Sewell v Zelden (No 2)

[2010] NSWSC 1181

CITATION:	Sewell v Zelden (No. 2) [2010] NSWSC 1181
HEARING DATE(S):	15 September 2010
JUDGMENT DATE :	1 October 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	Rein J
DECISION:	1. Judgment for the plaintiff against the first, second and third defendants in the amount of ninety thousand eight hundred and forty eight dollars and twenty two cents ($90,848.22). 2. First defendant to pay the plaintiff’s costs of the proceedings, to be assessed on an indemnity basis. 3. Second and third defendants to pay the plaintiff’s costs of the proceedings, to be assessed on the ordinary basis. 4. Existing costs orders made against the plaintiff in favour of the defendants or any of them stand unaffected by order 3. 5. Declare that the respective interests of each of the first, second and third defendants in the property owned by them at Rose Bay are hereby charged to the plaintiff to secure payment by the respective defendants of the amounts referred to in orders 1 to 3 above.
CATCHWORDS:	EQUITY - remedies - breach of fiduciary duty - account of profits - amount of "profit" or "benefit" received by solicitor in breach of fiduciary duty - whether solicitor's wife and company owned by her liable for account of profits under the second limb of Barnes v Addy ("knowing assistance") - PROCEDURE - judgments and orders - interest on judgments - time from which interest runs - PROCEDURE - costs - whether solicitor liable to pay plaintiff's costs - whether solicitor liable to pay plaintiff's costs on an indemnity basis - whether solicitor's wife and company owned by her liable to pay plaintiff's costs
LEGISLATION CITED:	Civil Procedure Act 2005 (NSW) Property, Stock and Business Agents Act 2002 (NSW) Uniform Civil Procedure Rules 2005 (NSW)
CATEGORY:	Consequential orders
CASES CITED:	Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 Colgate-Palmolive Co. v Cussons Pty Ltd (1993) 46 FCR 225 Consul Development Pty Limited v DPC Estates Pty Limited (1974) 132 CLR 373 Harrison v Schipp [2001] NSWCA 13 Hudson Investment Group Ltd v Australian Hardboards Ltd [2005] NSWSC 931 Leichhardt Municipal Council v Green [2004] NSWCA 341 Lever v Goodwin (1887) 36 ChD 1 Sanders v Snell (No. 2) (2000) 174 ALR 53 Warman International Limited v Dwyer (1995) 182 CLR 544
TEXTS CITED:	I E Davidson and M P Cleary, ‘Taking Accounts’ in P Parkinson (ed.), The Principles of Equity (2nd ed., 2003), Lawbook Co., 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: 15 September 2010
Date of Judgment: 1 October 2010

2009/287105 Phillip Malcolm Sewell v Boris Zelden and ors (No. 2)

JUDGMENT

1 REIN J: On 3 September 2010, I handed down my reasons for judgment in this matter, directed the parties to bring in Short Minutes of Order, and indicated that I would deal with the question of costs on 15 September.

2 I received, on or prior to 15 September, written submissions from Mr Drew for the plaintiff, Mr Kerr SC and Mr Hughes for the first defendant, and Mr Baran for the second and third defendants. A number of issues have been ventilated:

(1) whether my conclusion that $60,000 is the amount of the profit or benefit for which Mr Zelden should be liable to Mr Sewell ought to be replaced by a different amount;

(2) whether the amount so determined should be an amount for which Mrs Zelden and Henamast are liable;

(3) whether interest should be paid by Mr Zelden on the amount awarded against him;

(4) whether the defendants should pay Mr Sewell’s costs, or any of those costs; and

(5) if the defendants are to pay all of Mr Sewell’s costs, whether Mr Zelden should pay indemnity costs (no order for indemnity costs was sought against Mrs Zelden or Henamast).

Account of profits or benefits

3 I dealt with the issue of account of profits at [87]-[97] of the reasons for judgment. The defendants’ complaint was that the approach taken by me at [96] was not one which had been advanced by the plaintiff or the defendants and that it was erroneous to regard $60,000 (being the difference between what Henamast bought the property for ($255,000) and what it sold it to Mr Zelden for ($315,000) and which I shall refer to as the “sale-purchase price differential”) as a profit or benefit earned by Henamast, because Henamast had to pay tax, stamp duty and vendor’s duty, with an offset of rent received by Henamast, which when taken into account would reduce Henamast’s profit or benefit to $17,300.

4 Mr Drew, on behalf of the plaintiff, objected to the defendants effectively launching an appeal and seeking to tender fresh evidence that should have been tendered at the hearing. He maintained that even if leave were granted, $60,000 was an appropriate figure given that:

(1) $60,000 was the profit derived by deducting the purchase price from the sale price, and whether it is described as gross profit or benefit is not significant;

(2) the tax liability of Henamast is not relevant to Mr Sewell’s claim and is wholly independent of the breach of fiduciary duty;

(3) since Mr Zelden’s conduct was a breach of fiduciary duty and hence “unconscionable” (see [12] below), the derivation of the $60,000 is just and equitable, and it would be necessary for Mr Zelden to establish that he should not account for this amount;

(4) the defendants have not, in any event, tendered all of the documents which would support a conclusion of $17,300 as being the net profit; and

(5) any tax or other liabilities which are applied to the $60,000 ought not be applied to a differential which was made at Mr Sewell’s expense.

5 Over the opposition of Mr Drew, I granted leave to the defendants to put the arguments that they wished to put and to tender Exhibit 2D6, a notice from the Australian Taxation Office. That document refers to a tax on business and investment income of $32,800, but no details of how that amount was derived is contained in the document. I shall assume that there would have been some tax payable by Henamast on the proceeds of the sale of the Eastwood property to Mr Sewell. I should also note, however (and I was not reminded of this by any counsel on 15 September), that Mr Drew’s written submissions provided at the hearing in July include this at paragraph 108:

“The profit derived by Henamast can be determined by a simple calculation: it acquired the Eastwood Property for $255,000 and sold it to Sewell for $315,000; that is, a profit of $60,000, and it is liable to account for that amount (or its traceable proceeds) as constructive trustee.”

This is quite inconsistent with the contention advanced by the defendants on 15 September that the sale-purchase price differential had not been referred to prior to my judgment: see T3 and T6.3-19 of the transcript of 15 September.

6 The argument advanced at the hearing on behalf of Mr Zelden in relation to the account of profits was that $35,000 (which I shall refer to as the “sale-market price differential”) should be treated as having been received by all three defendants (it is described in Mr Kerr’s submissions of 7 July as the “total shared profit”) and since 69 percent of the purchase price of $315,000 (said to be $217,662.63) went into a joint account held by Mr and Mrs Zelden and 31 percent (said to be $97,443.78) went into Henamast’s account, Mr Zelden should pay half of 69 percent (that is, 34.5 percent) of the total shared profit (and not, as I stated in [94], 50 percent of the $35,000). The figure payable by Mr Zelden on this basis is $12,075, and not $17,500.

7 This argument would seem to accept that the amount that Henamast derived above the market value is the starting point and that at least part of it is to be treated as the benefit in Mr Zelden’s hands.

8 The sale-market price differential, whilst it may be an appropriate measure for equitable compensation as against Mr Zelden (and Mrs Zelden and Henamast) involves a different test to that for determining an account of profits. The two purposes of the rule that a fiduciary cannot profit from his breach of trust are set out in the passage from Warman International Limited v Dwyer (1995) 182 CLR 544 cited at [90] of my reasons for judgment, as is the Court’s reminder at page 559 of Warman that “the remedy must be fashioned to fit the nature of the case and the particular facts”.

9 The task in respect of the remedy for which Mr Sewell made an election is to determine the true measure of the benefit obtained by Mr Zelden as a result of his breach of fiduciary duty to Mr Sewell. As a fact, Mr Zelden (and Mrs Zelden) received $217,000 in the joint account out of the proceeds of sale of the Eastwood property to Mr Sewell, and it seemed to me that the whole of this amount (or 50 percent of it, allowing for his wife’s joint ownership) could not be treated as the benefit Mr Zelden received by virtue of the transaction proceeding in breach of his fiduciary duty. I indicated that I regarded $60,000 as an appropriate amount to which Mr Sewell should be restricted out of the monies received by Mr Zelden as a result of the sale to Mr Sewell.

10 Mr Baran, in his submissions dated 12 September 2010, made reference to page 34 of Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 in support of a proposition that “the aim of an account of profits is to establish and recover the net gain as profit from the relevant defendant as a result of a breach of a duty to the plaintiff”: see paragraph 2 of Mr Baran’s submissions.

11 Mr Drew’s response was that Colbeam was a trade mark case with its own particular rules, but also that there is no reference to “net gain” on page 34 of Colbeam.

12 At pages 34-35 of Colbeam, Windeyer J said:

“the account of profits retains the characteristics of its origin in the Court of Chancery . By it a defendant is made to account for, and is then stripped of, profits he has made which it would be unconscionable that he retain. These are profits made by him dishonestly, that is by his knowingly infringing the rights of the proprietor of the trade mark. This explains why the liability to account is still not necessarily coextensive with acts of infringement. The account is limited to the profits made by the defendant during the period when he knew of the plaintiff’s rights. So it was in respect of common law trade marks. So it still is in respect of registered trade marks: Edelsten v. Edelsten ; Slazenger & Sons v. Spalding & Bros. ; Moet v. Couston . I think that it follows that it lies upon a plaintiff who seeks an account of profits to establish that profits were made by the defendant knowing that he was transgressing the plaintiff’s rights.”

(emphasis added)

13 Recourse to pages 38-39 reveals, however, that his Honour’s approach was to regard it as appropriate to deduct from the price for which the goods had been sold the cost of obtaining the goods and the cost of selling and delivering them to buyers (but not general overhead costs), and then in relation to that profit, to determine how much was attributable to the selling of the goods “under the trade mark” (see page 39), the sales by the defendant in that case being in ignorance of the fact of registration of the mark by the defendant.

14 Windeyer J drew attention to the difficulty in determining how “profit” is to be assessed, saying at page 37:

“In modern economic theory the profit of an enterprise is a debatable concept. Consequently the word "profit" has today varying senses in the vocabulary of economists. For law some definition or working rule must be accepted for the case in hand; for, as Farwell J. said in Bond v. Barrow Haematite Steel Co. , at p. 366, "there is no single definition of the word `profits' which will fit all cases". Perhaps the only single and simple proposition is Lord Lindley's statement that "when a person gets out of a concern more than he puts into it the difference is profit": In re Armitage; Armitage v. Garnett , at p. 346. But that is too general to be helpful here.”

At page 38, his Honour recognised that a different approach to the assessment of profit would be taken when there had been a deliberate passing off of goods, referring to Lever v Goodwin (1887) 36 ChD 1.

15 Nothing is said by Windeyer J about allowing for tax payable on profits, and no case was cited by the defendants which supports such an approach, even in the field of infringement of intellectual property.

16 Even were the approach taken to intellectual property cases applicable here, there is then no support for the contention that tax should be taken into account.

17 The context of the claim for an account of profits, as Windeyer J’s judgment itself indicates, is very important (and see I E Davidson and M P Cleary, ‘Taking Accounts’ in P Parkinson (ed.), The Principles of Equity (2nd ed., 2003), Lawbook Co., Sydney).

18 The High Court pointed out in Warman International Limited v Dwyer (1995) 182 CLR 544 that “the liability of a fiduciary to account differs from that of an infringer in an intellectual property case”. In Warman, the High Court held that the profits to be awarded were not after tax profits, as the trial judge had held, but before tax profits: see Warman at pages 553 and 568. Warman disposes of the argument that tax should be deducted.

19 Vendor’s duty (in force at the time of sale of the Eastwood property to Mr Sewell), which was effectively a tax on profit levied when the profit was greater than 12 percent and on a reduced basis up to 15 percent, would probably be excluded by Warman as well. Stamp duty on the purchase may be in a different category, but the only authority relied on by the defendants for all three deductions was Colbeam, and I do not think that it is appropriate to consider this point further. I would add that having now been reminded that Mr Drew did put a submission at the hearing that Henamast should pay $60,000, calculated by deducting the purchase price from the sale price (see [5] above), I think that there is force in his point that any documents relevant to establishing any stamp duty and vendor’s duty paid by Henamast should have been tendered at the hearing. At the very least, they should have been tendered on 15 September.

20 I remain of the view that it is appropriate to treat the $60,000 sale-purchase price differential as the benefit or profit.

Liability of the second and third defendants

21 The plaintiff seeks judgment for the $60,000 plus interest against not only Mr Zelden, but also Mrs Zelden and Henamast. Mr Drew made reference to this in his written submissions in reply dated 14 September and at T19.40-T20.5. The only thing said about this issue by Mr Baran was that the plaintiff’s case was that Henamast was simply a conduit for the benefit obtained by Mr Zelden (see T4.42-46), although he did acknowledge at paragraph 15 of his written submissions that the Court had found that Mrs Zelden had derived a benefit. Mr Drew disputed this characterisation of Henamast in his submissions in reply of 14 September and orally: see T19.

22 In Consul Development Pty Limited v DPC Estates Pty Limited (1974) 132 CLR 373, Gibbs J (as his Honour then was) held that:

“a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation”.

23 That statement was cited with approval and applied in Warman at pages 564-565 in the unanimous decision of the Court.

24 Mr Kerr did not seek to advance any argument that the $17,000 which (on Mr Zelden’s and the other defendants’ cases) was the benefit should be apportioned in the manner he had argued at the hearing in relation to the $35,000. Whilst strictly it could be said that it is necessary to determine what both the fiduciary and the accessories obtained separately as profits or benefits, no one contended that I should now embark upon that task, either in respect of the $17,000 or the $60,000. The practical aspect is that if an apportionment were undertaken on the basis referred to in [6] above, it would come close to a division of one third each, and the property over which I have indicated that the charge should be given is conjointly held in, more or less, similar proportions. Accordingly, I hold that the defendants collectively obtained a profit of $60,000 (derived from the $315,000 distributed on settlement) and are liable to repay that amount to the plaintiff.

Interest

25 Mr Kerr submitted that no interest should be allowed on the amount awarded, and Mr Baran submitted that interest should only be permitted for half of the period since April 2005.

26 Given that since April 2005 Mr Zelden and the other defendants have had the benefit of an amount which I have held that they should disgorge, I do not think that there is any reason why they should not pay interest on the amount awarded. I do not accept that there is any “double dipping” involved, as Mr Kerr asserted. If Mr Sewell is entitled to the money, he was entitled to it in April 2005. The defendants complain about the length of time it took for the matter to come on (which it is asserted is the fault of the plaintiff), because proceedings were commenced in the District Court, then transferred to the Professional Negligence List of the Common Law Division, and then to the Equity Division. Even if blame were to be attributed to the plaintiff, it does not detract from the fact that the defendants have had the benefit of the $60,000 since April 2005. There was no dispute about Mr Drew’s calculation of interest as being $30,456.99 to 3 September. By extrapolation, a further $391.23 of interest is due up to today’s date, leading to a total judgment amount of $90,848.22.

Costs as against the first defendant

27 The general rule is that a plaintiff, having succeeded in his claims against a defendant, should obtain all of his costs. It was accepted by the plaintiff that existing costs orders made against him as a result of amendments and failed applications for transfer should stand. The Court does have a discretion to deny a plaintiff costs on issues on which he has failed: see Sanders v Snell (No. 2) (2000) 174 ALR 53 at 57 per Kirby J, where his Honour said that there would need to be “good and exceptional reasons” for reducing costs on an issue basis. This is not a case in which the plaintiff has failed on some issues – it is a case where, late in the piece, the plaintiff has abandoned causes of action based wholly or largely on the same factual background as the one on which he has succeeded.

28 I deal further with the failure of Mr Zelden to produce and/or discover documents in the context of the plaintiff’s claim for indemnity costs, but the plaintiff contends that it was only on receipt of material relating to Mr Zelden’s receiving much of the funds and personally benefiting by removal of liability under a guarantee for a loan to Henamast brought about by the sale that the decision to narrow the scope of the case could be taken. The defendants, through submissions, challenge that assertion as a fact and seek to do so notwithstanding the absence of any cross-examination of Mr Williams, the solicitor for the plaintiff, on his affidavit sworn 9 September 2010.

29 I do not think that it is necessary to determine whether the other formulations of claim could or should have been abandoned earlier. The defendants at no time admitted liability, and I do not think that the plaintiff should be penalised for including and then abandoning claims that were not intrinsically (with one exception) hopeless and that were based on the same factual substratum. The fact that Mr Zelden’s solicitors decided to retain senior counsel due to, on the evidence of Ms Dawes (a solicitor in the employ of Colin Biggers & Paisley, Mr Zelden’s solicitors), the complexity of the pleaded claim does not lead me to conclude that the plaintiff should be deprived of his costs or any portion of them. The engagement of senior counsel did not lead to an admission of liability on any of the heads of claim. The claim brought by the plaintiff on the Property, Stock and Business Agents Act 2002 (NSW) would appear to have been quite superfluous, but it was connected to the false statement made by Mr Zelden on the contract of sale that East Point Real Estate was the vendor’s agent for the Eastwood property. Very little time was spent on that issue.

30 Another ground on which it was asserted that the plaintiff should be deprived of his costs was the history of offers made by the parties. None of the offers or counter-offers are relied upon by the defendants as offers of compromise or Calderbank letters enlivening the Uniform Civil Procedure Rules 2005 (NSW) or normal principles relevant to Calderbank letters (see Leichhardt Municipal Council v Green [2004] NSWCA 341), but rather it was submitted that the Court can and should pay close attention to the offers made by Mr Zelden which came close to the $17,000 plus interest that it was submitted was the measure of benefit required to be repaid. Mr Kerr submitted that s 98(1) of the Civil Procedure Act 2005 (NSW) permits matters such as these offers to be taken into account. I doubt that it is desirable that parties should be permitted to put before the Court a history of offers (made without prejudice) that do not meet the requirements of offers of compromise or Calderbank letters. Mr Kerr was unable to provide me with any authority that supports his contention that s 98(1) does permit such evidence to be led. He did, however, also rely on the fact that no objection had been taken by the plaintiff to this evidence being put forward, and the plaintiff, in the affidavit of Mr Williams, has put forward evidence of early offers as well.

31 I shall proceed on the basis that it is permissible to take the history of offers into account, whether or not they meet the criteria for offers of compromise or Calderbank letters.

32 The history of offers revealed by the affidavits of Mr Williams and Ms Dawes (sworn 13 September 2010) is as follows. By a letter dated 6 August 2007, the plaintiff made an offer to resolve the proceedings on the basis that:

(1) he re-convey the Eastwood property to Henamast or Mr Zelden for $315,000;

(2) Mr Zelden reimburse him the amount of $57,050.92, the derivation of which was detailed in paragraph 11(b) of the letter, all of which amounts appear to be costs incurred by Mr Sewell as a result of the conveyance: stamp duty on the transfer and mortgage, interest paid on the $252,000 loan, the costs of the loan for the Eastwood property, and the costs paid to Mr Zelden; and

(3) Mr Zelden reimburse Mr Sewell his legal costs on a solicitor-client basis to that point in time.

33 At a settlement conference on 24 April 2008 attended by counsel and the solicitor for Mr Sewell, the solicitor for Mr Zelden and the solicitor for Henamast (Mrs Zelden was not then a party), the plaintiff offered to settle the matter for the amount of $57,500 in addition to a re-transfer of the Eastwood property to Henamast for $315,000: see paragraph 7(a) of Ms Dawes’ affidavit.

34 By a letter dated 27 May 2008 (see Annexure C to Mr Williams’ affidavit), Mr Sewell’s solicitors wrote to Colin Biggers & Paisley (who were by then acting for Mr Zelden) offering to settle the matter for $90,000 “plus costs as agreed or assessed in full and final settlement”. Although the letter describes the enclosed schedule which details the amounts incurred by Mr Sewell as “an updated version of the amount set out in our letter of demand to your client of 6 August [2007]”, giving rise to the possibility that it was intended that there be a re-conveyance, it is not clear whether that was intended. No response from Colin Biggers & Paisley seeking clarification is in evidence, so I infer that there was no response.

35 On 25 July 2008, at another settlement conference, an offer was made on behalf of Mr Zelden to settle the matter for $20,000 inclusive of costs. A counter-offer was made on behalf of Mr Zelden to settle the matter for $90,000 plus costs. A further counter-offer of $40,000 inclusive of costs was made on behalf of Mr Zelden: see paragraph 7(b) of Ms Dawes’ affidavit.

36 During the course of the hearing in July, the first defendant offered an amount of $25,000 plus costs to settle the matter.

37 I regard the first offer made by the plaintiff in August 2007 as of significance. In effect, the offer was one which, if accepted, would have put Mr Sewell in the position that he would have been in had the transaction not occurred and would have avoided the litigation which has ensued.

38 It is true that rescission is not a remedy that the plaintiff ultimately pressed, but I think that it is relevant that by the offer, Mr Sewell was seeking no more than that to which he would have been entitled. Mr Zelden’s letter in response dated 17 August 2007 stated, inter alia:

“After having legal advise [sic], we are now satisfied that any proceedings as contemplated by you in your correspondence have no prospect of success on either the questions of duty, breach, causation and/or damage.

This firm intents [sic] to strenuously defend any proceedings brought by your client and will enforce if necessary in bankruptcy any costs orders obtained against your client in the event that the proceedings are unsuccessful which we believe will be the likely outcome of any court action.

We are further satisfied that no one from this firm has acted contrary to the relevant rules of practice and are satisfied that any contemplated disciplinary proceedings will be dismissed.”

The letter concluded:
“In all the circumstances, we suggest that you seriously reconsider the threat to commence proceedings and lodge complaints. What you have styled ‘an offer’ is rejected.”

39 There was no suggestion in Mr Zelden’s response that he had ascertained the position of Henamast or his wife in relation to the proposal, or that it was Henamast’s refusal to agree to a rescission of the transaction that presented an obstacle. I think that the offer is an indication of a genuine attempt to resolve the matter at a very early stage and on a basis that was entirely appropriate. The offer of 24 April 2008 (see [33]) is in the same category and was also made to Henamast.

40 The history of offers made by the plaintiff and the result obtained by him in no way supports the conclusion that Mr Sewell should not be awarded his costs.

Indemnity costs

41 Mr Sewell seeks an order as against Mr Zelden that Mr Zelden pay his costs on an indemnity basis. The submissions accept that it is necessary for some delinquency to be shown on the part of Mr Zelden in the conduct of the case, and two matters are relied on. First, the plaintiff says that Mr Zelden’s defence was always doomed to failure because: first, his version of events has been rejected, and secondly, even if his version of events had been accepted, there was a breach of fiduciary duty. The second element of delinquency relied on was what was said to be Mr Zelden’s failure to produce relevant documents, either by way of discovery or by permitting production by the National Australia Bank on subpoena. The material relied on is found in the affidavit of Mr Williams.

42 An order for indemnity costs is unusual, and some basis needs to be established.

43 The categories of cases in which indemnity costs can be granted have been discussed in a number of cases, a very helpful case in this regard being Colgate-Palmolive Co. v Cussons Pty Ltd (1993) 46 FCR 225, where Sheppard J said at pages 233-234:

“ it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo ); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata ) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp (supra)); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata ); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Keng (unreported, Court of Appeal, NSW, Kirby P, Priestley JA, Cripps JA, No 40744/1992, 27 September 1993) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records (supra)). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.”

It is made clear by Sheppard J that his enumeration of categories is not intended to be exhaustive.

The NAB documents

44 In his affidavit, Mr Williams details not only the early offers made by his client, but a history of attempts by him on behalf of the plaintiff to obtain documents by means of subpoena to the NAB and by discovery from the first defendant, which documents would reveal “what happened to the purchase moneys paid by the plaintiff to Henamast. In particular, whether any of that money was subsequently paid either to Boris or Elena, or used to reduce or discharge the joint mortgage over the Rose Bay Property” (the reference to Boris being to Mr Zelden and the reference to Elena being to Mrs Zelden): see paragraph 7 of Mr Williams’ affidavit. Mr Williams stated that he considered this to be relevant to the allegations in the original Statement of Claim, in particular paragraph 15(c).

45 The correspondence annexed to Mr Williams’ affidavit, particularly Annexures P, Q, R and S, reveals an attempt by Mr Zelden’s solicitors to claim privilege over documents which could not be described as privileged, and that claim was ultimately abandoned.

46 There is also a question mark as to how it could have been asserted by those advising the first defendant that the documents produced by the NAB were not relevant to the claims brought by Mr Sewell, but Mr Drew expressly eschewed any assertion that Mr Zelden’s legal advisers had knowingly made false claims about the nature of the documents produced on subpoena or sought on discovery (see T27.35-40), so I do not need to consider this aspect further. Claims for privilege and assertions of lack of relevance are not simply a matter of instructions – they require advice from the party’s legal advisers, so I do not think these acts can be ascribed to Mr Zelden, notwithstanding the fact that he is a solicitor.

47 It follows that I am unable to conclude that by virtue of the failure to produce documents, Mr Zelden has engaged in conduct of a kind that would lead to the imposition of an order for indemnity costs against him.

The hopeless defence argument

48 So far as the fact that Mr Zelden’s version of events was rejected is concerned, I do not think that this is sufficient. Indemnity costs are not awarded against a defendant because his evidence has been rejected and he has been unsuccessful in his defence.

49 In my view, however, there is substance in the assertion that Mr Zelden’s defence was hopeless. It is not simply that Mr Zelden failed in his defence, nor even that he promoted a version of events that challenged the veracity of Mr Sewell in a context where Mr Zelden had no contemporaneous notes or letters to support his claims that he informed Mr Sewell of his Mrs Zelden’s ownership of the company that owned the Eastwood property, but that:

(1) even on his own version of events, he had given Mr Sewell a form of advice that assisted his wife’s company, himself and his wife; and

(2) he had failed to deal adequately with the conflict that he had himself created by not providing all of the information known to him and/or not insisting that Mr Sewell obtain alternative representation.

50 In my view, Mr Zelden had no realistic prospect of success in resisting the claim for breach of fiduciary duty. Even if his evidence had been accepted, he did not adequately deal with the conflict of interest that he created.

51 The only reason that an award of indemnity costs might not be appropriate, at least in relation to the whole of the proceedings, is the fact that Mr Sewell sought to recover $260,000 from Mr Zelden. Mr Zelden was obviously entitled to resist a claim for judgment in that amount.

52 It is significant, however, that Mr Sewell made two offers to which I have earlier referred: one prior to the commencement of proceedings and one in April 2008, both of which involved Mr Zelden or Henamast taking a re-conveyance of the property and putting Mr Sewell back in the position that he would have been in, absent the breach of fiduciary duty. Rescission remained an alternative remedy until a firm decision was made by Mr Sewell at the hearing not to seek a re-conveyance to Henamast and/or Mr Zelden: see the Second Further Amended Statement of Claim and page 17 of the plaintiff’s submissions dated 28 June 2010.

53 Taking all of these matters into account, in my view, it is appropriate to order Mr Zelden to pay Mr Sewell’s costs on an indemnity basis.

54 I should note that no argument was advanced on behalf of Mr Sewell that an order for indemnity costs can be made on the basis of the conduct giving rise to the proceedings, as opposed to the defendant’s conduct of the proceedings, an approach that would appear to be precluded by the Court of Appeal’s decision in Harrison v Schipp [2001] NSWCA 13 at [132]-[133] per Giles JA, with whom Handley JA agreed, and see also Hudson Investment Group Ltd v Australian Hardboards Ltd [2005] NSWSC 931 at [37] per Einstein J.

Costs as against the second and third defendants

55 Mr Baran submitted that the appropriate costs order against his clients would be no order as to costs as against Henamast and an order that Mrs Zelden pay one third of the plaintiff’s costs. The argument put forward for that approach was that Henamast had “played no active role in the proceedings, it was merely joined for the purposes of perfecting an order ultimately sought against Mr and Mrs Zelden”.

56 I do not accept that Henamast played no active role – Mr Baran appeared for both Henamast and Mrs Zelden and never stated that Henamast would submit to any order made against it. As I have noted, Mr Sewell seeks judgment against Henamast and Mrs Zelden.

57 The plaintiff has succeeded against Henamast and Mrs Zelden, and I do not accept that the normal rule should not apply (although, as noted earlier, any existing costs order previously made in favour of Henamast and Mrs Zelden, and I would add, Mr Zelden, will not be affected).

Orders

58 In accordance with the Short Minutes of Order proposed by the plaintiff, I order:

1. judgment for the plaintiff against the first, second and third defendants in the amount of ninety thousand eight hundred and forty eight dollars and twenty two cents ($90,848.22); and

2. that the first defendant pay the plaintiff’s costs of the proceedings, to be assessed on an indemnity basis; and

3. that the second and third defendants pay the plaintiff’s costs of the proceedings, to be assessed on the ordinary basis; and

4. existing costs orders made against the plaintiff in favour of the defendants or any of them stand unaffected by order 3

and I declare that the respective interests of each of the first, second and third defendants in the property known as "[address contained in file copy of judgment deleted]" are hereby charged to the plaintiff to secure payment by the respective defendants of the amounts referred to in orders 1 to 3 above.

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