Goddard Elliott (a firm) v Fritsch [2012] VSC 87

Supreme Court of Victoria|2012-03-14|Before: BELL J

PROFESSIONAL LIABILITY - solicitors - property proceeding in Family Court of Australia - settled at door of court on terms overly generous to wife - action by husband for damages for lost opportunity - valuation, taxation and other evidence not prepared in time for hearing - instructions taken and acted on from client lacking mental capacity - whether solicitors should have known - whether breach of duty of care - whether breach of fiduciary duty - whether coercion - pre-hearing representations - whether in trade or commerce - whether misleading and deceptive conduct - advocates' immunity - whether applicable - assessment of damages for lost opportunity - notional trial in Family Court - whether evidence of subsequent facts admissible - apportionment of damages between concurrent wrongdoers - rule in Jones v Dunkel - husband's senior counsel not called by solicitor - whether senior counsel in camp of solicitor - affidavit of husband's deceased father - whether admissible hearsay evidence - Fair Trading Act (Vic), s 9(1) - (Vic), - (Vic), s 135.

For the plaintiff and first defendant by counterclaim

1 When Goddard Elliott agreed to act for Paul Gerhardt Fritsch in a property settlement proceeding in the Family Court of Australia, it knew the proceeding raised complex commercial and taxation issues and he was mentally ill. Despite nearly two years of preparation and not due to any fault on his part, Mr Fritsch's case was not ready to proceed at the commencement of the trial, which was adjourned for three days.

2 On the return date, the proceeding settled at the door of the court on terms which were overly generous to the wife. At that time, Mr Fritsch was very ill; soon afterwards, he was admitted to a psychiatric hospital. He contends the settlement resulted from the negligence (and other wrongs) of Goddard Elliott, particularly by taking and acting on instructions which he did not have the mental capacity to give. In this court, he seeks as damages the alleged extra amount (said to be $1.6 million) he would have received in a just and equitable settlement by order of the court.

3 Mr Fritsch also sued his barristers Noel Ackman QC and Clive Rosen and his accountant Kevin Ferguson. During the hearing, he settled his claims against all three. Goddard Elliott did not settle. It contends Mr Fritsch had mental capacity to instruct and voluntarily settled the case to avoid significant forensic, taxation and other risks. Mr Fritsch had repented after-the-fact at his own bargain. There was no negligence (or other wrong). If there was, it is covered by an ancient principle, surviving in Australia, which immunises solicitors and barristers against liability for loss and damage caused by court-related negligence.

4 The proceeding in this court began when Goddard Elliott made a claim against Paul (as he was referred to by all parties) by way of amended statement of claim dated 5 October 2005. This was a straightforward claim for outstanding legal fees in the sum of $103,931.61, plus interest or penalty interest and costs.

Paul Fritsch (as defendant and plaintiff by counterclaim)

5 Paul conceded Goddard Elliott's claim for outstanding legal fees, subject to the resolution of an issue of detail about the amount owing.

6 Paul's claim was set out in his second further amended defence and counterclaim dated 1 October 2010. He pleaded his case in contract (against Goddard Elliott, Mr Ackman, Mr Rosen and Mr Ferguson), negligence (against all of them), breach of fiduciary (against the lawyers) and misleading and deceptive conduct contrary to ss 4 and s 9 of the Fair Trading Act 1985 (Vic) (against all of them but in different specified respects).

7 In the contractual claim, Paul alleged there were contractual terms of his engagements with Goddard Elliott, Mr Ackman, Mr Rosen and Mr Ferguson that they would each exercise all reasonable care, skill, diligence and competence as solicitors, counsel and expert accountant respectively (paragraph 15D). He also claimed there were implied terms that the lawyers would always act in his best interests and refrain from bringing improper pressure to bear on him (paragraph 15E). He alleged Andrew Goddard of Goddard Elliott breached those terms of the firm's engagement by failing to prepare for the scheduled final hearing in particularised respects (paragraph 19(a)). In summary, it failed to obtain proper valuation and tax liability evidence (paragraph 19(a)(i)-(vi)), failed to ensure the availability of witnesses (paragraph 19(a)(vii)), failed properly or adequately to brief or instruct counsel and failed properly to draw and file the husband's financial statement (paragraph 19(a)(ix)). In the running of the case, Paul also relied on Goddard Elliott's failure to prepare a response the wife's comprehensive affidavit on the question of costs and on its failure to seek, obtain and file proper evidence of Paul's post-separation contributions to the maintenance and conservation of the matrimonial assets.

8 In this contractual context, Paul also relied on the lawyers' imposition of improper pressure and procuration of a coerced settlement (paragraph 21(a) and (b)) and the making of the representations (Goddard Elliott, Mr Ackman and Mr Rosen) and further representation (Goddard Elliott, Mr Rosen and Mr Ferguson) referred to below (paragraph 27A(a) and (b)(i)).

9 In the negligence claim, Paul alleged Goddard Elliott, Mr Ackman, Mr Rosen and Mr Ferguson owed him a duty to take reasonable care in their respective professional capacities (paragraph 16(a)). It was clear from the way Paul conducted the case that, in relation to the negligence claim, he generally relied on the conduct and failures alleged in respect of the contractual and fiduciary duty claims. On that basis, he claimed the duty which the lawyers owed him was breached. In this negligence context, he also relied on the making of the representations (Goddard Elliott, Mr Ackman and Mr Rosen) and further representation (Goddard Elliott, Mr Rosen and Mr Ferguson) referred to below (paragraph 27A(a) and (b)(ii)).

10 In the breach of fiduciary duty claims, Paul pleaded that the duty arose out of his professional relations with his lawyers. He alleged that, in breach of this fiduciary duty, the lawyers procured him to enter a grossly unfair and inappropriate settlement and in circumstances where he had no or insufficient mental capacity to do so (paragraph 20(a) and (b)). His case was that, by reason of his major depression and chronic post stress disorder, which were aggravated by stress, he was unable to make decisions in his own best interests or properly instruct his lawyers (paragraph 20(b)). It was implicit in claim that the lawyers knew or should have known this and breached their fiduciary duty towards him by procuring the settlement in the circumstances. He expanded the claim in the running of the case to include the contention that the lawyers breached their fiduciary duty by coercing into the settlement.

11 In the misleading and deceptive conduct claims, Paul alleged the lawyers told him on 16 September 2004 that he would only have to meet a certain tax liability if he made voluntary disclosure or in the unlikely event of a tax audit (in paragraph 22(a)), that if the proceeding went to trial the judge would refer the papers to the Australian Taxation Office and there would likely be a tax investigation (paragraph 22(b)), that if Paul did not settle the case he would probably have to pay the wife's entire costs of about $200,000 (paragraph 22(c)) and that the judge's hostility towards Paul would be likely to have adverse consequences for him (paragraph 22(d)). These allegations were called 'the representations'. He made one other allegation of this kind against these defendants which he did not press (paragraph 22(e)).

12 Paul also alleged a further misleading and deceptive statement against Mr Goddard, Mr Rosen and Mr Ferguson. He alleged they told him on 16 September 2004 that he could use certain monies standing in a family company account to pay the wife without having to pay tax on that sum (paragraph 23). This was called 'the further representation'.

13 It was alleged that the representations and the further representation were made in trade and commerce and were misleading and deceptive contrary to s 9 of the Fair Trading Act and that s 4 of that Act applied to them (paragraphs 24 and 25). What made the representations and further representation misleading and deceptive was particularised (paragraph 26). He alleged he agreed to enter into the settlement in reliance on them (paragraph 27).

14 Paul alleged he had suffered loss and damage by reason of the civil wrongs done to him for which the defendants were liable (paragraph 28). He particularised his loss in this manner (rounded to the dollar):

This amount of $1,572,038 (plus interest and costs) was claimed as damages for breach of contract or in negligence, or equitable compensation for breach of fiduciary duty or pursuant to s 159(1) of the Fair Trading Act.

Goddard Elliott (as first defendant by counterclaim)

15 As the first defendant by counterclaim, Goddard Elliott admitted the retainer with Paul (paragraph 3) and the implied contractual terms, the duty of care and the fiduciary obligations which arose in consequence (paragraphs 4D and 5). In summary, it pleaded it had not breached those terms or that duty or obligation.

16 Goddard Elliott denied the allegation that it had breached the terms of its engagement by failing to exercise all reasonable care, skill, diligence or competence (paragraph 8). It denied the breach of fiduciary duty alleged to have occurred in relation to the settlement (paragraph 9) and the reliance on that breach in reference to the contractual claim (paragraph 10). It denied the allegations of misleading and deceptive conduct based on the representations and the further representation (paragraphs 11 and 12).

17 Goddard Elliott alleged it had arranged for all witnesses who were intended to give evidence to be present at the proceeding in the Family Court (paragraph 8(a)-(d)). Counsel were properly briefed and conferences were conducted (paragraph 8(d)(ii) and (iii)). Mr Ferguson had prepared a valuation report which was updated on Paul's direct instructions (paragraph 8(a), (b)). Any difficulties encountered by Paul resulted from the provision of those instructions (paragraph 8(e)). As to taxation matters, Paul was being advised by his own accountant (paragraphs 8(f) and 12). The statement of financial circumstances was in fact prepared by Paul with the assistance of that accountant, not by Goddard Elliott (paragraph 8(j)).

18 As to the alleged coerced settlement, Goddard Elliott alleged Paul agreed to enter into that settlement although the barristers did not recommend it (paragraph 8(h)) and only after giving authority in writing (paragraph 8(i)). Goddard Elliott relied on a letter dated 9 September 2004 from Paul's treating psychiatrist (which did not say he lacked capacity) (paragraph 9(b)).

19 Goddard Elliott admitted giving certain advice to Paul in relation to overdue taxation and the calculation of the asset pool (paragraphs 11(a) and (b)), as well as in relation to other matters (paragraphs 11(c)-(e)), but denied making the representations and the further representation (paragraphs 11 and 23). It denied that the representations and the further representation constituted conduct in trade or commerce that was misleading or deceptive within s 9 of the Fair Trading Act. Relying on s 4 of that Act (paragraphs 13, 14 and 26), it alleged the representations which were made to Paul (as set out in paragraphs 11(a)-(e)) were reasonable expressions of present opinion and not made in trade or commerce (paragraph 14A). It denied the allegation of reliance on the part of Paul and alleged he entered into the settlement on the basis of advice which was properly given by Goddard Elliott and the barristers (paragraph 16). If the further representation was made, it was so done by Mr Ferguson or Mr Rosen, not by Goddard Elliott (paragraph 12A(a)).

20 In reference to Paul's claims based on breach of contract, negligence and breach of fiduciary duty, Goddard Elliott alleged it was immune from suit because any alleged negligent acts or omissions constituted work out of court leading to a decision or decisions affecting the conduct of a case in court and constituting work intimately connected with work in court (paragraphs 9(c) and 10). It also alleged these claims were contrary to public policy for being a collateral attack on the consent orders of the judge of the Family Court (paragraphs 9(d)). It relied on the immunity in reference to the representation (by implication) and the further representation (paragraph 12A(b)) as well.

21 It was denied by Goddard Elliott that Paul had suffered any loss or damage by reason of the wrongs alleged (paragraph 19). It alleged any loss or damage was caused or contributed to by his own negligence (paragraph 18) and that he had failed continually to mitigate his loss (paragraph 20). Finally it alleged that Mr Ackman, Mr Rosen and Mr Ferguson were each liable for any loss or damage as concurrent wrongdoers with the result that, under Part IVAA of the Wrongs Act 1958 (Vic), the liability of Goddard Elliott was limited to that provision of loss or damage which the court considered just having regard to the extent of its responsibility for the loss or damage (paragraph 21-23).

Noel Ackman QC and Clive Rosen (as second and third defendants by counterclaim)

22 In accordance with the settlement reached between Paul and Mr Ackman and Mr Rosen, his claims against those defendants by counterclaim were dismissed with no order as to costs. However, by reason of the reliance by Goddard Elliott as the first defendant by counterclaim on the proportionate liability provisions of pt IVAA of the Wrongs Act, they were retained as nominal parties to the proceeding. In that context it will later be necessary to give consideration to the terms of settlement.

Kevin Ferguson (as fourth defendant by counterclaim)

23 In accordance with the settlement reached between Paul and Mr Ferguson, his claims against that defendant by counterclaim were dismissed with no order as to costs. As with the second and third defendants by counterclaim, Mr Ferguson was retained as a nominal party to the proceeding by reason of the potential application of the proportionate liability provisions of the Wrongs Act. In that context it will also later be necessary to give consideration to the terms of settlement.

24 On the pleadings I have just summarised, the issues raised for determination were:

• did Goddard Elliott, Mr Ackman and Mr Rosen breach their duty of care towards Paul

• did Goddard Elliott, Mr Ackman and Mr Rosen breach their fiduciary duty towards Paul

• did Goddard Elliott, Mr Ackman, Mr Rosen and Mr Ferguson make misleading and deceptive statements

• did Goddard Elliott, Mr Ackman and Mr Rosen procure the settlement by coercion or when Paul lacked capacity

• does the advocates immunity apply to the negligence, coercion and misleading and deceptive statements

• did the negligence, coercion or misleading and deceptive statements cause Paul Fritsch any loss

• what orders for apportionment of liability should be made

• what amount of fees are outstanding as between Paul and Goddard Elliott

25 As Paul settled his claims against Mr Ackman, Mr Rosen and Mr Ferguson, the issues which I must determine are those issues but only in relation to Goddard Elliott.

26 The trial was conducted over 25 sitting days in October and November 2010. The transcript numbers 2,450 pages.

Paul Fritsch
Hon Eric Baker (former judge of Family Court of Australia)
Arthur Velakoulis (Paul's treating psychiatrist)
Keith Harvey (independent taxation lawyer)
Hans Norbert Fritsch (Paul's brother)
Peter Walton (Fritsch family accountant)
Sofie Fritsch (Paul's mother)
Florence Plumridge (Paul's former mother in law)
Arno Fritsch (Paul's father) (affidavit evidence only)

Andrew Goddard
Hon Joseph Kay (former judge of Family Court of Australia)
Clive Rosen
Darren Hockley (independent tax accountant)
Kevin Ferguson.

28 The court book initially numbered 13 volumes. It was reduced to seven volumes by the end of the trial. The Family Court file was received into evidence, along with a large number of other exhibits. Where possible, I have based the findings of fact on the documentary evidence.

Settlements between Paul Fritsch and Noel Ackman QC, Clive Rosen and Kevin Ferguson

29 During the trial and before Goddard Elliott opened its case, Paul settled his claims against Mr Ackman and Mr Rosen. As the settlements were relied on by Goddard Elliott's in its proportionate liability defence, the terms were received into evidence. The material terms were as follows:

By proceeding No 8154 in the Supreme Court of Victoria at Melbourne, the plaintiff (Goddard Elliott) commenced legal proceedings against the defendant (Fritsch) (the proceedings).
Fritsch counterclaimed in the proceedings against Goddard Elliott and later against the second defendant by counterclaim (Ackman) the third defendant by counterclaim (Rosen) and the fourth defendant by counterclaim (Ferguson).

In the interests of avoiding the further expense and inconvenience of litigation, and with a denial of liability Ackman and Rosen wish to settle the proceedings on the terms hereof.

Ackman shall pay to Fritsch $90,000 on or before 15 November 2010 towards Fritsch's legal costs in full and final settlement of Fritsch's claims in the proceedings including his claim for interest and costs.
Rosen shall pay to Fritsch $90,000 on or before 15 November 2010 towards Fritsch's legal costs in full and final settlement of Fritsch's claims in the proceedings including his claims for interest and costs.
Fritsch hereby releases and forever discharges each of Ackman and Rosen from all claims (including claims or complaints which he might otherwise make to professional disciplinary bodies), causes of action, suites, demands, costs (including any costs orders already made in the proceedings) arising out of or incidental to the proceedings or the facts giving rise thereto.
Ackman and Rosen hereby release and forever discharge Fritsch from all claims, causes of action, suites, demands, costs (including any costs orders already made in the proceedings) arising out of or incidental to the proceedings or the facts giving rise thereto.
If either of:

(a) Ackman; or

(b) Rosen;

fail to pay the sum which respectively by clauses 1 and 2 they agreed to pay to Fritsch, by the time prescribed by such clause, then the party in default consents to judgment against them in the proceedings for the balance outstanding of the sum which they agreed to pay.

Fritsch hereby agrees forthwith to take all steps reasonably necessary to have orders made in the proceedings as follows:

(a) that the proceedings between Fritsch and Ackman and Rosen be dismissed (although the parties acknowledge that Ackman and Rosen will remain named as defendants by counterclaim for the purposes of allegations of proportionate liability made in the defences of Goddard Elliott and Ferguson); and

(b) there be no order as to costs.

30 During the trial and after Goddard Elliott went into evidence but before it closed its case and before Mr Ferguson opened his case, Paul settled his claim against Mr Ferguson. This settlement was also relied on by Goddard Elliott in its proportionate liability defence. The material terms are

By proceeding No 8154 in the Supreme Court of Victoria at Melbourne, the plaintiff (Goddard Elliott) commenced legal proceedings against the defendant (Fritsch) (the proceedings).
Fritsch counterclaimed in the proceedings against Goddard Elliott and later against the second defendant by counterclaim (Ackman) the third defendant by counterclaim (Rosen) and the fourth defendant by counterclaim (Ferguson).

In the interests of avoiding the further expense and inconvenience of litigation, and with a denial of liability Ferguson and Fritsch wish to settle the proceedings on the terms hereof.

Ferguson agrees to pay to Fritsch $60,000 on or before 26 November 2010 as a contribution towards Fritsch's legal costs in full and final settlement of Fritsch's claims in the proceedings including his claim for interest and costs.
Fritsch hereby releases and forever discharges Ferguson from all claims (including claims or complaints which he might otherwise make to professional disciplinary bodies), causes of action, suites, demands, costs (including any costs orders already made in the proceedings) arising out of or incidental to the proceedings or the facts giving rise thereto.
Ferguson hereby releases and forever discharges Fritsch from all claims, causes of action, suits, demands, costs (including any costs orders already made in the proceedings) arising out of or incidental to the proceedings or the facts giving rise thereto.
If Ferguson fails to pay the sum which by clause 1 he agrees to pay to Fritsch by the time prescribed by such clause, then Ferguson consents to judgment against him in the proceedings for any amount outstanding of the sum which he agrees to pay.
Fritsch and Ferguson agree to orders by consent in the proceedings as follows:

(a) that the proceedings between Fritsch and Ferguson be dismissed (although the parties acknowledge that Ferguson will remain named as fourth defendant by counterclaim for the purposes of allegations of proportionate liability made in the defence of Goddard Elliott); and

(b) there be no order as to costs.

31 On one view, the settlements affected the amounts which Goddard Elliott could recover against Paul. On that issue and with the leave of the court, Goddard Elliott made supplementary submissions dated 20 April 2011 and 20 May 2011 and Paul made supplementary witness submissions dated 10 May 2011. I will consider this issue later.

Failure of Goddard Elliott to call Noel Ackman QC

32 Mr Ackman was not called by any party to give evidence. It was submitted for Paul that the rule in Jones v Dunkel[1] should be applied in his favour on the basis that it was reasonably to be expected that Goddard Elliott would call Mr Ackman to give evidence on its behalf. Goddard Elliott strongly contested that submission.

33 As we have seen, there were four defendants by counterclaim in the proceeding: Goddard Elliott, Mr Ackman, Mr Rosen and Mr Ferguson (in that order). The solicitors for Goddard Elliott were Obst Legal and its counsel was Aileen Ryan. The solicitors for Mr Ackman and Mr Rosen were Landers & Rogers and their counsel were (separately and respectively) James Peters QC (with Jonathan Davis) and Kim Knights. The solicitors for Mr Ferguson were DLA Phillips Fox and his counsel was Tim Walker.

34 The settlement of the claims between Paul as the plaintiff by counterclaim and Mr Ackman and Mr Rosen as the second and third defendants by counterclaim was by the single document 12 October 2010 which I have already set out. It was signed by those parties. In accordance with that settlement, the claim against Mr Ackman and Mr Rosen was dismissed.

35 The settlement was reached while evidence was still being led on behalf of the plaintiff. The defendants had not yet opened their case. After the settlements and consequential orders, Goddard Elliott was the one remaining active lawyer defendant by counterclaim. After Goddard Elliott opened it case, it called a number of witnesses to give evidence, including Mr Rosen and Mr Ferguson (the latter by then had also settled his case with Paul). Goddard Elliott did not call Mr Ackman. No explanation was offered, besides the explanation that it was not obliged to call him. It was not submitted Mr Ackman was not available. He obviously was available, being present at court on a number of occasions during the trial. My invitation to rule on whether Mr Ackman was in Goddard Elliott's camp before it closed its case was declined.

36 In a case like the present, the rule in Jones v Dunkel will apply where 'it might reasonably have been expected'[2] or 'it would be natural'[3] for one party to call or produce the witness. It has been held the rule applies in a case where there has been an 'unexplained failure by a party to call a witness who is in the camp of that party'.[4] That was the principal matter at issue in the present case.

37 Goddard Elliott submitted Mr Ackman was not 'in the camp' of Goddard Elliott. There was no basis for contending Goddard Elliott had better access to Mr Ackman's knowledge than Paul. Mr Ackman was a co-defendant who was separately represented by solicitors and counsel. Mr Ackman had settled with Paul but Goddard Elliott had not. There was no basis for contending Goddard Elliott had the greater confidence of Mr Ackman. Mr Ackman was not an employee of Goddard Elliott, but was retained independently. Even in that capacity, Mr Ackman was entirely independent of Goddard Elliott. The retainer had ended and Mr Ackman had no continuing relationship with Goddard Elliott.

38 It was further submitted that, even if Mr Ackman could be seen to have been in Goddard Elliott's camp while he was retained by that firm, this was no longer the situation. The retainer having ended, Mr Ackman, could not be regarded as someone who was more likely to give evidence favourable to Goddard Elliott. The interests of Goddard Elliott and Mr Ackman and Mr Rosen in the proceeding brought by Paul did not coincide. The proportionate liability legislation made the individual liability of each defendant highly relevant to the liability of the other. It was not unrealistic to expect Paul to call Mr Ackman as a witness.

39 It was finally submitted that there was already a great body of evidence on the issues of fact about which Mr Ackman could have spoken. The rule in Jones v Dunkel does not require a party to give cumulative evidence which would add little to the evidence which had already been given on a subject.[5] Mr Rosen gave evidence in the present case. Although he was not the senior counsel, he was the one who was more constantly present on 16 September 2004 when the critical events happened. Mr Ackman had to be absent late in the day for medical reasons.

40 I do not accept these submissions. This proceeding arises out of a property settlement proceeding in the Family Court in which Paul was represented by Goddard Elliott, Mr Ackman and Mr Rosen. Paul's independent expert accountant was Mr Ferguson. In this proceeding, he alleges negligence and other causes of action against them. On the one side and in one camp on his own is Paul as the plaintiff by counterclaim and on the other side in the one camp as a group there is Goddard Elliott, Mr Ackman, Mr Rosen and Mr Ferguson as the defendants by counterclaim. After Mr Rosen and Mr Ferguson settled with Paul, they were called to give evidence on behalf of Goddard Elliott, as was natural and reasonably to be expected. It was only Mr Ackman who was not so called. The settlement of the claim as between Paul and Mr Ackman did not take Mr Ackman out of the defendants' camp and put him in Paul's camp or in no camp.

41 It is true that Mr Ackman is not and never was Goddard Elliott's employee. Mr Ackman was the retained, independent senior counsel. Mr Ackman was a co-defendant. Goddard Elliott and Mr Ackman might be liable in different proportions for any damages. All of these matters are relevant when determining whether it was reasonably to be expected that Goddard Elliott would call Mr Ackman to give evidence and I have taken them into account.

42 What is more important, however, is the nature of the case which has been brought by Paul against the defendants. In the negligence and other claims which have been made, and in the factual basis of what has been alleged, the nature of that case puts all of the defendants by counterclaim in the one camp. While there is a significant difference between what has been alleged against Goddard Elliott, Mr Ackman and Mr Rosen on the one hand and Mr Ferguson on the other, even that does not put any of them in a different camp to the other. I take into account that those defendants were represented by separate counsel (although Mr Ackman and Mr Rosen had the same solicitors) and their litigious interests were not conterminous. But they were still all united in their defence, on legal and factual grounds, against the plaintiff's claim. I reject the submission that, after the settlement between Paul and Mr Ackman, Paul should have treated Mr Ackman as a witness in whom he could have had as much confidence as Goddard Elliott. It defies the nature of the case which Paul had brought and the history of the participation of the parties in the proceeding.

43 I also reject the submissions that Mr Ackman's evidence would have been cumulative. He was the senior counsel briefed by Goddard Elliott to represent Paul. There were not many witnesses to the important events which happened. The question of Paul's mental capacity, about which Mr Ackman had significant and informed views, was a fundamental issue in the proceeding. Despite his absences on 16 September 2004, Mr Ackman was present for substantial periods on that day and allegedly played an important part in what occurred. Mr Ackman played the central role in seeking a ruling from the Ethics Committee in the previous days. The settlement agreement contains his handwriting. The circumstances surrounding that agreement are central factual issues in the case. Mr Ackman was the sole author of the memorandum dated 24 September 2004. In his evidence, Paul made factual allegations about Mr Ackman. Far from Mr Ackman's evidence being cumulative, I consider him to be a witness of substantial importance.

44 In my view, Mr Ackman was a witness whom Goddard Elliott could reasonably have been expected to call to give evidence. None of the authorities relied on by Goddard Elliott[6] persuade me otherwise and the principles which they state tend only to confirm my conclusion.

45 What use may be made of the unexplained failure by Goddard Elliott to lead evidence from Mr Ackman whom they could reasonably have been expected to call? The general principle which is stated in Blatch v Archer[7] is that 'all evidence is to be weighed according to the proof which it was in the power of one side to have produced and in the power of the other to have contradicted'. It was held by Newton and Norris JJ in O'Donnell v Reichard[8] (which was followed by Buchanan, Eames and Nettle JJA in Ronchi)[9] that, in so weighing the evidence, the unexplained failure of the party to call the evidence may be taken into account against that party for two purposes:

(a) in deciding whether to accept any particular evidence, which has in fact been given, either for or against that party, and which relates to a matter with respect to which the person not called as a witness could have spoken; and (b) in deciding whether to draw inferences of fact, which are open to them upon evidence which has been given, again in relation to matters with respect to which the person not called as a witness could have spoken.[10]

46 The unexplained failure of the party to call the witness cannot be used to reason that the evidence of the witness would not have been favourable to the party. The trier of fact cannot allow the inference which may (not must) be drawn to be elevated that high. It is limited to the inference that, if called, the evidence would not have assisted the case of the party failing to call the witness.[11] As was held in Weissensteiner v The Queen,[12] that inference is available when evaluating all of the evidence which is before the court, including the evidence given by witnesses whose credibility and reliability has been attacked. As applied in the case of evidence of that kind, Mason CJ, Deane and Dawson JJ held this to be the principle:

Doubts about the reliability of witnesses or about the inferences to be drawn from the evidence may be more readily discounted in the absence of contradictory evidence from a party who might have been expected to give or call it.[13]

That is of some importance in this case as Paul's credit and reliability has been attacked.

47 That principle was applied in a case like the present by the Full Court of the Supreme Court of South Australia in Meegan v Shore.[14] It too was a case where the plaintiff had brought an action in negligence against her lawyers. She too alleged the lawyers had failed properly to advise and represent her in relation to a settlement of legal proceedings. As was Paul's evidence in the present case, the reliability of the plaintiff's evidence about what had occurred in critical meetings was hotly contested. The defendant relied on the plaintiff's failure to call her companion to give evidence. He was present at one important such meeting. The reliability of the plaintiff's evidence was in question. Nyland, Gray, Vanstone JJ overturned the verdict of the trial judge in favour of the plaintiff. One ground of doing so was the trial judge should have taken into account the plaintiff's failure to call the witness, who was in her camp, in evaluating the plaintiff's evidence, both as to what happened at the meeting and generally.[15] The facts of the present case are very similar, except that it was the defendant, Goddard Elliott, who failed to call a witness. The same principle applies.

48 In conclusion, it was within the power of Goddard Elliott to call Mr Ackman as a witness in relation to important issues of fact in the case, particularly Paul's mental capacity and what occurred when the proceeding in the Family Court was settled on 16 September 2004. As Mr Ackman was in Goddard Elliott's camp, it was reasonably to be expected that it would call him to give evidence on its behalf. For reasons which were not explained, it failed to do so.

49 The unexplained failure of Goddard Elliott to call Mr Ackman gives rise to an inference that his evidence would not have assisted Goddard Elliott's case. That inference may be taken into account against Goddard Elliott in evaluating the whole of the evidence in the case, including the evidence of Paul. By reason of Goddard Elliott's failure to call Mr Ackman, I might more readily resolve any doubts I have about the reliability of Paul's evidence.

Admissibility of affidavit evidence of Arno Fritsch

50 It was submitted for Paul that the court should receive into evidence the affidavit of Arno dated 10 December 2008. Arno died on 14 December 2008 and was therefore unavailable to give evidence.

51 The circumstances of the signing of the affidavit were set out in Norbert's affidavit dated 4 October 2010. Arno was diagnosed with prostate cancer in 2005 but was in good health until September 2008. His health then deteriorated. His health improved, but then deteriorated again. He was in and out of hospital. In late November 2008, he was given two to three months to live.

While his condition then deteriorated further, he was lucid until near the end. On Arno's suggestion, Paul's solicitor, Brian Mulcahy, took the affidavit from Arno on 10 December 2008. At that time, Arno was 'weak but mentally alert'. His condition deteriorated rapidly on 12 December 2004 and he died on 14 December 2004.

52 Arno's affidavit adopts (as substantive content) his short unsworn affidavit of about 14 September 2004 with a correction about a $387,000 loan which he made to Paul. The correction was that the loan had been repaid and was not outstanding on 16 September 2004. The unsworn affidavit otherwise deals mainly with the Fritsch family business structure. The sworn affidavit explains that structure in more detail and gives evidence of Paul's state of mental ill-health and Arno's version of the days leading up to and the events of 16 September 2004. It is his evidence of what occurred on 16 September 2004 that is most controversial. Arno's evidence is set out more fully later in this judgment.

53 By reason of s 59(1) of the Evidence Act 2008 (Vic), Arno's evidence would not be admissible, although plainly relevant, because it contains previous representations.[16] This is the hearsay rule.

54 There are exceptions to the hearsay rule. Paul relies on the exception in s 63, which materially provides:

(1) This section applies in a civil proceeding if a person who made a previous representation is not available to give evidence about an asserted fact.

(2) The hearsay rule does not apply to:

(b) a document so far as it contains the representation ...

55 By s 62(1), the 'previous representation' to which s 63(1) refers is a reference to a previous representation 'that was made by a person who had personal knowledge of an asserted fact'. The contents of Arno's affidavit fall into this category. In my view, in that affidavit he swears to facts within his personal knowledge.

56 By s 63(2)(b), the hearsay rule does not apply to a document in so far as it contains the previous representation. Therefore the hearsay rule does not apply to the whole of Arno's affidavit and, being entirely relevant, it is admissible subject to discretionary exclusion. Section 67 imposes notice requirements in relation to the application of s 63. These have been complied with in the present case. By cl 4(1) of pt 2 of the dictionary, Arno was taken to be unavailable to give evidence because he is dead.

57 The court has a general discretion to exclude evidence. It is specified in s 135:

The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might:

(a) be unfairly prejudicial to a party; or

(b) be misleading or confusing; or

(c) cause or result in undue waste of time.

58 On behalf of Goddard Elliott, it was submitted the court should refuse to admit Arno's evidence under s 135(a) and (b), particularly the former. It was submitted Arno was not a disinterested witness. His evidence could not be tested by cross-examination. He was personally involved in the factual controversy. In parts, his evidence was highly prejudicial to Goddard Elliott. The reliability of the evidence could not be tested by cross-examination. Arno could have given the evidence on commission or in a de bene esse examination, though he did not do so. Moreover, parts of the affidavit were misleading and confusing.

59 In exercising the discretion to refuse to admit evidence under s 135, the starting point must be that the evidence is admissible. That the evidence was made admissible by the operation of s 63 is not, in my view, a relevant consideration. Evidence is either admissible or it is not. To refuse to admit the evidence, a case for the exercise of the discretion under s 135 must be established. The exercise of that discretion is not to be an indirect way of defeating the policy of the Evidence Act in favour of the admission of certain hearsay evidence under s 63. Thus I begin my examination of the question from the starting point that Arno's evidence was admissible.

60 Section 135 allows the evidence to be refused if 'its probative value is substantially outweighed' by the specified dangers. I think it is sensible first to identify the probative value of the evidence and then to consider whether it would be outweighed by those dangers.

61 'Probative value' is defined in pt 1 of the dictionary as meaning 'the extent to which the evidence could rationally affect the assessment of the probability of a fact in issue'. The probative value of Arno's evidence is high. In particular, he was personally present at the Family Court on 16 September 2004 and gives evidence about what occurred on that day. He gives evidence of Paul's state of mind on this day (and previous days), what his lawyers said to him and how they acted towards him, all of which are important factual issues in the proceeding.

62 I then turn to whether the probative value of this evidence is substantially outweighed, particularly by the danger that the evidence might 'be unfairly prejudicial' to Goddard Elliott as a party. What is required is not just that the probative value is outweighed, but that it is 'substantially outweighed'. Furthermore, it is not prejudice itself which must be established, but the danger that the evidence might be 'unfairly prejudicial' to the party.

63 A significant kind of unfair prejudice at which s 135(a) is aimed is the potential misuse of evidence. However, in considering the potential for misuse to occur, the court must take into account the mode of the trial. In the present case, I am conducting the trial as a judge alone. It is generally accepted that judges sitting in cases alone do not misuse evidence. Therefore this is not a consideration in this case.

64 Because it is unfair prejudice which must be established, it is not enough that the evidence will assist one party and damage the other party in the case,[17] as Arno's evidence does here. It is in the nature of such evidence that it is prejudicial to the case of the other party. The question is whether it is unfairly prejudicial.

65 The authorities discuss whether the inability of a party to cross-examine the witness can be taken into account as unfair prejudice.[18] There is a concern that taking this consideration into account might defeat the policy of admitting certain hearsay evidence. It seems inevitable, however, that this is a consideration which must be taken into account. In the final analysis, it will usually be necessary to determine whether the risk of unfair prejudice to the other party can satisfactorily be addressed by taking the absence of cross-examination into account when considering what weight should be given to the evidence.

66 In cases like the present, that is how judges have approached the matter. In Lane v Jurd (No 2),[19] a party sought to rely on the statement of a witness who had died. Despite the partiality of the witness, McClelland CJ in Eq admitted the statements after taking the absence of cross-examination into account:

Counsel for the plaintiff has asked me, if I should come to that conclusion, to refuse to admit the evidence under s 135 on the ground that it would be unfairly prejudicial to the plaintiff to do so. There is some substance in that submission in that Mr Major was not an entirely disinterested person. He was the father of the second defendant, and the plaintiff, by reason of his unavailability, is unable to cross-examine him with a view to testing the accuracy of what is asserted in his statement. I recognise the weight of those considerations but they do not persuade me that admission of this statement would be unfairly prejudicial to the plaintiff. Clearly they limit its probative value, but that can be assessed in the light of all the evidence.[20]

67 A similar case was DJZ Constructions Pty Ltd v Pritchard.[21] This was a negligence action brought by a client against his lawyers. The plaintiff sought to admit statements from witnesses who were not available. Schmidt J admitted the statements, giving these reasons:

It is settled that 'unfair prejudice' in s 135 of the Evidence Act means a risk that evidence will be misused in some way. That was not a possibility in this case. The lack of any opportunity to cross-examine had to be weighed in the balancing exercise which the section requires, but was not decisive of the question of whether the statements should be admitted (see for example Ordukaya v Hicks[22]). I came to the conclusion that in this case this difficulty was one which went to the weight to be given to the statements, once received, rather than to their admissibility.[23]

68 That is the approach which should be adopted in the present case. I am not satisfied the inability of Goddard Elliott to cross-examine Arno will result in unfair prejudice such that the probative value of Arno's evidence is substantially outweighed by the danger of the evidence being unfairly prejudicial to that party. However, Arno's affidavit must be given less weight because he was not able to be cross-examined. In that regard I take into account that Paul and Norbert were strenuously cross-examined by counsel for Goddard Elliott. In relation to Arno's evidence, that is the testing of which Goddard Elliott and the court have been deprived.

69 There is nothing 'misleading or confusing' (s 135(b)) about Arno's evidence. This is not a ground for discretionary exclusion in this case.

70 On a number of bases, Goddard Elliott made submissions attacking Paul's credit.

71 It was first submitted the contents and non-disclosure of Mr Walton's letter of 17 May 1996 should be taken into account against Paul in terms of his credit. I accept that submission.

72 As will be seen in next section of this judgment, the letter shows a purpose of the restructure of the Fritsch family businesses was to protect Paul's interest in those businesses from the wife. Paul was a party to that restructure. He kept the letter and the restructure secret from the wife. In the proceeding in the Family Court, he failed to disclose the restructure and the letter to Mr Goddard, the court and the wife, which cannot be excused. These matters reflect adversely on his credit. On this basis, I would be cautious before accepting Paul's evidence generally, but especially in relation to financial issues.

73 However, this needs to be seen in perspective. Paul's explanation for these matters was not entirely without merit and I do not accept he was generally an untruthful witness. The evidence established Arno and Norbert were intimately involved, for reasons of their own, with obtaining and considering Mr Walton's advice. Paul was dominated by his father, who controlled his income. The letter had legitimate purposes, as well as the purpose of protecting Paul's interest in the Fritsch family businesses from the wife. As the trial judge said in the proceedings in the Family Court, people are entitled to obtain advice of this kind and they do. Having listened to the whole of Paul's evidence, and seeing him survive a vigorous cross-examination, I do not think he fully appreciated the significance of the advice in the letter and the consequences of its non-disclosure. I do not conclude that the doubts about Paul's credit which have been established are as strong as have been submitted.

74 Goddard Elliott submitted Paul had deliberately under-declared his income in his financial statement dated 10 June 2004. The weekly income figure of $122 was compared with the yearly income declared in the taxation return for 2004 of $202,902 and a facsimile transmission from Paul to Mr Ferguson dated 15 September 2004 saying his total yearly income was about $66,000.

75 Paul was heavily cross-examined about this issue and I am satisfied with the evidence he gave. As submitted for Paul, the 2004 taxation return did not necessarily undermine his evidence. I regard the income figure of $122 in the financial statement as opportunistic but not a deliberate under-declaration.

76 I do not accept Paul's failure to lodge a taxation return since 2005 reflected poorly on his credit. The transactions after the case was settled show he has been trying to deal with his taxation problems. That process has not come to an end.

77 Goddard Elliott submitted Paul was a director of APN Nominees until shortly after the wife's property settlement application was commenced. He had the Protoline cheque book and could and did sign cheques in his own favour. Company documents were kept in the family home. In the light of that and other evidence, Paul's denials that Protoline was his entity should count against his credit.

78 I accept that submission with a similar reservation to the one I expressed in relation to the letter of 17 September 1996. The evidence showed Arno (who in law beneficially owned Protoline) allowed Paul to treat the company as his own (so the company was Paul's alter ego for family law purposes). But Arno did beneficially own APN Nominees and retain ultimate control, including control of the distributions. Further, the evidence shows Paul was dominated by Arno, who was intent on protecting the family wealth at all costs. By reason of these matters, I would be careful about accepting Paul's evidence generally and especially in relation to financial matters, but his evidence still warrants consideration.

79 Goddard Elliott submitted Paul behaved 'dishonourably' in removing the wife's case summary from her computer and sending a copy to Goddard Elliott, which should count against his credit.

80 I reject this submission. The parties were separated under one roof in the family home at the time. They had access by default to each other's papers, which access the wife had utilised on an earlier occasion. What Paul did on this occasion was a product of the situation, however unfortunate it was.

81 Goddard Elliott relied on certain failures of Paul to pay fees. There were explanations for these failures and these matters are not relevant to his credit.

82 Goddard Elliott submitted Paul's demeanour in court was evasive and he persistently gave long-winded, convoluted and unconvincing answers to questions and also sought to look into the court book before answering some questions.

83 Having listened to and observed Paul give evidence over several days, I reject this submission. Making due allowance for his state of health, the medication he was taking, the passage of time since 2004 and the stress of giving evidence, I did not find his responses to be evasive or persistently long. Several witnesses (including Mr Goddard) looked into the court book when a volume was left in front of them. That is quite natural. Far from being unconvincing, much of Paul's evidence was very convincing, even after examining it with the additional caution which was due (especially in relation to financial matters).

84 Goddard Elliott submitted senior counsel for Mr Ackman had established that Paul had given false evidence about retiring. No such thing was established. The burden of the evidence was that Paul had done no real work for many years. He did not give a self-serving explanation of why he went to Bowrings occasionally.

85 Goddard Elliott submitted it was to Paul's discredit that he told Mr Ferguson that he wanted to conduct a fire sale of all the matrimonial assets and split the proceeds with the wife. As Mr Goddard said in evidence, a lot of husbands think like that under the pressure of a marriage breakdown and property settlement proceedings. This is hardly a matter going to credit.

86 On several bases, Goddard Elliott submitted Mr Walton lacked credit. It referred to his evidence about the origins of the letter of 17 May 1996, his failure to produce the letter, the affidavit of 17 September 2004 (the 'perjured affidavit') which referred to the restructure of being due to a 'feared insolvency', his evidence about how long he had acted for Paul and his incorrect evidence that you cannot lodge a correcting document with ASIC.

87 The evidence shows that Mr Walton was the loyal accountant of the Fritsch family, and especially Arno and Norbert. He was not an independent witness and did not pretend to be one. I take that into account generally.

88 On the whole of the evidence, I accept Mr Walton's evidence that the driving force of the letter of 17 May 1996 was Arno and possibly Norbert. The contents of the letter, read as a whole, support that finding. The surrounding circumstances, the nature of the relationship between Arno, Norbert and Paul and the evidence about what was occurring at the time also support that finding.

89 Although I was concerned that Mr Walton had not produced the letter of 17 May 1996 in response to the subpoena issued by the Family Court, I do not find that he did so deliberately. Having listened to his evidence and seen him being cross-examined, his explanation that the letter, which was eight years old, had been archived is plausible. Mr Walton's affidavit of 17 September 2003 was, on the other hand, not full and frank. It did not tell the whole story of why the 1996 restructure was carried out. That does go to his credit and makes me cautious about accepting his evidence generally. The other matters relied on by Goddard Elliott do not.

90 This is the main factual part of the judgment. In it I will make some findings of fact. But my purpose is to set out what occurred in the property settlement proceeding in the Family Court as the foundation for the principle findings of fact which will I will make later.

91 The Family Court has the jurisdiction under s 79(1) of the Family Law Act 1975 (Cth) to make orders for the alteration of property interests of the parties to a marriage. Section 79(2) requires such orders to be 'just and equitable'.

92 Later in this judgment, I will refer to the principles which have been stated by the Family Court for the exercise of this jurisdiction. I will also set out and consider the evidence which was given by two former judges of that court as to how the trial judge would have decided the case had it gone to trial. So that the following factual part of this judgment may be better understood, I will give a brief summary of the principles which are applied as they relate to the main issues in the case.

93 The Family Court prefers to adopt a four-step approach to making property settlement orders: (1) identify the net pool of assets and liabilities; (2) identify each party's financial and other contributions in percentage terms; (3) take other factors into account in determining what the their respective shares should be; (4) make an overall assessment of what is just and equitable.

94 In the present case, a number of issues arose under step one, particularly the valuation of Paul's interest in the Fritsch family businesses, whether certain trust assets which were being held on Paul's behalf would be taken into account in increase of the net pool and whether certain liabilities (contingent income and capital gains tax and a parental loan) would be taken into account in reduction of that pool. As to step two, Paul had made a significant financial contribution at the start of the marriage. The parties were in dispute about how much allowance should be made in his favour by reason of that contribution. Under step three, it was agreed the wife's parental and homemaking contribution should be recognised. Step four was discretionary.

95 Parties to a property settlement proceeding have an obligation of full and frank disclosure. The wife alleged Paul had breached that obligation, causing her significantly greater than usual accounting and legal costs. She was seeking an order for those costs and indemnity costs generally against Paul. How exposed Paul was to such an order was an issue in the proceeding.

96 Paul was a toolmaker and fitter and turner until 1969. At the time he gave evidence his income came entirely from his war service disability.

97 Paul married Lianne Jane on 25 March 1978 when he was aged 30 and she was aged 18 years. They had three children, Benjamin Paul Fritsch (born 17 June 1980), Laura Jane Fritsch (9 March 1983) and Thomas Norbert Fritsch (16 May 1987). These three children were aged 24, 21 and 17 years in September 2004. At that time Paul was aged 56 years and Lianne 45 years.

98 The marriage encountered difficulties. Paul said in his evidence his wife had an affair in 1987 which she resumed in 1993. Paul and Lianne reconciled. Lianne's affidavit in the property settlement proceeding said the marriage encountered difficulties again in 1996 and separation was a real possibility. Paul's evidence in this proceeding was to the contrary. The marriage did encounter difficulties again and they separated under the one roof in August 2002. They continued to live in separate bedrooms in the family home until the property proceeding was settled on 16 September 2004, even sharing a computer during that time.

99 Paul was the son of Arno and Sofie Fritsch, who immigrated to Australia from Germany in 1952. Paul's younger brother was Hans Norbert Fritsch (known as Norbert). Arno built up an automotive engineering business from small beginnings. It was known as Bowring Engineering Services Pty Ltd. In 1977, Paul and Norbert joined the business. The two sons worked in the business in different ways.

100 Under the then arrangements, Arno, Paul and Norbert were directors and shareholders of the family company. The revenues from the business flowed from that company into the Bowring Unit Trust. Through further trusts, the father had 51 units in the Bowring Unit Trust and the two sons had 25 units respectively. From that trust the revenues flowed into three separate trusts: one belonging to Arno (the Fritsch Family Trust), one to Norbert (the Norbert Fritsch Family Trust) and the other to Paul (the Paul Fritsch Family Trust). By virtue of his majority unit holding, Arno controlled the Bowring Unit Trust. Distributions were therefore at his discretion, but were regular and substantial in the early years when the businesses were successful. The sons controlled their trusts and made distributions from them at their own discretion.

101 In the 1980s, a small engineering company called Mermaid Metals was established as part of the Fritsch family. It was owned by the Merbow Unit Trust which was structured in the same manner as the Bowring Unit Trust. It was never as profitable as Bowring Engineering.

102 These arrangements were restructured in 1996. The restructure came about after the family accountant, Peter Walton of O'Keeffe Walton Berry, wrote a letter of advice to Paul dated 17 May 1996. The letter (five pages) was marked 'Private and Confidential' and addressed to 'Mr P Fritsch' at 'Bowring Engineering Services Pty Ltd' at 125 Cochranes Road, Moorabbin VIC 3189'. It begins 'Dear Paul' and the subject row states 'Business Structure and Family Arrangements'. The letter begins by referring to 'our meeting of 14 May' and then makes a number of 'comments and recommendations'. However, the letter was clearly not intended to be read by Paul alone but also by Arno and Norbert. In it options are discussed which are in the interests of the family generally but not necessarily of Paul individually. It is equally clear the letter was not intended to be read by Lianne and it was kept secret from her.

103 Of the objective of the restructure, Mr Walton said:

As I see it, the objective of any changes that may be made is to protect or isolate the business interests of the Fritsch family (ie Bowring Engineering and Mermaid Metals) from any possible future family law dispute or settlement that may involve Paul Fritsch.

Current areas of risk/possible problems
Broad description/explanation for changes
Precise steps to be taken.

Mr Walton went through the issues arising under each of these headings in some detail.

104 As to the current areas of risk/possible problems, Mr Walton referred to Paul's 25 per cent share in ownership of the Bowring Unit Trust via the Paul Fritsch Family Trust but said a valuer could conclude the value of that interest was 33 per cent of the net income, reflecting recent distribution. Therefore, for the purposes of discussion, he valued Paul's share on that basis ($500,000 of a total of $1,500,000). Mr Walton then referred to the loan accounts and cash balances. He discussed the issuing of letters of demand for repayment of those amounts.

105 As to the broad description/explanation of changes (heading 2), Mr Walton expressed his understanding that the Family Court has the power to look through artificial private and business arrangements, although it is also guided by expert advice. He said the business would have greater protections 'if the value of Paul's interest in Bowring is diminished and if the value of loan accounts owned by Paul are also reduced'.

106 Mr Walton went on to recommend that Arno exercise his 51 per cent controlling interest (via the Fritsch Family Trust) in the Bowring Unit Trust to reduce the distributions from the Bowring engineering business to the Paul Fritsch Family Trust to the level of a base salary only. This was intended to provide 'strong evidence' that the value of Paul's interest in Bowring engineering was 'close to zero'. Arno could maintain a sub-trust under the Fritsch Family Trust for Paul's benefit if appropriate.

107 As to the loan accounts owed by the Bowring Unit Trust to Paul and Norbert's trusts, these should be paid out with those amounts then given back to the Bowring Unit Trust by 'deed of gift', which was also justified on a commercial basis.

108 Turning to the equal interest of Paul and Norbert in Bowrep Engineering Pty Ltd (a separate though related company to Bowring Engineering Services Pty Ltd), these should 'be separated for mutual protection'. The shares should be sold to 'two new companies' owned by their trusts. Non-taxable dividends of $1,600,596 should be declared by Bowrep to those companies. Bowrep Engineering Pty Ltd could then be de-registered with no further consequences.

109 Mr Walton made other comments and recommendations relating to the business of Mermaid Metals, to the Gertrude Investment Trust and the Chadwick Glen Trust (entities related to Bowring Engineering and Bowrep Engineering).

110 As to the precise steps to be taken before 30 June 1996 (heading 3), Mr Walton made several recommendations, of which these are the most pertinent:

Bowring Unit Trust profit distribution to be varied, with a small distribution only to the Paul Fritsch Family Trust
Bowring Unit Trust loans to be paid out to the Paul Fritsch Family Trust and the Norbert Fritsch Family Trust
Paul Fritsch Family Trust and the Norbert Fritsch Family Trust to execute a deed of gift of a similar amount to the Bowring Unit Trust
Paul Fritsch and Norbert Fritsch to establish new corporate beneficiaries
the trustee of the Paul Fritsch Family Trust should be a company controlled by Paul, not MOK Nominees Pty Ltd (another entity related to Bowring Engineering).

Mr Walton recommended that advice from a family law solicitor be obtained before finalising these matters. He said the matters discussed in the letter should be treated as 'extremely confidential' and asked that he be contacted at the earliest opportunity.

111 In his evidence in this court, Paul said he did not remember the meeting with Mr Walton on 14 May 1996. He did acknowledge receiving the faxed letter. He did not recall receiving it or reading it. If he did read it, he forgot about it quickly and paid no attention to it. Mr Walton presented the advice at the request of Norbert and Arno. As to the suggestion that he asked for the advice, Paul's response was: 'I deny that categorically'. He did not disclose the letter to Mr Goddard because he did not recollect it.

112 Paul agreed he and Norbert had shares in Bowrep Engineering. As a result of the restructure, Norbert's shares went to his company Yamit Pty Ltd and Paul's went to Protoline Nominees Pty Ltd. APN Nominees Pty Ltd (the trustee of the Fritsch Family Trust) owned Paul's shares as the sole shareholder of Protoline. The purpose of the arrangements was to minimise his trust income and assets in the light of any divorce proceedings. He accepted the Protoline arrangements were set up in 1996 as indicated by the incorporation documents dated 28 June 1996. He was appointed to be the company secretary and the director of the company. The 12 shares were allocated to APN Nominees, not as the trustee of the Paul Fritsch Family Trust as the incorporation documents incorrectly showed, but of the Fritsch Family Trust.

113 Norbert Fritsch gave oral evidence about the letter to this court. His affidavit in the property settlement proceedings dated 15 September 2004, which he told this court was true, also dealt with the restructure. Norbert said he wanted to separate his family business interests from Paul's as much as possible. The request for the advice did not come from Paul but from Norbert and also Arno. The meeting of 14 May 1996 which Mr Walton referred to was with Arno and Norbert, not Paul. The background to seeking the advice was that Paul was clearly unhappy with the family business arrangements. Paul was unreliable and had gone into another business called Scotchline, which did not succeed. Possible divorce proceedings involving Paul were also an issue, but Norbert did not find out about Paul's recent marital difficulties until later. He achieved the separation of his family business interests in 1996. The distributions which Arno decided to make to Norbert went into his trust via his company Yamit. Any distributions to Paul went to Protoline, which would be owned by Arno.

114 Norbert gave evidence about the subsequent decline of Bowring Engineering. At the time he gave evidence he was aged 61 years and managed everything. He had a foreman and six employees. Of those, there was himself, his wife and his handicapped son, who was a process worker. The company was once successful and had 25-29 employees. Taken to the sales and profit figures for 1999-2003 attached to Mr Ferguson's report, Norbert said there had been a significant decline in both in that period. The decline continued to 2009, where the sales were only $727,247 and the profit only $106,964. He was keeping the business alive for the two long-term employees. The business was unsaleable and that had been so for many years. The Mermaid Metals business was closed in 2008 and absorbed into Bowring's Engineering. I accept this evidence and will take it into account in the loss and damage (notional trial) part of this judgment.

115 Mr Walton's evidence was that Norbert did not want his family assets to be shared with Paul. He wanted his interest in Bowrep to be 'split' from Paul's. That is what occurred in 1996. Norbert's share went to Yamit. Paul's share went to Protoline, which was owned by Arno's company APN Nominees. Arno owned the shares in Protoline through APN Nominees, which was the trustee of the Fritsch Family Trust. When Protoline was incorporated, a staff member in his office incorrectly specified that APN Nominees was the trustee of the Paul Fritsch Family Trust. Mr Walton said: 'It was never that way and never intended to be that way'. I accept this evidence. Mr Walton said there were no procedures at the Australian Securities and Investment Commission for correcting the form. Mr Hockley later gave evidence that there were corrections procedures but they had not been used. That this procedure was not used does not cause me to doubt Mr Walton's evidence.

116 Mr Walton said Norbert was the stable one in the family. Paul had undertaken unsuccessful businesses and had 'some issues with his marriage'. Arno was strong on doing what was needed to protect the family business. That was why he maintained control of Protoline. But Arno let Paul pay the bills, which meant he could pay money to himself, and was a signatory to the accounts.

117 In Arno's affidavit dated 10 December 2008, he swore to the truth of his unsworn affidavit in the property settlement proceedings. In that unsworn affidavit, he said from 1988-1990 Paul was discontented and became involved in another business enterprise. To the detriment of Bowring, he devoted most of his time to that interest. Later Norbert wished to separate his interest from Paul's interest in the Fritsch family businesses. That was done in 1996. At that time, Protoline was incorporated. Thereafter Paul's distributions from the Bowring unit trust went to Protoline, not directly to the Paul Fritsch Family Trust. This was not done pursuant to the advice in Mr Walton's letter of 17 May 1996. From 1996 until September 2002, Paul was a director of Protoline and administered the company subject to Arno's ultimate control.

118 It was Mr Walton's evidence that he thought Arno and possibly Norbert had asked him to see Paul to discuss the matters referred to in the letter of 17 May 1996. He agreed the letter did not refer to any approach by Norbert. He did meet Paul alone. He wrote to Paul as it was he that he met with. The object of the advice was not to reduce Paul's interest in Bowring's. He agreed the anticipated divorce proceedings were an issue, but so was Norbert's desire to separate his interests from Pauls.

Lianne Fritsch's property settlement application (September 2002)

119 Lianne made application for final and interim orders on 10 September 2002. The return of this application was time abridged to 30 September 2002. The final order sought was a property settlement order. The interim orders sought were orders preventing the husband from dealing with specified corporate companies and their assets, giving authorisation to the release of financial information to Lianne and for her maintenance and other matters. Her affidavit in support mentioned the husband's 'deep depression', his need of assistance, his secrecy and his restriction of her access to financial information.

120 Paul engaged Goddard Elliott pursuant to a family law fees agreement dated 12 September 2002. Paul said he had been introduced to Andrew Goddard as an expert family lawyer with experience in dealing with complex corporate and trust cases. Paul engaged him after interviewing him and Mr Goddard had 'professed he was an expert in that field'. Mr Goddard was a partner in the firm and had the conduct of the matter. He was an accredited family law specialist. Mr Goddard accepted that, when Paul approached him, he held himself 'out as an expert, an accredited family law practitioner, experienced in complex financial matters'. He did not previously know Paul. He helped the Law Institute of Victoria to establish the specialisation scheme. In 2008 he was given the president's award to lifetime service to the legal profession.

121 Mr Goddard prepared Paul's response to the wife's application dated 24 September 2002 and his affidavit of 24 September 2002. He agreed in evidence that, from the wife's affidavit dated 9 September 2002, he knew he was about to get involved in complex financial matters.

Paul Fritsch removed as director of APN Nominees (September 2002)

122 On 26 September 2002 and within three weeks of Lianne making a property settlement application (see below), and by a meeting of which short notice was given, Paul was removed as a director of APN Nominees by the sole shareholder Arno. He was replaced by Arno, who then became the sole director as well as the sole shareholder of that company.

123 Paul denied this was done to dissociate him from Protoline. It was done by Arno who did not tell Paul why. It was not done by him in breach of an order of the Family Court. He agreed it was done at short notice. He was aware his father had concerns and wanted to move expeditiously. He did it to protect his own interests and not to assist Paul in the property settlement proceedings. Mr Walton said this was done by Arno after Paul and Lianne separated to protect the family business. The wife's family law application 'was the signal' this needed to be done. Arno did not want Paul to be a director or be involved in managing the business in the circumstance. It was not done to improve Paul's prospects in the property settlement proceedings.

124 Interim orders were made by consent by the Family Court on 30 September 2002. Among other things, the orders required the husband (and the wife) to give 28 days' notice of any intention to engage in activities designed significantly to alter their financial circumstances or to engage in any dealing of the kind described in the wife's application. The orders also required the husband to give all necessary authorisations to enable the wife to obtain all relevant financial information and documentation from the husband's accountant and any company in which he had an interest.

125 There was a notation on the order that 'until further Order the husband intends to maintain the status quo as to financial matters and benefits to the wife as identified in her Affidavit'. Paul at first said in oral evidence he did not authorise this notation. He could not go to court because he'd come out of hospital only the day before from an ear operation. His instructions were to contest what the wife wanted - maintenance in particular - and he only found out later what orders were made. That is not consistent with his affidavit of 3 October 2003, which states he 'authorised Counsel to consent to the Notation ... in the hope and expectation that the arrangements would operate for a short term interim period only'. Nor is that consistent with Paul's fax to Mr Goddard dated 28 April 2004 (page 3 of 11) which acknowledged what he was told about the orders. When taken to that document, he admitted he did consent, but only for a short time and the payments in fact went on for a long time. Mr Goddard's evidence was that 'we just had to do the best we could in those circumstances' and Paul was made aware of that beforehand.

126 Paul said he could not pay the wife $5,500 per month from his own resources. He had to liquidate assets from the matrimonial pool. He also used part of the liquidated assets to maintain the joint assets. The total amount he claimed for maintaining the joint assets, the wife and children was $225,909 (as set out in Mr Walton's letter of 10 April 2008). He had documentary evidence of the amount paid, which he had given to Mr Goddard. The actual amount was higher (approximately $356,000). There was money spent on 'the family home, repair of Sorrento, mowing ... Electricity, telephones ... ongoing costs ... money was spent on the children'. Paul said he was only claiming half of the money spent on the children and maintenance of joint assets, but the full amount that went to the wife.

Lianne Fritsch seeks further discovery (December 2002)

127 In September and November 2002, the parties exchanged simplified financial statements. On 9 December 2002 and 13 December 2002, Lianne issued a subpoena and amended application directed (among other things) at discovery of documents in the possession of the Fritsch family companies and obtaining security for costs. The amended application was supported by a long affidavit sworn by Sally Nicholes of Middletons Lawyers, the wife's solicitors. Paul gave Mr Goddard the letters of demand which Arno had sent on behalf of the money owed by his trusts to Protoline, saying he was demanding the repayment of these debts. According to Mr Goddard's evidence, his instructions were that Arno was in control of Protoline.

128 At the time and throughout the proceedings, Bill Impey of Kennedy Wisewoulds represented O'Keeffe Walton Berry (the Fritsch family accountant), Arno and Sofie Fritsch and Norbert Fritsch. Mr Goddard said he thought this was appropriate as their interests were separate. That firm provided some information to Middletons and objected to the request then being made for more. On various occasions afterwards, Kennedy Wisewoulds provided further information to Goddard Elliott or the wife's solicitors.

Arno Fritsch demands repayment of Protoline loans

129 On 5 December 2002 and as director of Protoline, Arno demanded repayment of the sums of $545,168 and $959,120 respectively which allegedly owed by Paul's trusts (the Paul Fritsch Family Trust and the Chadwick Glen Trust) to that company within seven days. No action was ever taken to enforce that demand. Paul gave evidence he told his father he did not have the money to meet these demands. Mr Goddard said Paul gave him the letters and said his father was demanding repayment of the debts.

130 In a letter dated 13 December 2002 and copied to Goddard Elliott on 16 December 2002, Mr Impey wrote on behalf of O'Keeffe Walton Berry, Arno and Sofie Fritsch and Norbert Fritsch to Middleton's explaining the Protoline arrangements. The letter said:

[Protoline] is a corporate beneficiary of the Fritsch Family Trust, the Trustee of which is A.P.N. Nominees Pty Ltd.

The director is Arno Fritsch, the sole shareholder is A.P.N. Nominees Pty Ltd (the shareholding of which is held solely by Arno and Sofia Fritsch).

Protoline Nominees Pty Ltd has an unpaid distribution of $782,913 from the P F Family Trust and $959,120 from the Chadwick Glen Trust as at 30 June 2002.

The letter notably did not refer to the recent history of these arrangements.

131 In his evidence, Paul agreed the Paul Fritsch Family Trust and the Chadwick Glen Trust would distribute to Protoline. But rather than receiving the money directly, the monies were paid to Paul and Lianne, who paid the corporate tax rate of 32 per cent. The debt of about $1,700,000 was subsequently reduced to about $1,200,000. The loans were not supported by formal loan agreements. It was a condition of them getting the money that the payments were treated as loans, at call and at Arno's discretion.

132 Mr Goddard told the court the wife's lawyers were very suspicious of Paul because of the restructure and the role of Protoline in the business arrangements. The wife's applications had to be seen in that light. It was 'one of the nastiest cases that [he'd] ever had'.

Family Court orders for sale of 5/7 Elm Grove, Mount Waverly (December 2002)

133 Orders by consent were made in the Family Court on 17 December 2002. Among other things, the orders allowed for the sale of 5/7 Elm Grove, Mount Waverley and the division of the proceeds. Under the orders, it was for the trial judge to categorise the nature of these payments. This meant it was a live question whether the payments were made by way of maintenance to the wife or by way of interim property settlement. The orders also narrowed the subpoena of 9 December 2002 to focus on documents related to the debts to Protoline and the court noted the parties intended to attend mediation at a later date. Mr Goddard said the orders for the sale of the property were being sought by the wife for her legal costs and accounting fees.

134 A Family Court report was filed on 24 December 2002 by the clinical psychologist (Robyn Weir).

Lianne Fritsch seeks further discovery (May 2003)

135 On 22 May 2003, the wife issued a further interim application. Among other things, it sought maintenance, further documentary disclosure and answers to specific questions. It was supported by an affidavit sworn by the wife on 21 May 2003 which complained about the lack of disclosure to date. As Mr Goddard said, the lack of disclosure was despite orders being made by the court six months earlier. The issue of disclosure was a 'running sore', with the wife continually demanding documents from Paul which should have been demanded of third parties (Arno and Norbert).

136 Mr Goddard said he received a letter from Mr Walton dated 26 May 2003 providing him with information about Paul's financial position. The letter claimed his trusts had debts to Protoline and calculated his worth accordingly.

Goddard Elliott seeks medical report on Paul Fritsch's mental health (May 2003)

137 An issue in the proceeding in the Family Court was Paul's future working capacity and medical condition. This had been mentioned by Lianne in her first affidavit. Mr Goddard obtained a report on this matter from a consultant psychiatrist, Dr David Sturrock. Mr Goddard's letter dated 30 May 2003 requesting that report described the difficulties he had encountered with obtaining instructions from Paul, including, missing or arriving late for appointments and the 'extreme difficulty' in getting quick instructions from him at the last hearing. Mr Goddard said in evidence he was 'concerned about' Paul and he was 'slow to give responses'. That was clear from his behaviour in conferences and at court and from his appearance. He repeatedly gave evidence that, for example, Paul 'needed time' to deal with things. Dr Sturrock's report (dated 10 June 2003 and annexed to his affidavit of 13 June 2003) diagnosed a deterioration of Paul's medical condition into a 'Major Depressive Episode' and recommended anti-depressant medication. Mr Goddard said at that stage Paul did not want to take medication.

Paul Fritsch claims Protoline debts as liabilities (June 2003)

138 Paul filed an updated simplified financial statement on 16 June 2003. The statement claimed as liabilities to be taken into account in the pool of assets and liabilities two debts owing to Protoline by his trusts, being $769,324 (Paul Fritsch Family Trust) and $959,120 (Chadwick Glen Trust), totalling $1,728,444. That statement was based on the advice of Mr Walton. Those debts were known in the proceedings as the Protoline debts. Mr Goddard said the statements were sworn and meant to be accurate.

139 In affidavits dated 18 June 2003 and 25 June 2003, the wife's independent accountant, June Wilson, said she needed more information to complete her task. She said the 'family businesses are part of a relatively complex structure of trusts and other entities' and it was necessary to 'lift the corporate veil'. She referred to the company distribution and ownership issues involved in valuing Paul's interest in the businesses and sought meetings with Mr Walton. She said Paul's share of the business was 33 per cent based on the recent distributions. Mr Goddard said Paul's instructions at that time were that his distributions from the family business were 'entirely up to Arno'. Mr Walton's evidence was that the recent 33 per cent distributions were not consistent over a long period of time and Paul's interest in the business was 25 per cent based on unit holding. In that regard, he stood by the views he expressed in his letter of 30 June 2003.

140 On the hearing of the wife's interim orders application on 2 July 2003, further orders for the production of documents by the husband were made by consent. These were provided to Mr Goddard by Mr Walton on 4 July 2003. Martin Bartfeld QC represented Paul at this hearing. By a memorandum dated 2 July 2003, he said the court would lift the corporate veil and look at 'the real situation' as to the husband's ownership share of the family companies. He advised 'that there should be no further messing about with discovery'. Mr Goddard said Mr Bartfeld's advice was correct and he was satisfied that Paul knew this. It was something that Paul was 'well and truly onto'. He disagreed with Pauls' evidence that he was not given a copy of this memorandum. He was given it in accordance with Mr Goddard's usual practice. Paul had referred to the memorandum in his fax to Mr Goddard dated 3 July 2003.

Paul Fritsch seeks advice from Goddard Elliott on Protoline debts (July 2003)

141 At this and other times throughout the Family Court proceedings, Paul asked Mr Goddard for advice as to whether and how he could claim the Protoline debts as liabilities in the pool of assets and liabilities and as to certain taxation issues. In a fax to Mr Walton dated 3 July 2003 which was copied to Mr Goddard, he told him he would be seeking Mr Bartfeld's opinion 'on the strength of my trusts and their discretionary powers'. That was necessary before any settlement offer could be formulated. On 12 August 2003 he said to Mr Goddard 'it would be appropriate to check out other cases with a similar structure and situation to ours which has come before the Family Court in the past and the result'. Mr Goddard sent that request to Mr Bartfeld.

142 Mr Walton wrote to Mr Goddard on 15 August 2003 enclosing further financial information. It showed a nil distribution to the Paul Fritsch Family Trust by the Bowring Unit Trust in 2002. That was despite significant distributions in previous years. Mr Goddard noted that this seemed to coincide with the making of the wife's application. He did not remember what explanation had been given.

Lianne Fritsch's further difficulties getting full and frank disclosure (August 2003)

143 The Protoline debts continued to be a major issue between the parties. As Middletons wrote to Goddard Elliott on 22 August 2003, the wife's independent accountant (Ms Wilson) required further information about the loans by Protoline to the Chadwick Glen Trust and the Paul Fritsch Family Trust. The issues were complicated by the fact that, under the trust and company documentation, the shares in Protoline were specified to be held by APN Nominees as trustee for the Paul Fritsch Family Trust (Paul's trust) and not the Fritsch Family Trust (Arno's trust), suggesting that Protoline was really owned by Paul and not Arno. Middletons sought an early response to their request. Using information provided by Mr Walton, Mr Goddard replied to the request on 29 August 2003.

144 This reply did not satisfy Ms Wilson. Her affidavit of 2 September 2003 went into great detail about her need for the financial accounts of Protoline and other information about how the Protoline debts arose. She referred to Paul's 'resignation' as a director of Protoline on 26 September 2002 and the delays in obtaining information. She complained the form was received by the Australian Securities and Investments Commission on 3 October 2002 three days after the making of the order requiring Paul to give 28 days' notice of making significant changes to his financial circumstances. Mr Goddard told the court this was a serious allegation because the wife was alleging the husband had resigned to defeat an interim order she was seeking on 30 September 2002. Also on 2 September 2003, Middletons wrote to Goddard Elliott requesting information. The letter attached the application for shares in relation to Protoline dated 28 June 1996 showing the shares were held by APN Nominees as trustees for the Paul Fritsch Family Trust, not the Fritsch Family Trust. Mr Goddard said his instructions from Paul were that these allegations were being made because the wife had stolen documents from him.

145 The wife's requests for documents and information resulted in a consideration by Mr Walton and Mr Impey of what the wife should be given. There was correspondence between the two about the subject. Mr Goddard wrote to Middletons on 29 August 2003 giving further information in Paul's hand and promising more, but stressing that information in the hands of third parties (Arno and Norbert) had to be obtained from them. Mr Goddard said he was effectively saying '[a]nything we can provide, we will provide'.

At a glance

Court

Decision date

Before

Source

Judgment (1811 paragraphs)

Parties

Legislation Cited (72)

Cases Cited (113)