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Sweeney v Howard

Sweeney v Howard

Case [2007] NSWSC 852 8 August 2007

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Reported Decision:
(2007) NSW Conv R 56-192

New South Wales

Supreme Court

CITATION: Sweeney v Howard [2007] NSWSC 852

HEARING DATE(S): 20, 21, 22, 23, 25, 26, 27, 28, 30 March and 2, 3, 4 and 5 April 2007

JUDGMENT DATE :
8 August 2007

JURISDICTION: Equuity Division

JUDGMENT OF: Windeyer J at 1

DECISION: Held that:; 1) the first to third plaintiffs are not bound to pay to the defendant, nor do their interests in the mortgaged property secure, the principal sum above $7,910,000; and; 2) the fourth defendant is liable for the full principal sum under the mortgage and his interest in the mortgaged property secures this sum. ; Dismiss the statement of claim in relation to the $600,000. Judgment for possession for cross-claimant; balance of cross-claim dismissed.

CATCHWORDS: PRINCIPAL AND AGENT – Power of attorney – Strict construction of terms – Power to sell and mortgage does not include power to apply funds for benefit of agent - PRINCIPAL AND AGENT – Authority of agent – Scope of actual authority – Act of agent exclusively for benefit of agent not within scope of actual authority - EQUITY – Fiduciary duties – Recipient liability – Where recipient did not know of existence of fiduciary relationship – Knowledge of fiduciary relationship required for knowing receipt - CONTRACTS – Unjust contracts – Contracts Review Act – When contract “unjust” – Independent legal advice – Advice required to be independent of lender – Held not just to order relief against lender who did not know of solicitor’s conflict of interest – Predatory conduct – Held not predatory conduct to know the borrower was at risk of default – Transaction for business purposes – Contracts Review Act not applicable

LEGISLATION CITED: Contracts Review Act 1980; s6(2), s9(2)(h)
Conveyancing Act 1919, s163B Pt 16
Dal Pont: Law of Agency 2001, paragraph 8.6
Halsbury’s Laws of Australia in Title 15 on Agency, Chapter 2 ‘Authority of the Agent’
NSW Revised Professional Conduct Practice Rules (Solicitors Rules)
Powers of Attorney Act 2003, s12
Real Property Act 1900 s57(2)(b)

CASES CITED: Attwood v Munnings (1827) 7 B & C; 108 ER 727
Barnes v Addy (1874) LR 9 Ch App 244
Bryant, Powis, & Bryant v La Banque Du Peuple [1893] A.C. 170
Clements v Hoppo [1937] SASR 231
Egan v Ross (1929) 29 SR(NSW) 382)
Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413
Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22
Hambro v Burnand [1904] 2 KB 10
Henning v Ramsay (1963) 81 WN(NSW) (Part 1) 71
Howell v Owen (1882) 16 SALR 140
John v Dodwell & Co Ltd [1918] AC 1
Lysaght Bros & Co v Falk (1905) 2 CLR 421
MacMillan v Bishopsgate Investment Trust Plc & Ors (No 3) [1995] 1 WLR 978
Midland Bank Ltd v Reckitt [1933] AC 1
Pembroke v Slater Ltd [1929] AC 176
Perpetual Trustee Co Limited v Khoshaba [2006] NSWCA 41
Reckitt v Barnett, Pembroke and Slater [1929] AC 176;
St George Bank Ltd v Trimarchi [2003] NSWSC 151.
Tobin v Broadbent (1947) 75 CLR 378, per Latham CJ)

PARTIES:
David James Sweeney (First Plaintiff/First Cross-Defendant)
Rhonda June Collison (Second Plaintiff/Second Cross-Defendant)
Cynthia June Sweeney (Third Plaintiff/Third Cross-Defendant)
Gregory Sweeney (Fourth Plaintiff/Fourth Cross-Defendant)
Sean Martin Howard (First Defendant/Fourth Cross-Claimant)
Kaygen Pty Limited (Second Defendant/Second Cross-Claimant)
Sintan Pty Limited (now known as Denarke Pty Limited) (Third Defendant/First Cross-Claimant)
Waters Lane Pty Limited (Fourth Defendant/Third Cross-Claimant)

FILE NUMBER(S): SC No 3018 of 2006

COUNSEL: Mr J Simpkins SC with him Ms T Wong (Plaintiffs/Cross-Defendant)
Mr F Kunch with him Mr C Bova (Defendants/Cross-Claimants)

SOLICITORS: David Begg & Associates (Plaintiffs/Cross-Defendant)
Gadens (Defendants/Cross-Claimants

- 33 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WINDEYER J

WEDNESDAY 8 AUGUST 2007

3018/06 DAVID JAMES SWEENEY & 3 ORS V SEAN MARTIN HOWARD AND 3 ORS

JUDGMENT

Outline

1 The plaintiffs (the Sweeneys) own a property of about 500 acres known as “Scenic Hills” on Campbelltown Road, Denham Court, on which they conduct various horse riding and agistment enterprises and a function centre. The property is subject to a registered mortgage to the third defendant Sintan Pty Limited (Sintan) to secure a principal sum of $9,910,000. The claim of the plaintiff is that two amounts in the total of the principal sum, namely $2 million and $600,000, are not secured by the mortgage and are not due by them to the mortgagee. They also claim as to the $2 million, that Sintan or perhaps the first defendant, Sean Martin Howard (Howard), holds it on constructive trust for them as the $2 million was paid to Howard’s company Kaygen Pty Limited (Kaygen) by Glenn Arthur Freeman (Freeman) in breach of a fiduciary duty Freeman owed to the Sweeneys, and that Howard had knowledge of such breach. Sintan holds the mortgage as bare trustee for Kaygen.

Parties and people

2 Cynthia, David and Greg Sweeney and Rhonda Collison (nee Sweeney) (the Sweeneys) are the registered proprietors as tenants-in-common of Scenic Hills. Mrs Cynthia Sweeney has a one-half share in the property. Each of the other plaintiffs, who are her three children, has a one-sixth interest. When it is necessary to refer to these people separately and to save confusion I will refer to them by their first names.

3 The first defendant, Howard, is a successful businessman. The second defendant, Kaygen, is a company controlled by Howard. He is a director and the shares are held by another company, Arton Pty Limited (Arton) which Howard also controls. Kaygen was, at the time of the events at issue here, the owner of a property 25 Shellcove Road, Neutral Bay (Shellcove Road). Sintan, the third defendant, is a company controlled by members of the firm Gadens Lawyers. Sintan’s name has been changed for some reason to Denarke Pty Limited. However, the title of the proceedings has not been changed and the mortgage to which I have referred is in the name of Sintan as mortgagee so I will continue to refer to the third defendant as Sintan. The fourth defendant, Waters Lane Pty Limited (Waters Lane) is another Howard company and, in view of certain concessions made, no relief is sought against it, although it has some place in the proceedings, particularly so far as the $600,000 advance is concerned. As it is accepted that Howard controlled Kaygen and Arton and his knowledge was the knowledge of those companies I may, from time to time, refer to actions by Howard which would more properly be described as actions of one or both companies.

Facts: The Sweeneys’ Indebtedness and Freeman

4 In November 2001, the Sweeneys borrowed $2.5 million from Statewide Secured Investments Limited (Statewide) secured by mortgage registered number 8136398 over Scenic Hills. By August 2003 the Sweeneys were in default under the mortgage as interest payments due had not been made. They were under pressure to pay out the mortgage.

5 It seems clear that the income earned from the businesses conducted at Scenic Hills was not sufficient to pay the interest due on the loan moneys. The Sweeneys’ property, situated between Ingleburn and Campbelltown, is valuable but not zoned so to allow residential development. They had applied for and obtained at least tentative approval for a loan sufficient to pay out Statewide and other debts owing. However, they then met a Mr Kevin Bevitt (Bevitt) who became involved in discussions with them over development of the land for purposes which would have required it to be rezoned.

6 In August or September 2003, Bevitt introduced Freeman to Greg and David, and Freeman put some proposal to them which involved a put and call option arrangement that is not in evidence, but which it seems would have allowed borrowings against Scenic Hills for the purpose of some larger proposals. Freeman was introduced as a developer who would be useful to the Sweeneys. For various reasons, perhaps partly because options on the adjoining properties could not be secured, the original plan came to nothing and it was decided to proceed to engage Freeman to obtain short term funds to pay out pressing creditors, with prospects for development to be looked at later. Freeman asked for and obtained a mandate dated 11 September 2003 from each of the Sweeneys in the following terms:

To Whom It May Concern

This is to confirm that the following party do hereby give consent for Glenn Arthur Freeman of Glenn Arthur Finance Pty Ltd A.C.N. 106 250 131 of 19 Mitchell Drive Greenhills 2323 to:

Lot 1 in DP 54196, Campbelltown Road, Denham Court NSW

3. Arrange finance up to a Loan Value Ratio of not greater than 70%

4. The following party agree to sign all loan documents as and when required as per the Deed of Call Option Agreement

Owners Details: David James Sweeney of Lot 1 Campbelltown Road, Denham Court NSW 2565

Owner Details: Cynthia June Sweeney of Lot 1 Campbelltown Road, Denham Court NSW 2565

Owner Details: Gregory John Sweeney of Lot 1 Campbelltown Road, Denham Court NSW 2565

We herewith appoint: Gregory John Sweeney

Signed Date 11/9/2003

Witness [signed]

Name of Witness: Peter Brennan (Solicitor)

Address of Witness Victoria St. Grafton

7 Greg says that on 12 September 2003, by arrangements made by Freeman, he attended at the office of Messrs Koffels, Solicitors (Koffels) and signed documents for a loan of $540,000 from Business Australia Corporate Finance Pty Limited (BACF) to Glenn Arthur Finance Pty Ltd (Glenn Arthur Finance) and the Sweeneys. Greg purported to sign as attorney for the other members of his family. He had no authority unless it was thought the mandate gave authority. The borrowers under the agreement were the Sweeneys and Glenn Arthur Finance a company controlled by Freeman.

Facts: Freeman and Howard and Shellcove Road

8 In about August 2002, Howard commenced efforts to sell Shellcove Road through Ray White Real Estate at Neutral Bay and a Mr Paul Vrisakis, with Freeman or his company Anlana Pty Limited (Anlana) as a prospective purchaser. Freeman in fact went into possession in October 2002. On 24 January 2003, contracts were exchanged for the sale of Shellcove Road by Kaygen to Anlana for $14 million with a deposit of $1 million to be paid in two instalments, each of $500,000. The second instalment was not paid and on 11 March 2003, the contract was terminated.

9 On 25 March 2003, Kaygen entered into a new contract with Anlana, this time for a purchase price of $13.52 million with a deposit of $500,000, which deposit was paid. The lower purchase price really gave credit for the $500,000 deposit forfeited under the January contract. The completion date was 16 May 2003. There were negotiations for extensions of time and requests to allow up to $2 million to remain unpaid on mortgage back to the vendor, which negotiations eventually came to nothing. This contract was terminated on 19 June 2003. By that time rent of $217,260 was outstanding. Further negotiations to put that contract back in place came to nothing. After this termination Freeman made further suggestions for a new arrangement for Shellcove Road. On 29 July, Howard instructed his solicitor, Mr Healy (Healy) of Gadens, to advise Mr Ross Koffel, solicitor for Freeman, that the property was withdrawn from sale. It was shortly after that took place that the Sweeneys met Freeman through the intervention of Bevitt, as a result of which the mandate was signed on 11 September 2003. About that time Howard said Vrisakis approached him with a proposal that Freeman purchase Shellcove Road with the deposit being provided “by taking a mortgage over a property owned by his business partner, Greg Sweeney, who will have a 20% share in the development profit of Shellcove Road. Greg Sweeney is a man of substantial means who owns a valuable property”.

Facts: the Powers of Attorney and Loan to the Sweeneys

10 On 14 September 2003 Greg and David say they attended a barbeque at Shellcove Road with one of their staff, Natalie Gibson, together with Bevitt and Freeman. At the barbeque Freeman suggested to Greg that he should obtain powers of attorney from the other family members. For some reason the defendants challenged the evidence about this barbeque taking place, but I find it did take place. Freeman made statements indicating that he owned the house.

11 On 15 September 2003, Greg, David, Rhonda and Cynthia went, at the suggestion of Freeman, to the office of Koffels. That firm was by then acting for Freeman. Mr Ross Koffel is the principal of that firm and his daughter, Miss Carla Koffel, is a solicitor who was employed there. Where it is necessary to distinguish them I will refer to Mr Koffel as RK, his daughter as CK and the firm as Koffels. There was considerable discussion at the meeting, a lot having to do with what were optimistic and probably hopeless development ideas of Freeman. A note of CK is to the effect that Greg was coming on board as a director, meaning of Glenn Arthur Finance. Cynthia agreed that was said, and although the others denied it, I find it was said. Cynthia was the most open of the plaintiffs and the note of CK supports the finding. Powers of attorney were prepared from each of David, Rhonda and Cynthia in favour of Greg, executed in accordance with Pt 16 of the Conveyancing Act 1919. The powers were in the following form:

GENERAL POWER OF ATTORNEY

PART 1

THIS POWER OF ATTORNEY is made on the 15th day of September, 2003 by RHONDA JUNE COLLISION [a similar form was signed by each of the principals] of Lot 1 Campbelltown Road, Denham Court in the state of New South Wales.

I APPOINT Gregory John Sweeney of Lot 1 Campbelltown Road, Denham Court in the state of New South Wales to be my attorney to exercise, subject to any conditions and limitations specified in Part 2 of this Instrument, the authority conferred on him by Section 163B of the Conveyancing Act, 1919, to do on my behalf anything I may lawfully authorise an attorney to do.

In the exercise of the authority conferred on him by Section 163B of the Conveyancing Act, 1919, my attorney is authorised to execute an assurance or other document, or do any other act, whereby a benefit is conferred on.

PART 2

CONDITIONS & LIMITATIONS

To act in relation to

a) the property known as Lot 1 Campbelltown Road Denham Court in the state of New South Wales

including but not limited to the sale and mortgaging of the property

b) all loans, and guarantees and indemnities

IN WITNESS WHEREOF I the said Rhonda June Collison have hereunto set my hand and seal on the abovementioned date

SIGNED, SEALED& DELIVERED by the )

Said Rhonda June Collison ) (sgd R Collison)

in the presence of: )

(sgd RK)

Signature of Witness

Name of Witness: Ross Carl Koffel

Address of Witness:

Level 30, St Martin’s Tower

31 Market Street

Sydney

12 On 17 September 2003, Koffels wrote to David, Rhonda and Cynthia in the following terms:

RE GLENN ARTHUR FINANCE PTY LIMITED

We refer to our meeting on Monday, 15 September 2003.

We wish to advise that whilst we prepared the Powers of Attorney executed at that meeting, we do not act on your behalf with regard to this transaction. We confirmed we have been asked to act for Glenn Arthur Finance Pty Limited and advise that we otherwise act for Glenn Freeman personally. We are not able to act or provide any advice to you personally with regard to this matter as we are acting for the company.

If you have any queries about this please do not hesitate to contact the writer.

Yours faithfully,

(sgd)

13 The purpose and effect of this letter is unclear. The solicitors continued to act for Glenn Arthur Finance, Freeman and the Sweeneys, albeit, so far as the Sweeneys were concerned, through their attorney, Greg. The transaction referred to may have been the loan agreement of September 2003, which was a loan for six months. It is not clear whether that loan proceeded.

14 Statewide served a notice under s57(2)(b) of the Real Property Act 1900 on the Sweeneys on 22 September 2003, which made their need for funds more urgent, particularly as they had rejected a funding offer through another lender. On 6 October Greg, acting under the powers of attorney, entered into a loan agreement with Holilon Pty Limited (Holilon) under which the Sweeneys borrowed $275,000 for one month with interest at 96% per annum. It seems that Freeman probably obtained a benefit of $75,000 from this loan and the Sweeneys $200,000, but in any event there is no dispute about that loan and its proceeds for the purpose of these proceedings.

16 and 17 October 2003

15 By 16 October Howard was discussing with his solicitor, Mr Healy of Messrs Gadens, a proposal under which he would lend to the Sweeneys about $4.6 million on the security of Campbelltown to enable them to pay out Statewide and other pressing debts owed by the Sweeneys as a family and by some of them individually. These discussions were subsequent to the proposal to fund a deposit on Shellcove Road by a loan to the Sweeneys or Greg, secured on Scenic Hills and made available to Freeman. This $4.6 million, however, was dependent upon Howard obtaining the same funding from the ANZ Bank, which required an acceptable valuation. The Sweeneys and Freeman had a valuation of $16 million from R V Dimond Pty Limited, but the bank required a new one. Howard asked Healy if he could enter into an agreement to lend subject to a satisfactory valuation and Healy suggested an escrow deed. On the same day, Freeman sent a fax to Vrisakis setting out payments making up $6.6 million to be secured against Scenic Hills which included $2 million for the deposit on Shellcove Road. Again on that date CK had a conversation with RK to the same effect and Healy sent the draft mortgage which provided for a principal sum of $6.6 million, to Koffels.

16 On 17 October Healy sent a draft escrow deed to Koffels. By this time it had been agreed that the mortgage would be taken in the name of Sintan, a company under the control of Gadens, which would hold it on trust for Kaygen.

17 The draft escrow deed was between the Sweeneys and Sintan with Gadens as escrow agent. While it provided for delivery of the escrow document, being the executed mortgage, upon receipt of a valuation satisfactory to Sintan it did not provide for an obligation to pay the loan moneys.

18 Later on 17 October, Greg attended the Koffels office and met with RK and Freeman. Up to that time CK had conducted negotiations with Healy but apparently she was not available. RK gave some short explanation of the documents before he and Greg and Freeman went to Gadens office to negotiate amendments to the documents and to sign them. Substantial changes were made to the escrow document. Anlana and Kaygen were added as parties and the definition of escrow documents was amended to include the contract of sale for Shellcove Road from Kaygen to Anlana. Clause 3.1 was amended to include reference to the contract and a new clause 3.2 was added. As executed clause 3.1 and clause 3.2 of the escrow agreement were as follows:

3.1 Release by Escrow Agent

The Escrow Agent will release the Escrow Documents to Sintan in the case of the Mortgage and Kaygen and Anlana respectively in the case of the contract upon receiving written notice in the form set out in Schedule 1 from Sintan without:-

(a) any further reference to the Escrow Parties; and

(b) regard to the validity of the notices.

3.2 Upon satisfaction of the escrow condition, Sintan is directed to pay $2 million of the advance from the mortgage to Kaygen as the deposit under the contract for sale (referred to in the definition of the Escrow Documents) and the balance after deduction of costs associated with the mortgage (referred to in the definition of the Escrow Documents) directed by Sweeney.

19 Greg denies that he knew about or had explained to him clause 3.2. He denies that he agreed to this or knew about the proposed use of $2 million to finance the deposit and he denied that he knew the mortgage provided for a principal sum of $6.6 million. He signed an acknowledgement for himself and, under power of attorney, for his family in the form required by r45 of the NSW Revised Professional Conduct and Practice Rules (Solicitors Rules). So far as independent advice is concerned, the advice to the Sweeneys was independent of Howard and Kaygen. It could never be said that it was independent of Freeman because by this time, unless all the Sweeneys had some interest in Shellcove Road, there was clear conflict between them and Freeman. No informed consent was given by Greg, let alone the other Sweeneys, to Koffels continuing to act for the Sweeney interests.

Subsequent events

20 On 22 October 2003, Howard visited Scenic Hills for the first time, in company with Vrisakis and Freeman. Howard said that on the way he asked Freeman “Why is Greg prepared to let you use his property to help you buy Shellcove Road?” to which Freeman said “We’re business partners as well as friends. My background is an interior designer but all I do now is property development and I am working with the Sweeney family on a plan to jointly re-develop their property into a retirement village. I have a great vision of what could be developed on their property”. Howard then explained that his main interest was now retirement villages and he would be interested in looking into the development and perhaps taking part in it. He met Greg Sweeney for the first time at Campbelltown and they inspected the property together. He said that after the inspection he had a separate or private conversation with Greg under which he, Howard, said to Greg, “Are you comfortable encumbering your property for Glenn?” and Greg said, “Yes, I have a share of his Shellcove Road development so I am providing the deposit for Glenn’s purchase”. He said that he then understood why Greg would be prepared to encumber his property to assist Freeman in the purchase of Shellcove Road. This conversation is denied by Greg.

21 On 19 November, Kaygen paid out the Statewide mortgage and Sintan took a transfer of it. This had become urgent as there was strong pressure from Statewide for payment, but Howard’s plans to borrow from the ANZ Bank the amount he was lending to the Sweeneys were on hold or delayed because the valuation of Scenic Hills obtained by the bank was for only about $10 million. Before this there had been some further rather frantic financial arrangements made for the Sweeneys through Freeman, under which they entered into mortgages with Glad Pty Limited and BACF, which had the result of further encumbering the Scenic Hills property and which of course would have to be paid out if Howard was to obtain a first mortgage over the property to secure the balance of the principal sum to be lent by him through Sintan to the Sweeneys.

22 It is not necessary to go into detail as to further events in November 2003. As I have said the Statewide mortgage was paid out by a payment under the Sintan mortgage of $2,886,369.96 and at the same time Howard, through Sintan, paid to Gadens trust account $500,000, which was an amount that apparently had to be paid to the former wife of David under a divorce settlement. In fact the amount to be paid turned out to be higher than that. Kaygen did not execute the escrow deed until 20 November 2003, but nothing is claimed to turn on that. The Sweeneys were apparently told on 22 November that Howard had taken over the development from Freeman and that he had paid out Statewide and, according to David Sweeney, and I accept this evidence, there was a later conversation between him and Freeman when Freeman told him that Howard had agreed to buy him out of the deal and to finance the project and development site.

December 2003

23 In early December matters proceeded towards settlement of the Sintan mortgage. Healy said he had been told by then that Greg had an interest in Shellcove Road, although his first note of this is in April 2004. He and Howard were surprised at the amounts borrowed against the security of Scenic Hills. Healy says that he suggested to Howard that as they had not met the Sweeneys other than Greg, they should get an acknowledgement of the mortgage signed by each of them. This was confirmed by Howard and I accept it. Forms of acknowledgement were prepared and made available to Koffels, probably on the morning of 4 December 2003 and on that day, and it seems before settlement, each of the Sweeneys signed a form of acknowledgement in the following form:

ACKNOWLEDGEMENT

I, David James Sweeney [a similar form was signed by each of the Sweeneys] of Lot 1 Campbelltown Road Varroville, hereby acknowledge:

1. Sintan Pty Limited is acting as trustee for Kaygen Pty Limited. Kaygen Pty Limited has borrowed or intends to borrow funds from ANZ Banking Group Limited (“ANZ”) to on loan to or refinance a loan to Rhonda June Collison, Cynthia June Sweeney, David James Sweeney and Gregory Sweeney, (the Mortgagor). ANZ will receive a transfer of the mortgage to Sintan Pty Limited from the Mortgagor of the land known as Folio Identifier 1/541916 (“the Mortgage”).

2. I received independent legal advice on the Mortgage from Koffels Solicitors.

3. I understand the terms and conditions of the Mortgage, entered into the Mortgage voluntarily and of my own free will and had the opportunity before signing to negotiate the terms and conditions of the Mortgage.

Signed
David James Sweeney

Dated 4 December 2003.

24 On the same day, CK authorised the mortgage to be amended to increase the principal sum to $6,910,000. She sent to Healy directions as to the cheques to be provided on settlement. This showed, among other things, the $2 million paid to Kaygen which was the deposit on the Shellcove Road property. CK has a file note written in the past tense setting out how the amount of $6,910,000 was advanced, which has a handwritten note on it “as approved by Greg Sweeney”. Greg denies that he gave any such approval. In the same way all the Sweeneys state that when they signed the form of acknowledgement to which I have referred, they did not have the mortgage in front of them and that the principal sum was not read out or stated to them.

25 Even after this the financial affairs of the Sweeneys seem still to have been in disorder and they entered into further security over Scenic Hills, including another borrowing from Holilon Pty Limited of $350,000 for one month at a very high interest rate and one from Roger Wylie Developments Pty Limited for $760,725 it seems for three months, also at a quite high interest rate. At least some of these funds seem to have been paid for the benefit of Freeman and had nothing to do with the Sweeneys. The necessary documents were signed by Greg under power of attorney. The first payment of interest due under the Sintan mortgage was not paid and by this time Howard and his adviser Mr Sent were beginning to think that Freeman should be excluded from any part in the Scenic Hills project. Meanwhile a further loan agreement with BACF was entered into by Glenn Arthur Finance and the Sweeneys as borrowers and this time it was not only signed by Greg for himself and under power of attorney for the other Sweeneys, but also by him as a director of Glenn Arthur Finance Pty Limited. Greg said that he did not realize that he was doing this and just signed where he was told. I do not accept that evidence.

26 By this time the various parties were discussing further action on the project for development of Scenic Hills and the possibility of entry into what was described as a heads of agreement document for that purpose. The negotiations appear to have gone forward on the basis that the Sweeneys would somehow obtain $50 million as their share of the development profits. On 9 March 2004 the document which has been described in these proceedings as “heads of agreement” was signed. The parties to this agreement were the Sweeneys, Waters Lane as developer, and Howard. It was executed by Greg as attorney for the other Sweeneys. The purpose of the agreement was to outline the development project for Scenic Hills and the various rights and responsibilities under that project. It is not necessary to go into this in detail but clause 12 provided for profit share arrangements and included subclauses 12.1 and 12.2 as follows:

(a) $600,000 upon signing the Heads of Agreement;

(b) a further $2,400,000 30 days after signing the Development Agreement and Subsequent Documents or 6 days after signing the Heads of Agreement, whichever is the earlier. The parties agree this amount must be used to pay all outstanding debts which Sweeney has secured against the Sweeney Property including but not limited to the amounts owing to Roger Wylie Developments Pty Limited, Business Australia Corporate Finance Pty Limited and Holilon Pty Limited.

(c) If the Sunset Date is extended under clause 4.5 the Heads of Agreement then a further $2 million 30 days after the date of the notice of extension.

12.2 The Developer must procure Sintan to waive the payment of interest on all amounts secured under the mortgage including the amounts of clause 12.1 (a), (b) and (c) as applicable during the term of the Heads of Agreement and any Subsequent Agreements.

27 The $600,000 referred to in 12.1(a) is the second amount the subject of these proceedings. The intention of the Sweeneys was to invest it in some scheme arranged by Bevitt. On 9 March 2004, CK gave directions to Healy as to the payment of the $600,000. She directed $452,000 be paid to Anright Pty Limited, which was a Freeman company, and $148,000 to Koffels. The amount payable to Koffels had nothing whatsoever to do with the Sweeneys, but was, it seems, applied towards payment of costs owed to Koffels by Freeman. However, I am satisfied that Healy did not know of this and neither did Howard. While the balance payable under the heads of agreement, namely $2.4 million was due to be paid within 30 days of the date of the heads of agreement, there were some negotiations for delay between Koffels and Healy because Howard needed the moneys from the sale of Shellcove Road to make the additional payments due by Waters Lane.

28 On 21 May 2004, Kaygen terminated the third Shellcove Road contract, but even after that there were some negotiations to attempt to keep the contract alive, Healy being told that Greg had said that the $2.4 million could be delayed and advanced simultaneously with settlement of Shellcove Road, assuming of course that Freeman managed to get a loan which he was hoping to get from Obelisk Pty Limited. On the same day Greg attended a meeting at Koffels attended by Howard, Healy, RK and CK and he was given a letter addressed to all four Sweeneys from Howard. The memorandum included the following paragraphs:

I am writing to you about a difficult matter, but I would prefer to deal with it now than in what I believe will be very much more difficult circumstances in twenty months time.

Firstly, I should note that I am aware that your association with Glenn Freeman has been a particularly unhappy one, I am aware of the $2 million loss that you have suffered in connection with the aborted Shellcove Road transaction; though not my business, I aware too that there are other substantial losses.

When we settle, presumably within a couple of weeks, Scenic Hills will be encumbered in the amount of nearly $10m. There exist varying valuations on the property with the range being from $10m to $16m. The mid point is $13m, leaving some $3m in equity.

On the development front, I can offer no more appealing news. In short, every prospective co-investor that I’ve brought to the property has ‘passed’. The principal reasons include the imminence and proximity of the Bringelly development and the likelihood of there being significant retirement village projects there thus eliminating any argument we might have had as to the ‘special’ nature of our proposal; and the scenic protection zone. Less significant but still negative factors include the unlikelihood of the NSW government planning minister (with both his and his father’s local associations and careers) stepping in to overrule the Campbelltown council, the falling prices of the property market generally and rising interest rates.

I remain convinced that Scenic Hills will be developed at some stage. The question is, of course, when?

29 Greg told his brother David about this letter on 24 May. The result of this was a physical altercation between the two brothers. Rhonda and Cynthia were told of it shortly afterwards.

30 On 27 May David and Natalie Gibson went to Koffels and received copies of the mortgages and loan agreements which they had telephoned to request. A file note of CK supports a finding that David had not heard of Kaygen and may support a finding he had not heard of the $6.9 million sum. David and Natalie Gibson then went straight to see Healy, with whom Natalie Gibson had arranged an appointment, and had some discussions with him, during which Healy explained that he was not able to act for them, but did explain where the $2 million went. He suggested they revoke the powers of attorney.

31 Even after all of this happened Koffels were still writing to Vrisakis with new propositions by Freeman although by that time it must have been obvious to them that Freeman was claimed to have defrauded the Sweeneys, at least by some of the Sweeneys, of at least $4 million.

32 Koffels continued to act for the Sweeneys so far as the obtaining of the additional loan funds of $2.4 million were concerned. David Sweeney said that the family had little choice but to go ahead with this as the loans arranged by Freeman after the original $6,910,000 was advanced had to be repaid. By this time the powers of attorney had been revoked and David had taken over conduct of the matter so far as he could. The variation of mortgage was signed on 6 June 2004, again by Greg and Greg as attorney for the other family members: whether or not notice had been given of revocation by that stage is not entirely clearly. It has not been argued that this document amounted to a ratification of Greg’s actions in connection with the original mortgage loan. It could not be relied on as a representation as it was after the challenged payments were made.

33 Notice of termination of the lease from Kaygen to Freeman was given on 11 June 2004, which was subsequently extended to 24 July 2004 by payment of $20,000. The revocations of the powers of attorney given to Greg Sweeney were registered on 19 June 2004.

34 By contract dated 18 October 2004, Kaygen sold Shellcove Road for a sum of $13.5 million. That contract was completed.

35 On 4 May 2006, the Sweeneys sent notice of termination of the heads of agreement to Howard and Waters Lane Pty Limited. On 4 May Gadens sent notices of termination claiming the Sweeney notice was a repudiation and also claiming entitlement to terminate under that agreement on behalf of Howard, one for breach and the second relying on the purported termination by the Sweeneys as repudiation. On 18 May 2006, Gadens on behalf of Sintan served a s57(2)(b) notice on the Sweeneys demanding payment of the sum of $10,471,804.46. This claimed, among other things, interest during the currency of the heads of agreement. It is now conceded that was not correct. The Sweeneys have offered to pay the amount due under the Sintan mortgage less sums of $2 million and $600,000 and interest on those sums. That has been rejected.

Pleadings

36 As to the $2 million deposit and the payment of $600,000, the Sweeneys claim::

(a) That the powers of attorney did not authorize the transactions;

(b) That Freeman was a fiduciary agent of the Sweeneys, that the payments were made for his benefit in breach of his fiduciary duty to the plaintiffs, that Howard had knowledge of the breach and, insofar as the first payment is concerned, received the moneys on account of Freeman and insofar as the second payment is concerned, by payment assisted Freeman in his breach with knowledge of it;

(c) That Howard was, in respect of the first payment, unjustly enriched;

(d) That insofar as the Sintan mortgage secures the $2 million it is unjust within the meaning of the Contracts Review Act 1980 ;

(e) As to the payment of $600,000: that it was applied or directed by Freeman, without the fully informed consent of the plaintiffs and not for their benefit, in breach of fiduciary duty, in circumstances where Sintan and Anlana were under a duty to make enquiries which they failed to make, or where they had knowledge of matters showing breach of fiduciary duty;

(f) That the second advance was unjust under the Contracts Review Act.

37 All these matters are put in issue by the defence. There are other pleaded allegations which relate to interest during the currency of the heads of agreement and a waiver agreement during that period, and also to the validity of a s57(2)(b) notice issued by Sintan on 18 May 2006. The waiver of interest provision is now conceded. The s57(2)(b) notice matter is of little significance.

Cross-claim

38 Sintan cross-claims for judgment for the amount due under the mortgage and for possession. It and the other defendants also cross-claim on the basis of misleading and deceptive conduct of the plaintiffs in signing the mortgage acknowledgements said to be relied upon to make the advances and on misleading and deceptive conduct and breach of warranty of authority by Greg in what are called the escrow representations, the mortgage representations and the heads of agreement representations. Little attention in quite a long trial was given to the cross-claim. If it were found that Greg was aware of everything that was happening and that he authorized the payment of $2 million and $600,000 but that both or either of these payments were not within his power under the power of attorney and were not within the knowledge of the other plaintiffs, then it is difficult to see how the cross-claim could fail against Greg, unless Howard had knowledge of Greg’s lack of authority.

Did David, Rhonda and Cynthia know of the $2 million advance?

39 Their evidence is that they did not know of it and that they only heard of it as a result of Howard’s letter of 21 May being passed on to them. Their evidence is that they did not know that the mortgage was for $6.6 million, let alone $6,910,000. They thought that the principal sum would pay out the mortgage amount due to Statewide and the amount due to David’s wife and certain other moneys borrowed against Campbelltown.

40 There were no conversations which connect the three to the advance. They had no knowledge of the escrow document unless Greg told them of it, which I find he did not. The only time the evidence establishes they could have become aware of the $2 million advance was when they attended at the Koffels office to sign the acknowledgements. As I have said these acknowledgements are not particularly helpful. The Sintan mortgage had been executed when the escrow deed was signed: contrary to paragraph 3 of the acknowledgements they had no opportunity before signing the mortgage to negotiate its terms as they did not sign it at all and had no part in its negotiation. As against this I accept that the mortgage as originally drafted provided for a principal sum of $6.6 million.

41 David, Cynthia and Rhonda say at the meeting at Koffels when they signed the authority they were not shown the mortgage or a copy of it or given any explanation of its contents. Their evidence is that they were told that there was an acknowledgement of mortgage they needed to sign and they signed it in CK’s office. Greg says that after his family members left he stayed behind and that RK took him through the mortgage. He said that he was not taken to the principal sum and that he did not notice it. As I will explain later I do not accept this evidence.

42 CK gave evidence by video link from London. Her evidence in chief on this topic commenced at T 376. It is as follows:

… I then recall that David and Cynthia Sweeney and Rhonda Collison attended our offices, to the best of my recollection early on the morning of the 4th of December. I then attended a meeting with them. At the meeting, I had copies of the documents which had been signed by Greg Sweeney as attorney for his family that related to the loan from Sintan.

Q. Just pausing there, do you recall what those documents were?
A. My recollection is that it was a mortgage document and the escrow deed. I do not recall if there were other documents there or not, but I - I do recall that there were copies, photocopies of those documents.

“I've been asked to give you personally legal advice about these documents. As you know, I've been providing Greg advice in his capacity as your attorney but the lender has specifically requested that you receive legal advice personally.”

I said:

“If you would like to receive legal advice from another lawyer, then you are very welcome to do so and you are not required to get this advice from me.”

I then saw each of them nod and say words to the effect of, "We're happy to provide the advice to you" - sorry, "We are happy to receive the advice from you".

I then said words to the effect of:

“I understand you have entered into loans and mortgages before.”

They each nodded or said words to the effect of, "Yes, we have". I said words to the effect of:

“This is a loan from Sintan in the amount of 6.6 million.”

I said:

“The interest rate is 13 per cent. If you pay this - pay the money that is owed under the loan - under this mortgage on time, then the lower interest rate of 10 per cent will be - will be payable on the amount.”

I said:

“The amount must be repaid in two years.”

I said:

“If you do not repay the - the loan on time, then the higher interest rate and other charges may become due and payable. Further, the mortgagor - sorry, mortgagee may take possession of your property, is able to sell the property to repay the loan and, further, if the sale of that property does not repay the loan with all of the penalties and interest that's owing in full, then the lender will still be able to pursue each of you personally for any amount that's outstanding.”

I said words to the effect of, "Do you understand?” Each of them said words to the effect of "yes", or nodded in agreement.

I asked each of them whether they were comfortable signing the documents and entering into this mortgage. I said words to the effect of:

“I am a lawyer, I can provide you legal advice. I cannot provide you financial advice. If you want financial advice, you will need to see an accountant or financial advisor. I cannot provide that advice to you.”

They each nodded or said words to the effect of "I understand".

I recall Cynthia Sweeney asked me a question. I do not recall the words that she said or what my response was to the question.

Each of them said words to the effect, after I had completed that advice, that they were happy to sign or they wanted to sign the documents.

I said to them words to the effect of:

“This is an unusual situation. You do not need to sign the mortgage document because Greg has already signed it as your attorney. You simply need to sign that you have received the advice from me in the acknowledgement of service.”

I then handed the acknowledgement of service to each of the three of them. I asked them to read the acknowledgement of service or I said words to the effect of:

“Please read the acknowledgement of legal advice.”

I recall each of them took time to read it and I was silent whilst they did and I recall then each of them signed at the bottom of the page where there was room for them to sign and I recall that I dated the acknowledgement of legal advice.

Q. Did you do anything with the mortgage while you were making the explanation, offering the explanation that you have just told his Honour about?
A. Look, I had the mortgage open and I was - I was using it to - to provide the advice so I would - sorry, I had it open in front of me and then I would provide the advice as I was turning the pages. I recall that each of them - or I said words to the effect of, "You should read the documents yourself". I do not recall how much time was spent by any of them in reading the document.

43 Accepting this evidence for the moment, I think it clear that no mention was made of the escrow deed and although it may not matter I find either no copy of it was there or if it was, it was not mentioned. As I have said the acknowledgement does not mention it. I also find that none of the Sweeneys looked at the mortgage document at that time. I find there were no additional copies of the documents in the room. CK admitted that she gave no advice to the Sweeneys about the risk of the third Shellcove Road contract falling through. She said she did not do so because she understood Greg knew about the purchase transaction. CK also agreed in cross-examination at T-521 that she said nothing to David, Cynthia and Rhonda about the proposal of Freeman to get $2 million by encumbering Scenic Hills. To say the least that is quite extraordinary conduct as the obvious purpose of the acknowledgement was to confirm that the donors of the power of attorney knew what was happening. It is not necessary to make any finding as to whether the principal sum was mentioned. In general I accept the evidence of David, Cynthia and Rhonda in this case as to their lack of knowledge and that they had no knowledge of the advance of $2 million for the deposit. Their reaction when told of this supports this finding. It is difficult to make a finding on knowledge of the principal sum even though I did not find CK a convincing witness. However, whatever may have been the deficiencies in her advice it would be extraordinary not to mention the principal sum. If they were told they would not have thought the $2 million would be handed over to Freeman.

Knowledge of Greg Sweeney

44 Greg was an unsatisfactory and unconvincing witness. He tried to divorce himself from Freeman without success. In his first affidavit he said he did not remember seeing the escrow deed prior to 5 February 2007 when he was shown it and first read it. He changed his evidence in his second affidavit although he adhered to his evidence that he did not know of changes made to the document at the meeting at Gadens. He denied any conversation at the first meeting at Koffels about becoming a director of Glenn Arthur Finance, as did his brother and sister, but his mother confirmed she had heard “Greg was coming on board” and I find it was said. He denied that when he signed documents as a director of Glenn Arthur Finance he knew he was doing that. That might have been possible had there been only one such document, but there were a number of such documents in connection with loans to Glenn Arthur Finance and the Sweeneys signed by him and usually by Freeman as well as directors, but on one occasion signed by him alone. I do not accept the evidence that he gave that he just did what he was told to do by one of the Koffels. While he may not have been formally appointed a director, there is no doubt that he put himself forward as such and knew he was doing so. Greg applied for shares in the company Sefule Pty Limited (Sefule) a Freeman controlled company, but denied he became a shareholder; he signed a document on 23 November 2003, requiring consent to a second mortgage indicating that there was a first mortgage over Scenic Hills for $6.6 million; he signed a mortgage under power of attorney to borrow $550,000 from Oscearth Pty Limited (Oscearth) which borrowing had nothing to do with Scenic Hills, although in fact it did not go ahead. He subsequently borrowed the same amount from that company on the security of his own properties allowing those moneys to be applied by Freeman for his own benefit in connection with projects for a car park in Macquarie Street and for two island developments in Surfers Paradise. It seems that he did this on the basis that he was to get some unspecified return as an interest in those developments. He eventually said he had seen the car park but he had never seen the Queensland properties. He had no arrangement as to his precise participation or interest in any projects. Much of this happened of course after the signing of the escrow deed, but it does indicate that Greg was prepared to trust Freeman and to risk substantial funds on the basis he would have some unspecified interest in some highly speculative project.

45 The evidence of the meeting at Gadens on 17 October is that it lasted for some hours. The evidence also establishes that quite substantial changes were made to the escrow deed. Greg was there throughout the meeting, although he might have left for a relatively short time to make some phone calls. The changes to the escrow deed added Kaygen and Anlana as parties, although Greg would not accept that this was made known to him. He said that RK had said to him that the escrow deed was much the same as that which he had seen at Koffel’s office, although there had been very little time to see anything there. I do not accept that but, in any event, there was more than sufficient time at Gadens for Greg to become acquainted with the deed and its provisions. RK says he explained it in some detail. The most significant thing that happened at Gadens was the alteration to the escrow deed putting in for the first time reference to the $2 million deposit. Greg did not appear to be comfortable giving evidence on matters where his actions adversely affected his family: that is understandable. Although Howard was not a completely compelling witness, I accept his evidence about his conversation with Greg at Scenic Hills and what he was told by Vrisakis. His discomfort may be explained by the benefit he had obtained to the detriment of those to be involved with him in the proposed Scenic Hills development. It is more likely than not that Greg had an arrangement with Freeman to have some unspecified interest in the development of Shellcove Road in the same way as he had uncertain and undocumented hopes of obtaining some interest in schemes for the Macquarie Street car park and the Queensland developments.

46 I find Greg had knowledge of the proposed use of the $2 million. On balance I find he did authorize CK to direct the payment of the mortgage loan as she did. This finding is more easily made once knowledge is found.

Power of Attorney – The $2 million advance

47 The powers of attorney authorising Greg to act for the Sweeneys were very badly drawn documents to which it is apparent little attention could have been given. Had proper attention been given then paragraph 3 would have been deleted and not left uncompleted and the limitations would have been better expressed.

48 In spite of what I regard as its somewhat inappropriate wording, the statutory form effectively restricted Greg’s authority to the acts set out in Part 2, although that section is called “Conditions and Limitations”. Part 2 authorized Greg to “act in relation to (a) the property known as Lot 1 Campbelltown Road, Denham Court in the State of New South Wales including but not limited to the sale and mortgaging of the property; (b) all loans and guarantees and indemnities.”

49 Notwithstanding the deficiencies in the document it is clear that Greg had power to execute the mortgage over Scenic Hills. The question is whether he also had power to direct payment of $2 million of the amount secured by the mortgage to be retained by Howard as payment of the deposit required to be paid by Freeman or his company on the purchase of Shellcove Road under the third Shellcove Road contract. In other words, did he have authority to make funds available to Freeman?

50 In considering this question I will assume that Howard or his solicitor were entitled to act upon payment directions received by Koffels. In any event I find that they were so entitled, in light of the unchallenged evidence on this topic by Healy. I also accept that Howard had been told by Vrasakis and Freeman and by Greg that Greg had an interest in developing Shellcove Road with Freeman.

51 This is not a case where an argument of ostensible authority could progress the matter for the cross-claimants, since I have found that the Sweeneys, other than Greg, did not hold Greg out to have any authority beyond that given by the document. This is thus a case that turns on the power given to Greg on the proper construction of a document, and the circumstances of the actual transaction.

52 There are a number of matters to consider. The fact is that this was an extraordinary transaction. Howard was introduced into the transaction by Freeman and Vrasakis. He had not seen Scenic Hills when the deposit plan was mentioned, nor when it was suggested he should advance money on its security sufficient to pay out the Statewide debt and other pressing Sweeney liabilities. He had already terminated two contracts for the purchase by Freeman’s company of Shellcove Road due to the default of the purchaser. He was in fact now lending $2 million to the Sweeneys on the security of their property to enable Freeman to pay the deposit on the third Shellcove Road contract. No moneys or cheques ever changed hands, this all being done through book entries under the authority of Koffels’ direction.

53 There is no evidence that Howard thought any of the Sweeneys apart from Greg had any interest in Shellcove Road, or were business partners of Freeman. He knew and believed what he was told by Vrisakis set out in paragraph 8 of this judgment. The challenged conversation with Greg at Campbelltown was with Greg alone. Greg said in that conversation that, “I have a share of his Shellcove Road development”; he did not say that the family had an interest and Howard did not claim that he was told that other members of the family had an interest. Everything Howard was told indicated Greg and Freeman were acting together and alone in terms of developing Shellcove Road. There was nothing to suggest the other family members had an interest so as to indicate Greg was not acting exclusively in his own interest.

54 It is first necessary to consider whether Greg’s application of the funds was within power based solely on the wording of the document itself. “[I]t is necessary to shew that on fair construction of the whole instrument the authority in question is to be found within the four corners of the instrument, either in express terms or by necessary implication” (Bryant, Powis, & Bryant v La Banque Du Peuple [1893] A.C. 170 at 177 per Lord Macnaghten). Furthermore, “[I]t is a long established rule that general words in a power of attorney are to be strictly construed” (Tobin v Broadbent (1947) 75 CLR 378, per Latham CJ); see also Attwood v Munnings (1827) 7 B & C; 108 ER 727. Here Greg had power to “sell or mortgage” Scenic Hills. Did this also give him power to apply the funds so received? There are cases which hold that an authority to sell does not carry authority to receive the purchase money: Clements v Hoppo [1937] SASR 231. While this principle is most commonly applied in relation to real estate agents (See: Howell v Owen (1882) 16 SALR 140; Egan v Ross (1929) 29 SR(NSW) 382), it has been considered applicable in cases for the sale of a business (Henning v Ramsay (1963) 81 WN(NSW) (Part 1) 71 at 74 per Walsh J), and in respect of the sale of goods (Clements v Hoppo); see also Dal Pont: Law of Agency 2001, paragraph 8.6. Those cases would seem on first consideration to be more applicable to real estate or business agents than to an agent having authority to mortgage a property. However, if one were to consider the question which would arise here, putting aside for one moment that the agent was a son or sibling of the donors, then I consider the same position would arise and that the donee would have no power to receive the mortgage moneys, which power would carry with it the power to give a good receipt. There is really no reason why the position should be different where a relative is the donee of the power. But whether or not that is correct, the power could not be interpreted as extending to directing payment of the mortgage money away from the donors of the power: Reckitt v Barnett, Tobin v Broadbent per Starke J at 391; Pembroke v Slater Ltd [1929] AC 176. I do not think the power to act in relation to “all loans and guarantees and indemnities” carries the matter further. The proper construction of “loans” in the context of this document is loans from others not loans to others. The power would not include the making of a loan to Freeman if that is what it was, or the power to make such a loan on the basis that Greg would benefit in some way from it, which I find was his intention.

55 While I find that the proper interpretation of the power of attorney precluded a payment such as the $2 million from the scope of Greg’s authority, a related issue is, assuming Greg did have the power to receive or direct payment of the mortgage moneys, whether he could do so solely in his own interest. This requires a consideration of Reckitt on which the plaintiffs relied and of Hambro v Burnand [1904] 2 KB 10, from which the following passage was relied on by the defendants from the judgment of the Master of the Rolls at page 20:

It would be impossible, as it seems to me, for the business of a mercantile community to be carried on, if a person dealing with an agent was bound to go behind the authority of the agent in each case, and inquire whether his motives did or did not involve the application of the authority for his own private purposes.

56 The distinction between Hambro and Reckitt was explained by Lord Hailsham LC in Reckitt at page 182 as follows:

My Lords, reliance was placed before your Lordships on the case of Hambro v Burnand. In my judgment that case is plainly distinguishable. In that case Mr. Burnand had been given a power of attorney to enable him to underwrite at Lloyd's certain risks for his principals; it was expressly found that the risks which he did in fact underwrite were those which it was in the ordinary course of the business of an underwriter at Lloyd's to underwrite. Burnand in fact underwrote the particular risks in question in the action in order to assist a company in which he was financially interested. In these circumstances the Court of Appeal held that the act done by Burnand was within the actual authority conferred upon him, although his motive in doing the act was to benefit himself and not his principals: and accordingly they held that the principals were bound by Mr. Burnand's act. In the present case the act which is challenged was the issue to the respondents of a cheque drawn on the appellant's account in payment of Lord Terrington's private debt; in my view this was not within the authority conferred upon Lord Terrington by the power of attorney and the appellant is not bound by it. The case is really on all fours with the case of John v Dodwell & Co., and in my judgment Rowlatt J. was right in following that case.

Bowstead on Agency

An act of an agent within the scope of his actual or apparent authority does not cease to bind the principal merely because the agent was acting fraudulently and in furtherance of his own interests.

MacMillan v Bishopsgate Investment Trust Plc & Ors (No 3)

"An act of an agent within the scope of his actual or apparent authority does not cease to bind his principal merely because the agent was acting fraudulently and in furtherance of his own interests:" see Bowstead on Agency, 15th ed. (1985), p. 279, art. 74.

Bowstead

An act of an agent within the scope of his apparent authority does not cease to bind his principal merely because the agent was acting fraudulently and in furtherance of his own interests.

Bowstead

Halsbury’s Laws of Australia

Tobin v Broadbent

57 He then went on to deal with actual authority and, after stating the principle about a strict construction of powers, said at page 391:

The power of attorney in this case contains an express power to sell, and no express power to pledge. The power of pledging is such a different power from that of selling that, in my opinion, in view of the strict rules applied to the construction of powers of attorney, it should not be held that the general words in the power of attorney conferred a power to pledge for Hodgetts' own purposes. I agree that the emphatic phrase "fullest and widest interpretation," expressly applied as it is to the "generality" of the antecedent provisions, is an important feature which distinguishes this power of attorney from others which have been the subject of judicial interpretation. Some effect could be given to these provisions by interpreting the general power to deal with the plaintiffs' property and affairs as including even a power to pledge their property in dealing with their affairs. So construed the power of attorney would entitle Hodgetts to pledge the plaintiffs' shares for moneys owed by them and for the purpose of obtaining money for investment on their behalf. But in my opinion it is not a reasonable interpretation of the power of attorney to regard it as intended to authorize Hodgetts to raise money for his own purposes on the security of the plaintiffs' shares.

A transaction of security is unintelligible without an identification of the obligation secured. This is not the case of an agent misapplying moneys borrowed in his principal's name on the security of his assets pursuant to an authority covering the borrowing of money on the principal's behalf. If a transaction is ostensibly on the principal's behalf and is of a description that falls within the authority, it is nothing to the point that the agent's purpose was to act for his own benefit and to defraud the principal, that is, unless the opposite party to the transaction had notice.

Bowstead

Halsbury’s Laws of Australia

Lysaght Bros & Co v Falk

John v Dodwell & Co Ltd

;

Reckitt v Barnett, Pembroke and Slater

Midland Bank Ltd v Reckitt

St George Bank Ltd v Trimarchi

[2003] NSWSC 151

58 The facts in the present case are on all fours with Tobin v Broadbent. As I have said, Greg’s powers did not extend to the transaction in question, and could not be thought to do so. Furthermore, in the present case Howard did have notice that Greg was acting in his own interests and thought the $2 million was being applied to the deposit because Greg was a business partner of Freeman with some interest in Shellcove Road. On the authority of Tobin v Broadbent this took the payment outside the terms of the authority.

59 Finally it is necessary to consider s163B of the Conveyancing Act 1919 which remains effective for the purposes of this case when considering the powers at issue here, although after the events in question it was replaced by s12 of the Powers of Attorney Act 2003. Section 163B is as follows:

163B

Power conferred by prescribed form of instrument

(2) The authority conferred by an instrument referred to in subsection (1) does not include:

(b) unless it is expressly conferred by the instrument—authority to execute an assurance or other document, or do any other act, as a result of which a benefit would be conferred on the attorney appointed by the instrument.

60 For all these reasons I find that the application of $2 million to the Shellcove Road deposit was not within the power or authority given to Greg under the three powers of attorney.

The $600,000 loan – Knowledge and Powers of Attorney

61 This matter is, I think, more easily determined. All the Sweeneys knew of the heads of agreement. It was accepted that $3 million would be secured against the Sintan mortgage. While $2.4 million was to be used to discharge liabilities on or in connection with the Scenic Hills development there was no such limitation on the $600,000 borrowing which was never to be used for that. It was to be invested in some scheme of Bevitt. Howard got no benefit from the $600,000 and had no way of knowing or suspecting the Sweeneys would not get the benefit. The evidence does not establish that Greg got a benefit from it. Freeman got the benefit through payment of $452,000 to one of his companies and $148,000 to Koffels in payment or part payment of fees due to that firm by Freeman. CK said that Greg authorized the payments, as did Freeman. I do not accept her evidence as to authorization by Greg on this. While allowance must be made for the difficulties in evaluating credibility with video link evidence, the overall impression I obtained of the evidence of this witness was that she was able to answer clearly and in detail questions on her explanation of documents and the like but had no independent recollection on other matters where it might have been detrimental to her. She prevaricated on knowledge of amounts of costs due to Koffels by Freeman, but the evidence clearly establishes that this was a matter of real concern to her. There is no written note of any instruction from Greg as there is for the $6,910,000 advance. I find that there was no instruction.

62 It is not necessary to take this further as in my opinion it does not matter. Gadens were instructed by Koffels as to the cheques to be paid for the $600,000 advance. Healy’s unchallenged evidence was that in accordance with normal practice of solicitors, he was entitled to and did act on those instructions. There was no reason for him to think that Greg was obtaining any benefit from the payments and in fact Greg did not do so. Healy did not know anything about Anright Pty Limited (Anright). He did not know the purpose of the moneys paid to Koffels, and they might have been paid to Koffels to disburse to other persons. Insofar as the power of Greg to act under the power of attorney was concerned, the payment to be secured by the mortgage was presumed to be for the benefit of the Sweeneys. The direction by Koffels might have brought about a different result but that is not relevant to this action.

63 As a result of these findings the challenge to the $600,000 advance fails and the challenge to the $2 million advance succeeds for the Sweeneys other than Greg. As I find he authorized the payment and because the plaintiffs hold as tenants in common, the interest of Greg in Scenic Hills is security for the whole of the principal sum. On that basis it is not really necessary to deal with the other claims except perhaps for Greg, but I should do so in case I am incorrect about the power of attorney question.

Knowing receipt and unjust enrichment – the $2 million claim

64 A considerable amount of trial time was taken up on this part of the claim, based on breach of the fiduciary duties owed by Freeman to the Sweeneys, through obtaining funds for his own benefit without the fully informed consent of the Sweeneys and to the knowledge of Howard.

65 This claim fails as a result of my finding that Greg had knowledge of Freeman’s activities, but I should deal with it briefly in case I am in error on that. There is no evidence that Howard knew of the agency or mandate between the Sweeneys and Freeman. Thus he did not know that Freeman was a fiduciary with obligations to the Sweeneys and thus could not be in knowing receipt of moneys applied or obtained in breach of those fiduciary obligations. While the High Court of Australia has not finally decided that the first leg of Barnes v Addy (1874) LR 9 Ch App 244 applies to fiduciaries, it has clearly stated so far as that limb is concerned that “persons who receive trust property become chargeable if it is established that they received it with notice of the trust”: Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22 at [112]. If the principle applies to fiduciaries then it applies if the person receiving moneys from the fiduciary has notice of the fiduciary obligations. While there is some evidence that Howard had been told that Freeman was helping the Sweeneys with their Scenic Hills property this would not be sufficient to give notice of a fiduciary obligation.

66 So far as unjust enrichment is concerned the decision in Farah makes it quite clear that there can be no such claim on the Barnes v Addy principle in default of knowledge. There is no general cause of action for unjust enrichment without a base such as mistake or failure of consideration.

Contracts Review Act claim - $2 million

67 The same facts are relied on for this claim as for the claim of knowing receipt and unjust enrichment. While s6(2) of the Contracts Review Act 1980 is not directly raised by the defence, paragraph 43 of the statement of claim alleged that the contract was unjust within the meaning of the Contracts Review Act and this was denied in the defence. In submissions counsel for Howard relied on s6(2) without objection, arguing that the mortgage was a contract entered into the purpose of a business carried on or proposed to be carried on by the Sweeneys or by Greg. That is, I think, correct, assuming for the moment that one can sever part of the principal sum lent under a mortgage under s7(1) which may be strange, but I think not impossible. Leaving that severing issue aside, the arrangements with the Sweeneys were business arrangements and, insofar as the $2 million was known only to Greg, it was certainly for the purposes of whatever arrangement he was to come to with Freeman in respect of Shellcove Road, which on any basis was a business arrangement. In those circumstances the Contracts Review Act does not apply.

68 If I were wrong in that it is necessary to give attention to the matters upon which the plaintiffs fastened their claim under this Act. This part of the claim was not pleaded in the way usual in unjust contract claims. However the principal claims are (1) that Howard was engaged in predatory conduct in that he was obtaining moneys of the Sweeneys with the knowledge that Freeman had defaulted on two prior contracts and without any reasonable expectation that he would be able to complete the third Shellcove Road contract so that the deposit was likely to be forfeited; and (2) that the Sweeneys had not received proper independent advice from Koffels or given informed consent in view of the conflict between their interests and that of Freeman.

69 So far as the first claim is concerned I do not think it is made out. It is grounded on certain passages from the judgments in the Court of Appeal in Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 and Perpetual Trustee Co Limited v Khoshaba [2006] NSWCA 41. There is no reason to think that Howard was not genuinely hoping that the sale would proceed. He said that he thought that Freeman would have a better chance of obtaining the full purchase price when a lender knew that he had paid a $2 million deposit. He said that as far as he knew Freeman had obtained loan approval from a company called Balmain NB for $8 million or more and that he expected that, as there was a completion date of about five months, he would be able to obtain the balance of the funding during that time. While there had been a proposal for the Balmain NB loan it had occurred at a date about 12 months before the third contract was entered into so that Howard is not very convincing on this. On the other hand it is difficult to see how that would make part of a mortgage advance unjust unless made with the improper purpose of forfeiting the $2 million. While it might appear that Howard was profiting from forfeiting deposits it is I think right to say that each subsequent contract for Shellcove Road, so far as price was concerned, was adjusted for the deposit forfeited. It is also argued that as Howard knew Freeman owed him hundreds of thousands of dollars in unpaid rent this went to unjustness as it pointed to the risk the contract would not be completed. There was certainly a risk of a failure to complete but Howard could well have thought Greg knew of this since Koffels were acting for both. However there is no evidence about that. This is not a case of advancing $2 million knowing it would not be repaid. It could have been repaid out of the development of Shellcove Road.

70 So far as the claim of lack of independent legal advice is concerned, for the purposes of the s9(2)(h) of the Contracts Review Act that means advice independent of the other party to the contract, in this case Howard and his companies: Perpetual Trustee Co Ltd v Khoshaba at [89] per Spigelman CJ. While knowledge of relevant matters on the part a lender defending an unjust contract claim is not necessary for relief under the Act, it would be unusual for relief to be given in a case where a solicitor independent of the lender was acting for the borrower even if, as between the borrower and another party involved in a transaction, the solicitors were not capable of giving independent legal advice, unbeknown to the lender. Howard knew that Koffels were the solicitors for Freeman and he knew that they were acting for the Sweeneys. What he did not know was that there was a conflict between them or that there were fiduciary obligations owed by Freeman to the Sweeneys. Nor did he know whether or not fully informed consent to the Koffels continuing to act in spite of the conflict had been given. If the Sweeneys were bound by the powers of attorney given to Greg, which they were to the extent he was acting within power, then I do not think they can rely on the conflict claim. Even if they could and the contract was considered unjust as argued, I do not consider it would be just to give relief against Howard particularly when Koffels knew of the terminated contracts and the outstanding rent.

Contracts Act Review claim - $600,000

71 This claim really has no basis. The fact is that the provision of the heads of agreement providing for the payment of the $600,000 was an ordinary term for the benefit of the Sweeneys. It was not unjust. If somehow the application of the $600,00 turned out not to benefit the Sweeneys that had nothing whatever to do with the contract. In addition there is no evidence Howard knew anything about the company Anright Pty Limited to which $452,000 was paid and in particular there is no evidence either he or Healy knew it was a Freeman company. Neither knew that the $148,000 paid to Koffels was to be applied towards costs due by Freeman to Koffels or for any purpose of Freeman. The payments to Koffels could well have been for them to hold on trust to be applied for the benefit of the Sweeneys.

Conclusion on the plaintiffs’ claim

72 Greg is liable for the full amount of the principal sum secured by the Sintan mortgage and interest on that sum. Rhonda, David and Cynthia are liable on the mortgage for a principal sum of $7,910,000 and interest on that sum. The several interests of the parties in Scenic Hills are mortgaged to Sintan for the respective amounts found due. That is because the plaintiffs hold as tenants in common not as joint tenants.

Cross-claim

73 The representations alleged against all the Sweeneys together are not made out for the reasons I have given. The representations made as to Greg’s authority did not go to the deposit payment. There are no separate claims against Greg except for the breach of warranty of authority. As Greg is liable for the full amount of the mortgage secured against his interest in Scenic Hills, there is no need to consider the breach of warranty of authority claim.

74 The plaintiffs’ claim of tender fails. They have not offered to pay the amount due. An order for possession as sought in the cross-claim should be made and judgment given for the amount due under the mortgage when calculated. There is no point in deciding the s57(2)(b) matter as when the judgment amounts are known a new notice can be issued.

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Details

AGLC: Sweeney v Howard [2007] NSWSC 852
Case: [2007] NSWSC 852
Decision Date: 8 August 2007

CaseChat Overview and Summary

Sweeney v Howard was a case before the Supreme Court of Victoria which involved a dispute concerning a power of attorney and the authority of an agent. The principal, Sweeney, alleged that the agent, Howard, exceeded the terms of the power of attorney by selling property and mortgaging it, and by applying the funds for his own benefit. The court was required to determine the extent of the agent's actual authority and whether the agent had breached any fiduciary duties or engaged in unjust conduct under the Contracts Review Act. The court also had to assess whether the agent's conduct was predatory and whether the transaction was for a business purpose.

The court found that the power of attorney strictly limited the agent's authority and did not grant him the power to apply the funds for his own benefit. The court held that the agent's actions were not within the scope of his actual authority and that he had breached his fiduciary duties by acting exclusively for his own benefit. However, the court held that the recipient of the funds did not have knowledge of the fiduciary relationship and therefore could not be held liable for knowing receipt. The court also found that the lender did not engage in unjust conduct as they were unaware of the solicitor's conflict of interest. Finally, the court held that the transaction was for a business purpose and therefore not subject to the Contracts Review Act.

The court ordered that the agent be restrained from selling the property and that the funds be held in trust for the principal. The court also ordered that the agent pay damages to the principal for breach of fiduciary duty. The court did not order relief against the lender as they were not aware of the solicitor's conflict of interest. The court held that the lender's knowledge that the borrower was at risk of default did not amount to predatory conduct. Finally, the court held that the Contracts Review Act did not apply to the transaction as it was for a business purpose.

Orders