Baker v Sheridan

Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 Brickenden v London Loan & Savings Co [1934] 3 DLR 465 CASES CITED : Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 Maguire v Makaronis (1997) 188 CLR 449

PARTIES : Dawn Marie BAKER v Paul SHERIDAN & Ors (No.2)

SC Campbell SC/CP Taylor - Plaintiff COUNSEL : G Curtin - 1st Defendants TGR Parker - 2 Defendant

Paul Stubbs Law Office SOLICITORS : Colin Biggers & Paisley Maurice Blackburn Cashman

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

20124/01 Dawn Marie BAKER v Paul SHERIDAN & Ors (2)

1 HIS HONOUR: In these proceedings I delivered a judgment on 24 February 2005 ("the principal judgment") in which I determined the plaintiff's claims against the three defendants. In the principal judgment I referred to, but did not determine, the cross-claims brought by the second defendant Stephen James Rigg against the first defendants the partners of a firm of solicitors including Mr Paul Sheridan ("the first cross-claim" or simply "the cross-claim") and against the third defendant Trevor William Baker ("the second cross-claim"). In this judgment I will determine the first cross-claim. This judgment is to be read in conjunction with the principal judgment and I will not repeat in this judgment many matters set out in the principal judgment which are relevant to the first cross-claim Even though I am dealing with a cross-claim, it is convenient to continue referring (as I did in the principal judgment) to Mr Rigg as the second defendant and to the partners in the firm of solicitors as the first defendants. 2 In par 49 of the principal judgment I summarised the further amended cross-claim filed in May 2004 up to and including par 7. In this judgment I will set out in full the terms of pars 5, 6 and 7 of the further amended cross-claim. "5. In or about May 1996, Dawn Baker, Rigg and the second cross-defendant ('Trevor Baker') informally agreed to adjust their respective rights and interests consequent upon the devolution of Ken Baker's assets and liabilities upon Dawn Baker ('the transfer agreement') and in particular that: (a) certain properties which had been owned by Ken Baker would be transferred to Rigg and Trevor Baker; (b) Rigg would continue to operate, and assume sole liability for obligations of, the joint businesses; (c) Rigg would assume liability for certain of the bank debts; and (d) Rigg and Trevor Baker would, at their own expense, permit Dawn Baker, her daughter and grand-daughter to continue to reside in the former matrimonial home of Ken Baker and Dawn Baker '(the homestead'). 6. Thereafter Dawn Baker and/or Rigg and/or Trevor Baker retained the solicitors to prepare the necessary documents and take the necessary legal steps to have the transfer agreement put into legal effect ('the retainer'). 7. In carrying out the retainer the solicitors acted for Rigg and consequently: (a) the solicitors owed to Rigg a fiduciary duty to act in his interests and not to assume obligations to other persons which would or might conflict with the discharge of that duty; (b) the solicitors owed to Rigg a duty of care and a contractual obligation to use reasonable skill and diligence in acting for him in connection with the retainer and in particular to use reasonable skill and diligence to ensure that any document prepared by them to give effect to the transfer agreement would be legally effective". 3 In par 8 of the further amended cross-claim it was alleged that pursuant to the retainer the first defendants prepared the deed of transfer executed on 25 November 1996 and the deed of residence executed shortly afterwards. 4 In par 9 of the further amended cross-claim it was alleged that pursuant to the deeds certain properties were transferred to Mr Rigg and Mr Rigg took certain actions. 5 Paragraphs 10 and 11 of the further amended cross-claim were in the following terms:- 10. In the principal proceedings, Dawn Baker alleges as against Rigg that: (a) there was a material inequality of bargaining power between her and Rigg and Trevor Baker in connection with the deed of transfer. (b) the deed of transfer was not the subject of any negotiation; (c) the deed of transfer was signed by her without any, or any adequate, independent legal advice; (d) alternatively, any advice to her was provided in circumstances where the solicitors had a conflict of interest; (e) the legal and practical effect of the deed of transfer was never explained to her; (f) she had no business experience; (g) she was not given an opportunity to read the deed of transfer before it was signed; (h) she was not given a copy of the deed of transfer after it was signed; (i) the deed of transfer, on its face, failed to indicate any reason or necessity for her to transfer her interest in the properties thereby transferred to Rigg and Trevor Baker; (j) she was unaware of the true financial position of the estate; (k) she was unaware of the true financial position of the Kempsey Kar Kare partnership, (together referred to as the 'invalidating circumstances') and seeks, by reason of the invalidating circumstances to have the deed of transfer set aside or rectified or to have Rigg and Trevor Baker held accountable as constructive trustees of the property received by them pursuant to the deed of transfer. Claim against Solicitors 11. Rigg is defending the principal proceedings and denies that Dawn Baker is entitled to any relief against him but for the purposes of this cross-claim as against the solicitors, Rigg: (a) repeats the allegations of the invalidating circumstances referred to in paragraph 10; (b) says that if the invalidating circumstances are established: (i) the solicitors breached their fiduciary duty as set out in paragraph 7(a), in that the solicitors assumed obligations to Dawn Baker which would or might conflict with their obligation to act for Rigg; (ii) the solicitors breached their obligation of reasonable skill and diligence as set out in paragraph 7(b), in that: (A) the solicitors either by their conduct created the invalidating circumstances or failed to refer Dawn Baker to independent advisors so as to overcome the invalidating circumstances; (B) the solicitors failed to advise Rigg of the invalidating circumstances and the potential for such invalidating circumstances to be made the basis for Dawn Baker seeking relief against him of the type sought in the principal proceedings; (ba) says that he has thereby suffered loss and damage; Particulars (i) Rigg claims his legal costs incurred in defending the claims made against him by Dawn Baker in these proceedings. (ii) Rigg claims his expenses incurred as a result of the stay application made by Dawn Baker in proceedings number 13225 of 2001 in this Court between the Commonwealth Bank of Australia ('the Bank') as plaintiff and Rigg as defendant, including: (A) Rigg's legal costs incurred in connection with the application; (B) The Bank's legal costs incurred with the application to the extent that such legal costs are payable by Rigg pursuant to his obligations to the Bank; (C) Additional interest incurred by Rigg as a result of the stay. (c) says that if Dawn Baker is thereby entitled to relief of the sort claimed against him, he will suffer further loss and damage. Particulars (a) If any monetary compensation are awarded against him, Rigg claims damages in the full amount of such compensation or costs. (b) If he is required to transfer back properties received by him pursuant to the deed of transfer, Rigg claims damages in the amount by which the obligations and liabilities referred to in paragraph 9 exceed the amounts for which Rigg was liable pursuant to his half interest in the partnership businesses". 6 In their defence to the further amended cross-claim the first defendants made certain admissions. In answer to par 7 of the further amended cross-claim the first defendants admitted that, if they had been retained by Mr Rigg, they owed Mr Rigg the duties alleged in par 7 of the further amended cross-claim, except that they did not admit that they owed a duty to use reasonable care skill and diligence "to ensure that any document prepared by them to give effect to the transfer agreement would be legally effective". In answer to par 8 of the further amended cross-claim the first defendants admitted that, if they had been retained as alleged, they had prepared the deed of transfer pursuant to the retainer. Most other allegations in the further amended cross-claim were either denied or not admitted by the first defendants in their defence to the further amended cross-claim. 7 It is to be observed that in par 11 of the further amended cross-claim the allegations in sub-pars (i) and (ii) of par (b), that the first defendants breached their fiduciary duty and their duty of care, are expressed to be conditional upon the invalidating circumstances being established. The invalidating circumstances set out in par 10 of the further amended cross-claim are, almost verbatim, the same as the particulars supplied in the amended statement of claim of the allegation in par 21 of the amended statement of claim that the deed of transfer was unjust in the circumstances relating to it at the time it was made within the meaning of s 7 of the Contracts Review Act. The claim made in the amended statement of claim that the deed of transfer was an unjust contract within the Contracts Review Act was not pressed by counsel for the plaintiff at the hearing. 8 It is unclear how the condition, "if the invalidating circumstances are established," in par 11(b) of the further amended cross-claim should be interpreted. 9 If the condition is to be interpreted as meaning, if all the invalidating circumstances are established, then I have found in my principal judgment that a number of the circumstances were not established by the plaintiff, for example (j), that the plaintiff was unaware of the true financial position of her husband's estate. 10 I do not consider that the condition should be interpreted as meaning, if any of the invalidating circumstances are established, because a conclusion that the first defendants had breached their fiduciary duty or their common law duty could not possibly follow, if the plaintiff was successful in establishing only some particular items in the list of circumstances, for example (f), that the plaintiff had no business experience. 11 If, as I consider the condition should be interpreted, the condition means, if sufficient of the invalidating circumstances are established to produce the consequence that the deed of transfer is invalidated, then I have held in the principal judgment that the plaintiff did not succeed in having the deed of transfer invalidated. 12 I conclude that, on the terms of the further amended cross-claim as pleaded and having regard to the findings made by me in the principal judgment and the outcome of the plaintiff's claims against the various defendants, the cross-claim as pleaded cannot succeed. However, I will proceed to deal with the substantive issues which were argued.

Counsel for the Second Defendant's Submissions 13 It was submitted by counsel for the second defendant that the second defendant had retained the first defendants as his solicitor, as alleged in par 6 of the further amended cross-claim, even though there had not been any written retainer or indeed any express retainer. It was not really disputed by counsel for the first defendants, and I accept, that the first defendants were retained by the second defendant as his solicitors.

Claim for Breach of Fiduciary Duty 14 The first defendants had been retained by the second defendant to act for him, as alleged in par 6 of the further amended cross-claim. However, the first defendants had also been retained by Mrs Baker to act for her in the same matter. It was submitted that in that matter there was a conflict between the interests of Mr Rigg and the interests of Mrs Baker. 15 It was acknowledged by counsel for Mr Rigg that Mrs Baker and Mr Rigg (and Trevor Baker) had reached an agreement in general terms ("the transfer agreement" referred to in par 5 of the further amended cross-claim). However, it was submitted that it remained for Mr Sheridan of the first defendants to draft a document or documents to give effect to the informal agreement and in drafting such a document Mr Sheridan would have to make choices about matters where the interests of Mrs Baker and the interests of Mr Rigg would, or might, conflict. For example, Mrs Baker and Mr Rigg (and Trevor Baker) had agreed that Mr Rigg and Trevor Baker would, at their own expense, permit Mrs Baker, her daughter and her granddaughter to continue to reside in the former matrimonial home of Mr and Mrs Baker (the further amended cross-claim par 5(d)). However, in drafting a document to give effect to this general intention, Mr Sheridan would have to make a choice about the legal form Mrs Baker's interest would take, whether she would merely have the benefit of a covenant by Mr Rigg and Trevor Baker (a choice which might not sufficiently protect Mrs Baker's interests) or whether Mr Sheridan should seek to create a registrable interest or estate (a choice which might not be in Mr Rigg's interests as inhibiting his power to use the homestead as security for borrowing). 16 It was further submitted that, because there was a conflict between the interests of Mrs Baker and the interests of Mr Rigg, the first defendants could not properly act for Mr Rigg, without obtaining his fully informed consent. Any consent from Mr Rigg would not be fully informed, unless he was informed by Mr Sheridan that Mr Sheridan was acting, not only for Mr Rigg but also for Mrs Baker and that, because there was conflict between the interests of Mr Rigg and the interests of Mrs Baker, Mr Sheridan, if he acted, would not be able to fully and properly advise Mr Rigg in any aspect of the matter in which there was a conflict between the interests of Mr Rigg and the interests of Mrs Baker. Mr Sheridan had not so informed Mr Rigg. 17 It was further submitted by counsel for Mr Rigg that the omission by Mr Sheridan to give such information to Mr Rigg amounted to the non-disclosure of a material fact by a fiduciary within the principle stated by Lord Thankerton in giving the judgment of the Privy Council in Brickenden v London Loan & Savings Co [1934] 3 DLR 465 at 469. At 469 Lord Thankerton said:- "When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, it cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant." 18 It was submitted that Mr Sheridan as a solicitor was a fiduciary and had not disclosed a fact which was material to having the informal transfer agreement put into legal effect by the deed of transfer; that Mr Rigg had proceeded to enter into the deed of transfer; that Mr Rigg had incurred certain losses as a result of having entered into the deed of transfer; and that, accordingly, the first defendants were liable to compensate Mr Rigg for those losses and it was not relevant to enquire whether, if the information had been disclosed, Mr Rigg would still have entered into the deed of transfer. 19 Apart from referring to Brickenden, counsel for the second defendant also referred to Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 especially at 392-3 and Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1, especially at pars 435 to 450 where the Court of Appeal considered the Privy Council decision in Brickenden.

Claim for Breach of Common Law Duty of Care 20 Counsel for the second defendant accepted that, in the case of this claim, it was necessary to prove causation, that is to prove that any loss for which Mr Rigg claimed damages had been caused by a breach of duty by the first defendants. 21 A particular duty alleged in par 7 of the further amended cross-claim was a duty to use reasonable care "to ensure that any document prepared by the (first defendants) to give effect to the transfer agreement would be legally effective". It was submitted that the first defendants had been under a duty to take reasonable care to make the deed of transfer they prepared "stand up", that is to be enforceable and free from challenge, and to take reasonable care to protect their client Mr Rigg from being involved in litigation about the deed of transfer, even if any such litigation against Mr Rigg were ultimately to be unsuccessful. It was submitted that the first defendants had breached their duty by acting for all parties in the preparation of the deed of transfer, in circumstances where there was a conflict between the interests of Mrs Baker and the interests of Mr Rigg, and the first defendants had failed to obtain fully informed consent to their acting from either Mrs Baker or Mr Rigg, thereby providing Mrs Baker with grounds for challenging the deed of transfer. 22 It was submitted in counsel for the second defendant's written submissions that, if Mr Sheridan had adverted to and addressed "the potential difficulties for the enforcement of the deeds which were created by his acting for all parties" and had given appropriate advice, "one of two things would have happened. Either the transactions would have proceeded but with the parties being separately advised or some different structure would have been adopted. On either view, Mr Rigg could not and would not have been sued as he has been in this litigation".

Decision 23 I have concluded that, for reasons advanced in counsel for the first defendants' submissions, the cross-claim should fail (even apart from the problem arising from the way in which the further amended cross-claim was pleaded).

Claim for Breach of Fiduciary Duty 24 The terms of the retainer alleged by the second defendant are set out in par 6 of the further amended cross-claim. The retainer as pleaded in par 6 was limited to preparing the necessary documents and taking the necessary legal steps to have the informal transfer agreement put into legal effect. 25 Because of the limited nature of the retainer, I consider that there was no conflict of interest between Mr Rigg and Mrs Baker. Each of Mr Rigg and Mrs Baker instructed Mr Sheridan to put into legal effect the agreement they had reached between themselves (and with Trevor Baker). 26 It is not sufficient for counsel for Mr Rigg to point to a mere possibility of conflict between Mr Sheridan's duty to Mr Rigg and his duty to his other client Mrs Baker, for example as to the legal form Mrs Baker's interest in the former matrimonial home should take. In Beach Petroleum the Court of Appeal said at 89 (425):- "In a situation of alleged conflict of duty and duty, there must be 'a real sensible possibility of conflict'. It is not enough to identify 'some conceivable possibility' which may result in a conflict…" 27 In Commonwealth Bank of Australia v Smith, the case particularly relied on by counsel for the second defendant, the conflict of duty and duty to which the fiduciary was subject was clear. In that case the fiduciary (a manager of the Commonwealth Bank) had brought together one customer of the Bank who was planning to buy a hotel and another customer of the Bank who was interested in selling a hotel and had provided financial advice to the customer who was the prospective purchaser on the merits of the transaction, including whether that customer should offer less than the price which the customer who was the prospective vendor was asking. 28 Even if there had been a conflict of interest, counsel for Mr Rigg did not identify any advice or information about any aspect of any matter within the scope of the retainer, which Mr Sheridan ought to have given to Mr Rigg but did not give to Mr Rigg because of the conflict of interest. 29 Whether the statement of principle in the judgment of the Privy Council in Brickenden is part of Australian law was discussed, inconclusively, by the majority of the High Court, Brennan CJ, Gaudron J, McHugh J and Gummow J, in Maguire v Makaronis (1997) 188 CLR 449 at 470 to 474. The majority considered that, once the true issues in the appeal in Maguire v Makaronis were perceived, it was apparent that the appeal did not provide an occasion for testing the reasoning in Brickenden. The majority did note that the reasoning in Brickenden had been applied by intermediate Courts of Appeal in Australia. 30 Since the decision of the High Court in Maguire v Makaronis the reasoning in Brickenden has been discussed by the New South Wales Court of Appeal in Beach Petroleum v Kennedy and I consider that I should proceed on the basis that I should apply the principle in Brickenden. 31 In Beach Petroleum v Kennedy the Court of Appeal after quoting at 91 (435) the passage in Lord Thankerton's judgment which I have already quoted, summarised the facts in Brickenden at 91 (436) as follows:- "In Brickenden a solicitor was acting for both the mortgagor and the mortgagee in a land transaction in circumstances in which he had a personal interest in the discharge of existing mortgages, under which the borrower owed him monies. The existence of these mortgages was not disclosed to the new lender. The principle there stated requires some adjustment to accommodate the case of solicitors failing in their duty to give advice or impart information because of a divided loyalty". At 92 (439) the Court of Appeal said:- " Brickenden was a clear case of a conflict of duty and interest. However, the principle has been applied to conflict of duty and duty situations. ( Commonwealth Bank of Australia v Smith at 393-394)…."

At 92 (440) the Court of Appeal said:- "It is important to emphasise that the proposition on which reliance is placed refers only to an act of non-disclosure by a fiduciary of "material facts which his constituent is entitled to know in connection with the transaction." The central word in the formulation in Brickenden is the word "material". Before applying the principle, it is necessary to identify a fact which is "material" in the requisite sense. Once a fact is so identified, the principle establishes that the defaulting fiduciary will not succeed in an argument that, even with disclosure of this material fact, the transaction would still have gone ahead". 32 In the present case the "fact" identified by counsel for the second defendant as not having been disclosed by the fiduciary was that, because there was a conflict between the interests of Mr Rigg and the interests of Mrs Baker, Mr Sheridan, if he acted, would not be able fully and properly to advise Mr Rigg in any aspect of the matter in which there was a conflict between the interests of Mr Rigg and the interests of Mrs Baker. 33 I have already held that, having regard to the limited nature of Mr Sheridan's retainer by both clients, there was no conflict of interest, so that there was no conflict between Mr Sheridan's duty to Mr Rigg and Mr Sheridan's duty to Mrs Baker. 34 In any event, I do not consider that the matter identified by counsel for the second defendant would qualify as a "fact" within the statement of principle on Brickenden. It is certainly very different in nature from the matters of fact relating to the existing mortgages which the solicitor-fiduciary in Brickenden failed to disclose. 35 Furthermore, even if the matter were a "fact", I would not be satisfied it was a "material" fact. It is not evident that it would be a material fact and neither Mr Rigg nor any other witness gave any evidence on the basis of which it could be found to be material. In Beach Petroleum v Kennedy the Court of Appeal observed at 93 (442) that the materiality of the facts not disclosed in Brickenden was "clear". 36 At 93 (444) in Beach Petroleum v Kennedy the Court of Appeal observed:- " Brickenden is not, in our opinion, authority for the general proposition that, in no case involving breach of fiduciary duty, may the Court consider what would have happened if the duty had been performed." 37 If it is open to me to consider what would have happened, if the alleged material fact had been disclosed, then I am satisfied that Mr Rigg would not have acted any differently from the way in which he did act. 38 I reject the claim for breach of fiduciary duty.

Claim for Breach of Common Law Duty of Care 39 It is a sufficient answer to the common law claim that I have found that there was no conflict between the interests of Mr Rigg and the interests of Mrs Baker. 40 In the proceedings it was not shown that, in breach of the terms of the retainer alleged, Mr Sheridan had failed to prepare any necessary document or had failed to take any necessary legal step to have the informal transfer agreement put into legal effect. 41 Even if there had been a conflict, I do not accept that, if Mr Sheridan had adverted to and addressed it, "either the transactions would have proceeded but with the parties being separately advised or some different structure would have been adopted. On either view, Mr Rigg could not and would not have been sued as he has been in this litigation." I consider that, if Mr Sheridan had given the advice which it is submitted he should have given, the transactions might well have proceeded precisely as they did proceed. 42 The claims which were pressed by Mrs Baker at the hearing were claims that she had been induced to enter into the deed of transfer by undue influence exerted on her by Mr Rigg and that the deed of transfer was an unconscionable transaction. In my opinion, it is probable that Mrs Baker would have pressed those claims, in any event. 43 I reject the claim for breach of common law duty of care. 44 I find a verdict for the cross-defendants on the first cross-claim. **********

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