(1984) 156 CLR 41
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10
(1985) 59 ALJR 492
Provident Capital Ltd v Papa (2013) 84 NSWLR 231
Source
Original judgment source is linked above.
Catchwords
(1999) 48 NSWLR 1
Caltex Refineries (QLD) Pty Ltd v Stavar [2009] NSWCA 258(1984) 156 CLR 41
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10(1985) 59 ALJR 492
Provident Capital Ltd v Papa (2013) 84 NSWLR 231
Judgment (2 paragraphs)
[1]
JUDGMENT
HIS HONOUR: Alison Neradovsky, the plaintiff, sues Karl Burnett, a solicitor, and KB Legals Pty Ltd, the incorporated legal firm, for breach of duty of care. They are, respectfully, the first and second defendants (the defendants). The proceedings in so far as relief was originally sought against the third and fourth defendants have been resolved.
The breach of duty for which the plaintiff sues the defendants is grounded, under the allegations of the plaintiff, in breach of retainer, breach of duty of care and of breach of fiduciary duty. In short, the plaintiff was a client of the legal firm and the first defendant (Mr Burnett), which or who acted for her on a real estate transaction to support a loan in relation to one or more investments. It is alleged that the firm and Mr Burnett had a conflict of interest as a result of acting for and a relationship with the principal of the company into which the plaintiff was investing, who was also the financial advisor to the plaintiff.
Leaving aside controversial issues, the essential facts in this matter are as follows. The plaintiff was a client of a financial advisor, Ms Sue Percival. Ms Percival advised the client to invest in a company, Ashmore Road Pty Ltd (Ashmore), in relation to a development project (Ashmore Road or Ashmore Road land). On the advice of Ms Percival, an application for finance was submitted to Challenger Financial and approved in March 2007.
Neradovsky v Burnett [2015] NSWSC 1458 | Case summary | Zoe
The stated purpose of the loan was to assist with the purchase of commercial investment property, but ultimately approval was granted for an amount of $1,050,000 for the purpose of "investment opportunities as they arise": Exhibit A (Tender Bundle, page 107). The approval for the loan was granted on 8 May 2007.
On or before 17 May 2007, the plaintiff had decided, on the advice of Ms Percival, to invest in Ashmore and that was to be effected by borrowing money against the plaintiff's property from Challenger and lending that money to Ashmore. The stated attractions of such an investment were said to be the tax deduction available for the pre-payment of interest, significantly enhanced cash flow (if one were to accept, as I find the plaintiff did, Ms Percival's advice) and an increase in wealth for the purpose of obtaining a fund for retirement.
On 17 May, the plaintiff attended the premises of the defendants and the first defendant, Mr Karl Burnett, conducted a conference with the plaintiff and Ms Percival. There is some controversy as to the content of that conference.
Essentially, the investment in Ashmore failed and the plaintiff was required to repay Challenger and suffered losses. The plaintiff claims, as outlined above, that the losses were occasioned by the failure of Mr Burnett, and his firm, to advise properly or at all on the plaintiff's strategy and, in particular, by acting for the plaintiff in circumstances where there was a conflict of interest and a continuing financial relationship between the defendants and the financial advisor, Ms Percival. No distinction has been made by the parties between the liability of the first defendant and that of the second and no distinction is made by me in these reasons.
Timeline of Events
It is appropriate to set out a timeline of events as alleged by the plaintiff. That chronology commences with the proposition that Ms Percival and her companies became clients of the defendants from approximately 2004.
Between 10 March 2005 and March 2008, Mr Burnett and Ms Percival were co-directors of Phoenix Project (Gosford) Pty Ltd and Mr Burnett, KBL Legals and Imagination Creation Group Pty Ltd (ICG) were shareholders of Phoenix Project (Gosford). ICG was a company controlled by Ms Percival.
From 22 June 2005 until 2010, Mr Burnett and Ms Percival were directors of Australian Regional Development Company Pty Ltd and KBL Legals and ICG were shareholders of that company.
On 23 September 2005, the National Australia Bank (NAB) registered an all-monies mortgage over the Ashmore Road land. The Ashmore Road land, which as stated was the site for a property development, was owned by Ashmore. On 27 September 2005, NAB registered a fixed and floating charge over all present and future property of Ashmore.
From 11 October 2005 until 2008, Mr Burnett and Ms Percival were directors of ARDC Lanitza Pty Ltd of which the majority shareholder was Australian Regional Development Company Pty Ltd, to which earlier reference has been made.
In February 2006, NAB approved an increase in the Ashmore debt to $1,544,000. On 16 October 2006, NAB approved a further increase in the Ashmore debt to $1,768,000.
On 10 November 2006 (Tender Bundle page 38A), Bricks & Mortar Australia Ltd (Bricks & Mortar) registered a mortgage over Ashmore Road land securing $640,000 in initial loan of $640,000 plus "further advances". On 13 November 2006, Bricks & Mortar also registered fixed and floating charges over all present and future property of Ashmore.
In early 2007, as a result of a conversation between the plaintiff and her sister, the plaintiff and her husband decided to make an appointment to see Ms Percival. According to the plaintiff, she had no pre-conceived ideas about the matters that they would discuss or the manner in which she would invest, if at all. Rather, the plaintiff wanted to hear what Ms Percival could offer in relation to a financial plan.
The plaintiff recalls that the people present at the initial meeting, which took place at Bondi Junction, included Mr Burnett, who was introduced as Ms Percival's lawyer, and another person whom Ms Percival introduced as an employee and whose name, as best the plaintiff recalls, was David. A PowerPoint presentation was utilised during the meeting.
Further such meetings were held. At the first or second meeting, Ms Percival informed the plaintiff that if she were to invest in real property, she could "build…a property portfolio that will assist…with cash flow".
Ms Percival provided the plaintiff with a folder containing a "Statement of Advice" outlining the investment portfolio plan at the second meeting.
The plaintiff's initial understanding was that Ms Percival was suggesting the purchase of residential properties or small boutique developments that would then be renovated and sold or retained to obtain a rental income, thereby increasing the plaintiff's assets. The plaintiff was comfortable with such a suggestion.
Sometime in early 2007, Ms Percival spoke to the plaintiff and made a suggestion that was considered to be a slight variation on the foregoing. The proposal put forward by Ms Percival involved the plaintiff borrowing money in the short term and investing it at a higher interest rate than the rate at which the borrowing occurred, thereby increasing income that could be disclosed to lenders for the purpose of effecting greater borrowing for longer term investments. Ms Percival mentioned Bricks & Mortar, a company with which Ms Percival was associated.
Following these meetings and the advice received, the plaintiff agreed, on or about 6 February 2007, to invest $60,000 of her savings in what she understood to be one of Ms Percival's companies, SuperSafe. The plaintiff's understanding was that the investment was "at call", which factor gave the plaintiff some comfort as to its safety.
It seems that the plaintiff had, by this stage, agreed to mortgage her property in Western Australia in order to obtain the investment money, although she had not as yet decided precisely how the funds would be invested.
It is fair to say that the plaintiff's approach to her financial advisor was naïve and did not question or seek to investigate the advice given or the recommendations made. The plaintiff's demeanour and evidence in Court confirmed the genuineness of that naivety.
On or about 14 March 2007, Ms Percival's company sent the plaintiff a conditional approval of finance from Challenger dated 13 March 2007, being an application for borrowing of $700,000 (see Tender Bundle, page 42 and following). The plaintiff signed the document and returned it. On or about 2 May 2007, the plaintiff received a formal offer of funds from Challenger (Tender Bundle, page 47), which offer involved a mortgage over the property in Western Australia and an approval for a loan providing funds of $1,050,000. Establishment and valuation fee disbursements were required to be paid.
The plaintiff and her husband arranged to see Ms Percival for dinner on 3 May 2007, on the plaintiff's view, in order to finalise the investment strategy. Apparently, Ms Percival had also requested the opportunity to look at the plaintiff's properties and to see her work on interior design, although I take the view that Ms Percival's interest was disingenuous.
On 3 May 2007, prior to the dinner that had been arranged with Ms Percival, the plaintiff received an email from her sister, Catherine. The email discloses that the sister was aware of the plaintiff's previous and forthcoming meeting with Ms Percival and of some of the investment strategies. The defendants submitted that the letter was a letter of warning from the plaintiff's sister as to the investment strategy, which warning was ignored by the plaintiff. I will deal at greater length with this letter later in these reasons.
On 9 May 2007, the plaintiff received an email from Ms Percival enclosing a letter of offer from Challenger, claiming that the fees payable had been reduced and that there would be no commission payable to Ms Percival's entities. The offer involved a pre-payment of interest before 30 June 2007 and involved the investment of $500,000 at 15% for 12 months and the remainder of the funds to be invested at call at 10% per annum. The investment was to be an investment with Ms Percival's company Ashmore and was said to involve a second mortgage in favour of Ms Neradovsky against 16 and 18 Ashmore Road (previously described as the Ashmore Road land) which were described as two commercial properties that Ms Percival's companies owned and which had been valued at $2,700,000. The representation by Ms Percival was that the NAB had a first mortgage of $1,300,000 over those properties.
On 11 May 2007, the plaintiff signed Challenger's offer and the loan documents became available on 15 May 2007.
On 17 May 2007 at 9.04am, Mr Burnett was retained by Ashmore to review the loan agreements between the plaintiff and Ashmore (the Ashmore Road loan agreement or documents) and the guarantee from Ms Percival. The email, sent from Jessica Sumaryo, who worked at ICG, was in the following terms:
"Hi Karl
Please find attached all the documents Sue has asked me to prepare for the Neradovsky meeting this morning.
On instructions from Michelle, could you please review the Loan Agreements. They have been based on our standard Loan Agreements, however as this deal is a special one I am not sure the Clauses in section 3 of both agreements apply.
Michelle has also asked if you could also please review the Deed of Guarantee that you drafted for us as again I am not sure if I have drawn this up correctly.
I will give you a call shortly to explain the deal.
Regards
Jessica" (Tender Bundle, page 116A).
At 10am on 17 May 2007, Mr Burnett printed the Ashmore Road loan documents attached to the email and prepared for "the meeting with a client" for which a charge of 1 hour's time was billed. At 11am on the same day, the plaintiff met with Mr Burnett for 1.25 hours. During the course of that meeting, Ms Percival was present. The content of the matters discussed during the course of that conference is controversial. The time of the meeting as 11am is the time provided by Mr Burnett (Courtbook page 55 at [20]).Following the conference with Ms Neradovsky, attended by Ms Percival, Mr Burnett conferred with Ms Percival alone.
The defendants admit (Amended Defence to the Amended Statement of Claim, Courtbook 20 [12a]) that they were aware on or about 17 May 2007 that the proceeds of the loan were intended by the plaintiff to be used to fund or invest in Ashmore.
On 22 May 2007, the Challenger loan was settled and Challenger paid $947,000 to Ashmore.
According to Mr Burnett, on 27 May 2007, he returned to his office at a time prior to the telephone conversation he had with Ms Percival on that day. That telephone conversation occurred at or about midday. It seems that Mr Burnett remained at the office for the remainder of the work day.
The plaintiff attended Mr Burnett's office on 23 May 2007with Ms Percival and, at that office, executed the Ashmore loan agreements. Ms Anderson, an employee of KB Legals and/or Mr Burnett, witnessed the plaintiff's execution of the documents and Ms Percival's execution of the documents.
On 26 June 2007, Mr Burnett accepted a retainer from Sunshine Coast Pty Ltd, another company associated with Ms Percival: Courtbook page 60 at [45].
On 26 June 2007, NAB approved an increase in the Ashmore debt from $1,768,000 to $1,890,000 and obtained a Deed of Priority for $2,205,000: Exhibit C. On the same date, Ms Neradovsky attended Mr Burnett's office in the company of Ms Percival, at which juncture Mr Burnett arranged for the plaintiff to attend on Mr Rogers, the third defendant, a solicitor practising from premises in Miranda. At that time, the plaintiff executed the NAB guarantee, the mortgage and Sunshine Coast agreements. There is significant contest as to the circumstances that led the plaintiff to attend on Mr Rogers, with which contest I will deal at a later time.
By the end of the financial year 30 June 2007, Ashmore, according to its end of year accounts, had a secured debt NAB and Bricks & Mortar of $2,020,000. As at 30 June 2007, Ashmore had made a net loss of $12,071 and reported net assets of $131,000. By 30 June 2008, Ashmore's accounts disclosed a net loss of $78,000 and net assets of $209,000. The secured debts continued to be owed.
On 26 February 2009, NAB demanded $1,966,000 from Ashmore, which it did not or could not pay and, on 5 March 2009, a receiver and manager was appointed to Ashmore.
On 24 November 2009, Ms Percival was bankrupted on her own petition and, as earlier stated, on 1 February 2010 the Ashmore Road land was sold for $1,843,000.
The February 2010, the receiver and manager for Ashmore sold the Ashmore Road land for $1,834,000. On 24 August 2010, the receiver and manager to Ashmore ceased to act and on 20 September 2010 filed the final account for the company.
The Evidence
It is unnecessary in recounting or summarising the evidence to deal with those matters that are relatively uncontroversial. Nevertheless, I will summarise the evidence for the purpose of disclosing, amongst other things, the demeanour of the witnesses and the reliability and credit of those witnesses that give relevant and controversial evidence of fact.
The plaintiff, Alison Neradovsky
Alison Neradovsky swore affidavits dated 23 September 2013 and 1 November 2013. Generally, the affidavits attest to the circumstances outlined above, to the state of mind and intention of Ms Neradovsky, to the receipt of the email from her sister, Catherine, and to the content of the meetings with the first defendant and the circumstances surrounding the execution of the mortgage documents. From the evidence of Ms Neradovsky, including the cross-examination, and especially her demeanour and attitude, the overwhelming impression was that Ms Neradovsky was an honest witness who, understandably, could not remember details of dates or times some years earlier or the precise words used in conversations.
Nevertheless, her recall on those matters that were significant to her, was good and reliable. Ms Neradovsky gave the impression that she had no understanding of financial matters and, even though she understood the fundamental basis of a mortgage being the borrowing of money, its repayment and of the possibility of forfeiture of property over which the mortgage issued, she displayed an inability to understand the nature and details of financial transactions. It was also obvious that Ms Neradovsky did not understand the return that would need to have been earned on her investments in order for the strategy of Ms Percival to bear fruit.
Until it was "explained" by Ms Percival, Ms Neradovsky had no experience with or knowledge of a situation where monies could be borrowed, which monies included the interest to be paid, then paid forthwith giving one a tax deduction of all of the 12 months' interest immediately and relevantly in the tax year in which the borrowing occurred.
Ms Neradovsky was generally agreeable and compliant with any suggestion, and almost every suggestion, put to her. The overwhelming impression was that, to large measure, Ms Neradovsky neither understood the financial questions that were put nor, often, the question itself.
Moreover, her lack of financial sophistication and inability to understand basic financial matters was obvious from the outset and would have been obvious to any person who engaged with her about financial matters. Ms Neradovsky neither understood the true nature of the provision of security and investments nor understood the meaning of terms used in them including, for example, the term "pro forma" in relation to letters.
Ms Neradovsky was, to a very limited extent, involved in her then husband's business, but that involvement did not, it seems, lead to her understanding financial affairs or to her ceasing to be other than a wholly unsophisticated person in financial issues. It is clear from the evidence given, which evidence I accept, that Ms Neradovsky's involvement in financial matters was largely confined to leaving those matters to her then husband and his accountant.
Ms Neradovsky may have seen the valuation of the property at Ashmore Road, but she did not see the mortgage documents over that property.. She accepted that which was told to her by Ms Percival, namely, that the properties were worth $2,700,000 and that there was a mortgage to NAB of between $1,300,000 and $1,400,000 and understood from that information, that there was sufficient equity available in the Ashmore Road properties to secure any loan she may have advanced.
Even though Ms Neradovsky was involved in some mortgages, as earlier stated, she was not the moving party and left the financial details to her then husband.
Ms Neradovsky was also involved in a business. However, the business, on the material before the Court, would not have required any sophistication in Ms Neradovsky's understanding of financial matters.
A number of the documents that are in issue in these proceedings or were the subject of cross-examination were not completed by Ms Neradovsky and the content of those documents are not matters upon which Ms Neradovsky had any particular knowledge or recollection and, in a large number of cases, may not have been read by Ms Neradovsky.
Ms Neradovsky was cross-examined at length about her understanding of the email received from her sister, Catherine, on 3 May 2007. It was suggested to Ms Neradovsky that the email suggested that one of Ms Percival's companies was having cash flow and management issues and was paying dividends late and that this was a warning from her sister to be careful with the investments. Ms Neradovsky maintained, and I accept, that she was unaware that the matters raised in the email were "a bad sign", but rather, put the issues down to typical business issues all of which have there "ups and downs".
I accept, unqualifiedly, that Ms Neradovsky had no adequate understanding of the financial concerns that may be implied in the email. The lack of understanding derives from Ms Neradovsky's lack of sophistication in financial affairs and lack of understanding of even basic aspects of a commercial venture of this kind. As earlier stated, I will deal with the content of the email later in these reasons.
Ms Neradovsky accepted that she would probably have glanced at the valuation for the property but did not read it in detail in the process of confirming that the location of the properties were as indicated by Ms Percival and generally of the value indicated.
Ms Neradovsky authorised her sister to collect the loan documents and faxed material to Ms Graham from a fax she had at home.
By 15 May 2007, Ms Neradovsky had decided to borrow $1,000,000 from Challenger and invest the money into Ashmore. By this stage, Ms Neradovsky had not seen Mr Burnett, except for the initial meeting at Ms Percival's office regarding financial advice.
On 17 May 2007, Ms Neradovsky arranged with Ms Percival to meet at Mr Burnett's office and each attended on Mr Burnett during the entirety of the conference.
Ms Percival had told her that Mr Burnett would explain the documents and sign the loan agreement and that Mr Burnett was very familiar with Ms Percival's business and personal finances so he will be able to explain it to her: Courtbook page 40 [83].
Ms Neradovsky's attitude to this information was that she was not surprised by it, given the presence of Mr Burnett at the initial meeting . Ms Neradovsky considered that Ms Percival's company, ICG, was offering a "one stop shop" for financial advice.
During the conference at Mr Burnett's office, Mr Burnett and Ms Neradovsky had a conversation, according to Ms Neradovsky, in or to the following effect:
"Ms Neradovsky: This is a lot of money. Am I mad?
Mr Burnett: I know everything about Sue's business dealings. I have her so stitched up with guarantees that the bank wouldn't even look at you."
Obviously other matters were discussed. Ms Neradovsky then signed documents in Mr Burnett's presence, including the deed of loan with Challenger; a mortgage to Challenger over their Western Australian property; and a cheque direction for settlement, which direction was witnessed by Ms Percival. According to Ms Neradovsky, Mr Burnett also signed the certificate of advice at this meeting on 17 May 2007 (see Tender Bundle 157).
On 23 May 2007, according to Ms Neradovsky, she again met with Mr Burnett and Ms Percival in Mr Burnett's office. This meeting concerned the loans to Ashmore Road. During the meeting, again according to Ms Neradovsky, she saw Mr Burnett printing copies of documents from his printer; Mr Burnett briefly outlined the definitions printed on the first couple of pages of the loan agreements; and Mr Burnett briefly outlined the roles of the Borrower and Lender as defined under the loan agreements and the Guarantee and Indemnity. Those documents are located at Courtbook pages 163, 175 and 187 respectively. At the time, Ms Neradovsky was unaware that there was not a mortgage in her favour providing security for the monies being "invested" in Ashmore.
Ms Neradovsky recalls a conversation with Mr Burnett in which she asked him what he thought of an investment into Paradise Island, which was a reference to the company that became known as Sunshine Coast transaction during the course of the proceedings. To that enquiry, Mr Burnett replied, according to Ms Neradovsky, "I can't comment on that because I have a conflict of interest".
Ms Neradovsky gave evidence that she did not at the time understand the term "conflict of interest" and did not ask about it because, at the time, there had been no commitment given to that project. It was not a matter of concern to her because, according to Ms Neradovsky, if there were information required or about which she was or ought to be advised that would be done later.
Ms Neradovsky testified to the fact that Mr Burnett did not explain the Ashmore documents to her beyond what I stated above and did not say that she should obtain independent legal and financial advice relating to whether or not to invest in one of Ms Percival's companies and to the degree to which there were risks and/or the degree of security involved.
On or about 25 May 2007, Ms Neradovsky received a letter from Mr Burnett (Tender Bundle page 202), which enclosed signed copies of the deed of loan agreement for the 10% per annum loan facility; a deed of loan agreement for 15% per annum loan facility; and a deed of guarantee from Ms Percival. The letter remarks:
"Due to our firm acting for the borrower we cannot advise you in respect of the attached agreements due to the conflict of interest by you being the lender. You should seek your own independent legal advice should you wish to obtain legal advice."
Ms Neradovsky denies that Mr Burnett said anything on 23 May 2007, either before or after the signing of the Ashmore loan documents, about a conflict of interest or the obtaining of independent legal advice other than the comment concerning Paradise Island/Sunshine Coast transaction, recited above.
Further, the notion of "independent legal advice", on Ms Neradovsky's understanding, referred to the witnessing of the signature on the Ashmore loan documents.
Ms Neradovsky makes clear that she was not concerned about the terms of the letter because she had already borrowed the money and signed the Ashmore loan documents with Mr Burnett.
On 26 May 2007, Ms Percival communicated, by email, with Ms Neradovsky proposing an arrangement in relation to Paradise Island, which later became referred to as the Sunshine Coast transaction. The email suggested that Mr Burnett would act for Ms Neradovsky and Ms Percival would be represented by another solicitor. On 28 May 2007, Ms Neradovsky replied to that email and commented that Ms Percival's big ideas made her "nervous". The email, expressly, discloses Ms Neradovsky's lack of understanding of the financial arrangements.
On 26 June 2007, Ms Neradovsky met with Ms Percival and Mr Burnett in Mr Burnett's office in relation to the Paradise Island investment. She had been told by Ms Percival to bring the Certificate of Title to her property in Hargrave Drive to the meeting, which certificate she handed over either to Ms Percival or Mr Burnett. Ms Neradovsky signed no documents at that meeting, but saw Ms Percival sign a document, which she assumed was the Sunshine Coast Guarantee Agreement. The reason that Ms Neradovsky did not sign the documents at that meeting was that there was a conversation between herself and Mr Burnett, during which he told her that she also needed to sign the documents and, after a request from Ms Neradovsky for Mr Burnett to witness the documents, he replied in or to the effect that he could not act for her in this transaction because he had a conflict of interest. When Ms Neradovsky enquired as to what that meant, she was told by Mr Burnett, that he acts "as [Ms Percival's] solicitor on this project so I cannot act for you on the same matter".
At that point, Ms Neradovsky indicated that she would use a solicitor who she had used earlier in unrelated matters and who was only 10 minutes from there, but she was persuaded, it seems, by Ms Percival to attend on a solicitor across the road, because Ms Percival was required to fly back to Queensland in a few hours.
Ms Neradovsky then attended on the recommended solicitor, whose office was across the road from Mr Burnett's office. The discussion with the recommended solicitor took no more than 10 minutes and involved an expression of opinion by Ms Percival to the solicitor that Ms Neradovsky had been given advice and that she, Ms Neradovsky, knew what she was doing.
Apparently, the referred solicitor commented that the documents appeared to be in order; that Ms Neradovsky had security as she was obtaining a second mortgage and charge; and that the guarantee seemed safe. The solicitor then indicated where to sign the NAB documents and the deed of finance and, accordingly, Ms Neradovsky signed the secured Guarantee and Indemnity to NAB for an amount of $1,040,000 plus interest and charges; a mortgage to NAB over her property at Hargrave Drive; and the Sunshine Coast Guarantee Agreement. There was, notwithstanding the comment from the referred solicitor, no mortgage in favour of Ms Neradovsky in those documents. Ms Neradovsky was unaware of the absence of a mortgage in her favour.
Ms Glennis Anderson
Ms Anderson swore an affidavit dated 4 April 2014 in which she described her role as a secretary for Mr Burnett, employed by him and/or the second defendant. Her function was the day to day aspects of conveyancing matters, general secretarial duties and assisting in the preparation of certain documents. She had no recollection of Ms Neradovsky, either by that name or her previous name, and has no recollection of what occurred when she witnessed the Ashmore loan documents on 23 May 2007.
In [12] of Ms Anderson's affidavit, she described some circumstances in which she may have witnessed the signing of the documents in question. In cross-examination, Ms Anderson made clear that it was not normal for her to witness documents in the office and that for her to have witnessed a document she would have been directed by someone to do so. If she were asked to witness a document by a person, other than Mr Burnett or his wife she would endeavour to contact Mr Burnett and would not witness a document for a person "off the street". Ms Anderson testified that "she would have only witnessed the Ashmore Road loan documents with Mr Burnett's permission unless no one else was in the office, she had tried to contact him and was told that any adult could witness the documents".
Ms Anderson was asked about a number of letters which, according to the reference at the top of the page, were typed by her. However, she had no independent recollection of any of the letters or the circumstances involving the matters.
Generally, while Ms Anderson was not involved in the funding aspects of the work undertaken by Mr Burnett through KB Legals, she was aware that Mr Burnett acted for developers in large scale property developments and in the associated funding arrangements. The funding arrangements involved Mr Burnett sourcing and arranging loans for developers who sometimes needed funding.
The fact, if it were the fact, that Mr Burnett was involved in obtaining funds for developers is not particularly relevant to any of the issues associated with these proceedings. The more relevant aspect is that Ms Anderson made clear that she would not have witnessed any document of her own volition: Transcript 112, line 13. Further, it was not normal for Ms Anderson to witness documents and, if she were to have witnessed a document, it would have been done at the direction of someone and not before she had endeavoured to contact Mr Burnett.
In my view, more probably than not, the documents witnessed by Ms Anderson were witnessed at the direction of Mr Burnett, which is consistent with the evidence of Ms Neradovsky.
Mr Karl Burnett, the First Defendant
Mr Burnett affirmed affidavits dated 1 November 2013 and 5 May 2014. As was the case with Ms Neradovsky, it is unnecessary to summarise all of the affidavit evidence in circumstances where the factual contest is within short compass and much of the uncontroversial evidence has already been summarised.
The first overall comment in relation to the affidavit evidence is that it seems to seek to give the impression that Mr Burnett's relationship with Ms Percival was one of solicitor-client and nothing more. Mr Burnett attested to the fact that he had no financial or pecuniary interest in ICG, Ashmore or Sunshine Coast. Otherwise, Mr Burnett describes the business of Ms Percival and attests to the relationship of solicitor-client between him (and the second defendant) and Ms Neradovsky. He also describes the terms of his discussions and communications with Ms Neradovsky in the course of his affidavit.
In the course of the cross-examination of Mr Burnett, he conceded that his relationship with Ms Percival was not confined to solicitor-client. His relationship with Mr Percival also was a financial relationship through his involvement in a number of companies, all of which were engaged in development activities. Furthermore, as directors of a number of companies jointly owned by them, Mr Burnett and Ms Percival each gave personal guarantees to those companies. Ms Percival was a client of Mr Burnett from about 2004 and Ms Percival's company, ICG was also a client.
One of the companies in which Mr Burnett and Ms Percival had joint financial interests was Phoenix Projects. Mr Burnett was a director of Phoenix Projects, of which Ms Percival was also a director. Further, KB Legals, the second defendant, was a trustee of a family trust, as well as the service company for the solicitor's firm, and owned a number of shares in Phoenix Projects, which it continued to possess. Mr Burnett is the sole director of KB Legals and owned shares personally in Phoenix Projects. As earlier stated each of the directors of Phoenix properties, namely, Mr Burnett and Ms Percival, signed personal guarantees for the company.
Another company in which Mr Burnett had financial interests with Ms Percival was ARDC Lanitza, of which Ms Percival was also a co-director. The majority of shares in ARDC Lanitza were owned by ARDC of which Mr Burnett was a director, together with Ms Percival and of which the KB Legals was a shareholder as trustee for Mr Burnett and his family. Similarly, Ms Percival's company, ICG, was a shareholder in ARDC.
Overall, the evidence establishes that there was a close and continuing financial relationship between Mr Burnett and Ms Percival and companies associated with each of them.
Mr Burnett accepted that it was neither proper nor ethical practice for a financial planner to advise a client to invest in the planner's own commercial enterprise and that he held that view in or about May 2007. Further, he understood that a financial planner was required to give full disclosure in relation to those matters upon, such that the party being advised was aware that the planner gained commercially from their investment as he or she had an interest in it. In circumstances such as those, Mr Burnett accepted that the person should seek and obtain independent advice.
Further, it is conceded that Mr Burnett was aware of the totality of the financial arrangements that Ms Neradovsky was planning to enter. Notwithstanding the terms of [17] of Mr Burnett's affidavit of 5 May 2014, Mr Burnett accepted that, at least from the time of the initial meeting at Bondi Junction between Ms Percival and Ms Neradovsky in which he was in attendance, he was aware that Ms Percival was the financial planner for Ms Neradovsky. The initial meeting, was, as earlier indicated, well before the formal meetings between Ms Neradovsky and Mr Burnett (Transcript page 137).
Mr Burnett was featured on ICG's website in early 2007 and yet, as earlier indicated, Mr Burnett's evidence, both his affidavit and oral evidence, gave the impression that it was deliberately confined in a way that underplayed Mr Burnett's association with Ms Percival and Mr Burnett's role with Ms Neradovsky.
Moreover, Mr Burnett's "recollection" gave the impression that his relationship with Ms Neradovsky was more of a reconstruction from documents that he has seen for the purposes of these proceedings, as his description of his involvement with Mrs Neradovsky is confined to those tasks on which the documents disclosed his signature. Otherwise, Mr Burnett could not recall the documents.
Further, his lack of recollection of significant aspects of the meetings between him and Ms Neradovsky seems inconsistent with the certainty with which he gave evidence about having stated in the meeting on 17 May 2007 that he had a conflict of interest and could not act. The existence of the conflict of interest was also the basis upon which, it seems, Mr Burnett reconstructed with certainty that no other documents were dealt with during the course of that meeting.
The documents that were sent to him by solicitors acting for Challenger were provided to Ms Neradovsky. However. Mr Burnett denies "absolutely" that the Ashmore loan documents sent to him by Ms Jessica Sumaryo, an employee of Ms Percival or her company, were discussed with Ms Neradovsky. Mr Burnett is also certain that the documents were not given to Ms Neradovsky during the course of the conference on 17 May 2007. That certainty arises because Mr Burnett had "major concerns" relating to the conflict of interest and the wisdom of the investment.
Nevertheless, the computer records of Mr Burnett show that the Ashmore loan documents from Ms Sumaryo were accessed on Mr Burnett's computer at 11.37am on 17 May 2007, namely, at a time that was half way through the conference between Mr Burnett and Ms Neradovsky. The screen shot of the computer records, being a directory of files, shows that the last modification to the files, being the "disbursement authority" modification and the "application to invest: Ashmore Road", was on 17 May 2007 at 11.37am. In the case of the "disbursement authority" modification that time was the time, according to the computer record, that it was last modified, created and printed. The document being the "application to invest: Ashmore Road" was modified last on 17 May 2007 at 11.37am, but was last printed at 1.12pm on 7 February 2008.
As a consequence of the computer record and my view about the reliability of Mr Burnett's evidence, it is more probable than not that Mr Burnett gained access to the Ashmore loan documents sent by Ms Sumaryo during the course of the conference with Ms Neradovsky on 17 May 2007. While Ms Neradovsky is not certain this occurred, she considers it her best recollection and I do not accept Mr Burnett's version on account of its inconsistency with the computer records, his demeanour in Court and the nature of the evidence which sought to distance himself from Ms Percival and confine the role he played with Ms Neradovsky.
Mr Burnett accepted that he was aware, prior to the meeting on 17 May 2007, that Ms Percival must have advised Ms Neradovsky to lend "or invest" just under $1,000,000 to Ashmore, one of Ms Percival's business ventures. Mr Burnett accepted that this process was unethical, but suggested that it could become ethical if it were subject to the relevant and appropriate disclosures. As a consequence, the evidence of Mr Burnett was that, in the absence of full disclosure by Ms Percival, the investment would be unethical and he would need to warn Ms Neradovsky against it. Mr Burnett also accepted that he asked neither Ms Neradovsky nor Ms Percival whether full disclosure had been made (Transcript Page 160) and never did.
Over and above the foregoing, Mr Burnett accepted, as he would have to have done, that he owed a fiduciary duty to Ms Neradovsky at the time he saw her on 17 May 2007, within the ambit of the retainer. That duty required him to give Ms Neradovsky 100% loyalty. Mr Burnett also accepted that, at the very same time, he owed to Ms Percival the same 100% loyalty and that it was in Ms Percival's commercial interests for Ms Neradovsky to obtain the loan from Challenger, on which matter Mr Burnett was acting, and to on-lend it to Ms Percival.
The understanding under which Mr Burnett was acting at the time that the conference on 17 May 2007 occurred was that under the Solicitors' Rules he could not act for two clients at the same time if there were a conflict of interest, unless full disclosure had been effected. At no stage, in the evidence before the Court, was full disclosure effected. While Mr Burnett did, at one stage (the timing of which will be dealt with later), disclose that he acted for Ms Percival on the Sunshine Coast Transaction, he at no stage disclosed the financial relationship between him and Ms Percival and the intertwined financial affairs in which they were involved.
Mr Burnett was of the opinion, as at 17 May 2007, that he was required to deal with Ms Neradovsky free of the influence of any interest which may conflict with Ms Neradovsky's best interests. Yet he conferred with Ms Neradovsky while Ms Percival was in the room and Ms Percival was an "influence of [an] interest which may conflict with [Ms Neradovsky's] best interests" (Transcript page 165-166). He did so, notwithstanding his view that a financial advisor, Ms Percival, whom he knew well, had advised Ms Neradovsky to lend money to Ashmore and was acting unethically, because he assumed, without asking either Ms Percival or Ms Neradovsky, that Ms Percival had made full disclosure of the interests she had.
The demeanour of Mr Burnett, particularly, his refusal to answer directly the questions that were put to him, his constant attempts to argue, and his attempts, despite material to the contrary, to confine his role in a way that "protected his position", led me to the conclusion that Mr Burnett was dissembling.
In particular, his evidence as to the content of the meeting on 17 May 2007, whether the Ashmore loan documents from ICG were seen, studied, given or printed during that conference and the circumstances of the "unavailability" of Ms Percival to contact prior to the conference, are simply unbelievable.
The evidence that Mr Burnett gave, which, in this respect I accept, was that he was aware that Ms Percival was Ms Neradovsky's financial advisor from a time well before 17 May 2007. He did not ask whether that financial advice involved advice as to whether or not Ms Neradovsky should borrow money on her real estate in order to fund the investment in Ms Percival's business ventures. It defies common sense that a financial advisor, advising on the entirety of a financial plan, would not advise as to how a client would obtain the necessary funds to enable an investment to occur.
Nevertheless, Mr Burnett deliberately turned a blind eye to that circumstance. Mr Burnett deliberately did not ask whether Ms Percival had advised Ms Neradovsky on the desirability or otherwise of mortgaging her real estate for the purpose of the business investment, despite being aware of the significant risks associated with the business ventures and the lack of security in relation to that investment.
Thus, Mr Burnett, as a solicitor acting for Ms Neradovsky, was acting on a transaction to obtain funds from a financial institution, against real estate that was otherwise, relevantly, unencumbered, as part of a plan to invest that money in business ventures that he knew to be risky. Yet, Mr Burnett did not ask whether there had been full disclosure by the financial advisor; Mr Burnett did not ask whether the financial advisor had advised on the Challenger loans; and Mr Burnett did not disclose his own financial association with Ms Percival, the advisor in question.
Moreover, the extent of Mr Burnett's disclosure was that he could not act because he was Ms Percival's solicitor in one or perhaps two particular transactions.
Lastly, in terms of Mr Burnett's evidence necessary to summarise, Mr Burnett conceded that, if Ms Percival and her companies were not his clients and had never been his clients, but, if somehow, he knew that Ashmore had a first mortgage with NAB, he would have told Ms Neradovsky, when advising her about the Challenger loan, about the NAB all-moneys mortgage and the risks associated with a business venture of the kind into which she was embarking. However, Mr Burnett did not advise Ms Neradovsky of those facts, because Ms Percival was his client.
In other words, on Mr Burnett's own evidence, he deprived his client, Ms Neradovsky, of information that he considered necessary or appropriate to provide, because of the conflict of interest with Ms Percival and her companies (Transcript page 191-192).
Catherine's Email
On 3 May 2007, as earlier indicated, Ms Neradovsky received an email from her sister, Catherine Doherty. The email was sent at 10.15am. The email discloses, as I have also previously noted, that Catherine, Ms Neradovsky's sister, was aware that Ms Neradovsky was meeting with Ms Percival that evening. Catherine had met with Ms Percival and discussed cash flow, management issues and the state of Bricks & Mortar paying dividends late and advised Ms Neradovsky that she might want to do the same.
Ms Neradovsky's sister was an employee of Ms Percival (or her company). The remainder of the email is worth repeating:
"I asked her for the security on your money - so that would be a good way of getting more assurance and security over your capital investment.
If she is offering you an investment into Supersafe or Northcoast Qld then they are her private companies which she has more control over.
For example my interest payments from Supersafe have not missed a beat where as the dividends from Bricks & Mortar have been more effected as there are stricter rules for the operation of the fund.
So your money would probably be better off in Supersafe so that you will get your payments regularly and secured against some property.
Her ideas for you to develop now on the Gold Coast maybe a good way of getting into your business and start making money immediately - or otherwise wait till there is a better time for you and George to set up the 2nd part of the loan and investment until you are ready to develop.
Obviously it is all your decision - Like you - when I listen to Sue it all sounds great - however it has to sit right with you and George.
I trust you have a profitable dinner party -
I suspect she will bring papers for you to sign.
I would discuss with George before she gets there - what you will do about that - make a decision before she gets there how you will handle that - so you are in a position of strength.
EG Colin and I never sign in front of the sales person - even if you have to get up and go out on to the verandah just the two of you for 5 mins then do it - to make sure you both feel right about it and if not then take your time.
Catherine Doherty
IC Group Perth." (Tender Bundle page 49).
As earlier indicated by suggestion for the defendant's counsel, the suggestion was that this letter was a letter of warning to Ms Neradovsky from her sister. I accept that a person more financially sophisticated than Ms Neradovsky may have seen it in those terms. There is, as recited above, a reference to cash flow issues associated with one or more of Ms Percival's business ventures as a reason to ensure an investment over which Ms Percival had greater personal control.
Nevertheless, it does not seem to be a communication, particularly given the relationship between Ms Neradovsky and her sister, that advised against investing with Ms Percival. If anything, it was advice not to succumb to Ms Percival's persuasiveness and a warning not to sign documents at a point in time that Ms Percival was seeking to persuade Ms Neradovsky to invest.
The terms of the email would, to Ms Neradovsky or a person as financially unsophisticated as she obviously was, confirm the wisdom of an investment in Supersafe or the Gold Coast investments and confirm that Ms Neradovsky's sister has discussed the matter with Ms Percival and was looking out for Ms Neradovsky's interests.
Even that which was a warning about cash flow issues associated with Bricks & Mortar was qualified by providing a reason, namely, that "there are stricter rules for the operation of the fund".
I do not consider that Ms Neradovsky acted otherwise than in her own interest or was careless in not being on guard in dealing with Ms Percival as a consequence of the receipt of this email.
The Letter of 21 May 2007
Mention has already been made of a letter sent by Mr Burnett, on the letterhead of KB Legals, to Ms Neradovsky, dated 21 May 2007. The letter is short and bears repeating:
"Re: Yourself loan from Challenger Managed Investments
Further to the meeting at our office on Thursday May 17, 2007 we confirm that we act for you in respect to advice for the loan documents for the above matter and the provision of a solicitor's certificate which your mortgagee solicitors required.
We enclose herewith our tax invoice for attending to the above.
As indicated to you on May 17, 2007 in respect to your proposed loan to 16-18 Ashmore Road Pty Ltd we act for Sue Percival who is the principal director of such company. As indicated to you we cannot act for you on such matter due to the conflict of interest by you being the lender and the said company being the borrower." (Tender Bundle, 116J)
Mr Burnett gave evidence that this letter was sent for his protection. There are a number of aspects that require comment. First, Mr Burnett obviously considered that his interests needed protecting. I take that to mean that, on Mr Burnett's view, there was an arguable or actual conflict of interest associated with him acting for Ms Neradovsky, given that the transaction was a larger transaction on which other aspects Mr Burnett could not act.
Secondly, the letter does not indicate to Ms Neradovsky, for Mr Burnett's protection or otherwise, that Mr Burnett was not able to give, and had not given, financial advice.
Thirdly, it indicated no conflict other than the fact that Mr Burnett and KB Legals acts for Ms Percival in a particular later related transaction. The letter confirms that, to the extent any indication was given to Ms Neradovsky of a conflict of interest, any conflict was based solely on Mr Burnett's representation of Ms Percival in some of the transactions and not on the financial intertwining of Ms Percival's investments and Mr Burnett's investments.
Moreover, the letter confirms that Mr Burnett did not indicate to Ms Neradovsky that he had a conflict associated with acting for Ms Neradovsky even on the Challenger loan documents.
Plainly, and accepted by Mr Burnett, Ms Percival's interest was that Ms Neradovsky enter into the Challenger loan (Transcript page 168). On the other hand, Ms Neradovsky's interests were to be advised in a manner that would allow her to be fully informed of the risks associated with entering into the loan for the purpose described in the loan documents. Ms Neradovsky was never fully informed of those risks.
Mr Burnett understood, prior to advising Ms Neradovsky, that Ms Neradovsky would be borrowing from Challenger and on-lending to Ashmore and concluded that he had a conflict of interest in acting for Ms Neradovsky in that arrangement. Further, he understood that, even if the arrangement were broken into particular transactions, he was required by his retainer to advise on the Challenger loan in the context of the entire arrangement in which he t saw himself having a conflict (Transcript page 172-173).
The letter of 21 May 2007 does not disclose the interests that Mr Burnett had; it does not disclose the entirety of the conflict; and it does not advise Ms Neradovsky of that information or those concerns held by Mr Burnett and which, according to his understanding of his retainer, were required to be disclosed by him.
Other Lay Evidence
Evidence was adduced from Ms Amanda Ward, who is the accountant to Mr Burnett and KB Legals, essentially for the purpose of confirming Mr Burnett's attendance at a conference with Ms Ward on the morning of 23 May 2007. While there are understandable gaps in the documentation, Ms Ward produced minutes of meeting between her, Mr Burnett and another on 23 May 2007 from 9am until 11.30am.
The cross-examination disclosed that Ms Ward performed accounting work for Mr Burnett and for KB Legals and tax work for Phoenix Projects and the trust of which KB Legals is trustee. The relevance of that work is not immediately apparent, given that the purpose of the evidence was establishing Mr Burnett's presence at the accounting firm on 23 May 2007, which it seems, was not significantly an issue by the end of the trial.
Evidence was also adduced from Kristyl Burnett, being an affidavit sworn on 19 October 2014. Ms Burnett, who is the daughter of Mr Burnett and who works in the legal firm, as does her mother, gave evidence relating to facsimile records and other documents. Apart from the somewhat irrelevant conclusion that the evidence of Ms Burnett discloses that there was non-compliance with the orders for discovery, the evidence was not particularly relevant. Its probative value was to refute a suggestion relating to the timing of facsimile records relating to communication to Ms Neradovsky. Ultimately, this minor issue of fact is not one which is significant in my findings.
Expert Evidence
Not unusually, the initial reports of the two experts qualified by the plaintiff and defendants respectively seemed diametrically and fundamentally opposed to each other. In accordance with the Court rules, a joint report was required, which report narrowed those differences significantly. In any ultimately relevant sense, the differences all but disappeared during the course of the oral evidence adduced in a conclave.
The experts were Jeffery Paul Bartels, whose initial reports were dated 21 February 2014 and 17 March 2014, with a report in reply dated 25 June 2014. Mr Bartels was qualified on behalf of the plaintiff. The other expert was Peter William Rosier, whose report was dated 13 May 2014. Each expert is a solicitor with significant experience and each of whom has practiced as a solicitor both as an employed solicitor and as a partner in a firm. Each is undeniably qualified to give expert evidence on the duty and standard of care of solicitors in New South Wales and the conduct that is widely accepted as conduct of solicitors in Australia in competent professional practice.
It would be tempting to decide this matter on the simple proposition associated with whether it is permissible for a solicitor to "compartmentalise" a total arrangement in a manner that allowed a particular transaction to be the subject of advice by that solicitor who otherwise may have had a conflict. To some extent, whether solicitors could do that was one of the major sources of difference in the original expert reports. However, the circumstances of this case are far more particular and peculiar than an ordinary circumstance where a solicitor will act for both parties in a particular transaction and will "compartmentalise" a particular aspect of that transaction in order to act otherwise than in a conflict situation.
As is made clear in the preliminary observations to the joint report (Exhibit J1), the major point of difference between the initial reports of Mr Bartels and Mr Rosier was whether Mr Burnett had a conflict of interest from the outset in accepting instructions to advise Ms Neradovsky on the Challenger Loan documents. Mr Bartels concluded that there was such a conflict because of Mr Burnett's full knowledge of the later transactions and the knowledge that the funds to be borrowed from Challenger were to be applied to a transaction with which Mr Burnett was concerned and about which he failed or was unable to advise Ms Neradovsky. Mr Bartels' position would have been different were the Challenger Loan transaction a wholly independent transaction, in which case, the mere fact that Mr Burnett had acted for Ms Percival would not have precluded him acting for Ms Neradovsky.
On the other hand, Mr Rosier took the view that if Mr Burnett were acting solely on the Challenger loan transaction, in circumstances where he has advised Ms Neradovsky to obtain independent legal and financial advice and has not advised on any other aspect of the whole arrangement, there is no obvious conflict. Mr Rosier agrees with Mr Bartels that Mr Barnett was not in a position to give any advice about any other aspect of the whole arrangement.
Each expert opined that, if Ms Neradovsky's evidence were accepted, Mr Burnett and KB Legals did not act in accordance with the common practice of solicitors of good repute in relation to the services provided to Ms Neradovsky and to which these reasons have earlier referred. In that regard, each expert considers, again assuming Ms Neradovsky's evidence is accepted, that the departure from the common practice of solicitors of good repute were in the following respects:
"Mr Burnett in his November 2013 affidavit concedes that he was a long time retainer of Percival and her companies. On the morning of 17 May 2007, prior to seeing Ms Neradovsky, he had received instructions from Ms Percival or one of the entities related to her in respect of a transaction involving Percival, one of Percival's trading entities, 16-18 Ashmore Road Pty Limited (Ashmore Road), and Neradovsky.
On the assumptions made, Mr Burnett's conduct departed from common practice in that he either failed to identify the inherent and obvious conflict of interest or alternatively identified it as set out in his affidavit and chose to ignore it. Having identified the conflict, Mr Burnett nonetheless acted in the Challenger transaction for Ms Neradovsky in breach of the Solicitors Practice Rules and of common practice.
Again, on the assumptions we are asked to make, a solicitor of good repute would have had a reasonable apprehension by the time the solicitor saw Ms Neradovsky that a significant sum of money being raised in the same time frame would be used for the development transaction, i.e. the Ashmore Road development. Having that apprehension, a solicitor in common practice would have asked the client the purpose for which the funds were being borrowed and assuming a truthful answer was received, the Percival conflict of interest and Mr Burnett's personal conflict of interest would have been revealed. Although, on those assumptions, Mr Burnett was aware of at least the potential for conflict in any event.
A solicitor in common practice would then have directed Ms Neradovsky to see her own solicitors about the whole transaction. If the Court finds that Mr Burnett was aware that Ms Percival or an advisor employed by her was the person from whom Ms Neradovsky had obtained the financial advice, a solicitor in common practice would have also advised that such financial advice was not independent. A solicitor in common practice would be obliged to caution Ms Neradovsky to seek independent investment advice.
In the event that a solicitor was minded to proceed with the transaction for Ms Neradovsky then such a solicitor in common practice would be required to obtain a written acknowledgement of informed consent in accordance with the Practice Rules. Solicitors of good repute at the time of these transactions, even if complying with the Solicitors Practice Rules and not acting otherwise than in accordance with common practice, would nonetheless have avoided taking instructions in the circumstances which we assume by reason of the scant reward measured against risk of suit, even if that suit would not be likely to succeed.
The experts observe that Ms Neradovsky's evidence includes a concession that she received a letter on or about 21 May 2007 containing the words "As indicated to you on May 17, 2007, we cannot act for you in such matter due to the conflict of interest by you being the lender and [that company] being the borrower." The experts note that it is a matter for the Court to decide what, if any, consequences flow from this concession." (Question 2, Exhibit J1, the Joint Report)
The experts disagree on the conclusion as to whether Mr Burnett and KB Legals acted in accordance with the common practice of solicitors of good repute, if the evidence of Mr Burnett were to be accepted. I will not deal with this aspect to a great extent, but each has a nuanced and different view of the common practice amongst solicitors in the circumstances outlined in Mr Burnett's evidence.
The answer to question 5 in the Joint Report by Mr Rosier is informative. The answer seems to assume that Mr Burnett did not already know that the loan to Ashmore was imprudent, which was contrary to the evidence before the Court. Mr Rosier opined, in those circumstances, that if the Challenger and Ashmore loans were one transaction or two intimately related transactions (as opposed to two separate and distinct transactions) and Mr Burnett knew, either from the face of the transaction or knew it was imprudent or of questionable prudence, he could not, unless he departed from common practice of solicitors of good repute, accept instructions or continue to accept instructions from Ms Neradovsky because the conflict would be "so obvious that no amount of care or warning [would] allow a solicitor in the position in which Mr Burnett found himself to be to exercise the full duty of care which he owed to both clients and there would be a real danger of loss or damage to either client or both if he failed to act".
I do not repeat all that is in the joint report. It is, of course, available as an exhibit. Nevertheless, one further extract is appropriate. Each of the experts agreed that in relation to the Ashmore transactions, Ms Neradovsky should have been advised in clear terms to obtain independent financial advice and, on an analysis of the answers given, such financial advice should have been obtained prior to an explanation being given of the Challenger Loan documents. Each expert opined that Ms Percival was not, on the assumptions given to them, capable of giving truly independent financial advice and any independent financial advice should have been sought prior to the execution of the documents. Further, the experts record:
"In the event that Ms Neradovsky refused to take any other financial advice prior to executing the documents, the solicitor could if satisfied that Ms Neradovsky had understood the advice concerning financial advice proceed to explain the Challenger Loan documents and otherwise comply with Rule 45 of the Solicitors Rules as they stood in May 2007. Confirmation in strong terms of the need to take the financial advice, and of the refusal to have obtained it, should in common practice have been sent in writing immediately the conference with Ms Neradovsky was concluded.
The experts agreed that on the factual assumptions made above, it is a departure from common practice for Ms Percival to be permitted to be present when the solicitor gives advice in relation to the Challenger Loan transaction. Accordingly, the solicitor would require Ms Percival to be absent and if she insisted on being present, the solicitor should refuse." (Page 12 of Exhibit J1)
Further questions were asked by the defendant from which I extract the following:
"On the further assumption that Mr Burnett accepted instructions to provide advice, he was obliged at the least to comply with Rule 45.6 of the Solicitors Rules. In relation to 45.6.1 Mr Burnett, knowing of the relationship between Ms Percival and Ms Neradovsky and of the proposal for Ms Neradovsky to lend part of the proceeds of the Challenger Loan to Ashmore Road in common practice should have advised Ms Neradovsky in plain terms to seek independent legal advice in relation to the Ashmore Load transactions. Mr Bartels is of the further opinion that Mr Burnett should also have enquired as to who had given Ms Neradovsky the financial advice she had been given, and if advised that it was Ms Percival, should have advised again in plain terms to seek other, independent, financial advice before proceeding with the transaction
In common practice, Mr Burnett should not, on the assumptions we are asked to make, have given any advice in relation to the Ashmore Road loan transactions.
Mr Burnett should in common practice have given advice as to the financial risks and implications of the Challenger Loan including the consequences of default. Mr Bartels is of the opinion that a risk and implication is the inherent risk involved in the Ashmore Road loan transactions and that Mr Burnett should at least have explored the consequences of the ability of Ms Neradovsky to repay the Challenger Loan in event of default of the borrower in the Ashmore Road loan transactions. Mr Rosier is of the opinion that Mr Burnett did not depart from common practice because he advised Ms Neradovsky to obtain independent legal advice in relation to the Ashmore Road loan transactions and refused to advise in respect of those transactions."
Despite an initial reticence so to do, or perhaps because of a limited understanding of the facts from the questions that were posed, Mr Bartels and Mr Rosier each agreed that, given the extensive commercial dealings between Mr Burnett and Ms Percival, it would be common practice not to advise somebody who is going also to be in commercial dealings with the other party (Transcript page 226, line 40). Even if the transaction occasioned no impact, a solicitor in common practice, and acting reputably, would advise of the full extent of the conflict (Transcript page 226, line 45).
Further, in the facts as I accept them, each expert agreed that the advice given by Mr Burnett, if it were ever given, would not be given, as a matter of common practice of solicitors of good repute, in the presence of Ms Percival (Transcript page 227, line 50 to page 228, line 15). Likewise, in those circumstances, the common practice of a solicitor of good repute, on the assumptions given, which assumptions I accept as the evidence in the proceedings, would have been to send Ms Neradovsky to a wholly independent solicitor, even in relation to the confined role of the Challenger Loan (Transcript 228, line 17 - Transcript 229, line 7).
Conclusions of Fact
As earlier stated, I accept, in most part, the evidence of Ms Neradovsky. There are some aspects of her evidence in which she is unsure of what in fact occurred. Nevertheless, in all significant respects I accept the evidence of Ms Neradovsky for the reasons already outlined.
First, I accept that Ms Neradovsky first met Mr Burnett at a meeting in Bondi Junction in which they were each identified in a manner described by Ms Neradovsky.
Secondly, I accept that Ms Neradovsky met with Mr Burnett at his office on 17 May 2007 and discussed a range of issues. I find, on the balance of probabilities, particularly in light of the computer evidence, that Mr Burnett printed off the Ashmore loan documentation sent from ICG during the course of that conference. I find that the conference occurred in the presence of Ms Percival.
That fact and the comfort drawn from it persuaded Ms Neradovsky not to attend on a solicitor whom she knew and trusted. The foregoing statement is not to suggest that Ms Neradovsky did not trust Mr Burnett. She did and that was part of the problem.
The documents to witness were provided from the documents printed by Mr Burnett at 11.37am that day.
I accept, in accordance with the opinion expressed by the experts, that Mr Burnett was in a conflict situation on the basis of his financial dealings with Ms Percival and the continuing fiduciary relationship that he had with Ms Percival and her companies. That conflict was not adequately described by Mr Burnett in his letter dated 21 May 2007 as conflict that arose because he was acting for Ms Percival on the Ashmore Road loan in that transaction.
A description of the relationship between Mr Burnett and Ms Percival, confined to the proposition that Mr Burnett acted for Ms Percival as the borrower in the transaction while Ms Neradovsky was the lender in that transaction is, on the balance of probabilities, a representation that would have the effect of minimising the relationship between Mr Burnett and Ms Percival or her companies. It may well have been deliberately intended to minimise that relationship, but it is unnecessary to make such a finding. It is certainly not full disclosure of the basis of any conflict and was misleading.
Lastly, although not a conclusion of fact as much as a conclusion going to issues otherwise to be determined, there is a vast difference between, on the one hand, a solicitor advising that the solicitor could not act for a party in a subsequent transaction because he was acting, in that transaction, for another party or the only other party, and, on the other hand, a solicitor advising of his or her long term continuing financial and fiduciary relationship with the party who is the ultimate recipient of monies to be borrowed in the transaction for which he was acting for the borrower. Whether intentional or otherwise, confining the conflict in that manner would provide a false sense of comfort that otherwise there was no conflict and the advice being received by Mr Burnett was independent. There was other conflict and the advice was not independent. Only full disclosure would have informed Ms Neradovsky sufficiently to make her realise the importance of advice, both legal and financial, that was wholly and truly independent.
Consideration
The defendants argue that the evidence of Mr Burnett should be accepted and that the damage, if any, caused to Ms Neradovsky was occasioned by her choosing to ignore the warnings from her sister in the email, of which previous mention has been made, and her being "blinded by the prospect of significant wealth", not by the actions of Mr Burnett.
The submissions on behalf of Mr Burnett seek to rely upon the letter of 21 May 2007 as "corroboration" of the advice given by Mr Burnett allegedly on 17 May 2007 that "we cannot act for you". The letter does not say that. Indeed, if that were Mr Burnett's view, this case would not arise. Mr Burnett did act for Ms Neradovsky. The letter of 21 May 2007 may corroborate that which was said to Ms Neradovsky in the meeting of 17 May 2007. If it were corroborative, the advice given by Mr Burnett was confined to a conflict arising from acting for the borrower in a subsequent transaction and an incapacity to act in that subsequent transaction.
Further, I have accepted largely Ms Neradovsky's evidence and, in particular, I accept that Mr Burnett said he had "Percival so stitched up with guarantees that the bank would not even look at [the plaintiff]". The submission, as I understand it, put on behalf of Mr Burnett that the statement makes no sense in circumstances where Ms Percival's guarantee would relate to the loans to Ashmore, not to the borrowing from Ms Neradovsky, is accurate only if one accepts that Ms Neradovsky was sufficiently financially sophisticated to understand the distinction.
In my view, based largely upon her demeanour and her willingness to agree to much that was put to her in a way that suggested she did not understand the question at all, Ms Neradovsky was wholly financially unsophisticated and relied upon her solicitor's advice that the bank "would not even look at [her]". She was entitled, at that time, to accept her solicitor's advice in circumstances where the solicitor owed Ms Neradovsky a fiduciary duty.
Lastly, I reiterate the evidence given by Mr Burnett that the letter of 21 May 2007 was written for Mr Burnett's protection; not to persuade Ms Neradovsky to take action. After all, the documents relating to the subsequent loan to Ashmore had already been executed, as had the documents instructing as to the disbursement of funds. In the case of the disbursement of funds, that document was executed in Mr Burnett's office at his suggestion.
The defendants' submission that the statement made on 17 May 2007 and reiterated in the letter of 21 May 2007 related to the Challenger Loan and not the Ashmore transaction does not withstand scrutiny. The letter of 21 May 2007 confirms that Mr Burnett acted for Ms Neradovsky in respect of the advice for the documents for loan from Challenger. The reference to conflict related to the loan to Ashmore and that conflict was one based upon the proposition that Mr Burnett acted for Ms Percival and/or her company on that transaction and therefore could not act for Ms Neradovsky in that aspect of the total arrangement.
I accept that Mr Burnett did not fax the document bearing the signature of Ms Neradovsky to either Challenger or its solicitor on 17 May 2007. However, I also accept that the disbursement authority was one of the documents received by Mr Burnett at 11.37am on that day and printed off at the same time. More probably than not, the document was then provided to Ms Neradovsky or Ms Percival. To whom it was then sent is, in terms of the issues relevant to these proceedings, immaterial.
The reliance by the defendants on the evidence of Ms Neradovsky that she had neither a mortgage in relation to Ashmore Road nor any documents relating to the loan that she was to make to Ashmore when she left the conference on 17 May 2007 is insufficient to prove the matter upon which the defendants rely. In my view, the more probable circumstance is that the documents were printed at 11.37am on that day, as revealed in the computer reports, and provided to Ms Percival. There is evidence that the documents were sent to Mr Burnett and printed by Mr Burnett. I infer that the documents, having been printed, were given to one or other of Ms Neradovsky or Ms Percival to deliver to the referred solicitor. Probably, the documents were given to Ms Percival. If, as was her testimony, Ms Neradovsky did not have the documents when she left Mr Burnett's office on 17 May 2007, then Ms Percival did. The absence of a mortgage document is neither unexpected nor surprising. No second mortgage was executed and, I infer, none was drafted.
The defendants' submission as to the terms of the retainer and its execution omit the acceptance by Mr Burnett that, were it not for the conflict, his retainer on the Challenger Loan documents would have ordinarily required him to advise on the lack of security and the risk involved in the investment in Ashmore (reference to which has been made earlier). The conflict of interest precluded Mr Burnett, on his own evidence, from providing that advice.
It may be appropriate, at this juncture, to set out some principles involving the legal relationship between Mr Burnett and Ms Neradovsky. It is unnecessary to deal with the totality of the relationship between solicitor and client. Its foundation depends upon the formation and existence of a contract. There is no inconsistency between the existence of such a contract and the existence of a fiduciary duty. As the High Court made clear in Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41, a contractual and fiduciary relationship may co-exist and are, in many circumstances, required to co-exist. In the judgment of Mason J, 156 CLR at 97, [70], his Honour said:
"That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."
Earlier in that judgment, in a passage cited by the Court of Appeal in Beach Petroleum NL v Abbott Tout Russel Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1, Mason J also said:
"The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions "for", "on behalf of", "in the interests of" signify that the fiduciary acts in a "representative" character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal." (Hospital Products Ltd v United States Surgical Corp, per Mason J, at 96-97 [68]).
In the circumstances of a solicitor and client, the existence of a retainer carries with it a fiduciary relationship and a fiduciary duty owed by the solicitor to the client. In Beach Petroleum, supra, the Court of Appeal (Spigelman CJ, Sheller, and Stein JJA) said:
"[192] It is well-established that a person may take upon herself or himself the role of a fiduciary by a less formal arrangement than contract or by self- appointment: see Lyell v Kennedy (1889) 14 App Cas 437 at 456, 459-460; Boardman v Phipps [1967] 2 AC 46 at 100, 118, 126-127; Walden Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815 at 833; Meagher, Gummow and Lehane, Equity Doctrines and Remedies, 3rd ed (1992) Butterworths, Sydney, par 505; Parkinson (ed), The Principles of Equity (1996) LBC, Sydney at 369-370. Ultimately a fiduciary responsibility is an imposed not an accepted one, one concerned with an imposed standard of behaviour; Finn, The Fiduciary Principle, in Youdan (ed), Equity Fiduciaries and Trusts (1989) Carswell, Toronto at 54. But whether the relationship derives from retainer, a less formal arrangement or self-appointment, it must be examined to see what duties are thereby imposed on the fiduciary and the scope and ambit of those duties: see Boardman v Phipps (at 127).
…
[194] The existence and scope of the duty may derive from a course of dealing. In a passage frequently cited with approval from Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384, a partnership dispute, Dixon J, as his Honour then was, said (at 408):
'…The subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which partnership exists; and this is to be ascertained, not merely from the express agreement of the parties, whether embodied in written instruments or not, but also from the course of dealing actually pursued by the firm'.
[195] Moreover a role which was limited when originally assumed may, by reason of conduct in the performance of the role, be expanded so as to extend the duty: see, eg, Australian Breeders Co-operative Society Ltd v Jones (1997) 150 ALR 488 especially at 514-517." (Beach at [192] and following).
Before the Court, there was some debate about the existence of a duty of care extending beyond the limit of the retainer under which Mr Burnett was engaged. I do not understand the plaintiff's case to depend on the existence of such a wider ambit of duty and, therefore, it is unnecessary for the Court, in this case, to determine that issue.
The plaintiff relies on the adumbration of the duty of care by the Court of Appeal (Allsop P, Macfarlan JA and Sackville AJA) in Provident Capital Ltd v Papa [2013] NSWCA 36; (2013) 84 NSWLR 231 in which Macfarlan JA (in which reasons, relevantly, Allsop P and Sackville AJA agreed) said:
"[75] It is well established that solicitors are not ordinarily required to advise upon the wisdom of transactions in relation to which they act (Polkinghorne v Holland (1934) 51 CLR 143 at 158; Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 418). Further, the correctness of the view expressed in Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 that a solicitor may have a duty of care extending beyond the ambit of the solicitor's retainer (a so-called penumbral duty) remains a matter of debate (Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; (2008) 77 NSWLR 205 at [267]-[294]; Dominic v Riz [2009] NSWCA 216; [2009] NSW Conv R 56,248 at [89]-[90]; Keddie v Stacks/Goudkamp Pty Ltd [2012] NSWCA 254; (2012) 293 ALR 764 at [86]-[104]). However proper execution of a retainer to give independent legal advice concerning a loan and mortgage transaction may, depending upon the circumstances known to the solicitor, require more than an explanation of the legal effect of the documents to be executed. As Allsop P (with whom Hodgson JA and Handley AJA agreed) said in David v David [2009] NSWCA 8; [2009] Aust Torts Rep 81,993 at [76], after referring to the existence of a "penumbral" duty being 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."
In Papa, Macfarlan JA, after referring to David v David [2009] NSWCA 8 and Dominic v Riz [2009] NSWCA 216, recited the circumstances surrounding the advice to be given by the solicitor, which circumstances were within the knowledge of the solicitor. They included that the client Mrs Papa "was a mature lady who owned a property…where she resided and from which she conducted a small business". Her assets were limited. She was proposing to borrow a substantial sum ($700,000) to assist her son with a gymnasium business and to repay an earlier debt. She had no involvement in the gymnasium business but was dependent upon the gymnasium business succeeding in order for the repayments of the loan to be made.
Further, Macfarlan JA recited the knowledge that the solicitor obtained from work previously performed for the son and ultimate borrower from the current client. His Honour, Macfarlan JA, then said:
"[80] In my view, a reasonable solicitor in [this] position…would have formed the view that Mrs Papa's home, and the business which constituted her livelihood that she conducted from it, would be significantly endangered by her entry into the transactions with Provident [the proposed mortgagee on the home]. A reasonable solicitor giving her independent legal advice in relation to the truncations would not in my view have failed to draw to Mrs Papa's attention, in strong terms, that her home and livelihood was dependent upon the viability and prospects of the gymnasium, specifically on the ability and willingness of her son to make the loan repayments out of the income from the business, and to recommend, again in strong terms, that she obtain financial advice, independent of her son, concerning the capacity of the business to service the loan. A solicitor's obligation is not simply to explain the legal effect of documents but to advise his or her client of the obvious practical implication of the client's entry into a transaction the subject of advice. The prospect of the subject transaction wreaking havoc on Mrs Papa's life was glaring, given the by no means remote prospect that the business would be unable to support the loan repayments."
The foregoing passage is apposite to the current circumstances rendered even more compelling by the absence, in the present case, of any filial relationship between lender and borrower in the subsequent transaction. Mr Burnett was aware of circumstances that made the investment in Ms Percival's business venture risky in the extreme. He was aware there was little or no security for the investment. He failed to advise Ms Neradovsky of these issues because of his perceived duty to Ms Percival.
The defendants rely upon the fact that the legal effect of the documents, related to the Challenger Loan, were explained. Of itself, that does not satisfy the duty that had been imposed upon Mr Burnett. While Mr Burnett advised Ms Neradovsky that he could not act on the subsequent loan to Ashmore, he did so in perfunctory terms. He did not advise, in the manner suggested by Macfarlan JA, namely, in strong terms, of the need to obtain wholly independent legal advice and wholly independent financial advice.
Mr Burnett did not warn Ms Neradovsky that the practical effect of the Challenger loan or "investments" as and when they arose was that her future livelihood depended fundamentally on the success of those investments and there was a need to obtain wholly independent legal and financial advice as to the whole of the transaction, which he, Mr Burnett was incapable of giving because of his conflict.
Rather, Mr Burnett confined his inability to provide independent legal advice to the subsequent loan to Ashmore. Further, Mr Burnett arranged for the "independent" legal advice in relation to the Sunshine Coast Transaction to be given and, given the state of knowledge of the solicitor to whom Ms Neradovsky was recommended, must have understood that such advice would be at best perfunctory and would deal only with the legal effect of the documents relating to the loan from Ms Neradovsky to Ms Percival's business ventures. Moreover, Mr Burnett fundamentally facilitated that approach by acquiescing in Ms Percival's persuasion of Ms Neradovsky as to the need for urgency and the inability of Ms Neradovsky to obtain independent legal advice from a person with whom she had previously dealt.
I make it clear that nothing in the foregoing relies upon a proposition that the fiduciary duty extends beyond the retainer relationship between Mr Burnett and Ms Neradovsky.
Given the foregoing findings, it is unnecessary to deal with the duties imposed upon Mr Burnett by the Solicitors Rules and whether they apply to extend the duty to advise on the Ashmore Loans in circumstances where an employee of the firm, with the permission of Mr Burnett, witnessed the documents pertaining to the Ashmore loan investment. Nor is it necessary to determine whether the Challenger Loan transactions were a separate transaction or part of one transaction. If it were necessary, I would hold that the transactions were at least "intimately connected" within the meaning of Rule 9 of the Solicitors' Rules and, given the particular circumstances of this case, one integrated transaction.
Causation
In my view, the proper course for Mr Burnett to have taken, when approached to advise Ms Neradovsky on any part of the arrangement with Ms Percival, was to refuse so to do and to advise Ms Neradovsky, in strong terms, to obtain wholly independent legal advice and wholly independent financial advice. The latter two aspects of the advice, if not provided, would probably not be a breach of any particular duty (unless there were to exist a penumbral duty as discussed in Provident Capital Ltd v Papa). Nevertheless, that is not the action that Mr Burnett took.
If Mr Burnett had so advised, the probability is that Ms Neradovsky would have obtained advice that was wholly independent on the entire transaction or series of transactions from the solicitor whom she had used in the past. If she were to have obtained that advice, given her lack of financial sophistication, it is likely she would have followed it and it is more than likely that any such wholly independent legal advice would include a warning relating to the effect of a failure of the investment on Ms Neradovsky's life and the requirement to obtain security at least over the principal sum of the loan. No second mortgage of itself would have been appropriate security. No deed of priority was provided such that the funds provided by Ms Neradovsky would take priority over the first mortgage. Such a deed of priority is not uncommon: see the evidence of the joint experts. If the first mortgagee were not prepared to provide the deed of priority, it would have indicated, even more obviously, the degree of risk being undertaken by Ms Neradovsky.
But for the advice given by Mr Burnett and the confidence Ms Neradovsky gained by its provision from a person familiar with the financial affairs of Ms Percival, Ms Neradovsky would have obtained wholly independent legal advice and, in those circumstances, would have been unlikely to invest in Ms Percival's ventures.
In my view, Mr Burnett has breached his duty and is liable for the damages caused thereby. To the extent necessary in dealing with the features identified by Allsop P in Caltex Refineries (Qld) Pty Ltd v Stavar [2009] NSWCA 258; (2009) 75 NSWLR 649 at [103], I would do so in the following manner:
1. The harm suffered was plainly foreseeable on the information known to Mr Burnett;
2. The nature of the harm plainly included the losses that have accrued;
3. The degree and nature of the control able to be exercised by the defendant to avoid harm was total;
4. In the circumstances of this case and the lack of financial sophistication of the plaintiff, the plaintiff was vulnerable to the risk unless appropriate and proper advice were given, which it was not;
5. The plaintiff wholly relied upon the defendant's advice and the deliberately perfunctory, independent advice to which she was referred;
6. Mr Burnett assumed the responsibility to which I have referred by undertaking the retainer inconsistent with his better judgment and in a manner that involved a fundamental conflict of interest between him and Ms Neradovsky and between Ms Neradovsky and Ms Percival;
7. The temporal nearness of the damage was not as immediate as it could have been were Mr Burnett to have advised on the Ashmore loan documents, but it was sufficiently proximate to involve Mr Burnett in the damage which he would have and did foresee;
8. The relationship between solicitor and client is one well-known to involve a duty of care; and
9. The activity undertaken by the defendant is one contemplated by the existence of the relationship between solicitor and client and affords a proper basis for the imposition of the duty of care.
The factors to which Allsop P refers in paragraph (j)-(q) (Caltex Refineries (QLD) Pty Ltd v Stavar at [103]) have already been the subject of determination and the answer to each is obvious from the foregoing reasons.
It is also necessary for comment to be made on the conduct of Ms Anderson on 23 May 2007 when she witnessed the signing of Ashmore documents. I have already commented that the inference drawn, more probably than not, was that Ms Anderson witnessed the documents with the express permission or authority of Mr Burnett. This was done in circumstances where Mr Burnett had, for his own protection and in order to ensure fulfilment of his fiduciary duty, advised Ms Neradovsky he (or his firm) could not act for her in relation to the Ashmore loan documents or Ashmore transaction.
Nevertheless, the firm, through its employee, Ms Anderson, facilitated the execution of the Ashmore transaction, without enquiring as to whether such independent legal advice and/or independent financial advice had been obtained. That was a breach of the duty undertaken by Mr Burnett in his retainer on the Challenger transaction in that he failed to enquire as to the implementation of the advice he had given, which advice was necessary in order to avoid the risks he had foreseen in the ultimate transaction contemplated by his client, Ms Neradovsky.
Furthermore, the reference to the referred solicitor on 26 June 2007, necessarily precluded Ms Neradovsky from obtaining wholly independent legal advice of any substance and was not sufficient to enable advice to be given as to the issues of risk which Mr Burnett had foreseen or was aware.
The foregoing finding in relation to the conduct of Ms Anderson does not depend upon an interpretation of Rule 9 of the Solicitors' Rules to extend to all employees of a legal practice that are not legal practitioners. The foregoing is confined to the firm's breach of the duty it had undertaken through Mr Burnett in advising on the Challenger Loan and advising (or requiring) that Ms Neradovsky obtain independent legal advice.
To the extent that it would be necessary to construe the terms of Rule 9 of the Solicitors' Rules, in my view, neither party accurately construed the Rules. The Rule is not confined in its operation to the conduct of a legal practitioner. Nor does it apply to all employees of a legal practice.
Ordinarily, the witnessing of a document, by itself and with no other ancillary function or duty, would not be legal work and the Rule would not apply to it. If, for example, a legal firm had a cleaner who was also a Justice of the Peace and could witness documents and did so, temporally or otherwise during the course of his or her employment, if there were no other associated legal duties that had been breached in the process, such conduct would not be covered by the terms of Rule 9. On the other hand, a conveyancing clerk undertaking "legal" work for a solicitor would be covered and the firm or solicitor would be bound in relation to such legal work.
The issue is determined by whether the work performed on behalf of or for the legal firm is "legal work". In this case, however, it is unnecessary to apply the Rule, because the duty imposed by the retainer and arising from the advice given had been breached, without regard to the provisions of the Rule.
Lastly, if the claim is founded in negligence, for the reasons already given, I consider that Mr Burnett's conduct to be the result of negligence, as defined in s 5 of the Civil Liability Act 2002, that is, it is such as to constitute a failure to take precautions against a risk of harm where the risk was foreseeable; the risk was not insignificant; and a reasonable person would have taken those precautions.
As already indicated, Mr Burnett's conduct was a necessary condition of the occurrence of the damage or harm and it is appropriate for the scope of Mr Burnett's liability, or solicitors in his situation, to extend to the harm so caused.
Further, to the extent not already made clear, Mr Burnett, being a person practising a profession, has not established that the conduct in which he engaged and the manner of conduct was widely accepted in Australia by his peers as competent professional practice. To the contrary, the plaintiff has established that Mr Burnett's conduct in accepting a retainer at all and in the manner of its performance would not be seen by his peers as competent professional practice: s 5O of the Civil Liability Act.
Apportionment
By [30] of the Amended Defence to the Amended Statement of Claim (filed 17 July 2014) the defendants allege that the claim by Ms Neradovsky is a claim for economic loss in an action for damages arising from a failure to take reasonable care. I accept that proposition and, in so doing, as earlier started, accept the applicability of the Civil Liability Act to the claim for damages. I am not certain that a claim arising from contract involving a breach of fiduciary duty attached thereto is, or always would be, a claim arising from a failure to take reasonable care. Nevertheless, I so hold in the current circumstances and will deal with the claim on that basis.
The defendants allege that Ms Percival is a concurrent wrongdoer within the meaning of s 34(2) of the Civil Liability Act.
There are a number of difficulties associated with this claim for concurrent wrongdoing. First, the terms of the engagement of Ms Percival by Ms Neradovsky are not before the Court. It is unclear and unknown what the full extent of the terms of Ms Percival's engagement were.
More importantly, there is no material before the Court that would give rise to the implication or inference that there was a relevant fiduciary duty owed by Ms Percival to Ms Neradovsky. I have no doubt and would otherwise infer that Ms Percival advised Ms Neradovsky to enter into the investment in relation to Ashmore. I have already found that Ashmore was a company controlled by Ms Percival. So much was known or understood by Ms Neradovsky.
Further, it is beyond doubt that in advising Ms Neradovsky to invest in Ashmore, Ms Percival owed Ms Neradovsky a duty of care. However, a duty of care in those circumstances does not give rise to a fiduciary duty. It is unclear how one would imply a duty on Ms Percival to advise the plaintiff to obtain different or independent financial advice from that which Ms Percival was providing. The conflict of interest, or the facts giving rise to the conflict of interest, namely, that Ms Percival was advising Ms Neradovsky to invest in a company owned by Ms Percival, were manifest and known to Ms Neradovsky.
The terms of the engagement of Ms Percival were not such as to require Ms Percival to act in the interests of Ms Neradovsky to the detriment of Ms Percival or, at least, the Court is incapable of inferring such a condition.
The failure to provide security to the investment by Ms Neradovsky in Ashmore was not, of itself, negligence or a failure to take reasonable care in the circumstances of the relationship between Ms Percival and Ms Neradovsky. Further, the ultimate failure of Ashmore and the investment in Ashmore may or may not have been the result of the negligence of Ms Percival. The circumstances of the failure of the business venture are not before the Court.
I accept that the failure of the investment in Ashmore and the liquidation of Ashmore was a major factor, if not the overwhelming factor, in the loss suffered by Ms Neradovsky. But there is nothing before the Court that would allow the Court to determine that Ms Percival was, in the circumstances of which the Court is aware, a "concurrent wrongdoer" in the sense that meets the objects of this provision as explained by the High Court in Australia in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd [2013] HCA 10; (2013) 247 CLR 613.
The purpose of the legislation which, at least in part, implements the Davis Report was to abolish joint and several liability and replace it with a scheme of proportionate liability.
However, the foregoing assumes that a plaintiff affected by conduct that is compensable will be able, assuming the liquidity of each defendant, to obtain the proper compensation for the economic loss (or damage to property) that had been sustained. On the other hand, a defendant that is held liable would not be liable beyond his or her degree of fault, unaffected by matters beyond a defendant's control.
Ultimately, a concurrent wrongdoer must be a "wrongdoer", being a person who has engaged in a civil wrong that is actionable in accordance with law. The High Court construed the provisions of s 34(2) of the Civil Liability Act to be consistent with the requirements of s 5(1)(c) of the Law Reform (Miscellaneous Provisions) Act 1946 with respect to the contribution as between joint tortfeasors. In other words, the concurrent wrongdoer must be a tortfeasor or person against whom the plaintiff would have an actionable cause. Mr Burnett and the firm have not satisfied the Court that there would be an actionable claim for damages against Ms Percival, regardless of the "relative moral culpability" for which the defendants, on the one hand, and Ms Percival, on the other hand, were responsible (see Bryson AJ in Chandra v Perpetual Trustees Victoria Ltd [2007] NSWSC 694 at [110]).
Approached differently, the apportionment between the "concurrent wrongdoers" apportions the damages arising from a claim against each of them, if such a claim were to have been taken. The defendants, in their claim for apportionment, concentrate on the definition in s 34(2) of the Civil Liability Act but give no meaning to the term "wrongdoer" which, necessarily, imports the notion that the person has engaged in conduct for which the person would be liable in law.
I reiterate that the foregoing assumes and accepts that a breach of fiduciary duty of the kind here alleged is a failure to exercise reasonable care. Indeed, while the terms are nowadays the subject of much elision, a claim for a breach of fiduciary duty is a claim for an award of equitable compensation and not "an action for damages".
Nevertheless, by operation of the definition of "damages" in s 3 of the Civil Liability Act, damages includes any form of monetary compensation which, ordinarily, would include equitable compensation. The difficulty in applying that broader meaning to the terms of s 34(1) of the Civil Liability Act is that what is required is "an action", which may be a technical term and, if so, would not ordinarily or historically include a suit in equity but would refer to proceedings in common law and not suits in equity: see Willison v Warburton (1873) 4 ALR 66; but see Pennell v Smith (1855) 43 ER 834, which held that "action" included a suit in equity. I decide that a claim for equitable compensation, being a civil proceeding commenced for the recovery of an individual right or redress, is an "action" for the purpose of s 34 of the Civil Liability Act.
Nevertheless, I do not consider that the defendants have established that Ms Percival is, in the relevant sense, a "wrongdoer" and would be liable to the plaintiff in damages as alleged. Therefore, I reject the claim for apportionment.
Contributory Negligence
I accept, unreservedly, that a claim in contract is a claim governed by the provisions of the Civil Liability Act in that it is a claim for damages (as defined in the Civil Liability Act) and, often, will be a claim resulting from negligence (as defined by s 5 of the Civil Liability Act as a failure to exercise reasonable care and skill). Nevertheless, there is much debate as to whether a claim arising from a breach of fiduciary duty is a claim for a loss or compensation as a result of a failure to exercise reasonable care and skill.
For the purpose of these reasons, I have accepted the applicability of the Civil Liability Act, and have done so for the purposes of the foregoing claims as to lack of reasonable care and apportionment. I continue to accept the applicability of the Civil Liability Act for the purpose of dealing with contributory negligence. Nevertheless, I reiterate that I am not deciding that a breach of fiduciary duty is necessarily or always a failure to exercise reasonable care and skill. Certainly, in some cases, it would not be included in such a definition. A trustee may act with reasonable care and skill, but still breach the fiduciary duty owed to the beneficiary of the trust.
In the circumstances of this case, I am prepared to accept that the breach of fiduciary duty alleged against Mr Burnett is one which is a failure to exercise reasonable care and skill, thereby rendering applicable the provisions of the Civil Liability Act.
By operation of s 5R of the Civil Liability Act, the principles applicable in determining whether a person should have a claim for damage reduced, wholly or partly, are determined by applying to the plaintiff the same principles as one would apply to a defendant in determining negligence. Thus, by operation of s 5R of the Civil Liability Act, the requirements of ss 5B, 5C and 5D apply in determining whether contributory negligence should lead to the reduction of the damages payable.
Obviously, a person owes a duty to himself or herself to take care for his or her own safety.
It seems to me that the risk of injury was foreseeable, even if it were not foreseen. Further, the risk was not insignificant and a reasonable person in the position of Ms Neradovsky would have taken precautions to prevent or ameliorate the risk by obtaining independent legal advice as suggested.
Nevertheless, Ms Neradovsky, being a person who, at the time, was, and to a lesser degree still is, financially unsophisticated, would not have foreseen the need to obtain independent financial advice about which she was not warned. Moreover, given the comfort that Ms Neradovsky would have obtained from the willingness of Mr Burnett to advise on the Challenger Loan and the circumstance that the only conflict about which she was advised was that Mr Burnett was acting on the Ashmore loan agreements for Ms Percival and/or Ashmore, the need to obtain wholly independent legal advice and not to act urgently would not have been foreseen by Ms Neradovsky.
Plainly, the failure to take wholly independent legal advice was a contributor to the loss suffered. I apply the principles set forth by the High Court in Podrebersek v Australian Iron & Steel Pty Ltd [1985] HCA 34; (1985) 59 ALJR 492, in which the High Court said:
"The making of an apportionment as between a plaintiff and a defendant of their respective shares in the responsibility for the damage involves a comparison both of culpability, ie of the degree of departure from the standard of care of the reasonable man and of the relative importance of the acts of the parties in causing the damage. It is the whole conduct of each negligent party in relation to the circumstances of the accident which must be subjected to comparative examination. The significance of the various elements involved in such an examination will vary from case to case; for example, the circumstances of some cases may be such that a comparison of the relative importance of the acts of the parties in causing the damage will be of little, if any, importance."
I accept, as should be obvious from the earlier comments, that an apportionment of a certain kind may, under the Civil Liability Act, result in 100% of the liability being attributed to the plaintiff: see s 5S of the Civil Liability Act.
Nevertheless, the assessment of a plaintiff's conduct involves a different exercise to that involved in the assessment of negligence. As stated by Basten JA in Council of the City of Greater Taree v Wells [2010] NSWCA 147 at [107]-[108]:
"[107] The assessment of the plaintiff's conduct involves a quite different exercise. A critical difference between the assessment of negligence and the assessment of contributory negligence is that the purpose of the latter assessment is to allow for an apportionment of responsibility for the injury by a reduction in the damages recoverable by the plaintiff "to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage": Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 9(1). That is a different exercise from the determination of whether or not the defendant has been negligent.
[108] A further important difference in approach in assessing the negligence of the defendant, as against the contributory negligence of the respondent, involves the degree of precision by which the activity, including relevant states of knowledge and understanding, is to be identified. Thus, the state of the park at the time of the accident was a matter of objective fact. Although some attention was paid in the evidence to identifying what was known by officers of the Council with respect to the use of the pathway by cyclists, the answer to that question was not critical on the issue of liability. It would have been sufficient for the plaintiff to demonstrate that the Council ought to have known that the path was used, or likely to be used, by cyclists. With respect to the plaintiff, the focus of the evidence is often quite different. Although the ultimate question is what a reasonable person in the cyclist's position would have known and done, it is inevitable that the evidence will focus upon the knowledge, understanding and actions of the plaintiff himself, shortly prior to the accident, in part to determine whether he exercised reasonable care, but also to assess what would be reasonable care in the specific circumstances. That evidence has been described and assessed by Beazley JA at [7]-[11] and [20] above."
In this case, Mr Burnett, being in a position of a professional with specialised knowledge, would be far more aware of the dangers associated with the unavailability of security or a deed of priority and also of the risk of investment and the likely effect on the life of Ms Neradovsky than Ms Neradovsky would have been. The degree of "culpability" must be measured accordingly.
Further, the particular attributes of Ms Neradovsky are entitled to be taken into account: Joslyn v Berryman (2003) 214 CLR 552 per McHugh J at [33], in which his Honour said:
[33] This statement suggests that the physical and mental deficits of each plaintiff must be taken into account in determining whether that person was guilty of contributory negligence. Support for such a proposition can be found in the judgment of Jordan CJ in Cotton v Commissioner for Road Transport and Tramways (52) where his Honour said:
It is conceived that contributory negligence in the sense in which it is now being considered occurs only when a person fails to take all such reasonable care as he is in fact capable of. I am not aware of any case in which a person has been held to be guilty of contributory negligence through the application of some arbitrary general standard, notwithstanding that he had been as careful as he could.
[34] In McHale v Watson (53), Kitto J held, correctly in my opinion, that this statement of Jordan CJ does not represent the law. Kitto J said (54) that `[i]n so far as his Honour's observations suggest a subjective standard for contributory negligence they ought not, I think, to be accepted'. The statement of Jordan CJ, like that of Stable J in Daly, is inconsistent with the established rule that '[i]n theory, a plaintiff is required to conform to the same standard of care as a defendant, with due allowance for the fact that here the enquiry is directed to what is reasonable for his own safety rather than the safety of others' (55). No one would now suggest that the standard of care expected of a defendant is that which the defendant 'is in fact capable of'. To introduce such a standard into the law of contributory negligence would not only contradict the objective test of contributory negligence, it would impose on tribunals of fact the almost insuperable task of determining what standard of care the plaintiff was 'in fact capable of'."
However, relevantly, it would seem to me that lack of financial sophistication is not caught within the rubric of "a person in the position" of the plaintiff and an objective standard must be applied.
There is no doubt, in the absence of the advice from Mr Burnett, that Ms Neradovsky would not have known of the need to obtain independent advice on the Ashmore loan documents. The question then arises as to whether, given the advice of Mr Burnett to obtain independent legal advice, a reasonable person in the position of Ms Neradovsky would have obtained that legal advice. This is a difficult question, which must weigh, on the one hand, the express terms of the advice against, on the other hand, the comfort Ms Neradovsky obtained by the fact that Mr Burnett was giving her advice as to the loan from Challenger in circumstances where he knew, better than she did, the financial circumstances of Ms Percival and the arrangements into which Ms Neradovsky was to enter. As earlier stated, Ms Neradovsky obtained significant comfort from that fact. In my view, a reasonable person in the position of Ms Neradovsky would have obtained such comfort.
Further, Mr Burnett did not advise, as he should have, that Ms Neradovsky should obtain wholly independent financial advice as to the totality of the arrangement. Nor did he advise or warn as to the effect of the loan, in the absence of security, on any subsequent investment for which purpose the loan had been taken. Nor, in the words of Macfarlan JA in Papa, did Mr Burnett warn of the dire effects on Ms Neradovsky's life, in circumstances where any subsequent investment would fail and in the absence of a priority security over any such investment property.
Nevertheless, taking reasonable care for her own safety, Ms Neradovsky should have taken independent advice from the solicitor with whom she was familiar and from whom she had obtained advice on an earlier occasion. A reasonable person in the position of Ms Neradovsky would have done so.
In all of the circumstances, I consider that Ms Neradovsky is contributorily negligent and the damages awarded against the defendants will reduce accordingly. Taking into account all of the issues adumbrated in the passage in Podrebersek above, and the facts of this case, I assess contributory negligence at 15 per cent. An interesting aspect is that much, if not all, of the contribution or contributory negligence apportioned to Ms Neradovsky is as a result of her reliance on Ms Percival and, if Ms Percival were a "wrongdoer", may well have been covered in any proportion to be borne by Ms Percival. It is unnecessary to determine this issue further.
Otherwise, I accept the schedule of loss and damage submitted by the plaintiff. There is a need to re-calculate interest.
For the reasons outlined, the Court makes the following orders:
1. Judgment for the plaintiff against the first and second defendants;
2. The damages claimed will be reduced by 15 per cent on account of contributory negligence;
3. The first and second defendants shall pay the plaintiff's costs of and incidental to the proceedings, as agreed or assessed;
4. Any party may apply, in writing, for a different or special order as to costs. Such application shall be made within 14 days of the date hereof and be accompanied by a submission in relation thereto (including any documents upon which the application relies other than documents already in evidence) and may be the subject of response within a further 14 days from the receipt thereof. Any such submission or submission in reply (excluding the accompanying evidence) shall be no more than 3 pages in length. In the absence of an application otherwise, the costs will be decided on the papers;
5. The plaintiff shall serve a minute of the order in relation to damages, including interest and including interest on costs, in the usual form, and file same after agreement by the defendants or after 14 days from the date of service of the draft minute, whichever occurs first. In the circumstance that there is disagreement as to terms of the order reflecting these reasons for judgment, the matter will be re-listed for hearing.
[2]
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Decision last updated: 02 October 2015