PAPADOPOULOS & ANOR. V. HRISTOFORIDIS [2001] NSWCA 368

COUNSEL : Mr. J. Berwick for appellants Mr. J. Stevenson for respondent SOLICITORS : Chrichton-Browne Crossley, East Sydney for appellants Phillips Fox, Sydney for respondent CATCHWORDS : EQUITY - Fiduciary obligations - Breach of fiduciary duty - Onus of proof. ND. DECISION : Appeal dismissed with costs

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

CA 40827/99 SC 20951/95 SPIGELMAN CJ SHELLER JA HODGSON JA

Friday 12th October 2001 PAPADOPOULOS & ANOR. V. HRISTOFORIDIS

Judgment 1 SPIGELMAN CJ: I invite Hodgson JA to deliver the first judgment. 2 HODGSON JA: On 8 November 1999 Wood CJ at CL gave a verdict for the respondent, John Hristoforidis, in respect of a claim brought against him by the appellants, Sofia Papadopoulos and Dimitrios Tsesmetzis, for alleged negligent misstatements and breaches of fiduciary duty in relation to the development of a property at Wollongong. The appellants have appealed to this Court against that decision. 3 I begin by outlining the circumstances. For convenience, where it is necessary to do, so I will refer to the names of parties by their forenames. 4 On 23 March 1989 the appellants, Sofia and Dimitrios, who are brother and sister, contracted to purchase adjoining properties, 72 to 77 Corrimal Street, Wollongong, for $335,000. On 7 June 1989 a development approval was obtained for construction of ten home units on that site. On 21 July 1989 the purchase was completed. Sofia contributed $155,000 of the price, and the balance of $185,000 was provided by Mercantile Credits Limited on security of a mortgage. 5 It appears that the appellants had difficulties securing finance for the development, and in about September 1989 they approached the respondent, John, to join with them in the project. There were a number of meetings at which the project was discussed. 6 On 14 November 1989 the parties signed a letter of agreement on the letterhead of BCE Constructions Pty Limited, which I will call BCE, a building company owned and controlled by the respondent. The body of the letter contained the following: Below is a list of conditions and guidelines on which the construction of the above project shall be based. · B.C.E. Constructions Pty. Ltd. shall construct the project, as builders, at the rate of $50-00 per hour (minimum 40 hour week) plus 7½ % of cost of construction (of course not including land cost or interest on loan) paid weekly. · All units must be sold as soon as possible and loan repaid as a priority. · Any monies spent shall be accounted for, that is, all books, invoices and other paperwork shall be available at any time to the Partnership. · In the event of my death my wife shall take centre of all my affairs. In the event of Sophie's death Tony shall take control of her affairs. In the event of Jim's death his wife shall take control of his affairs. 7 The person "Jim" referred to in that document is Dimitrios. 8 On 28 November 1989 some valuers, Burgess & Jaye, provided a valuation for an impending mortgage to be given to Mercantile Credits Limited under instructions from J. Christo, that is the respondent. In the valuation, construction costs were estimated at $1.401 million, and there was an estimate of a further $45,000 for non construction costs. The total sales value of the units to be constructed was projected as $2 million. 9 An application for building approval was lodged on 30 November 1989 with Wollongong City Council, and building approval was granted on 13 February 1990. 10 On 23 April 1990 a shelf company, Emery Park Pty Limited, which I will call Emery Park, was acquired and the appellants and the respondent became shareholders and directors of it. On 18 May 1990 Emery Park entered into a contract to purchase the properties from the appellants for $340,000, and on 25 May 1990 Emery Park entered into an agreement with BCE whereby BCE agreed to construct the units for $1.45 million. 11 During the months of May to July 1990 there were various transactions and agreements, whereby capital contributed by each party was determined. Insofar as further payments were required, such payments were made to Emery Park. 12 On 31 July 1990 the sale of the properties from the appellants to Emery Park was completed, and on 1 August 1990 Emery Park executed a mortgage of the properties in favour of Mercantile Credits Limited securing an advance of $1.63 million. $180,000 of that was to pay out the existing mortgage, leaving $1.45 million available for the building work. 13 By about July 1991 construction of the units was completed. The cost of the construction, as calculated by an accountant called by the respondent, was given as about $1.58 million. Sales of the units achieved a gross return of just over $2 million. 14 It appears that by October 1991 Emery Park was insolvent. The respondent filed a summons in the Equity Division of this Court for an order that Emery Park be wound up. Receivers and managers were appointed on 30 October 1991, and a winding up order was made on 26 October 1992. 15 The outcome was that there was no return to the partners on account of their capital contributions, and the appellants lost the land and the moneys that they had contributed to the project. However, the respondent, through BCE, received about $233,347 in respect of building works that BCE carried out, including about $110,000 calculated at 7.5 per cent of the building costs, in accordance with the letter of agreement signed on 14 November 1989. 16 The appellants' claim, as formulated in the statement of claim in these proceedings, had the following elements. The appellants alleged that the respondent represented to the appellants prior to entry into the venture, among other things, that he could build the ten units for $1.24 million; that he could sell them for $2.4 million; and that he guaranteed that each party would make a profit of $150,000. The appellants alleged that the respondent thereby induced the appellants to enter into the venture. The appellants alleged that the respondent had a fiduciary duty to the appellants, and that he breached that duty in the following respects: (ii) Failing to disclose to the joint venture partners that building costs would exceed $1,240,000.00.

(iii) Failing to disclose to the joint venture partners that total sales value of home units would be less than $2,400,000.00.

(iv) Failing to deliver to the plaintiffs the accounting records of the joint venture and/or Emery Park Pty Limited when requested.

(v) Failing to disclose to the plaintiffs that the joint venture and/or Emery Park was in financial difficulty.

(vi) Making statutory demand on Emery Park Pty Limited causing the company to be placed into receivership.

(vii) Causing Emery Park Pty Limited to be placed into liquidation.

(viii) Acting otherwise than for the benefit of the joint venture.

(ix) Failing to disclose the Burgess & Jaye valuations dated 28 November 1989. 17 The appellants alleged that by those breaches the appellants were caused loss. The appellants also alleged that the respondent breached a duty of care owed to the appellants by making the representations previously referred to, and that this also caused loss to the appellants. 18 The statement of claim included a claim under the Fair Trading Act, but it appears that this was not pressed because it was brought outside the time limits in that Act. 19 The Statement of Claim sought damages or compensation in respect of the breaches alleged in the statement of claim, and also sought an account by the respondent of the dealings of the venture. 20 The respondent, in his defence, denied the representations and breaches of fiduciary duty which the appellants alleged. 21 The primary judge, in his judgment, said that he preferred the evidence of the respondent to that of the appellants, and that he was not satisfied that the alleged representations were made, or that the alleged breaches occurred. He went on to say this: On the contrary, I accept his evidence that he discussed it with the first plaintiff, and that she said that the sale estimates were too low. Its inclusion within the Coopers & Lybrand material when inspected in 1992, is inconsistent with any attempt by the defendant to conceal it. Moreover, in view of the later valuations obtained for subsequent draw downs, any such suppression would have been likely to have proved fatal. 22 The grounds of appeal specified by the appellants originally included eight matters. At the hearing, Mr Berwick, for the appellants, indicated that only the first three of the those matters would be pressed. Those grounds are as follows: 1. The primary judge was wrong, in respect of the appellants' case for breach and fiduciary duty, when having correctly held that the relationship between the parties was fiduciary in character to hold that in such relationship the appellants' bear the onus of proof that the respondent failed to act in good faith in the supply of information to them concerning the estimation of construction costs and sales value and/or in withholding the November valuation and/or so acting generally in relation to the venture as to encourage them to go ahead with it for the collateral purposes of enriching himself. The primary judge should have held that in all circumstances the respondent bore the onus of proof.

2. The primary judge was wrong not to draw an adverse inference in terms of Jones v Dunkel with respect to the evidence which the respondent might have called specifically in relation to the September 1989 meeting.

3. The primary judge was wrong in his analysis and interpretation of admissions made by the respondent to an offer of the ANZ Bank in exhibit 291 dated 28 August 1991 in that properly construed such admission contradicts the case made by the respondent and provides an irrefutable admission in favour of the appellants. 23 The original Notice of Appeal sought that this Court give a verdict for damages in specified amounts in favour of the appellants. The amended notice of appeal handed up today sought rather that there be a new trial. 24 Mr Berwick's submissions to this Court have focused on the proposition that the respondent had a fiduciary duty towards the appellants and that, contrary to the approach of the primary judge, this meant that the respondent had an onus of proof in relation to alleged breaches of that fiduciary duty. 25 Mr Berwick's submission was that this was particularly important in circumstances where the primary Judge said that none of the three principal witnesses in the case, that is the three parties to the case, impressed him. Mr Berwick submitted that, in circumstances where a comment of that nature was made in relation to the credit of a fiduciary, this meant that the fiduciary did have some explaining to do and bore some onus to give an account of what had happened; and he submitted that even though the paragraph which I quoted previously in this judgment might appear to suggest that, in relation to the crucial matter of the disclosure of the November 1989 valuation the primary judge made a positive finding that the valuation had been disclosed, the judgment, read as a whole, showed that the primary judge had approached his task on the basis that the appellants carried the onus. 26 Mr Berwick submitted that, on the crucial matter of the disclosure of the November 1989 valuation, the primary judge should have found in the appellants' favour, with the result that the appellants made out their case that they proceeded with this unfortunate venture in ignorance of something that the respondent knew; namely, that it was very likely that the appellants would receive nothing from him. 27 Mr Berwick also submitted that the primary judge's preference for the respondent's evidence and his failure to find in favour of the appellants was vitiated by a number of particular matters. 28 Firstly, there was his failure to give appropriate weight to the circumstance that the respondent did not call his wife, who was also his business partner, to give evidence about crucial matters. Secondly, the point was made, in the written submissions, that the primary judge sought to explain the unlikely circumstance of the appellants going ahead with the venture, even if the valuation was not withheld from them, on the basis of evidence of the respondent to the effect that Sofia "took a bullish view of the likely sales' values". Mr Berwick complained that that approach should not have been taken where it had not been put to the appellants that their judgment was clouded by over-enthusiasm. 29 Finally, it was submitted that, although the primary Judge had listed evidentiary failings concerning the appellants, he had failed appropriately to analyse evidentiary failings of the respondent. The written submissions made particular reference to a bank manager's diary referring to a meeting with the respondent on 28 August 1991, where the respondent is reported as giving the expected profit of the venture at around $200,000, and it was submitted that the respondent's evidence on this point was evasive and unreliable. 30 In my opinion the principal submissions of the appellants, depending as they do on an alleged misplacement of the onus of proof, depend upon a failure to distinguish two types of cases that may be brought against fiduciaries. 31 A case may be brought against a fiduciary alleging that the fiduciary has obtained an advantage from a beneficiary and, if this is proved, the law is that the beneficiary cannot retain that advantage unless the fiduciary proves it was obtained with the informed consent of the beneficiary. Mr Berwick has referred us to passages from the textbook Fiduciary Obligations by Finn in support of that proposition. In those cases, there is an onus of proof falling on a fiduciary to prove not merely consent by a beneficiary but informed consent. 32 Another type of claim that can be made against a fiduciary is that a beneficiary can claim damages from a fiduciary for loss caused by a breach of fiduciary duty. In that kind of case, in my opinion, the law is that the onus of proof lies on the beneficiary to prove the breach of fiduciary duty and to prove that this has caused loss. 33 From my account of the statement of claim, it is plain that this case fell within the second category, and for that reason, in my opinion, the primary judge was plainly right to hold that the onus of proof lay on the appellants. 34 Turning to the other more particular matters raised in this appeal, I would note first that there are very limited grounds on which an appeal court can interfere with the factual findings of a primary judge. It is necessary to approach the particular submissions of the appellants by considering whether they indicate the kind of error that might justify such interference. 35 In my opinion, the primary judge made no error in the way he dealt with the absence from the witness box of the respondent's wife. It was a matter which he took into account, and I can see no error in the way in which he did so. 36 In relation to the complaint about the primary judge's comment about Sofia taking a bullish view of the likely sales' values, the circumstance that the appellants took quite optimistic views as to sales' values was a matter considered in the evidence. The question whether or not the particular valuation was disclosed was squarely in issue and squarely fought. In those circumstances, I can see no substance in any suggestion that there was any breach of the principle of Browne v Dunn in this respect. 37 The final particular matter concerning the bank manager's diary is, in my view, just one factor that may be considered to have had some relevance, but it falls far short of suggesting any inadequacy in the primary judge's approach to the question of credibility, any inadequacy in his reasons, or any error in his final decision. 38 For those reasons, my opinion is that this appeal should be dismissed with costs. 39 SPIGELMAN CJ: I agree. 40 SHELLER JA: I also agree. 41 SPIGELMAN CJ: The order of the Court is that the appeal is dismissed with costs.

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