$50,000]”. In my view, contrary to Mr Baran’s contention, the note, although not entirely accurate, establishes that Mr Sewell did complain to the lender. It is true that his solicitors, in responding to a formal demand on Mr Zelden from the lender, did not refer to any breach of duty by Mr Zelden, but strictly it was of no concern to the lender. For the solicitors to record the allegations made by the plaintiff against Mr Zelden would entail a need to be confident that the occasion for the communication of such assertions was privileged.

( 13) Mortgage insurance

47 The plaintiff was required to pay approximately $4,500 mortgage insurance, and it was put to him that he must have appreciated why he was required to pay this insurance, particularly since he was not required to pay mortgage insurance in respect of the Surry Hills property. Mr Sewell says that he did not appreciate why the lender required mortgage insurance for the Eastwood property. The defendants’ submission is predicated on an assumption that the reason that the lender required mortgage insurance was because its valuation of the property was only $280,000 and the plaintiff had agreed to pay $315,000. That premise is not established, but even if it were, the reason behind the requirement is not said to have been made known to Mr Sewell. Quite significantly, Mr Zelden does not say that he made the reason for the mortgage insurance known to Mr Sewell, who after all was his client. If Mr Sewell should have appreciated that that was the reason behind the requirement (which I accept he did not), then a fortiori Mr Zelden should have appreciated it and so advised Mr Sewell.

Mr Sewell’s claim that he is not a sophisticated man

48 There is a further issue which was the subject of submissions by the defendants. The defendants pointed out that Mr Sewell:

49 Mr Sewell’s evidence was that he came to own shares when the Woolwich Bank demutualised, that he was the “worker” in the landscape business as opposed to Mr Scully, that it was Mr Scully who “did most of the reading and stuff”, and that he trusted his partner in relation to contracts entered into: see T138.4-13.

50 In his oral submissions, Mr Baran extended the attack on Mr Sewell (see T243.29-244.3), including a submission that Mr Sewell was

“the author of his own financial misfortune. To come along now and milk a lot of money out of a solicitor and then accuse the wife and the family company of wrongdoing”.

51 Mr Baran’s submission (in an endeavour to bolster his oral contention that Mr Sewell was sophisticated) that Mr Sewell had obtained a significant bargain on the Surry Hills unit was not borne out by the evidence, which I have summarised at [14] above.

52 There was another point made by the defendants, which is that Mr Sewell acknowledged that he had made the decision himself to proceed with the purchase of the Eastwood property. That acknowledgment in no way detracts from his case, which is that it was Mr Zelden’s conduct which led him to make that decision.

53 At T210.36-38, Mr Kerr said that he was not trying to suggest that the plaintiff “was a sophisticated investor”. There is a margin of territory between “sophisticated investor” and “not unsophisticated person”, but in my view, Mr Sewell was not demonstrated to be particularly sophisticated in business generally, and given that the undisputed evidence is that the Surry Hills property was the first property he had ever bought (and the Eastwood property the second), I do not think that there is sufficient material to lead to the conclusion that he had any proper grasp of property investment. Indeed, the evidence points to Mr Sewell’s ignorance of matters such as negative gearing and the role of a mortgage broker (Mr Sewell recorded Mr Wang as “morgage [sic] bloke”: see Exhibit B1 at page 96). Further, I think it is clear that he was completely trusting of what his solicitor told him. It is his evidence that he told Mr Zelden that he had no objection to Mr Zelden acting for both himself and the vendor, which was quite neutral to his case, because as it happened, Mr Zelden did not (at least to Mr Sewell’s knowledge) continue to act for Henamast, and I think that that evidence, which I accept, is indicative of naïve trust and acceptance. More importantly, there is no dispute that Mr Sewell accepted the idea of buying a second unit, which idea was advanced by no one other than Mr Zelden.

54 There is no dispute that Mr Sewell accepted Mr Zelden’s advice that he should obtain a strata report in respect of the Surry Hills property. Mr Sewell’s evidence was that Mr Zelden told him that he did not need to obtain a strata report in respect of the Eastwood property because Mr Zelden knew the property. Mr Zelden’s evidence was that he said, “that is why you should get another solicitor. He can get a strata report and check for you” and Mr Sewell said, “I do not want a strata report and I do not want to use another solicitor. I want you to act and that’s it”: see paragraph 31 of Mr Zelden’s affidavit. Whichever answer from Mr Zelden is accepted as the truth, the fact that Mr Sewell did not seek a strata report is another indication of his trust in Mr Zelden.

Mr Zelden’s credit

55 It was submitted that Mr Zelden was a very quietly spoken man who made candid admissions against interest in the witness box and that he should be accepted as an honest witness. Mr Zelden admitted at T165.5-9 that he had not told Mr Sewell that Henamast had bought the property for $255,000 and his statement that “If I would have had my time again definitely I wouldn’t have done it this way” was in that context. Mr Zelden also admitted that he had made a “very, very serious error of judgment” (see T152.4 and see also T152.19-27), but this related to his failure to make a note of his conversations with Mr Sewell. There was no acceptance of the more serious factual allegations made by Mr Sewell, and I do not accept that Mr Zelden’s admissions amounted to him “[falling] on his sword” (see T213.12), as Mr Kerr put it. I do not accept that Mr Zelden is an honest witness and I do not accept his evidence, for reasons to which I shall refer, but I should say that my conclusion is not based on his demeanour.

56 Mr Zelden has no diary notes of any conferences or conversations with Mr Sewell. There is no letter from him to Mr Sewell setting out any advice given to him pertaining to the issue of Mr Zelden’s conflict of interest or in respect of any advice given and not followed. Mr Kerr contended at T71.44-72.5 that it is not unusual for solicitors not to record everything in writing. That contention ignores the importance of the matters in question here. The degree to which notes are made by solicitors (and barristers, for that matter) is obviously not uniform, but I think that when important advice is given orally by a legal practitioner, a failure to follow up that oral advice with a letter, or at least to note the advice by means of a file note, particularly where the subject matter of the advice is relevant to the existence of a conflict of interest or where the client has indicated that he or she does not wish to follow the express advice given, is extraordinary and sufficiently remarkable as to induce doubt whether the advice was given at all. In any event, Mr Zelden said that his practice was to record important matters and to confirm them in writing: T149.27-35. The absence of any advice to the effect asserted to have been given orally (that the vendor was a company owned by Mr Zelden’s wife) in a letter to the client that he wrote on 9 March 2005 only reinforces that doubt.

57 I have come to the view that Mr Sewell’s evidence that Mr Zelden did not tell him that the vendor of the Eastwood property was a company controlled by his wife is to be preferred over that of Mr Zelden for the following reasons:

58 Mr Kerr submitted that another factor which should be taken into account in determining whether Mr Zelden did not inform Mr Sewell of Mrs Zelden’s interest in Henamast is that it “wasn’t a sophisticated plan, because it would have been unravelled with the most basic telephone call” (see T211.19-20) and there was no evidence that Mr Zelden discouraged Mr Sewell from making that call. The short answer to that point is that the fact that the “plan” might be uncovered easily is of the most slender weight in assessing the likelihood as to whether Mr Zelden did not tell Mr Sewell the truth about Henamast. There are some other points, however:

59 Since I accept Mr Sewell’s account of his conversations with Mr Zelden, the following facts emerge in addition to what was conceded by Mr Zelden:

(1) Mr Zelden failed to advise Mr Sewell that Mrs Zelden was the holder of all shares in Henamast and its sole director and shareholder;
(2) Mr Zelden positively encouraged Mr Sewell’s purchase of a second property (see paragraphs 26-28 Mr Sewell’s affidavit), even after Mr Sewell had expressed doubt as to his ability to afford it;
(3) Mr Zelden made positive statements about the Eastwood property, such as “It’s a really good buy”: see paragraph 57 of Mr Sewell’s affidavit;
(5) There was complete absence of any proper advice from Mr Zelden about the nature of the conflict and its resolution;
(6) Mr Zelden made statements to Mr Sewell about Mr Zelden’s conversation with the owner of the property (see paragraph 57 of Mr Sewell’s affidavit) and pretended that the person he spoke to was a male person with an Asian name; and
(6) Mr Zelden advised Mr Sewell that he did not need to obtain a strata report.

Non-disclosure of interest

60 There can be no question that Mr Zelden was required to disclose his interest to Mr Sewell: see Maguire v Makaronis at 465; O’Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 at 208 per Kirby P and at 213 per Mahoney JA. In Fitzpatrick v Waterstreet [2000] ANZ ConvR 15, Mason P (with whom Beazley JA and Sheppard AJA agreed) said at 19:

a heavy burden indeed lies upon the solicitor to show that he has done everything in his power to protect the interests of the client and to ensure that the client is aware of every circumstance that is or might be relevant to his decision

(emphasis added)

61 Another recent application of that principle is found in Farrington v Rowe McBride & Partners [1985] 1 NZLR 83, where Richardson J said at 89:

“a solicitor must not without the informed consent of his client stand to make any profit or receive any benefit from the transaction which he is retained to carry through. It is no defence that his interest is indirect – as where the transaction is between his client and a company in which he or a member of his family has a significant shareholding or where he otherwise has an indirect financial interest in the transaction. But whether present or prospective there must be a potential benefit to the solicitor of pecuniary consequence or perhaps personal advantage in or through the transaction in which his advice is engaged.”

62 Mr Drew, in submissions, made the point, with which I agree, that even if Mr Zelden had made the disclosure which he says he did make about his wife’s company’s ownership of the Eastwood property, it was insufficient to solve the problem of conflict by Mr Zelden saying (as he claims to have said, and on the assumption that Mr Sewell had no objection), “what I will have to do is stop acting for my wife’s company. I will hand over the file to another solicitor and she will act for my wife”: see paragraph 31 of Mr Zelden’s affidavit. Mr Drew asserted that Mr Zelden’s statement to Mr Sewell, on Mr Zelden’s evidence, that he answered the question “Is there anything wrong with the property?” by saying, “I don’t know and that is why you should get another solicitor. He can get a strata report and check for you. It is much better that you do this” (see paragraph 31 of Mr Zelden’s affidavit) is also misleading because Mr Zelden had extensive dealings with the property, having acted for Henamast on the purchase and having acted on behalf of Henamast in dealing with LJ Hooker. I think that there is some force in this as well, but it is not necessary to explore this further.

Other aspects of Mr Zelden’s conduct

63 There was a theme in the submissions from Mr Kerr that I should draw from the fact that Mr Zelden did not immediately introduce the idea of the Eastwood property after he had raised with Mr Sewell the suggestion of a second property and that Mr Zelden did not chase Mr Sewell, that Mr Zelden was not actively seeking to draw Mr Sewell into the purchase of the Eastwood property and was not “pushy”. Apart from the fact that it was Mr Zelden’s evidence that he did introduce the Eastwood property in the same conversation as he raised the idea of a second unit, a lack of overt pressure by Mr Zelden is immaterial and it was more likely linked to the “friendly” and “laidback” approach with which Mr Zelden addressed Mr Sewell, which guile worked very well for Mr Zelden, perhaps because he had, correctly, estimated Mr Sewell’s lack of sophistication.

64 Another example of this is Mr Zelden’s suggestion that he could show him the property, followed by him saying (see paragraph 42 of Mr Sewell’s affidavit):

“There’s no point in showing you, because you are not going to live in it. It’s rented out already and will always have tenants, so you don’t have to worry about that. Are you keen?”

65 I regard the statement, on Mr Zelden’s own evidence, that “Look, I can’t give you financial advice” (see paragraph 23 of Mr Zelden’s affidavit), when followed by what amounted to advice dressed up in another guise, as another example of this approach: see also T157.37-43.

66 I have noted that it was submitted on behalf of Mr Zelden that the case alleging fraudulent conduct was inadequately articulated by the plaintiff. I do not accept that submission. There can be no doubt that allegations of fraud must be made “specifically and with particularity”: see Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279 at 285 per Mason CJ and Gaudron J; Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691 at 700 per Handley JA. Paragraph 58H of the Second Further Amended Statement of Claim (“SFASTOC”) reads, after deletion of a reference to paragraph 43 during the hearing:

dishonest and fraudulent design

67 In his opening at T7.12, Mr Drew said of Mr Zelden’s conduct, as described, that it “[transgresses] the ordinary standards of honest behaviour.” The paragraphs of the SFASOC which continue to be pressed against Mr Zelden and the other defendants are detailed, and in my view, leave no doubt as to the nature of the case which was advanced against Mr Zelden. As was remarked in Heperu v Belle (2009) 258 ALR 727, [2009] NSWCA 252 by Allsop P (with whom Campbell JA and Handley AJA concurred) at 731 ([7]): “the legitimate scope of the pleading takes its context not merely from the textual meaning of the words used by the pleader, but also from the context of how the case was conducted at the trial.”

68 Whilst it is true that Mr Drew did not put to Mr Zelden that his conduct was fraudulent or dishonest:

(a) T156.1-157.35
“Q. Why did you say those things to him when he came to just ask about a bad deal with the bank? What was the connection between the two?
A. I am a sole - the best way to answer, I am a sole practitioner. I am very, how do you say, very much, maybe feel is the best word for my clients, all of them. For me a client is very important. I may have gone on a tangent at that time, I accept that, but I thought, as I thought that was doing the right thing by telling him--

KERR: Could he be allowed to finish?

HIS HONOUR: Yes, allow him to finish please.

DREW: Yes, apologies.

WITNESS: It was more on a friendly basis. I understood or at least I thought I understood that I was giving him, not legal advice at this point, but on a friend to friend, inverted commas basis.

DREW

Q. Right, and you thought you might be able to solve his bad deal with the bank by telling him these things?
A. No.

Q. They are unconnected; is that what you are saying? He came to you about a bad deal with the bank and somehow the conversation ended up with you telling him these things; is that right?
A. That is the way the conversation went.

Q. I put it to you that you told him all about these things so as to plant the idea into Mr Sewell’s mind that maybe purchasing a second property might be to his advantage. Is that right?
A. Can you--

Q. I put it to you that you said these things to Mr Sewell to plant into his mind the notion that buying another property or a second property might be to his advantage; is that right?

BARAN: I object to the form of that question, namely, “these things”. If something is going to be fairly and squarely put it may have implication for my client so I ask that it be specifically put. These things concern me.

HIS HONOUR: It is what is read in the affidavit. I allow the question.

DREW

Q. Would you answer the question?
A. Can you repeat it?

Q. Those things that you said to Mr Sewell going on, “I can’t give you financial advice” and you then went on to say, “All I can do is tell you what my family and I do and then it’s up to you”, and the things that you then said to him about how your family buys properties on an interest only basis, moving through and eventually ending up and telling him that your wife's company just has a property that she is selling and telling him about that property. The reason you did that was to plant into Mr Sewell’s mind the idea that buying another property would be to his advantage; that’s right, isn’t it?
A. No, it is not.

Q. Why did you tell him those things?
A. I did. I told him.

Q. Why?
A. It was on, again, I repeat, it was on a, inverted commas, friend to friend basis. I may have gone too far by telling him, but it was on a friend to friend basis. No other reason.

HIS HONOUR

Q. But he wasn’t a friend of yours, was he?

A. No, he wasn’t.

Q. So why would you say that?
A. It was in hindsight, maybe I shouldn't have said it, I appreciate that, but--

Q. Appreciate what?
A. That in hindsight maybe I shouldn’t have said it, but maybe it was because I felt sorry for him. Maybe it was for any other reason.

(b) T163.28-44
“Q. In the course of your dealings with Mr Sewell in relation to the conveyancing of the Eastwood property from Henamast to Mr Sewell you had identified him as a potential purchaser of the Eastwood property, hadn’t you?
A. At what time, I am sorry? I don't understand the question.

Q. When you first mentioned to him that your wife, when you say mentioned to him that your wife had a property in Eastwood for sale for $315,000, you had identified Mr Sewell as a potential purchaser of that property, hadn’t you?
A. At the end of the conversation, yes.

(c) T164.9-165.9
“Q. When Mr Sewell came in to your office to buy the Surry Hills property you identified him as a potential purchaser of the Eastwood property?
A. No, I did not.

Q. You told him about your family’s practices of investing in investment properties to plant in his mind the idea that buying another property would be to his advantage, didn’t you?
A. No, I did not.

Q. Earlier you told us that you did?

KERR: I object. He hasn’t said that. The planting of an idea is a recent statement that has come from my learned friend.

DREW: Withdrawn.

Q. You introduced Mr Sewell to the Eastwood property because you thought he might buy it?
A. I suppose so.

Q. You told him $315,000; is that right?
A. Yes.

Q. You knew that Henamast bought it for $255,000 only twelve months before, didn’t you?
A. Yes.

Q. Did you think that was a good deal for Mr Sewell to buy a property for $315,000 that had been brought only a year before for $255,000?
A. I never thought about it in that way.

Q. Why not?
A. I didn't think about it that way.

Q. Price is important, isn’t it, when you are buying a property?
A. Yes.

Q. You told Mr Sewell that it was going to cost $315,000, but you told him nothing about the fact that Henamast had bought it for $255,000, did you?
A. That’s right.

HIS HONOUR
Q. With hindsight do you accept that it is something that--
A. Definitely.

(2) the fact that Mr Zelden denied that he had not told Mr Sewell of his wife’s connection with Henamast; and

(3) the plaintiff’s opening and the plaintiff’s outline of the case

69 The Full Court of the Federal Court of Australia pointed out in Kennedy v Wallace (2004) 142 FCR 185 at 198:

Cross on Evidence

in order that

70 Mr Drew drew attention to the decision of the House of Lords in Tyrell v The Bank of London (1862) 10 HLC 26, in which a solicitor had encouraged the purchase of premises by a bank for whom he was acting, when he had entered into an arrangement with the vendor to take a half interest in the property, which arrangement he did not reveal to his client. Lord Westbury LC said at 44:

He forgot the first duty of a solicitor in the concealment and falsehood which were practised.

(emphasis added)

71 When one takes into account all of the matters referred to above and adds to it the failure by Mr Zelden to mention to Mr Sewell that the vendor was a company owned by his wife, the conclusion to which I am drawn is that Mr Zelden’s conduct was designed to lure Mr Sewell into purchasing a property for more than it was worth by planting the idea of him buying a second property and then introducing to him the Eastwood property. The plaintiff does not seek to establish that Mr Zelden’s breach of fiduciary duty was dishonest and fraudulent in his case against Mr Zelden (it being said that the plaintiff does not have to establish that as against Mr Zelden), but that characterisation of Mr Zelden’s conduct is asserted in the case against Mrs Zelden and Henamast. The conclusion that Mr Zelden did not tell Mr Sewell that the vendor was a company owned and controlled by his wife, coupled with the matters in [57](8)-(9) and [59](1)-(6) above, lead me to conclude that Mr Zelden acted in total disregard of his obligations to Mr Sewell as a client. I am of the view that Mr Zelden’s behaviour amounted to dishonest and fraudulent conduct (see the discussion of fraud in King Network Group Pty Ltd v Club of the Clubs Pty Ltd (2008) 69 ACSR 172, [2008] NSWCA 344 at [50]), that is, it was “contrary to normally acceptable standards of honest conduct”: see Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476 at [15].

72 In reaching this conclusion, I am conscious of the grave seriousness of it for Mr Zelden (a matter to be taken into account in considering whether the degree of persuasion required by the civil standard has been met: see Briginshaw v Briginshaw (1938) 60 CLR 336; see also Rejfek v McElroy (1965) 112 CLR 517 at 521), but it is a consequence of his conduct, which was of a most inappropriate kind for a solicitor to have engaged in. I understand that a complaint has already been made to the Office of the Legal Services Commissioner, and I will direct that a copy of these reasons be provided to the Office of the Legal Services Commissioner.

73 It is clear that:

74 It follows that Henamast knew matters (1)-(8) as well. Henamast must also be taken to have known these matters because Mr Zelden was acting as its agent, and Henamast therefore must be taken to have known what Mr Zelden had done on its behalf in reaching agreement with Mr Sewell and that he had accepted instructions where the interests of Mr Sewell and Henamast were in conflict: see paragraphs 28(b), 58H and 60 of the SFASTOC.

75 It was submitted (see Mr Drew’s submissions dated 7 July 2010 at [99]-[100]) that it should be inferred that Mrs Zelden, with knowledge of the matters referred to above, engaged in deliberate conduct designed to disguise and obscure her relationships, in particular:

76 I have referred to the absence of evidence from Mrs Zelden (and Henamast). Mr Baran is quite correct in his contention that their failure to give evidence does not make out the plaintiff’s case if it is otherwise insufficient to establish a prima facie case: see Tozer Kemsley & Millbourn (Australasia) Pty Ltd v Collier’s Interstate Transport Service Ltd (1956) 94 CLR 384 at 403 per Fullagar J (with whom Kitto J agreed), but his Honour noted that the silence of one party “may serve to resolve a doubt or ambiguity, especially where the facts are particularly within the knowledge of the silent party”; see also Jones v Dunkel at 308 per Kitto J, at 312 per Menzies J and at 317-318 per Windeyer J. The question in this context is whether the material advanced by the plaintiff is sufficient to establish a prima facie case. I accept that for the liability of Mrs Zelden and Henamast to be established, the Court must be persuaded that they had “knowledge”, which the authorities discussed at [81] below require.

The use of the name “Semiatitski”

77 Mr Baran pointed out that evidence that Mrs Zelden was using her maiden name well before the contract of sale of the Eastwood property means that it cannot be said that she used her maiden name for the purpose of deceiving Mr Sewell, as Mr Drew contended. Whilst it is true that Mrs Zelden did not use her maiden name only on the contract of sale, the fact is that her relationship with Mr Zelden would not be revealed either by an ASIC search of Henamast or by observing the signature on the contract of sale. Mrs Zelden knew (obviously) that using her maiden name would not draw to the attention of Mr Sewell that she was married to Mr Zelden and that a search of Henamast, if undertaken, would not reveal that fact either. Mr Baran did not endeavour to deal with the issue of the apparently false address given by Mrs Zelden.

78 I have reached the conclusion that there is enough evidence to support the plaintiff’s contention that Mrs Zelden and Henamast were aware of Mr Zelden’s breach of duty to Mr Sewell.

79 I base my conclusion on these matters:

(1) the matters referred to by the plaintiff and set out earlier;

80 The matters in (1)-(4) above are sufficient, but there is a further basis which is relevant as against Henamast, namely that Mr Zelden was Henamast’s agent at the time of negotiation of the purchase price (at least). Mr Zelden’s conduct on behalf of Henamast and his knowledge is conduct and knowledge with which Henamast is fixed. Therefore Henamast had, by its agent, concealed from Mr Sewell the identity of the directors and shareholders of Henamast, pretended to obtain instructions from someone who was not his wife, and encouraged Mr Sewell to enter into the transaction by the means that I have previously described.

81 The law in relation to benefits obtained by third parties in the context of a breach of trust or fiduciary duty has come under close scrutiny in recent times. Much judicial and extra-judicial consideration has been given to the topic, and I will attempt to distil the principles binding on this Court and relevant here (see ConsulDevelopment Pty Limited v DPC Estates Pty Limited (1974) 132 CLR 373 and Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89), acknowledging the assistance of P W Young, C Croft and M L Smith, On Equity (2009), Thomson Reuters, Sydney (see [6.880]-[6.910]):

(1) A constructive trust may be imposed upon a third party where the third party has (a) received trust property or (b) assisted a trustee or a fiduciary in their breach of trust or fiduciary duty.

Barnes v Addy”

Robins Incentive Dynamics Pty Ltd (in liq)

Farah

82 This is not a case where a fiduciary (A) enters into a transaction with a client (B) to the detriment of B, and then pays some or all of the benefit to C. It is a case where A encourages B, by a breach of fiduciary duty, to enter into a contract with C, which contract benefits C directly and A indirectly.

83 Dealing with the plaintiff’s case against Mrs Zelden and Henamast on the “knowing assistance” basis, I think that it is established on the balance of probabilities that Henamast (by its human agents) and Mrs Zelden knew that Mr Zelden was in breach of his fiduciary obligations to Mr Sewell, but if they did not, they wilfully shut their eyes to the obvious, wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make, or had knowledge of circumstances which would indicate the facts to an honest and reasonable person. It follows that Mrs Zelden and Henamast also had sufficient notice for the “knowing receipt” claim, but there is a difficulty in characterising the settlement cheques as the “trust property” and it is not necessary to decide whether there has been a receipt of trust property in the light of my conclusion on the “knowing assistance” claim.

84 A decision of Einstein J in Magafas v Carantinos [2007] NSWSC 917 was drawn to my attention and relied upon by Mrs Zelden and Henamast. In an earlier decision in the same matter (Magafas v Carantinos [2007] NSWSC 416), his Honour, applying the New South Wales Court of Appeal’s decision in Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309, held that the wife and daughters of a director of the defendant company into whose names property had been transferred were liable as constructive trustees. The decision of the High Court in Farah was handed down before orders were finalised in Magafas and led Einstein J to reach a different conclusion. In the second judgment, his Honour noted at [14]-[16] that the plaintiff’s case had originally been that Mrs Carantinos (the wife of the fiduciary) had left the task of selling the property in question to her husband and that the plaintiff later sought to make out a case that Mrs Carantinos had knowledge of the breach of trust. Einstein J held that the plaintiffs had not established that Mrs Carantinos knew that the money was received into the joint bank account, or of the way that her husband had chosen to apply the proceeds of that cheque, or “that she was aware that the $296,000 cheque [in favour of a company and endorsed by her husband] had been drawn”: see [13].

85 Mr Drew argued that Magafas is a very different case to the present one and does not offer any guidance as to whether or not Mrs Zelden and Henamast are shown to have had knowledge of circumstances which would indicate the facts to an honest and reasonable person, or wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make, or wilfully shut their eyes to the obvious. I accept that submission.

86 Mr Drew submitted that even if Mrs Zelden and Henamast did not have the requisite knowledge before the transaction, Heperu is authority for the proposition that a volunteer who has received funds traceable in equity from cheques misappropriated by an employee of a company will be liable to restore the value of the proprietary benefit derived from the receipt of those funds when he or she becomes aware of the misappropriation (see the judgment of Allsop P, with whom Campbell JA and Handley AJA concurred). I do not think that Henamast can be described as a volunteer, it having transferred title to the Eastwood property to Mr Sewell. It could be said that Mrs Zelden was a volunteer, but it is not necessary to determine the question because she was, in any event, a joint owner of the property with Mr Zelden and Henamast.

87 There are two species of remedy available to a plaintiff where the defendant has breached his or her fiduciary duty – proprietary and personal remedies. The proprietary remedies are:

Boscauer v Bajwa

Foskett v McKeown

(4) an account of profits;

(5) restoration of property; and

(6) equitable compensation for loss caused

Nocton v Lord Ashburton

Fiduciary Duties: Directors and Employees

88 As I have noted, the only personal claim now advanced by Mr Sewell is (4), an account of profits.

89 It will be observed that since Henamast was the vendor on the conveyancing transaction, Mr Zelden has received no profit per se, since he did not own the property. The plaintiff’s argument is that in fact the proceeds of sale, or at least a significant portion of the proceeds, did find their way to Mr Zelden, because the cheque paid by the plaintiff went to the NAB and thereby reduced the debt owed by Mr Zelden jointly with his wife, as well as Henamast’s debt to the NAB. The solicitor obtained a “benefit”, argues the plaintiff, and the cases do not limit the claimant to “profit” in the strict sense. In Phipps v Boardman [1967] 2 AC 46 and Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, there were statements indicating the width of the notion of “benefit”. In Hospital Products, Mason J referred at page 107 to the principle that “the fiduciary cannot be permitted to retain a profit or benefit which he has obtained by breach of his fiduciary duty” (emphasis added). In Chan v Zacharia (1984) 154 CLR 178, Deane J expressed the view at pages 204-205 that the requirement for an accounting of benefit or gain was not necessarily as absolute as some of the earlier cases had viewed it, noting that there may be circumstances where it would be:

“unconscientious to assert it or in which, for example, there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interests of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed”.

90 In Warman International Limited v Dwyer (1995) 182 CLR 544, the High Court considered the appropriate remedy for the actions of a former employee of Warman who, in breach of his fiduciary duty to Warman, established two companies to operate as agents of an Italian manufacturing company with which Warman previously had an agency agreement. The Court concluded that the company in which Dwyer was one of the shareholders and the company in which he owned all of the shares were liable to pay two years of profits of their businesses to Warman. The Court said at pages 562-563:

profit or gain

The Court also said at pages 556-558:

Consul Development Pty Ltd v DPC Estates Pty Ltd

‘Where the rule applies, the liability of the person in a fiduciary position does not depend on the fact that the person to whom the duty is owed has suffered injury or loss.’

profit or benefit

What is necessary however is to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty.”

(emphasis added)

91 Out of the settlement proceeds, a cheque for $217,662.63 was paid into the Zelden joint account and $43,741.41 was credited to the Henamast account, which Mr Zelden and Mrs Zelden had guaranteed. The total, approximately $260,000, is capable of being viewed as the benefit which Mr Zelden (and Mrs Zelden) obtained by the sale of the Eastwood property. If one were to focus only on Mr Zelden, the benefit might be viewed as a notional benefit to him of $130,000. I say “notional” because a joint account is in law “simply a debt owed to the account holders jointly”: see M Hapgood, Paget’s Law of Banking (13th ed., 2007), LexisNexis Butterworths, London citing In re Head, Head v Head (No. 2) [1894] 2 Ch 236.

92 The plaintiff claims that the “benefit” which Mr Zelden obtained was the discharge of the debt owed to the NAB and the mortgage, and hence an amount of $260,000, because that is what was paid to the NAB and it left the home of Mr and Mrs Zelden unencumbered. There are, I think, two essential problems with that. First, Mr Zelden and Mrs Zelden are joint tenants as to 70 per cent of the property, and Henamast is a tenant in common as to 30 per cent; and secondly, to require Mr Zelden to repay $260,000 to Mr Sewell would produce the result that Mr Sewell would receive a unit worth $280,000 in 2005 for approximately $55,000, which I think can only be described as a windfall. Mr Drew’s riposte to the second issue is a bold “so what?” – that, he submits, is the remedy which courts will grant a person to whom a fiduciary obligation is owed when the obligation has been breached, particularly when the fiduciary has been dishonest and fraudulent. To the first point, Mr Drew’s response, in effect, is that Mrs Zelden and Henamast were involved in the breach, and hence there is no need to apportion the benefit.

93 In my view, Mr Drew’s submission as to the benefit to be disgorged treats the earlier authorities too literally, and more importantly, ignores what has been said in the High Court about proportionality of remedy, however Mr Zelden’s conduct is categorised. So far as the first point is concerned, even if Henamast and Mrs Zelden were involved in the breach, it would still be necessary to consider what benefit was derived by them. Henamast, at least, did not obtain the benefit of the sale to Mr Sewell without transferring title to Mr Sewell.

94 The approach urged on behalf of Mr Zelden in relation to the account of profits was to deduct from the sale price of $315,000 the amount of $280,000 (that is, the agreed value), leaving $35,000, and to treat Mr Zelden has having received 50 per cent of that profit, that is $17,500. Reference was made to the statement in Warman International that has been extracted above, with focus upon the words “the true measure of the profit or benefit obtained by the fiduciary in breach of his duty” at page 558. Reference was also made to the decision of Bergin J (as her Honour then was) in Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 at [31].

95 The first defendant’s submissions pointed out that a constructive trust remedy is not a separate remedy, but rather it is a means of securing by a proprietary remedy profits made by a defaulting fiduciary that are traceable into property held by the fiduciary. I should note that the High Court in a number of cases, and most recently in John Alexander’s Clubs Pty Limited v White City Tennis Club Limited; Walker Corporation Pty Limited v White City Tennis Club Limited [2010] HCA 19, has emphasised that the remedy to be granted ought to take into account the rights of third parties and that a constructive trust should be imposed only when that is absolutely necessary.

96 I think that the approach urged by the plaintiff produces a result that effectively gives a windfall to the plaintiff and does not adequately take into account the fact that he obtained a property with a market value then of $280,000, but the approach urged by the defendants is inadequate taking into account the benefit which Mr Zelden (and Mrs Zelden) obtained from the transaction and as a result of a very clear breach of fiduciary duty. Having regard to the broad principles discussed in Warman International, I think that the approach to be taken is to focus on the difference between what Henamast bought the property for in 2004 and what it sold it for in 2005 (that is, $255,000 and $315,000 respectively). That “profit” of $60,000, although derived by Henamast, is the amount that should be taken to be the benefit received by Mr Zelden and Mrs Zelden for which they are liable to account to Mr Sewell by reason of Mr Zelden’s breach of fiduciary duty. It is an amount, it will be observed, which is less than 50 per cent of the $130,000 notional benefit to Mr Zelden to which I referred earlier, and it is an amount I would arrive at irrespective of whether Mrs Zelden and Henamast have an accessorial liability, as I have held they do.

97 The amount of $60,000, however, should attract interest at the rate set out in Schedule 5 to the Uniform Civil Procedure Rules 2005 (NSW) until 30 June 2010 and thereafter at the rates referred to in Practice Note SC Gen 16. The $60,000 plus interest, together with any costs ordered to be paid (see below), should be (as the High Court ordered in Warman International) secured by an equitable charge over the Zeldens’ 70 per cent interest in the Rose Bay property.

Short Minutes of Order

98 I will direct the parties to bring in Short Minutes of Order to reflect the conclusions to which I have come.

Costs

99 I will hear the parties on the appropriate costs orders to be made.

Office of the Legal Services Commissioner

100 I direct the Registrar in Equity to send a copy of these reasons to the Office of the Legal Services Commissioner.

**********

Citations

Sewell v Zelden [2010] NSWSC 1180

Most Recent Citation

Cases Citing This Decision

5

Zelden v Sewell; Henamast Pty Ltd v Sewell [2011] NSWCA 56

Rasch Nominees Pty Ltd v Bartholomaeus [2013] SASCFC 23

John Hudak v Rhys Adams (No 2) [2013] NSWSC 1501

Cases Cited

30

Statutory Material Cited

1

Chan v Zacharia [1984] HCA 36

Maguire v Makaronis [1997] HCA 23

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CITATION:	Sewell v Zelden [2010] NSWSC 1180
HEARING DATE(S):	5-8 July 2010
JUDGMENT DATE :	3 September 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	Rein J
DECISION:	Held that the first defendant breached his fiduciary duty to the plaintiff. Held that the second and third defendants are liable for "knowing assistance" under the second limb of Barnes v Addy. Matter stood over for orders to be prepared based upon the findings contained in the reasons for judgment.
CATCHWORDS:	EQUITY - fiduciary duties - breach - conflict of interest - defences to breach - disclosure and informed consent - where solicitor acted for client on sale of property owned by solicitor's wife's company, and proceeds of sale used to discharge mortgage on home of solicitor and solicitor's wife - whether solicitor breached fiduciary duty to client - EQUITY - second limb of Barnes v Addy ("knowing assistance") - whether solicitor's wife and company owned by her had knowledge of solicitor's dishonest and fraudulent breach of fiduciary duty to client - EQUITY - remedies - breach of fiduciary duty - account of profits - "profit" or "benefit" received by solicitor, solicitor's wife and company owned by her
LEGISLATION CITED:	Uniform Civil Procedure Rules 2005 (NSW)
CATEGORY:	Principal judgment
CASES CITED:	Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279 Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 147 Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 Boscauer v Bajwa [1996] 1 WLR 328 Briginshaw v Briginshaw (1938) 60 CLR 336 Chan v Zacharia (1984) 154 CLR 178 Clark Boyce v Mouat [1994] 1 AC 428 Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 Consul Development Pty Limited v DPC Estates Pty Limited (1974) 132 CLR 373 Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68 Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89 Farrington v Rowe McBride & Partners [1985] 1 NZLR 83 Fitzpatrick v Waterstreet [2000] ANZ ConvR 15 Foskett v McKeown [2001] 1 AC 102 Hamilton v Whitehead (1988) 166 CLR 121 Heperu v Belle (2009) 258 ALR 727 Hospital Products Ltd v United States Surgical Corporation (1983) 156 CLR 41 In re Head, Head v Head (No. 2) [1894] 2 Ch 23 John Alexander’s Clubs Pty Limited v White City Tennis Club Limited; Walker Corporation Pty Limited v White City Tennis Club Limited [2010] HCA 19 Jones v Dunkel (1959) 101 CLR 298 Kation Pty Ltd v Lamru Pty Ltd; Lewis v Nortex Pty Ltd (in liq) (2009) 257 ALR 336 Kennedy v Wallace (2004) 142 FCR 185 King Network Group Pty Ltd v Club of the Clubs Pty Ltd (2008) 69 ACSR 172 Magafas v Carantinos [2007] NSWSC 416 Magafas v Carantinos [2007] NSWSC 917 Maguire v Makaronis (1997) 188 CLR 449 Manly Council v Byrne [2004] NSWCA 123 Nocton v Lord Ashburton [1914] AC 932 O’Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 Payne v Parker [1976] 1 NSWLR 191 Phipps v Boardman [1967] 2 AC 46 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 Rejfek v McElroy (1965) 112 CLR 517 Robins Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691 Tozer Kemsley & Millbourn (Australasia) Pty Ltd v Collier’s Interstate Transport Service Ltd (1956) 94 CLR 384 Tyrell v The Bank of London (1862) 10 HLC 26 Warman International Limited v Dwyer (1995) 182 CLR 544
TEXTS CITED:	M Hapgood, Paget’s Law of Banking (13th ed., 2007), LexisNexis Butterworths, London A Stafford and S Ritchie, Fiduciary Duties: Directors and Employees (2008), Jordan Publishing Ltd, Bristol P W Young, C Croft and M L Smith, On Equity (2009), Thomson Reuters, Sydney
PARTIES:	Phillip Malcolm Sewell (plaintiff) Boris Zelden (first defendant) Henamast Pty Limited (second defendant) Elena Zelden (third defendant)
FILE NUMBER(S):	SC 2009/287105
COUNSEL:	G M Drew (plaintiff) S A Kerr SC, D A Hughes (first defendant) D E Baran (second and third defendants)
SOLICITORS:	Williams & Co Solicitors (plaintiff) Colin Biggers & Paisley (first defendant) Colin Daley Quinn Solicitors (second and third defendants)