40 The primary judge found that by March 2001, Ms Jajoo knew that there was a question as to whether the investment scheme being conducted by Mr Suleman through KSE was contrary to law, even if she was not aware of any details. The primary judge also found that by February 2001 Ms Jajoo knew that Mr Suleman had become a substantial client of DDS. Neither of these findings was challenged by the respondents.
41 The evidence of the first and second respondents dealt with their relationship with Mr Suleman. It was apparent that towards the end of 2000 the first and second respondents (who were brother and sister) participated, through Mr Suleman, in what was said to be the purchase of some scooter wheels which were subsequently sold at a profit. This transaction returned a profit to the first and second respondents of some $70,000 on an investment of $170,000, over a very short period.
42 Also, the first respondent said that in February 2001 he and the second respondent discussed with Mr Suleman a proposal to involve them in a music shop retail business. Discussion about this proposal continued for some time while the company, Froggy Music Pty Ltd, was incorporated.
43 The primary judge found that throughout the period leading up to March 2001 DDS was acting professionally for Mr Suleman and his companies and the first and second respondents were engaged in discussions with him regarding a commercial transaction in which they had a personal interest. The primary judge also concluded that he had no doubt that the first and second respondents regarded Mr Suleman as a very important connection and client of the firm.
44 The primary judge also dealt with the evidence as to what was known by the first and second respondents as to the status of the investment contracts employed by Mr Suleman by reference to the then Corporations Law. The primary judge found that the first respondent must have suspected that the investment contracts employed by Mr Suleman constituted, or may have constituted, an unauthorised managed investment scheme contrary to the Corporations Law. There was no challenge by the respondents to this finding.
45 The primary judge also accepted the first respondent's evidence that he had no knowledge about the way returns were made or calculated by Mr Suleman's businesses.
46 The evidence of the second respondent, through her affidavit, set out in some detail the consultation which DDS and Mr Suleman had with Mallesons about the question of the managed investment scheme. It is unnecessary to recount the detail of this. It is sufficient to understand that the second respondent and DDS were, on behalf of Mr Suleman and his entities, involved in obtaining advice from Mallesons from late 2000 as to the possible application of the provisions of the Corporations Law to the raising of money by Mr Suleman through investment contracts.
47 On 30 January 2001, the second respondent, in company with Mr Suleman, attended a conference with Mr Fleming of Mallesons in which Mr Fleming said the following:
"These activities attract the managed investment provisions. The existing structure is not good. A new company ought to be set up and the existing investment contracts assigned to the new company.
We will need to get you a dealer's licence, which may take 10 weeks to complete. We will then assign all the existing contract into the new structure. In the meantime Karl, it is better if you do not issue investment contracts."
48 Following this meeting, Mr Suleman assured the second respondent that he had given an instruction to the effect that no more investment contracts would be issued.
49 On 1 March 2001, the second respondent had a telephone conversation with two other persons from Mallesons. In this advice, the second respondent was told that the contracts should not have been structured the way that they had been; as they were structured, they may be a managed investment scheme, although in one sense they were not if recognised as a debenture or straight out loan. However, difficulties were expressed in relation to the lack of approval from ASIC. Mallesons were said to have severe concerns as to how ASIC would react to an application for a managed investment scheme. Mallesons agreed to redraft the contracts as loan agreements. It was stated that there were other issues as to dealer and investment advisor licences.
50 The second respondent also agreed in cross-examination that she had received advice in February 2000 from a barrister, Ms Robinson, that Ms Robinson had concluded that it was open to ASIC to deem the investment scheme conducted by Mr Suleman a managed investment scheme and that the consequences of such a situation were "potentially commercially disastrous for Suleman Enterprises".
51 The second respondent also said in cross-examination that she had discussed these matters with Ms Jajoo in February 2001 and that Ms Jajoo had wanted to know how "the Mallesons thing was going". She told Ms Jajoo that Mallesons had asked for quite a lot of information to put the restructure in order and that there seemed to be deficiencies that needed to be fixed, but Mallesons were waiting on information from Mr Suleman so after which they (Mallesons) would proceed with a restructure in order to deal with the managed investment provisions.
52 The second respondent said that by 16 March 2001 she was only aware of one more client who was seeking to refinance their properties with the whole or part of the proceeds being invested in KSE.
53 There was also some evidence given by the second respondent in cross-examination to the effect that she relied upon the assurance by
Mr Suleman that he was not issuing anymore contracts, although she was aware that there was one refinancing in February 2000 in which there was an investment in KSE.
54 The evidence of the second respondent was to the effect that she took no steps to ensure Ms Jajoo declined to act completely in relation to any transaction that involved the provision of funds for later investment in any of Mr Suleman's businesses.
55 The primary judge found that the second respondent's evidence should be accepted. He also found that by the end of February 2001, the second respondent undoubtedly knew that there were grave questions as to whether KSE was accepting investments for the purposes of its trolley collection business in a manner which contravened the Corporations Law. The primary judge said that he was satisfied that the substance of the advice received by the second respondent from Mallesons was probably conveyed to Ms Jajoo and that it is probable that the second respondent knew or suspected that despite his undertaking to her,
Mr Suleman was continuing to encourage investment in KSE for the purposes of its trolley collection business. There was no challenge by the respondents to these findings.
56 It was against this factual background that the primary judge resolved the controversy.
57 The primary judge first considered the retainer of DDS and Ms Jajoo. He concluded at [133] that the retainer "did not go beyond acting for the [appellants] in the refinancing of their mortgage and, in particular, did not extend to advising the [appellants] as to the commercial, financial or legal implications of their proposed investment with Mr Suleman's company." This conclusion was not challenged on appeal. It was plainly correct.
58 The primary judge said that it followed from that finding that the retainer of DDS was limited to the refinancing documents, that the action for breach of contract against the first to fourth defendants could not succeed. He said that although it had been established that there was a contract or retainer, it had not been established that there was any breach of its terms by the first to fourth respondents.
59 His Honour was undoubtedly correct to conclude that the retainer pleaded was not found. The retainer that had been pleaded was to advise the appellants in relation to the proposed investment by them in the scheme as discussed above. In one sense, this was the end of the case against the first to fourth respondents. However, the primary judge proceeded to deal with the case on the basis as to whether the retainer that he had found had been breached. The appeal proceeded on the basis that this was a legitimate approach.
60 In the pleading, there had been an assertion that there was a breach of retainer, a breach of fiduciary duty and/or duty of care by the first to fourth respondents in failing to advise the appellants of certain matters of which they were aware or ought to have been aware. A number of these matters presupposed the knowledge by the first to fourth respondents of the business of Mr Suleman which was not proved. It is convenient at this point to set out paras 2, 9 and 10 of the pleading as against the first to fourth respondents:
"2. In February 2001, the plaintiffs retained the first to fourth defendants to advise and act for them in their professional capacity as their solicitor in respect of a proposed investment by them in a scheme [hereafter referred to as 'the scheme') conducted by Karl Suleman Enterprises Pty Limited, its associated entities and agents [hereafter referred to as 'KSE'], and a loan to be secured by a mortgage by the plaintiffs to fund that investment.
….
9. In breach of their retainer, fiduciary duty and/or duty of care the first to fourth defendants failed to advise the plaintiffs of the following matters, of which they were aware or ought reasonably to have been aware:
(a) they were in a position of conflict of interest, in that they stood to benefit financially from the promotion of the scheme and the plaintiffs' entry into the scheme from KS and possessed the following relevant information in their capacity as solicitors retained from time to time by KSE, its officers and/or associates;
(b) they were in truth acting in their own interests and those of KSE in advising and acting upon their retainer by the plaintiffs;
(c) the investment or loan agreement was a sham, in that:
(i) the money to be lent or invested was not intended by KSE and could not be used by KSE to produce the interest and principal repayments agreed upon;
(ii) the business, in which it was represented to the plaintiffs the money would be used, either did not exist or could not possibly fund the repayments agreed upon;
(iii) the money was in fact to be used by KSE to pay other 'investors' or 'lenders' interest and principal on similar agreements and to pay commissions to interested parties;
(d) the scheme was not a legitimate business venture, but was illegal, constituting either or both an unlicensed managed investment scheme in breach of s 601ED of the Corporations Law and/or a pyramid scheme in breach of s 61 of the Trade Practices Act 1974 ;
(e) the capacity of KSE to make payments to the plaintiffs under the scheme depended upon the entry by other persons into the scheme and could not be sustained in the long term;
(f) the scheme was highly speculative and likely to result in loss of some or all of the first plaintiffs' money.
10. In the circumstances each of the first to four defendants' conduct was negligent in and about the performance of the plaintiffs' instructions and the rendering of advice to them concerning the scheme.
Particulars of Negligence
(a) Failure to advise the plaintiffs of the matters stated above.
(b) Failure to make enquiries or seek and provide to the first plaintiff particulars of the scheme, the creditworthiness of KSE and its source of funds.
(c) Failure to scrutinise the loan agreement proffered by KSE to discern the fact or likelihood of the matters state above.
(d) Failure to decline to act on behalf of the plaintiffs."
61 It was in the context of these pleadings that the primary judge made some further findings that were relevant to his conclusions. His Honour found at [137] of his reasons that as at February 2001 the first to fourth respondents were "in a position of conflict of interest in relation to any transaction involving Mr Suleman or his companies". By the expression "conflict of interest" it is unclear whether the primary judge was referring to a conflict of duty and duty (being duties to the appellants and Mr Suleman and his companies) or a conflict of personal interest of the solicitors with duty to the appellants. The appeal proceeded on the basis that both notions were encompassed.
62 The primary judge then found that not only was Mr Suleman a client of the firm and potentially at least, a large one, but also both the first and second respondents were, or thought they were, involved in commercial transactions with him, one of which transactions had led to a significant profit in 2000. Also, the primary judge found that the first and second respondent and Ms Jajoo knew that Mr Suleman's investment schemes were probably being conduct contrary to the Corporations Law.
63 The primary judge then concluded that nobody in DDS could properly act for a client in relation to any transaction with Mr Suleman or his companies. He said that it was apparent that otherwise an immediate "conflict of interest" would arise. No argument was placed before the Court to the contrary these propositions. It is unnecessary to explore their accuracy in circumstances if disclosure were to be made as to any relationship with Mr Suleman or his companies and how such disclosure would operate in respect of any potential conflict of interest with duty, as opposed to any conflict of duty with duty.
64 The judge then dealt (at [138]) with what he saw as the more difficult question, that is: "What should have been done by Ms Jajoo in the situation in which she found herself?". The primary judge then examined this question by reference to the particulars set out in [9] and [10] recited above.
65 Many of these particulars required Ms Jajoo, as the primary judge pointed out, to breach the firm's duty to existing clients, Mr Suleman and his companies. Particulars (a), (b), (c) under paragraph 10 required the disclosure the affairs of Mr Suleman or KSE. It may be that particular (c) on its own did not require such, but any useful consequence of it in terms of (a) would have required such breach of duty.
66 It was the primary judge's dealing with the fourth particular under paragraph 10 that lay at the centre of the appeal. Under this particular, it was asserted that Ms Jajoo should have declined to act further on behalf of the appellants after she became aware of the destination of the funds to Mr Suleman's interests. The essence of the primary judge's approach was contained in [138] of his Honour's reasons as follows:
"… I was initially attracted to the proposition that a solicitor in Ms Jajoo's position should have declined to act at all upon finding out that the client proposed to invest in a scheme possibly conducted contrary to the Corporations Law. Upon reflection, I have decided that such a proposition should be rejected. In my opinion, the solicitor, by acting only in the refinancing of the plaintiff's mortgage, was not lending herself to any legal act, which may have constituted a reason for her not having anything to do with the transaction once she found out the purpose or one of the purposes of the refinance. Nor was there any conflict of interest."
67 The primary judge elaborated upon these propositions. He referred to Karl Suleman Enterprizes Pty Ltd (In Liq) v Babanour [2004] NSWCA 214; 49 ACSR 612 and the conclusion of the Court of Appeal in that case (Beazley JA with whom Spigelman CJ and Santow JA agreed) that the investment in Mr Suleman's business was not illegal. At [51] in Babanour, Beazley JA said the following:
"The registration requirement for the operation of a Managed Investment scheme is for the protection of investors. The legislation does not expressly make an unregistered scheme unlawful. Rather it impugns the conduct of the entity responsible for registration by imposing a penal sanction for a contravention of the registration provisions. The members of an unregistered scheme are protected by the provisions whereby the scheme may be compulsorily wound up. There is nothing, therefore, in the scheme of the legislation whereby an implication of an illegality would arise, nor is there anything that points to a legislative intention that contracts entered into as part of an unregistered scheme are illegal."
68 Thus, it was not illegal for the appellants to enter the investment contracts and no occasion arose for Ms Jajoo to contemplate whether or not she would, by completing the refinancing transaction and putting the appellants in the position to invest, be lending herself to an illegal activity. These conclusions of the primary judge were correct.
69 His Honour then turned to the question of the effect of the knowledge of the direction of the funds had upon the obligations of the solicitor, confined as they were to that point by the limited terms of the retainer. His Honour referred to the decision of the Court of Appeal in Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398. His Honour accepted that upon learning of the direction of the funds produced by the refinancing some obligation may have arisen upon Ms Jajoo to speak beyond anything she would otherwise have been required to say consistent with the discharge of her obligations in the limited retainer to effect, and advise upon, the refinancing. This conclusion was not challenged on appeal by the respondents.
70 As to any such duty to speak, the primary judge concluded that Ms Jajoo had amply discharged it, in that she advised the appellants in clear terms (on 6 March) to both appellants that they should obtain financial advice about any investment and (on 16 March to the first appellant) that he and the second appellant should obtain independent legal and financial advice before investing in Mr Suleman's enterprises.
71 His Honour then turned to the question of asserted breach of fiduciary duty.
72 His Honour, correctly, said that the first question was to define the scope of the retainer. His Honour referred to what had been said in Beach Petroleum NL v Kennedy & Ors (1999) 48 NSWLR 1 at [188] by the Court (Spigelman CJ, Sheller JA and Stein JA) as follows:
"Even in the case of a solicitor client relationship, long accepted as a status based fiduciary relationship, the duty is not derived from the status. As in all such cases, the duty is derived from what the solicitor undertakes, or is deemed to have undertaken, to do in the particular circumstances. Not every aspect of a solicitor client relationship is fiduciary. Conduct which may fall within the fiduciary component of the relationship of solicitor and client in one case, may not fall within the fiduciary component in another."
73 At this point, the primary judge made clear his views as to the limit of the original retainer. It was not to provide any advice or services in respect of the proposed investment with Mr Suleman's companies; rather, it was to effect, and advise upon, the refinancing. Thus, the primary judge concluded that DDS had "no conflict of interest". He said at [150]:
"… They, accordingly, could not be said to be acting in their own interests if it be the case that the proposed investment was a sham because they had no conflicting interest and they had no obligation to give advice. Indeed, as I have said, to do so would be a clear breach of their obligations to Mr Suleman, as would the advice that his scheme was being conducted in breach of the Corporations Law. Nor were they entitled, let alone obliged by fiduciary obligation, to proffer advice as to the wisdom of the proposed investment or as to the viability of the scheme upon which incidentally, so far as the evidence relates they had no knowledge."
74 These conclusions are attacked by the appellants. Two fundamental propositions were put on appeal. The first was that even if Ms Jajoo was entitled to continue to act on the refinancing she should have expressed herself far more robustly and more clearly in relation to the need for independent legal advice. Thus, it was said that when she was speaking to the first appellant on the telephone on 16 March and he indicated, after she had effectively raised the need for obtaining legal and financial advice, that he proposed to go ahead, she should have reiterated her statement and been robust in her expression of her advice about the appellants seeking independent advice. The second way of putting the matter was that Ms Jajoo (a) should have immediately ceased to act and informed the first appellant that the firm could not act; and (b) should have advised the first appellant in the strongest possible terms to seek independent legal advice and that she could not disclose the reason for this position because of legal professional privilege.
75 In support of these propositions it was said that because of the involvement of the first and second respondents with Mr Suleman and in the light of the knowledge that the first and second respondents and Ms Jajoo had about the issues upon which they were advising Mr Suleman DDS could not act in any transaction whatsoever that had any connection with his affairs. Also, it was said that even if, theoretically, Ms Jajoo was entitled to continue with performance of the retainer in respect of the refinancing, it was apparent to her that the first appellant was so determined to go ahead that she should, in the appellants' interests have taken the step of ceasing to act in order to ensure, as far as could be ensured, that another solicitor advised the appellants in circumstances where that solicitor was likely to come to know of the connection of DDS with Mr Suleman as the reason for the referral of the partly completed work on the refinancing.
76 Some reliance was placed on Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 in argument. In Kowalczuk v Accom Finance Pty Limited [2008] NSWCA 343 at [267]-[294] Campbell JA undertook a detailed analysis of the precedential status of Waimond in particular after Heydon v NRMA Ltd [2000] NSWCA 374; 51 NSWLR 1 and Astley v Austrust Ltd [1999] HCA 6; 197 CLR 1. It is unnecessary to repeat that analysis. It is sufficient to say that the notion that a solicitor may owe a client a "penumbral" duty that extends beyond scope of the retainer is doubtful. If, however, the solicitor during the execution of his or her retainer learns of facts which put him or her on notice that the client's interests are endangered or at risk unless further steps beyond the limits of the retainer are carried out, depending on the circumstances, the solicitor may be obliged to speak in order to bring to the attention of the client the aspect of concern and to advise of the need for further advice either from the solicitor or from a third party.
77 That is the approach that appears to have been taken by the primary judge at [143] and [144] of his reasons. No challenge was made to it by the respondents.
78 Here, the retainer undertaken by Ms Jajoo and DDS, which was almost complete in its execution, was not apparently contradictory to any personal interest held by members of the firm or employees in relation to Mr Suleman's business, nor was it contradictory to any duty to Mr Suleman. The advice and actions required of the firm were in relation to a financing transaction. When the retainer was undertaken and through the majority of the time of its execution, there was no knowledge whatsoever of any relationship of the proposed use of the funds in connection with Mr Suleman. When this matter was adverted to by the first appellant, it did not create any inability to continue the retainer. There was no possible conflict between the duty to the appellants and any interests of the respondents. There was no conflict with any duty owed to Mr Suleman in completing the retainer. The funds were being made available by the refinancing. However, the completion of the retainer did not mean that the investment with Mr Suleman must necessarily take place. The cheques were to be made available to be picked up after the refinancing. There was an opportunity for the advice that Ms Jajoo urged in clear terms upon the appellants (on 6 March) and upon the first appellant and thus effectively the second appellant (on 16 March) to be taken. Ms Jajoo made it clear that she could not advise the appellants about Mr Suleman's business, in respect of which a conflict of duties would arise and perhaps also a conflict between the duty to the appellants and the interests of DDS with such an important client. The first appellant was, however, content with the retainer being completed on that basis: cf Clark Boyce v Mouat [1994] 1 AC 428 at 435.
79 Therefore, I agree with the learned primary judge that there was no obligation to cease to act. That dealt with the pleaded case.
80 The first to fourth respondents complained that aspects of how the appeal was argued went beyond the conduct of the trial. It was submitted that there was no case put below that though Ms Jajoo gave, or might have given, advice to seek independent legal and financial advice, she did not do so in sufficiently clear terms. Also, it was said that there was no case run below that the appellants were apparently so in need of protection that clear advice to see another solicitor or financial advisor was not sufficient, but rather DDS should cease to act, not because it was otherwise necessary to do so, strictly speaking, but because it would maximise the likelihood of the appellants seeing another solicitor to obtain the advice they needed.
81 I think there is force in these complaints of the respondents. The landscape of the controversy fought out before the primary judge was one based on entirely different and competing versions of conversations. The case of the appellants was that they had been advised in clear terms by both the first respondent and Ms Jajoo that this was a good investment and the appellants were wise to be taking the course they were. All of this was rejected by the primary judge who found a clear statement of advice by Ms Jajoo that before the appellants committed themselves to investing they should obtain independent advice. This was ignored. In these circumstances the trial below did not investigate the possibly variegated qualities of robustness of the advice. The appellants complained that they got no proper advice, but rather improperly enthusiastic and supportive encouragement. Similarly, the notion that DDS should cease to act, not because it was legally obliged to do so but because it would maximise the prospect of a second solicitor advising the appellants in circumstances where they appeared intent on going ahead was not investigated below. For these reasons, these ways of putting the matter should not be allowed to be raised on appeal: Coulton v Holcombe (1986) 162 CLR 1; and see generally Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; 117 FCR 424 at 438-440 [34]-[39].
82 If I am wrong in this conclusion, on the facts as found by the primary judge, and which are not in context, I do not think that either way of putting the matter avails the appellants.
83 First, as to the clarity of the advice, the primary judge's findings have been earlier set out, as has the evidence of Ms Jajoo which was accepted. His Honour's conclusions as to the clarity of the advice are not merely to be taken from the text of her affidavit evidence. The advice is not merely to be taken from her affidavit, but also from all the evidence. She said that she told the appellants to get independent legal advice after learning of the proposed disposition of the funds. His Honour's conclusion can be seen as based on his assessment of all the evidence. In all the circumstances, her advice was appropriate, reasonable and clear. Indeed, perhaps, Ms Jajoo went too far in disclosing the affairs of Mr Suleman. However, she made it plain that the appellants should obtain independent legal and financial advice before committing themselves to an investment. The financing, when completed, did not commit them to that investment. It may have committed them to certain fees and charges, but those had been incurred before DDS, through Ms Jajoo, became aware of the disposition of the funds with Mr Suleman.
84 It is unnecessary to set out in detail the aspects of the evidence recounted by the primary judge which reflected the enthusiasm of the appellants to invest in a high return money-making scheme put forward by Mr Suleman and his companies. Given the knowledge Ms Jajoo had as to the potential difficulties of Mr Suleman's schemes in relation to the managed investment scheme provisions of the Corporations Law, the primary judge approached the matter on the basis that there was or may have been an obligation to advise the appellants to obtain independent advice before committing themselves to the investment. This she did, and so she discharged any such duty. On the primary judge's findings, the appellants invested in the scheme without seeking any further advice notwithstanding Ms Jajoo's clear advice to obtain such advice because of their enthusiasm for the benefits anticipated from the investment. Those conclusions were based on an assessment of the witnesses.