Sewell v Zelden [2010] NSWSC 1180 | Case summary

Sewell v Zelden [2010] NSWSC 1180 | Case summary | Zoe

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Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279 Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 147 Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 Boscauer v Bajwa [1996] 1 WLR 328 Briginshaw v Briginshaw (1938) 60 CLR 336 Chan v Zacharia (1984) 154 CLR 178 Clark Boyce v Mouat [1994] 1 AC 428 Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 Consul Development Pty Limited v DPC Estates Pty Limited (1974) 132 CLR 373 Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68 Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89 Farrington v Rowe McBride & Partners [1985] 1 NZLR 83 Fitzpatrick v Waterstreet [2000] ANZ ConvR 15 Foskett v McKeown [2001] 1 AC 102 Hamilton v Whitehead (1988) 166 CLR 121 Heperu v Belle (2009) 258 ALR 727 Hospital Products Ltd v United States Surgical Corporation (1983) 156 CLR 41 In re Head, Head v Head (No. 2) [1894] 2 Ch 23 John Alexander's Clubs Pty Limited v White City Tennis Club Limited; Walker Corporation Pty Limited v White City Tennis Club Limited [2010] HCA 19 CASES CITED : Jones v Dunkel (1959) 101 CLR 298 Kation Pty Ltd v Lamru Pty Ltd; Lewis v Nortex Pty Ltd (in liq) (2009) 257 ALR 336 Kennedy v Wallace (2004) 142 FCR 185 King Network Group Pty Ltd v Club of the Clubs Pty Ltd (2008) 69 ACSR 172 Magafas v Carantinos [2007] NSWSC 416 Magafas v Carantinos [2007] NSWSC 917 Maguire v Makaronis (1997) 188 CLR 449 Manly Council v Byrne [2004] NSWCA 123 Nocton v Lord Ashburton [1914] AC 932 O'Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 Payne v Parker [1976] 1 NSWLR 191 Phipps v Boardman [1967] 2 AC 46 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 Rejfek v McElroy (1965) 112 CLR 517 Robins Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691 Tozer Kemsley & Millbourn (Australasia) Pty Ltd v Collier's Interstate Transport Service Ltd (1956) 94 CLR 384 Tyrell v The Bank of London (1862) 10 HLC 26 Warman International Limited v Dwyer (1995) 182 CLR 544

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JUDGMENT REIN J: Background 1 In March 2005, Mr Sewell, the plaintiff, entered into a conveyancing transaction by which he purchased for $315,000 an apartment in Eastwood, Sydney ("the Eastwood property") from Henamast Pty Limited ("Henamast"), the second defendant. Mr Zelden, the first defendant, is a solicitor admitted to practice in New South Wales and acted for Mr Sewell on the transaction. Henamast is a company the shares in which were at all times owned by Mrs Zelden, the third defendant, who is the solicitor's wife. 2 Mr Sewell alleges that Mr Zelden breached the fiduciary duties owed to him by Mr Zelden, for reasons which I shall detail below. Mr Sewell claims that Mrs Zelden and Henamast were involved in the "dishonest and fraudulent design" of Mr Zelden and that all three defendants are liable to disgorge to him all of the profits and benefits which they received by virtue of their acts and omissions. Mr G Drew of counsel appeared for the plaintiff. Mr S Kerr SC appeared with Mr D Hughes of counsel for Mr Zelden. Mr D Baran of counsel appeared for Mrs Zelden and Henamast. 3 The plaintiff relies on the matters asserted in paragraph 49 of the Second Further Amended Statement of Claim, namely that Mr Zelden: "(a) Induced or influenced the plaintiff to purchase the Eastwood Property. (b) Assured the plaintiff that $315,000 was a good price for the Eastwood Property when in fact, to the first defendant's knowledge, that was a price that exceeded the market value of the Eastwood Property PARTICULARS The particulars at paragraph 35(c) are repeated. The first defendant had actual knowledge that the second defendant had purchased the Eastwood Property less than 12 months previously (ie on or about 29 March 2004) for $255,000 because he acted as the second defendant's solicitor in relation to that transaction. (c) Failed to advise the plaintiff about the implications (including possible disadvantages) if he purchased the Eastwood Property. (d) Failed to advise and facilitate the provision of independent advice to the plaintiff in relation to his decision to purchase of the Eastwood Property. (e) Induced or influenced the plaintiff not to obtain funding pursuant to the ANZ loan approval. (f) Induced or influenced the plaintiff to obtain funds from PTV to purchase the Surry Hills Property and the Eastwood Property. (g) Induced or influenced the plaintiff to enter into the Surry Hills Loan and to grant the corresponding Surry Hills mortgage. (h) Induced or influenced the plaintiff to enter into the Eastwood Loan and to grant the corresponding Eastwood Mortgage. (i) Failed to advise the plaintiff about the implications (including possible disadvantages) if he obtained funding from PTV instead of pursuant to the ANZ loan approval. (j) Failed to advise and facilitate the provision of independent advice to the plaintiff in relation to his funding for the purchase of the Surry Hills Property or the Eastwood Property. (k) Failed to avoid the real or substantial possibility of conflicts between his duties to the plaintiff and his personal interest in: (i) the second defendant - (ii) East Point Real Estate - (iii) the sale by the second defendant of the Eastwood Property. (l) Failed to disclose to the plaintiff that he was in an immediate family relationship with the third defendant and that she was the sole director, secretary and shareholder of the second defendant (m) Failed to disclose to the plaintiff that he was a director of East Point Real Estate. (n) Failed to disclose to the plaintiff that he had an immediate family relationship with Ruvin Zelden and Malvina Zelden and that they were directors and shareholders of East Point Real Estate. (o) Failed to obtain the informed consent of the plaintiff to the first defendant acting for him when the first defendant had a real or substantial possibility of conflict between his duty to the plaintiff and his personal interest in: (i) the second defendant (ii) East Point Real Estate. (iii) the sale by the second defendant of the Eastwood Property. (p) Failed to protect the interests of the plaintiff in connection with: (i) the plaintiff's purchase from the second defendant of the Eastwood property; and (ii) the funding of the plaintiff's purchase of the Surry Hills Property and the Eastwood Property including the grant of the Surry Hills Mortgage and the Eastwood Mortgage. (q) Failed to subordinate his personal interests to the interests of the plaintiff in connection with the plaintiff's purchase from the second defendant of the Eastwood Property." 4 The plaintiff's case was, on the pleadings, based upon a multiplicity of causes of action. At the hearing, all but breach of fiduciary duty and knowing receipt and assistance were abandoned. However, the plaintiff, although no longer pressing a claim in contract against Mr Zelden, maintained that there has been a breach of the solicitor's retainer and that this was relevant in considering the breach of fiduciary duty. 5 Another major change in the case which occurred during the hearing related to the relief sought. At the outset, the plaintiff sought equitable compensation and an account of profits; subsequently, through his counsel, he seemed to accept that he could not obtain both, and on the last day of the hearing, he indicated through his counsel an election for an account of profits (see T264.19-23), using the term "account of profits" broadly. 6 There was an acceptance by Mr Zelden that he owed fiduciary duties to Mr Sewell - this was an appropriate concession: see Maguire v Makaronis (1997) 188 CLR 449 at 463, citing Hospital Products Ltd v United States Surgical Corporation (1983) 156 CLR 41 and Clark Boyce v Mouat [1994] 1 AC 428 at 437. The fiduciary obligations required him to act in utmost good faith for the benefit of Mr Sewell, to avoid conflicts between his duties to Mr Sewell and his personal interests or the interests of a third party, not to use improperly his position to gain an advantage for himself or for any other person or to cause detriment to Mr Sewell, and not to apply Mr Sewell's property for the benefit of anyone other than Mr Sewell: see Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at 46 ([196]) and 47 ([201]) per Spigelman CJ, Sheller and Stein JJA. 7 The plaintiff also relied on the Law Society of New South Wales Professional Conduct and Practice Rules ("the Rules"), including rule 10.1, which states: "10.1 A practitioner must not, in any dealings with a client - 10.1.1 allow the interests of the practitioner or an associate of the practitioner to conflict with those of the client" In the Rules, a reference to an associate of a practitioner is defined to include a reference to a member of the practitioner's immediate family (which expression includes the spouse of a practitioner).

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8 Mr Zelden accepted in cross-examination that he had failed to tell Mr Sewell at least the following things: (1) that he had acted for Henamast on the purchase of the Eastwood property in 2004; (2) that Henamast had purchased the property on a mortgagee sale for $255,000; (3) that Mr Zelden had been significantly involved in giving instructions to LJ Hooker Eastwood real estate agency, both in respect of the rental of the property and its proposed resale; and (4) that the proceeds arising out of the sale to Mr Sewell were to be used to pay off a mortgage given to the National Australia Bank by Mr and Mrs Zelden and Henamast over the Rose Bay home of Mr and Mrs Zelden, that the Rose Bay home was owned by Mr and Mrs Zelden as joint tenants, on the one hand, as tenants in common with Henamast, on the other hand, and that Mr and Mrs Zelden had given guarantees of Henamast's obligations. 9 I should note that the Selling Agency Agreement with LJ Hooker Eastwood signed by Mr Zelden on behalf of Henamast on 1 October 2004 shows that the price at which the property was to be offered was $335,000 and that the agent's opinion as to the current estimated selling price, as expressed on the document, was $300,000. 10 Mr Zelden strenuously resisted the characterisation of his conduct as part of a dishonest and fraudulent design. There were three elements to that defence: (1) that the claim had not been pleaded adequately; (2) that the cross-examination had not put to Mr Zelden matters that ought to have been put; and (3) that the material relied upon by the plaintiff did not, in any event, support such a contention. 11 Mrs Zelden and Henamast joined in the attack on the plaintiff's case that there had been a fraudulent and dishonest design, and in addition, they attacked what they described as the insufficiency of evidence to support the claim of knowledge asserted against them. I should note that there was nothing said against the proposition that Mrs Zelden's knowledge, such as it was, could be imputed to Henamast. In my view, there can be no doubt about that: see Hamilton v Whitehead (1988) 166 CLR 121 at 127; Kation Pty Ltd v Lamru Pty Ltd; Lewis v Nortex Pty Ltd (in liq) (2009) 257 ALR 336 at 366, [2009] NSWCA 145 at [117] per Basten JA; and Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68. 12 There was a significant dispute on the issue of the quantum of liability of all three defendants should liability, contrary to their respective contentions, be established. 13 Before dealing with the matters to which I have adverted, it is necessary to recount so much of the factual matters as are not in dispute, outline the areas of dispute and express my views on the credibility of Mr Sewell and Mr Zelden. Mrs Zelden did not give evidence either on her own behalf or on behalf of Henamast or her husband. Mr Baran did not put any questions to Mr Zelden: see T148.21-23. There was expert evidence relied upon, but as a result of concessions made during the hearing, neither expert was called. The concessions were that as at the date the Eastwood property was purchased by Mr Sewell in March 2005, it had a market value of $280,000 and that as at the date of the hearing, it had a market value of $365,000. The facts not in dispute 14 Mr Sewell is a landscape gardener with his own business. He was previously in partnership with another person, Mr Scully, operating through a company, T&S Australia Wide Pty Ltd. As at 2004, he had never owned real estate, and in late 2004, he commenced looking for a property to purchase as his residence. He found a unit he liked at Surry Hills ("the Surry Hills property"), but when he made an offer for it, he discovered that another offer had already been made and accepted by the vendor. He attempted to invite the vendor to sell the unit to him by increasing the amount offered, but to no avail. Subsequently, the successful purchaser was unable to proceed, and Mr Sewell secured the unit at the price at which the vendor had agreed to sell it to the earlier purchaser. I mention this detail because it was one of the matters relied upon by the defendants in asserting that Mr Sewell was not unsophisticated. 15 In connection with the prospective purchase of the Surry Hills property, Mr Sewell had sought a recommendation from Mr Scully for a solicitor who could act for him on the purchase of the unit: see T48.34-38. Mr Zelden's name was given to him, and he met with Mr Zelden at Mr Zelden's office in Bondi Junction. 16 Mr Sewell, in connection with his proposed purchase of the Surry Hills property, had obtained an offer of finance from the ANZ Bank for up to $430,000 on a principal and interest basis. On his second visit to Mr Zelden, Mr Sewell asked him if he thought that ANZ's interest rate was a "bad deal". Mr Zelden's evidence (at paragraph 23 of his affidavit sworn 3 September 2009) of what he said in reply is: "On a date I can no longer recall, but to the best of my recollection, on a date in early February 2005, I was approached by Sewell and had a conversation with Sewell in words to the following effect: PS: Do you think I am doing the right thing? BZ: What do you mean? PS: I am afraid I am getting a bad deal with the bank. Can you advise anything? BZ: I'm sorry but I can't give you any financial advice. You should see someone about this. PS: I'm not asking for financial advice. What do you do in these circumstances? BZ: Look, I can't give you financial advice. All I can do is tell you what my family and I do and then it is up to you. My family and I buy properties on an interest only basis. That way we can buy more and with the rent coming in, the out of pocket repayments on the two properties would be roughly the same as if you hold one property on principal and interest. PS: That sounds like a great idea. I should buy a second property. Do you know any good ones out there? BZ: My wife's company has a property in Eastwood she is selling. She wants $315,000 for it. It is a 2 bedroom property in May Street currently rented at $250.00 per week. At the moment the property is listed with LJ Hooker Eastwood for $330,000. But it is up to you. I can not and will not push you one way or the other. PS: That sounds great. Let's see it." 17 There is no dispute that what Mr Zelden said in the conference led Mr Sewell to consider and accept the idea that instead of simply purchasing the Surry Hills property with a loan on a principal interest repayment basis, as he had intended to do, he should buy two units and borrow most of the purchase price for both units on an interest only repayment basis. 18 There is some uncertainty on the evidence about the timing of the next salient matter. On Mr Zelden's evidence, it was in the same conversation as the one set out in [16] above, but on Mr Sewell's evidence, there was a gap between the statement as to what Mr Zelden's and his family's approach to real estate was and the mention of the Eastwood property. There is no dispute that Mr Zelden informed Mr Sewell that he knew of a property for sale and that it could be purchased by Mr Sewell for $315,000.

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21 Mr Sewell entered into a contract of retainer with Mr Zelden for the conveyance of both the Surry Hills property and the Eastwood property, and both transactions proceeded to completion. 22 Mr Zelden did not, on the face of the matter, purport to act for Henamast on the conveyance of the Eastwood property to Mr Sewell. It is agreed that Ms Abrahams, a solicitor, acted for Henamast on that conveyance. Mr Zelden, however, drafted the special conditions of sale for Henamast, even after speaking to Mr Sewell (see T161.21-162.30), and he discussed the requisitions he had sought on behalf of Mr Sewell with his wife: see T150.50-151.9. He continued to act for Henamast in relation to its dealings with LJ Hooker: see Exhibit B1 at page 201 and Exhibit B4 at pages 198-200. 23 The contract for sale of the Eastwood property contains a reference to East Point Real Estate Pty Ltd ("East Point Real Estate") as the vendor's agent. East Point Real Estate is a company of which Mr Zelden and his parents are directors. In his affidavit, Mr Zelden states that he is a licensed real estate agent (as well as being a solicitor). In cross-examination, Mr Zelden agreed that East Point Real Estate was not the vendor's agent on the sale to Mr Sewell. I will describe later Mr Zelden's explanation for having included this statement, which he admits was a false statement: see T153.17-25. Matters in dispute 24 Mr Zelden, in his evidence both in his affidavit and in cross-examination, asserts that he informed Mr Sewell that the vendor of the Eastwood property was a company owned by his wife and that he had acted for the company. He deposes to having taken Mr Sewell to visit the property and to have: (1) encouraged Mr Sewell to obtain a strata report; and (2) encouraged Mr Sewell to engage another solicitor. 25 Mr Sewell, in his affidavit and in his oral evidence: (1) denies that Mr Zelden ever told him that Mrs Zelden owned Henamast (or the vendor company); (2) denies that he accompanied Mr Zelden to see the property, although he says that initially Mr Zelden indicated that he could take him to see it; (3) admits that Mr Zelden raised the question of a conflict of interest, but not in the manner that Mr Zelden asserts but rather as one arising out of the fact that Mr Zelden was acting for both vendor and purchaser. Mr Sewell says that he told Mr Zelden he had no objection to Mr Zelden doing so. On Mr Sewell's evidence, Mr Zelden did not encourage him to obtain separate legal advice; and (4) says that Mr Zelden told him that he did not need to obtain a strata report. 26 I set out the account given by Mr Sewell (in his affidavit sworn 7 April 2009 and using the headings contained in his affidavit) of his conversations with Mr Zelden after the initial meeting at which Mr Sewell explained that he was proposing to buy the Surry Hills property and wanted Mr Zelden to act as his solicitor on the conveyance: "24. The next day I telephoned Mr Zelden and had a conversation to the effect of: Me: I want to proceed with buying the property. Zelden: I'll get everything in order. You can then come in and see me to sign the contract." (The reference to "the property" was to the Surry Hills property)

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" Second meeting with Mr Zelden 25 In or about early February 2005 I had a second meeting with Mr Zelden. At this meeting I signed the Contract for the Sale of Land in relation to the Surry Hills Property. 26 During this meeting Mr Zelden did most of the talking and he said to me words to the effect of: "Have you thought about investing in another property? With the amount of money you have, you can afford to buy another property." "You wouldn't need to put any money into in because the rent will cover most of the costs and the mortgage repayments. If there is any shortfall you'd be able to claim it back on tax at the end of the year." "There's tax advantages." "As long as you've got the deposit, you borrow the rest and let the tenant pay it off." "Buying another property would be in your interests." 27 I recall saying to him during this meeting words to the effect of: "I don't think I earn enough money to buy two properties." 28 He drew a diagram of pyramids or blocks showing how the number of properties increased and said words to the effect of: "It's worthwhile to do it. Once you've got the initial mortgage the tenant is paying it off for you." "I've got eighteen properties. I borrow against them to buy the next one." "Properties will increase in value. In a few years time you'll be able to borrow against this one and invest in another property." "Let's get this one in order first" (referring to the Surry Hills Property). 29 I recall saying to Mr Zelden words to the effect of: "I'll leave it all up to you." 30 While Mr Zelden was talking he appeared to me to be very laid back and relaxed and spoke to me like a friend. … Third meeting with Mr Zelden 41 I had a third meeting with Mr Zelden in his offices on or about 3 February 2005 at which I recall signing Mr Zelden's costs agreement a copy of which is annexed and marked " B ". I recall signing the agreement in his office and paying him cash for the strata report. 42 During this meeting I had a conversation with Mr Zelden to the following effect: Zelden: I look after properties to sell for other people. I've got one at the moment that's available and is going for a good price. I can take you over to show it to you if you want. (After a short pause) There's no point showing you, because you're not going to live in it. It's rented out already and will always have tenants, so you don't have to worry about that. Are you keen? Me: Yes, I want to buy another property. Mr Zelden did not mention the address of the property he was referring to. Zelden: Leave it to me and I'll sort it out. I'll be able to get you a better loan for both properties. I know someone who can help you; his name is James at Trustar Mortgages. Me: Should I cancel the ANZ loan? Zelden: No hold off until we sort the others out. You'll be borrowing about $500,000". You can afford it. The rent will pay most of the mortgage and you'll get money back from your tax return on the investment property. Me: The ANZ bloke is ringing me. What should I do? Zelden: Just put him off until we sort out the other ones. … 57 Sometime during February 2005, Mr Zelden telephoned me and we had a conversation about the investment property I was going to buy to the following effect: Zelden: I rang the owner and offered him $315,000.00 and told him to take or leave it. The owner rang me back and agreed to it. Me: What do you think? Zelden: It's a really good buy. 58 During this conversation he told me the owner's name, which I do not now recall but to me sounded like a Japanese or Chinese name. In or about late 2006 I saw the name "Elena Semiatitski" for the first time. Neither that name nor "Henamast" sound anything like the name that Mr Zelden told me. … 64 When I went into the meeting, Mr Zelden said to me words to the effect of: "This is the property that you're buying. It's located in Eastwood." While he was saying this, I observed Mr Zelden to be manipulating his computer in a way that led me to believe that he was attempting to show me the property on the Internet. However, he was apparently unable to do so and shortly thereafter abandoned those efforts. He said words to the effect of: "Well, I'll take you over and show you sometime." 65 During this meeting Mr Zelden and I had a conversation to the following effect: Zelden: I'm representing the vendor as solicitor. You could go to another solicitor but there's no point because I can act for you if you want me to. If you go to another solicitor it would just mean that I miss out on the fees. Me: I'm happy for you to do it.

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27 I set out Mr Zelden's versions of these conversations in his affidavit: "23 On a date I can no longer recall, but to the best of my recollection, on a date in early February 2005, I was approached by Sewell and had a conversation with Sewell in words to the following effect: PS: Do you think I am doing the right thing? BZ: What do you mean? PS: I am afraid I am getting a bad deal with the bank. Can you advise anything? BZ: I'm sorry but I can't give you any financial advice. You should see someone about this. PS: I'm not asking for financial advice. What do you do in these circumstances? BZ: Look, I can't give you financial advice. All I can do is tell you what my family and I do and then it is up to you. My family and I buy properties on an interest only basis. That way we can buy more and with the rent coming in, the out of pocket repayments on the two properties would be roughly the same as if you hold one property on principal and interest. PS: That sounds like a great idea. I should buy a second property. Do you know any good ones out there? BZ: My wife's company has a property in Eastwood she is selling. She wants $315,000 for it. It is a 2 bedroom property in May Street currently rented at $250.00 per week. At the moment the property is listed with LJ Hooker Eastwood for $330,000. But it is up to you. I can not and will not push you one way or the other. PS: That sounds great. Let's see it. … 26. Whilst in attendance at the Eastwood property, Sewell and myself had a conversation in words to the following effect: PS: Let's go ahead with it. BZ: Are you sure. I don't want to tell you one way or the other. You asked me to show you and I did. Are you happy with the price? PS: Yes I am, but do you think I can get an extra loan to buy this? BZ: I don't know. You should speak to your bank. PS: Do you know anyone who can help me with the loan? I don't think ANZ is giving me a good deal. BZ: I know someone from Trustar Mortgage-James Wang. He might be able to help you. PS: Can we go and see him together? BZ: Yes no problem. I can't give you financial advice but if there is anything legal? … 28. On a date I can no longer recall, but I believe it to be on or around 24 February 2005, I attended the offices of Trustar Mortgage with Sewell. I do not recall the specifics of the conversation between James Wang (hereafter referred to as "Wang"), Sewell and myself, although I do recall Wang explaining to Sewell the difference between a principal and interest loan on both properties and then an interest only loan on both properties. I recall Wang was using his calculator to calculate exactly what the repayments would be on both properties on an interest only option. After hearing the financial advice from Wang, Sewell spoke to Wang in words to the following effect: PS: I want to proceed with the interest only option. I am happy with the repayments. … 31. After meeting with Wang, I had a further conversation with Sewell in words to the following effect: BZ: Are you sure you want to do this? You do know that it is my wife's company property? PS: Yes definitely, but by the way, are you making any money out of James Wang for this? BZ: Not at all. If you do not want to use him, it is up to you. Maybe you should shop around before you agree with James. I only gave you his name. The rest is up to you. By the way, there are two more things I should say before you go ahead and if you are not happy, please do not go ahead. First, apart from being a solicitor, I am also a licensed real estate agent. I am licensee in charge of East Point Real Estate, although the company hasn't been trading and I am not at all involved per se in the company. But just in case, I would like to disclose this to you. In fact, to be really open with you, I would like to put the Real Estate on the front page of the Contract. The agency has nothing to do with the sale and is getting no commission or anything but this would be the best way for me to be candid to you and disclose my interest in the agency. PS: That's no problem. What else do you want to tell me? BZ: As this is my wife's company, I am currently acting for my wife in the sale. So as to avoid conflict, I need you to find another solicitor to act for you on the purchase of the Eastwood property as I can not act for you both. PS: No way, I am happy with you and want you to act for me. There is no conflict of interest. BZ: Yes there could be. I really need you to get another solicitor. PS: Is there anything wrong with the property? BZ: I don't know and that is why you should get another solicitor. He can get a strata report and check for you. It is much better that you do this. PS: I do not want a strata report and I do not want to use another solicitor. I want you to act and that's it. BZ: But I have acted for my wife's company to date. PS: That doesn't matter. I want you to act for me. BZ: OK. But what I will have to do is stop acting for my wife's company. I will hand over the file to another solicitor and she will act for my wife. PS: That's great. Let's proceed that way." Conversation after settlement Mr Zelden maintained that the conversation he had with Mr Sewell after settlement was in words to the following effect (see paragraph 68 of Mr Zelden's affidavit): "PS: I have just been told you own the property I just bought. BZ: No. Who told you that? PS: The agent. BZ: That's not true. They know I am only helping my wife's company." 28 It will be observed that there are, in addition to the major points identified in [25] above, other divergences. For example, Mr Sewell describes the detail into which Mr Zelden descended in respect of how he and his family approached purchasing real estate in response to Mr Sewell's expressed concern about being able to afford a loan sufficient to buy both the Surry Hills property for $332,000 and another property for $315,000, a total of $647,000. Mr Sewell also says that Mr Zelden did not mention the location of the second property at first, but Mr Zelden says that he did. Mr Sewell's credit 29 Mr Kerr and Mr Baran launched a vociferous attack on Mr Sewell's credibility. I will deal with the points that were made, but I should record that having heard and observed Mr Sewell in the witness box, neither his demeanour nor his evidence left me with the impression that he was not doing his best to recount truthfully what had occurred in his dealings with Mr Zelden. Some of what he admitted suggests that he is a naïve and somewhat gullible person, and I think he became confused about some aspects of what occurred, particularly the timing of events. I found his evidence that he had never sought to inspect the property that he was buying (that is, the Eastwood property) as surprising, but on his evidence, his solicitor, in whom he clearly placed considerable trust, had told him that: (1) the property was known to the solicitor (in fact a true statement); (2) it was a good property; (3) the price was a good price; and (d) the property was tenanted (which was true) and it is consistent with the naivety to which I have referred. Further, Mr Sewell says that even after the purchase, he has never visited the property, and his failure to do so is not of any assistance to his case.

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30 The first defendant's attack on Mr Sewell's credibility has these components (see paragraphs 16-19 of Mr Kerr's submissions dated 7 July 2010): (1) Mr Sewell said that he had made a note of the details of the forthcoming meeting with Mr Wang once it had been arranged (see paragraph 46 of the plaintiff's affidavit sworn 7 April 2009), but in cross-examination, "he claimed to have made no notes of the conversation": see T61.41-42. (2) The plaintiff "has given numerous versions of the manner in which he claims to have discovered that the Solicitor's wife previously owned the property": see T63.23, T64.7-64.50, T66.25-40, T67.41, T68.30 and T68.47. (3) The plaintiff "gives conflicting evidence" as to whether Mr Zelden explained the contract of sale for the Eastwood property to him: see T79.2, T79.9, T79.24 and paragraph 72 of his affidavit sworn 7 April 2009. (4) Mr Kerr submitted that "On many occasions, it was clear in cross-examination that the Plaintiff was giving a reconstructed account of what occurred, and was not giving evidence based on his genuine recollections." (5) The plaintiff's solicitors had communicated to the defendant's solicitors an intention to subpoena as witnesses Mr Wang, Mr Lee and "Rena" from L J Hooker's offices, and Ms Abrahams, but called none of these witnesses. Mr Kerr submitted that it was "open to the Plaintiff to call those witnesses. By virtue of the failure to call them, an inference should be drawn that their evidence would not have assisted the Plaintiff." 31 The second and third defendants attack on the plaintiff's credit had these elements (see paragraphs 107-115 of Mr Baran's submissions dated 7 July 2010), continuing the numbering from [30]: (6) The plaintiff's evidence that he never inspected the Eastwood property "must be rejected as being completely nonsensical." (7) The plaintiff "made the forensic decision not to call Mr Lee from LJ Hooker or [Rena] from LJ Hooker to corroborate the fact that he had not been to the property and the appropriate inference needs to be drawn." (8) "The plaintiff elected, despite giving notice not to call Mr. Wang, to make good the contention that the plaintiff would not have been shown or had disclosed to him details about the Megaw & Hogg valuations or the fact that the valuation for Perpetual Trustees had come in at under the proposed purchase price of $315,000.00. Again, the appropriate inference needs to be drawn that the evidence of Mr. Wang would not necessarily have assisted the plaintiff's case." (9) The Court "should find that the plaintiff was well aware of a number of matters: (a) The security valuation of $280,000.00; (b) That a valuation had been obtained wherein the sum of $315,000.00 was well within the comparable sale range and was an appropriate price; (c) The $315,000.00 was on a market value basis not a mortgagee value basis a reasonable price for the property in the circumstances; (d) That even if Mr Zelden had ceased to act or referred the plaintiff off to an independent solicitor he still would have proceeded with the transaction." (10) The Court "should not ignore the fact that the only reason why the plaintiff has brought these proceedings on any rational view is because of an increase in interest rates. Were it not for that, even though the plaintiff had knowledge of a connection between the first defendant and the vendor, he would have no complaint to make." (11) "Another telling feature of this case is that the plaintiff had every opportunity in the past to dispose of the property and recover what he paid for it, if not more. He has made and continues to assert an indifference as to whether or not he is going to sell the property and the probabilities favour that he is going to hold onto the property." (12) "There is a credit issue that arises in terms of the fact that the plaintiff, contra to his assertions in his affidavit, did not raise any of the issues regarding the alleged conflict of interest with Mr. Zelden with either the finance company in the initial stages or when he first instructed solicitors." (13) "He also took out mortgage insurance which the court would not accept was something he knew nothing about having regard to the significant amount of money involved to pay the premium."

[29]

(5) and (7) Other witnesses 39 This seems to amount to a Jones v Dunkel (1959) 101 CLR 298 point. The rule well known to lawyers was restated most helpfully in Manly Council v Byrne [2004] NSWCA 123 at [51] by Campbell J (as his Honour then was), with whom Beazley JA and Pearlman AJA agreed: "Thus, if a witness is not called two different types of result might follow. The first is that the tribunal of fact might infer that the evidence of the absent witness, if called, would not have assisted the party who failed to call that witness. The second is that the tribunal of fact might draw with greater confidence any inference unfavourable to the party who failed to call the witness, if that witness seems to be in a position to cast light on whether that inference should properly be drawn." At [53], his Honour quoted with approval the words of Glass JA in Payne v Parker [1976] 1 NSWLR 191: "(6) Whether the principle can or should be applied depends upon whether the conditions for its operation exist. These conditions are three in number: (a) the missing witness would be expected to be called by one party rather than the other, (b) his evidence would elucidate a particular matter, (c) his absence is unexplained. (7) The first condition is also described as existing where it would be natural for one party to produce the witness: Wigmore, par 286, or the witness would be expected to be available to one party rather than the other: O'Donnell v Reichard [1975] VR 916, at p 921, or where the circumstances excuse one party from calling the witness, but require the other party to call him: ibid [1975] VR 916, at p 920, or where he might be regarded as in the camp of one party, so as to make it unrealistic for the other party to call him: ibid [1975] VR 916, at p 920, Regina v Burdett (1820) 4 Barn & Ald 95; 106 ER 873, or where the witness' knowledge may be regarded as the knowledge of one party rather than the other: Earle v Castlemaine District Community Hospital [1974] VR 722, at p 733, or where his absence should be regarded as adverse to the case of one party rather than the other: ibid [1974] VR 722, at p 734. It has been observed that the higher the missing witness stands in the confidence of one party, the more reason there will be for thinking that his knowledge is available to that party rather than to his adversary: ibid [1974] VR 722, at p 728. If the witness is equally available to both parties, for example, a police officer, the condition, generally speaking, stands unsatisfied. There is, however, some judicial opinion that this is not necessarily so: ibid [1974] VR 722, at p 728. Evidence capable of satisfying this condition has been held to exist in relation to a party's foreman: Cafe v Australian Portland Cement Pty Ltd (1965) 83 WN (Pt 1) (NSW) 280; his safety officer: Earle v Castlemaine District Community Hospital [1974] VR 722; his accountant: Steele v Mirror Newspapers Ltd [1974] 2 NSWLR 348; his treating doctor: O'Donnell v Reichard [1975] BR 916, at p 921." 40 The defendants' contention (the second and third defendants make the same point) seems to conflate the ability to issue a subpoena with an important, but different, element of Jones v Dunkel that the witness is someone who, it would be expected, would be called by the party against whom the rule is sought to be relied on. Mr Wang, Ms Abrahams, Mr Lee and Rena were not persons whom Mr Sewell would be expected to call. 41 There are further problems with the defendants' argument, however: (1) It is the first defendant's case that Mr Zelden took Mr Sewell to see the Eastwood property, not that Mr Sewell himself made arrangements to see the property. Mr Lee could not assist Mr Sewell in proving that he did not see the property with Mr Zelden. Mr Lee could assist Mr Zelden if Mr Zelden had rung Mr Lee to make arrangements with the tenant to inspect the property, but Mr Zelden did not say that he had done so. (2) Mr Sewell did not need to call Mr Lee to prove that Mr Lee had told him that Mr Zelden owned the property, since there is no dispute that Mr Sewell rang Mr Zelden and said that "the agent" had told him that Mr Zelden owned the property. All that is disputed is Mr Zelden's reply. (3) It does not matter whether it was Mr Lee or Rena who told Mr Sewell that Mr Zelden owned the property. Mr Sewell told Mr Zelden that "the agent" had told him. (4) Mr Sewell did not need to call Mr Wang because Mr Sewell does not assert that anything was said by Mr Zelden at the meeting with Mr Wang which was relevant to Henamast's ownership of the property. (5) Mr Sewell does not dispute that Ms Abrahams acted for Henamast on the transaction. All he says is that he did not know that she was the solicitor acting for the vendor: see paragraph 66 of Mr Sewell's affidavit. It is possible that Ms Abrahams could provide information about who was giving her instructions, but it is not at all obvious why Mr Sewell would call her in his case. 42 I do not think that any inference can be drawn against Mr Sewell by reason of his failure to call any of these witnesses.

[31]

(8) and (9) That the plaintiff did not know that the lender had a valuation of the property at $280,000 (the Megaw & Hogg valuation) 44 The irony about this submission is that Mr Zelden did not assert that he knew that the lender had such a valuation and he denied that the figure of $280,000 had been present on the loan application when he signed the document as Mr Sewell's solicitor. No evidence other than the loan application was led by the defendants to support the contention that the plaintiff knew of the valuation. I think that the likelihood is that if, contrary to Mr Zelden's evidence, the valuation amount was on the loan application, it was not drawn to Mr Sewell's attention. (10) and (11) Non-disposal of the property 45 Mr Sewell was taxed with his failure to sell the Eastwood property. His evidence was to the effect that, at times, he found it difficult to meet the mortgage repayments because the rent he received fell short of the repayments, but later when the interest rates went down, he found it easier to meet the mortgage repayments. He also mentioned that he has been wanting to see what happened in this case. He explained that he has been in two minds about whether or not to keep the property. There is no dispute that he came under sustained pressure from the lender at an earlier time, but it appears that he has managed that crisis. Mr Sewell does not have a large income, and it is surprising that he has been able to manage to service the two loans. I do not accept the defendant's submission that Mr Sewell's failure to sell the unit establishes that Mr Sewell is "opportunistic" or that he can be criticised because he has not been sure what to do. (12) The plaintiff's failure to mention his complaint about Mr Zelden to the lender 46 Mr Baran cross-examined Mr Sewell on the basis of the lender's note of a conversation recorded by the lender's agent: see T127.35-128.24 and Exhibit 2D5. According to the note, Mr Sewell asserted that he had been "ripped off" to the extent of $60,000 "in his [business]", and he later refers to his "previous [solicitors]" having "obtained a loan worth [an] extra [$50,000]". In my view, contrary to Mr Baran's contention, the note, although not entirely accurate, establishes that Mr Sewell did complain to the lender. It is true that his solicitors, in responding to a formal demand on Mr Zelden from the lender, did not refer to any breach of duty by Mr Zelden, but strictly it was of no concern to the lender. For the solicitors to record the allegations made by the plaintiff against Mr Zelden would entail a need to be confident that the occasion for the communication of such assertions was privileged. ( 13) Mortgage insurance 47 The plaintiff was required to pay approximately $4,500 mortgage insurance, and it was put to him that he must have appreciated why he was required to pay this insurance, particularly since he was not required to pay mortgage insurance in respect of the Surry Hills property. Mr Sewell says that he did not appreciate why the lender required mortgage insurance for the Eastwood property. The defendants' submission is predicated on an assumption that the reason that the lender required mortgage insurance was because its valuation of the property was only $280,000 and the plaintiff had agreed to pay $315,000. That premise is not established, but even if it were, the reason behind the requirement is not said to have been made known to Mr Sewell. Quite significantly, Mr Zelden does not say that he made the reason for the mortgage insurance known to Mr Sewell, who after all was his client. If Mr Sewell should have appreciated that that was the reason behind the requirement (which I accept he did not), then a fortiori Mr Zelden should have appreciated it and so advised Mr Sewell.

[32]

Mr Sewell's claim that he is not a sophisticated man 48 There is a further issue which was the subject of submissions by the defendants. The defendants pointed out that Mr Sewell: (a) was a director of a company (his landscape business), which he ran with a partner; (b) owned shares in the Woolwich Bank in England; (c) had lodged partnership returns and accounts, albeit in consultation with an accountant: see T137; and (d) understood the difference between borrowing and a purchase, what an interest rate was, and what a "value" was: see T138.18-28; 49 Mr Sewell's evidence was that he came to own shares when the Woolwich Bank demutualised, that he was the "worker" in the landscape business as opposed to Mr Scully, that it was Mr Scully who "did most of the reading and stuff", and that he trusted his partner in relation to contracts entered into: see T138.4-13. 50 In his oral submissions, Mr Baran extended the attack on Mr Sewell (see T243.29-244.3), including a submission that Mr Sewell was "the author of his own financial misfortune. To come along now and milk a lot of money out of a solicitor and then accuse the wife and the family company of wrongdoing". This submission and the submission that he was "opportunistic" were, in my view, inappropriate ones to have made. The issue of Mr Sewell not having sold the Eastwood property, which I dealt with earlier, is linked to some themes which emerged in cross-examination to the effect that Mr Sewell's financial problems in maintaining the units derived from profligate expenditure, even gambling, and the suggestion in submissions that he would have proceeded with the purchase of the Eastwood property even if Mr Zelden had (contrary to Mr Sewell's evidence) told him that his wife's company owned the unit. Mr Sewell denied that he was a gambler. He explained that he had drawn a significant amount of cash to fund his social life, but it was certainly not established that he was a gambler or that his financial problems did not arise in part due to the burden of paying interest on two units when the rent did not cover the payments relating to the Eastwood property. Indeed, Mr Baran put it to him that this was a problem: see T126.27-30. In any event, a breach by Mr Zelden of his fiduciary duty is not answered by establishing any of these matters. 51 Mr Baran's submission (in an endeavour to bolster his oral contention that Mr Sewell was sophisticated) that Mr Sewell had obtained a significant bargain on the Surry Hills unit was not borne out by the evidence, which I have summarised at [14] above. 52 There was another point made by the defendants, which is that Mr Sewell acknowledged that he had made the decision himself to proceed with the purchase of the Eastwood property. That acknowledgment in no way detracts from his case, which is that it was Mr Zelden's conduct which led him to make that decision. 53 At T210.36-38, Mr Kerr said that he was not trying to suggest that the plaintiff "was a sophisticated investor". There is a margin of territory between "sophisticated investor" and "not unsophisticated person", but in my view, Mr Sewell was not demonstrated to be particularly sophisticated in business generally, and given that the undisputed evidence is that the Surry Hills property was the first property he had ever bought (and the Eastwood property the second), I do not think that there is sufficient material to lead to the conclusion that he had any proper grasp of property investment. Indeed, the evidence points to Mr Sewell's ignorance of matters such as negative gearing and the role of a mortgage broker (Mr Sewell recorded Mr Wang as "morgage [sic] bloke": see Exhibit B1 at page 96). Further, I think it is clear that he was completely trusting of what his solicitor told him. It is his evidence that he told Mr Zelden that he had no objection to Mr Zelden acting for both himself and the vendor, which was quite neutral to his case, because as it happened, Mr Zelden did not (at least to Mr Sewell's knowledge) continue to act for Henamast, and I think that that evidence, which I accept, is indicative of naïve trust and acceptance. More importantly, there is no dispute that Mr Sewell accepted the idea of buying a second unit, which idea was advanced by no one other than Mr Zelden. 54 There is no dispute that Mr Sewell accepted Mr Zelden's advice that he should obtain a strata report in respect of the Surry Hills property. Mr Sewell's evidence was that Mr Zelden told him that he did not need to obtain a strata report in respect of the Eastwood property because Mr Zelden knew the property. Mr Zelden's evidence was that he said, "that is why you should get another solicitor. He can get a strata report and check for you" and Mr Sewell said, "I do not want a strata report and I do not want to use another solicitor. I want you to act and that's it": see paragraph 31 of Mr Zelden's affidavit. Whichever answer from Mr Zelden is accepted as the truth, the fact that Mr Sewell did not seek a strata report is another indication of his trust in Mr Zelden.

[33]

Mr Zelden's credit 55 It was submitted that Mr Zelden was a very quietly spoken man who made candid admissions against interest in the witness box and that he should be accepted as an honest witness. Mr Zelden admitted at T165.5-9 that he had not told Mr Sewell that Henamast had bought the property for $255,000 and his statement that "If I would have had my time again definitely I wouldn't have done it this way" was in that context. Mr Zelden also admitted that he had made a "very, very serious error of judgment" (see T152.4 and see also T152.19-27), but this related to his failure to make a note of his conversations with Mr Sewell. There was no acceptance of the more serious factual allegations made by Mr Sewell, and I do not accept that Mr Zelden's admissions amounted to him "[falling] on his sword" (see T213.12), as Mr Kerr put it. I do not accept that Mr Zelden is an honest witness and I do not accept his evidence, for reasons to which I shall refer, but I should say that my conclusion is not based on his demeanour. 56 Mr Zelden has no diary notes of any conferences or conversations with Mr Sewell. There is no letter from him to Mr Sewell setting out any advice given to him pertaining to the issue of Mr Zelden's conflict of interest or in respect of any advice given and not followed. Mr Kerr contended at T71.44-72.5 that it is not unusual for solicitors not to record everything in writing. That contention ignores the importance of the matters in question here. The degree to which notes are made by solicitors (and barristers, for that matter) is obviously not uniform, but I think that when important advice is given orally by a legal practitioner, a failure to follow up that oral advice with a letter, or at least to note the advice by means of a file note, particularly where the subject matter of the advice is relevant to the existence of a conflict of interest or where the client has indicated that he or she does not wish to follow the express advice given, is extraordinary and sufficiently remarkable as to induce doubt whether the advice was given at all. In any event, Mr Zelden said that his practice was to record important matters and to confirm them in writing: T149.27-35. The absence of any advice to the effect asserted to have been given orally (that the vendor was a company owned by Mr Zelden's wife) in a letter to the client that he wrote on 9 March 2005 only reinforces that doubt.

[34]

57 I have come to the view that Mr Sewell's evidence that Mr Zelden did not tell him that the vendor of the Eastwood property was a company controlled by his wife is to be preferred over that of Mr Zelden for the following reasons: (1) Overall, I accept that Mr Sewell was a truthful witness; (2) The undisputed core of the evidence, even without more, involves: (a) Mr Zelden failing to provide Mr Sewell with all of the relevant information concerning the Eastwood property; (b) Mr Zelden responding to a question about interest rates at the ANZ Bank by asserting that he was not able to give financial advice, but then saying something which was very much in the nature of advice and which was treated by Mr Sewell as such, its central strand being that it would be a good idea for Mr Sewell to buy two units, not one, and to borrow sufficient funds for that purpose on an interest only basis; (c) Mr Zelden recommending that Mr Sewell seek a loan not from the ANZ Bank, but from or through someone he knew, without even enquiring what the rate offered by the ANZ Bank was: see Mr Zelden's version of the conversation set out at paragraph 26 of his affidavit and T154.34-41; and (d) Mr Zelden arranging a meeting with Mr Wang and accompanying Mr Sewell to that meeting; (3) Mr Zelden has no notes of his meetings with Mr Sewell, yet he says that it was his usual practice to "keep a record of discussions with the clients that concern important matters within the scope of [his] retainer" (see T149.27-31), and where he has given advice or information to a client concerning important matters, to confirm that in writing to the client: see T149.33-35; (4) Mr Zelden has no note of any visit to the Eastwood property with Mr Sewell, there is no record of him having done so with Mr Sewell, and he has no recollection of how he went with Mr Sewell to the property. No evidence was called on behalf of Mr Zelden of any arrangements made with the tenants to facilitate such an inspection; (5) As I have noted, Mr Sewell does not dispute that Mr Zelden raised the issue of conflict arising from Mr Zelden acting for both Mr Sewell and the vendor. On the issue of the strata report, it is not disputed that Mr Sewell accepted that he should obtain one for the Surry Hills property. Once again, the absence of any note by Mr Zelden to the effect that he had advised his client to obtain a strata report for the Eastwood property but the client did not want one supports the conclusion that no such advice was given; (6) The transcript, at T156-158, shows Mr Zelden initially evading the question of why he had told Mr Sewell about what he and his family did in relation to property and then asserting that his answer was given on a "friend to friend basis" when, as Mr Zelden conceded, Mr Sewell was not a friend: see T157.21-22. Mr Zelden then said that "maybe it was because I felt sorry for him". In response to my question as to why he "felt sorry" for Mr Sewell, he said that this was because Mr Sewell asked him, "Am I getting a good deal?" (from the ANZ Bank). I accept Mr Drew's submission that there was no plausible connection between the query by Mr Sewell and Mr Zelden's response, and I did not find Mr Zelden's evidence at all credible, particularly given the fact that the sale of the unit was of interest to Mr Zelden, his wife and his wife's company. What Mr Zelden said to Mr Sewell was clearly a form of financial advice, notwithstanding the purported disclaimer (on Mr Zelden's version), and although Mr Zelden denied this, its purpose was, I am persuaded, to encourage Mr Sewell to act upon it, which Mr Sewell did; (7) Mr Zelden's explanation for having inserted into the contract a reference to East Point Real Estate as the vendor's agent (that it was "a form of disclosure to Mr Sewell that I was a director of East Point Real Estate at that time": see T152.47-153.13) was not credible; (8) Everything points to a keen desire on Mr Zelden's part to sell the Eastwood property, which had been listed for sale with LJ Hooker in October 2004 and not sold by March 2005: (a) Mr Zelden raised the idea of a second unit in response to a query about interest rates; (b) Mr Zelden suggested an alternative source of finance; (c) Mr Zelden offerered to arrange a meeting with Mr Wang and accompanied Mr Sewell there; (d) Mr Zelden failed to mention the fact that he had acted on the purchase by Henamast and that knew what it had been purchased for; (e) Mr Zelden failed to mention the advantage to him and his wife of the sale to Mr Sewell; (f) Mr Zelden, even on his own case, offered no warning to Mr Sewell about the financial implications; (g) the fact that on 3 March 2005, Mr Zelden (together with Mrs Zelden) had agreed to guarantee the liabilities of Henamast under the Henamast account up to $288,000: see Exhibit B4 at pages 73-91; and (h) the unusually small deposit ($500) which Mr Zelden told Mr Sewell was required for the purchase; and (9) Mr Sewell's evidence that he called LJ Hooker some time after the settlement and after having had a conversation with Mr Lee he confronted Mr Zelden with what he said he had been told by Mr Lee was not disputed. It was not suggested that what Mr Sewell said he had been told by Mr Lee was not in fact what he had been told. There is evidence LJ Hooker saw Mr Zelden as the owner of the Eastwood property (see Exhibit B1 at page 201), even though there is a document from LJ Hooker which records Henamast as the owner, with Mr Zelden's telephone number and his office PO Box as the mailing address: see Exhibit B4 at page 22. The only dispute was as to Mr Zelden's response. The fact that Mr Sewell did ring Mr Zelden provides some support for Mr Sewell's evidence that he did not know prior to his conversation with Mr Lee that Mr Zelden or Mrs Zelden was connected with the vendor. Having regard to Mr Sewell's evidence overall, it is difficult to accept Mr Kerr's submission that if Mr Zelden had told Mr Sewell that his wife owned the property, Mr Sewell would have been interested in understanding the discrepancy between that and LJ Hooker's information that Mr Zelden owned it. 58 Mr Kerr submitted that another factor which should be taken into account in determining whether Mr Zelden did not inform Mr Sewell of Mrs Zelden's interest in Henamast is that it "wasn't a sophisticated plan, because it would have been unravelled with the most basic telephone call" (see T211.19-20) and there was no evidence that Mr Zelden discouraged Mr Sewell from making that call. The short answer to that point is that the fact that the "plan" might be uncovered easily is of the most slender weight in assessing the likelihood as to whether Mr Zelden did not tell Mr Sewell the truth about Henamast. There are some other points, however: (1) The only evidence of Mr Sewell being aware that LJ Hooker was the current managing agent for the Eastwood property is that the contract of sale annexed a copy of a rental agreement entered into on 25 September 2004 (see Exhibit B3 at page 1091). The contract, on its face, showed East Point Real Estate as the vendor's agent for sale. Assuming that Mr Sewell was aware that there was a copy of the rental agreement annexed, there is nothing to indicate that he paid attention to who the agent was, and he certainly was not encouraged to make any enquiries of the current letting agent; (2) When Mr Sewell learned after the contract was entered into that LJ Hooker was managing the property and was told that Mr Zelden owned the property, Mr Zelden denied that he owned the property (and did not even then, on Mr Sewell's evidence, reveal that his wife's company owned it). The "most basic telephone call" did not lead Mr Sewell to the truth, because of Mr Zelden's response. It was not suggested to Mr Sewell that what he said to Mr Zelden as to what he had been told by Mr Lee or Rena was untrue; and (3) The description of East Point Real Estate as the vendor's agent on the contract of sale had the convenience of not referring to LJ Hooker as a point of contact for Mr Sewell. It is true that this was not put to Mr Zelden, but he was asked why he had put this false information in the contract and he gave an explanation that made no sense at all. 59 Since I accept Mr Sewell's account of his conversations with Mr Zelden, the following facts emerge in addition to what was conceded by Mr Zelden: (1) Mr Zelden failed to advise Mr Sewell that Mrs Zelden was the holder of all shares in Henamast and its sole director and shareholder; (2) Mr Zelden positively encouraged Mr Sewell's purchase of a second property (see paragraphs 26-28 Mr Sewell's affidavit), even after Mr Sewell had expressed doubt as to his ability to afford it; (3) Mr Zelden made positive statements about the Eastwood property, such as "It's a really good buy": see paragraph 57 of Mr Sewell's affidavit; (5) There was complete absence of any proper advice from Mr Zelden about the nature of the conflict and its resolution; (6) Mr Zelden made statements to Mr Sewell about Mr Zelden's conversation with the owner of the property (see paragraph 57 of Mr Sewell's affidavit) and pretended that the person he spoke to was a male person with an Asian name; and (6) Mr Zelden advised Mr Sewell that he did not need to obtain a strata report.

[35]

Non-disclosure of interest 60 There can be no question that Mr Zelden was required to disclose his interest to Mr Sewell: see Maguire v Makaronis at 465; O'Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 at 208 per Kirby P and at 213 per Mahoney JA. In Fitzpatrick v Waterstreet [2000] ANZ ConvR 15, Mason P (with whom Beazley JA and Sheppard AJA agreed) said at 19: "it is well established that a solicitor must put the client in the position where the latter is able to make a free and informed decision about the proposed transaction. As Hope JA pointed out in Law Society of New South Wales v Moulton [1981] 2 NSWLR 736 at 739-80, the best and easiest way to achieve this result is to insist that the client have independent and informed advice. His Honour continued: "If this does not happed, a heavy burden indeed lies upon the solicitor to show that he has done everything in his power to protect the interests of the client and to ensure that the client is aware of every circumstance that is or might be relevant to his decision ."" (emphasis added) 61 Another recent application of that principle is found in Farrington v Rowe McBride & Partners [1985] 1 NZLR 83, where Richardson J said at 89: "a solicitor must not without the informed consent of his client stand to make any profit or receive any benefit from the transaction which he is retained to carry through. It is no defence that his interest is indirect - as where the transaction is between his client and a company in which he or a member of his family has a significant shareholding or where he otherwise has an indirect financial interest in the transaction. But whether present or prospective there must be a potential benefit to the solicitor of pecuniary consequence or perhaps personal advantage in or through the transaction in which his advice is engaged." 62 Mr Drew, in submissions, made the point, with which I agree, that even if Mr Zelden had made the disclosure which he says he did make about his wife's company's ownership of the Eastwood property, it was insufficient to solve the problem of conflict by Mr Zelden saying (as he claims to have said, and on the assumption that Mr Sewell had no objection), "what I will have to do is stop acting for my wife's company. I will hand over the file to another solicitor and she will act for my wife": see paragraph 31 of Mr Zelden's affidavit. Mr Drew asserted that Mr Zelden's statement to Mr Sewell, on Mr Zelden's evidence, that he answered the question "Is there anything wrong with the property?" by saying, "I don't know and that is why you should get another solicitor. He can get a strata report and check for you. It is much better that you do this" (see paragraph 31 of Mr Zelden's affidavit) is also misleading because Mr Zelden had extensive dealings with the property, having acted for Henamast on the purchase and having acted on behalf of Henamast in dealing with LJ Hooker. I think that there is some force in this as well, but it is not necessary to explore this further. Other aspects of Mr Zelden's conduct 63 There was a theme in the submissions from Mr Kerr that I should draw from the fact that Mr Zelden did not immediately introduce the idea of the Eastwood property after he had raised with Mr Sewell the suggestion of a second property and that Mr Zelden did not chase Mr Sewell, that Mr Zelden was not actively seeking to draw Mr Sewell into the purchase of the Eastwood property and was not "pushy". Apart from the fact that it was Mr Zelden's evidence that he did introduce the Eastwood property in the same conversation as he raised the idea of a second unit, a lack of overt pressure by Mr Zelden is immaterial and it was more likely linked to the "friendly" and "laidback" approach with which Mr Zelden addressed Mr Sewell, which guile worked very well for Mr Zelden, perhaps because he had, correctly, estimated Mr Sewell's lack of sophistication. 64 Another example of this is Mr Zelden's suggestion that he could show him the property, followed by him saying (see paragraph 42 of Mr Sewell's affidavit): "There's no point in showing you, because you are not going to live in it. It's rented out already and will always have tenants, so you don't have to worry about that. Are you keen?"

[37]

66 I have noted that it was submitted on behalf of Mr Zelden that the case alleging fraudulent conduct was inadequately articulated by the plaintiff. I do not accept that submission. There can be no doubt that allegations of fraud must be made "specifically and with particularity": see Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279 at 285 per Mason CJ and Gaudron J; Spies v Commonwealth Bank of Australia (1991) 24 NSWLR 691 at 700 per Handley JA. Paragraph 58H of the Second Further Amended Statement of Claim ("SFASTOC") reads, after deletion of a reference to paragraph 43 during the hearing: "The matters referred to in paragraph 49 comprise a dishonest and fraudulent design on the part of the first defendant including (but not limited to) because the first defendant did and failed to do things in the circumstances referred to in paragraphs 14 to 14E, 28, 29, 35, 38, 29 and 46." (emphasis added) 67 In his opening at T7.12, Mr Drew said of Mr Zelden's conduct, as described, that it "[transgresses] the ordinary standards of honest behaviour." The paragraphs of the SFASOC which continue to be pressed against Mr Zelden and the other defendants are detailed, and in my view, leave no doubt as to the nature of the case which was advanced against Mr Zelden. As was remarked in Heperu v Belle (2009) 258 ALR 727, [2009] NSWCA 252 by Allsop P (with whom Campbell JA and Handley AJA concurred) at 731 ([7]): "the legitimate scope of the pleading takes its context not merely from the textual meaning of the words used by the pleader, but also from the context of how the case was conducted at the trial." 68 Whilst it is true that Mr Drew did not put to Mr Zelden that his conduct was fraudulent or dishonest: (1) taking the cross-examination into account, particularly the following parts of it: (a) T156.1-157.35 "Q. Why did you say those things to him when he came to just ask about a bad deal with the bank? What was the connection between the two? A. I am a sole - the best way to answer, I am a sole practitioner. I am very, how do you say, very much, maybe feel is the best word for my clients, all of them. For me a client is very important. I may have gone on a tangent at that time, I accept that, but I thought, as I thought that was doing the right thing by telling him--

[70]

Mrs Zelden (and Henamast) 73 It is clear that: (1) Mrs Zelden knew that Mr Zelden was acting for the purchaser, Mr Sewell; (2) Mrs Zelden knew that Mr Zelden was a solicitor; (3) Mrs Zelden knew that Mr Zelden had acted for Henamast on the earlier purchase and had drawn the contract to be used on the sale to Mr Sewell; (4) Mrs Zelden knew that the sale price to Mr Sewell was $315,000; (5) Mrs Zelden knew that the Eastwood property had been purchased one year earlier for $255,000; (6) Mrs Zelden knew that Mr Zelden had been acting for Henamast in relation to the property; (7) Mrs Zelden knew that she and her husband were beneficiaries of the sale to Mr Sewell; and (8) Mr Zelden discussed with her the requisitions on behalf of Mr Sewell. 74 It follows that Henamast knew matters (1)-(8) as well. Henamast must also be taken to have known these matters because Mr Zelden was acting as its agent, and Henamast therefore must be taken to have known what Mr Zelden had done on its behalf in reaching agreement with Mr Sewell and that he had accepted instructions where the interests of Mr Sewell and Henamast were in conflict: see paragraphs 28(b), 58H and 60 of the SFASTOC. 75 It was submitted (see Mr Drew's submissions dated 7 July 2010 at [99]-[100]) that it should be inferred that Mrs Zelden, with knowledge of the matters referred to above, engaged in deliberate conduct designed to disguise and obscure her relationships, in particular: (1) by avoiding the use of her married name "Zelden", and instead using her maiden name "Semiatitski" in relation to the ASIC registration details for Henamast; (2) by avoiding the use of her married name "Zelden", and instead using her maiden name "Semiatitski" in all dealings on behalf of Henamast with LJ Hooker concerning the Eastwood property; (3) by avoiding the use of her married name "Zelden", and instead using her maiden name "Semiatitski" when signing the Eastwood contract; (4) by avoiding the use of her married name "Zelden", and instead using her maiden name "Semiatitski" when signing the transfer of the Eastwood property; and (5) by avoiding the use of her married name "Zelden", and instead using her maiden name "Semiatitski", as well as using as a false or misleading address for Henamast (that is, [address contained in file copy of judgment deleted]), in all her dealings with Henamast's solicitor, Ms Abrahams, concerning the sale of the Eastwood property. The plaintiff, in this context, relied on the following matters (omitting Court Book references to the evidence, which were provided): (1) Mrs Zelden appears otherwise to customarily use her married name "Zelden", for example, in relation to the Rose Bay property, the Rose Bay mortgage, the Henamast guarantee, the Zelden joint account and her "National Tailored Home Loan"; (2) Henamast's address for LJ Hooker was given as either "PO Box 2146, Rose Bay North, NSW 2030" or "PO Box 420, Bondi Junction, NSW 1355"; (3) Henamast's address under the Rose Bay mortgage was given as the address of the Rose Bay Property (that is, [address contained in file copy of judgment deleted]); (4) Henamast's address on the Eastwood contract was given as "PO Box 2146, Rose Bay North, NSW 2230"; (5) Henamast's address under the Henamast guarantee was given as the address of the Rose Bay Property (that is, [address contained in file copy of judgment deleted]); and (6) The registered proprietors of the (residential) property known as "[address contained in file copy of judgment deleted]" are Adolf Berger and Rimma Berger as joint tenants who appear to have owned the property since 16 January 1990; there is no evidence of any connection between Mrs Zelden or Henamast and this property or its proprietors, for the purposes of the sale of the Eastwood property or otherwise. 76 I have referred to the absence of evidence from Mrs Zelden (and Henamast). Mr Baran is quite correct in his contention that their failure to give evidence does not make out the plaintiff's case if it is otherwise insufficient to establish a prima facie case: see Tozer Kemsley & Millbourn (Australasia) Pty Ltd v Collier's Interstate Transport Service Ltd (1956) 94 CLR 384 at 403 per Fullagar J (with whom Kitto J agreed), but his Honour noted that the silence of one party "may serve to resolve a doubt or ambiguity, especially where the facts are particularly within the knowledge of the silent party"; see also Jones v Dunkel at 308 per Kitto J, at 312 per Menzies J and at 317-318 per Windeyer J. The question in this context is whether the material advanced by the plaintiff is sufficient to establish a prima facie case. I accept that for the liability of Mrs Zelden and Henamast to be established, the Court must be persuaded that they had "knowledge", which the authorities discussed at [81] below require. The use of the name "Semiatitski" 77 Mr Baran pointed out that evidence that Mrs Zelden was using her maiden name well before the contract of sale of the Eastwood property means that it cannot be said that she used her maiden name for the purpose of deceiving Mr Sewell, as Mr Drew contended. Whilst it is true that Mrs Zelden did not use her maiden name only on the contract of sale, the fact is that her relationship with Mr Zelden would not be revealed either by an ASIC search of Henamast or by observing the signature on the contract of sale. Mrs Zelden knew (obviously) that using her maiden name would not draw to the attention of Mr Sewell that she was married to Mr Zelden and that a search of Henamast, if undertaken, would not reveal that fact either. Mr Baran did not endeavour to deal with the issue of the apparently false address given by Mrs Zelden. 78 I have reached the conclusion that there is enough evidence to support the plaintiff's contention that Mrs Zelden and Henamast were aware of Mr Zelden's breach of duty to Mr Sewell. 79 I base my conclusion on these matters: (1) the matters referred to by the plaintiff and set out earlier; (2) as against Mrs Zelden, the material relied upon by the plaintiff suggests that she was alive to the need to keep the truth from Mr Sewell. I accept that Mrs Zelden may have been able to provide explanations for her use of her maiden name and for the different addresses, but she did not do so. Further, she gave no evidence of having made any enquiry or having been told by Mr Zelden anything about Mr Sewell and Mr Zelden's dealings with him. I do not accept the submission that Mr Drew was obliged to cross-examine Mr Zelden about the matters alleged against Mrs Zelden and Henamast; (3) Mr Zelden discussed the requisitions with Mrs Zelden at a time when he was acting for Mr Sewell and presumably when Mr Zelden was, on the face of matters, no longer acting for Henamast on the conveyance; and (4) Henamast knew that Mr Zelden was in a position of conflict of interest, as did Mrs Zelden.

[71]

80 The matters in (1)-(4) above are sufficient, but there is a further basis which is relevant as against Henamast, namely that Mr Zelden was Henamast's agent at the time of negotiation of the purchase price (at least). Mr Zelden's conduct on behalf of Henamast and his knowledge is conduct and knowledge with which Henamast is fixed. Therefore Henamast had, by its agent, concealed from Mr Sewell the identity of the directors and shareholders of Henamast, pretended to obtain instructions from someone who was not his wife, and encouraged Mr Sewell to enter into the transaction by the means that I have previously described. 81 The law in relation to benefits obtained by third parties in the context of a breach of trust or fiduciary duty has come under close scrutiny in recent times. Much judicial and extra-judicial consideration has been given to the topic, and I will attempt to distil the principles binding on this Court and relevant here (see Consul Development Pty Limited v DPC Estates Pty Limited (1974) 132 CLR 373 and Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89), acknowledging the assistance of P W Young, C Croft and M L Smith, On Equity (2009), Thomson Reuters, Sydney (see [6.880]-[6.910]): (1) A constructive trust may be imposed upon a third party where the third party has (a) received trust property or (b) assisted a trustee or a fiduciary in their breach of trust or fiduciary duty. (2) The first situation, often referred to as "knowing receipt" or "the first limb of Barnes v Addy" (1874) LR 9 Ch App 244, does not require any dishonesty by the trustee or fiduciary, but does require the third party to have had notice of the trust or fiduciary duty. (3) The second situation, often referred to as "knowing assistance" or "the second limb of Barnes v Addy" , requires dishonest and fraudulent conduct by the trustee or fiduciary to impose liability on the third party, who in this scenario does not receive trust property. (4) The "knowledge" that must be established for "knowing assistance" is one of four kinds: (i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; or (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable person. (5) "Knowing receipt" applies in the case of property handled by a fiduciary in breach of his fiduciary obligations and obtained by a third party (see Robins Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 at 299-300), although the High Court has not determined the point finally, it being prepared to assume in Farah that that was so: see Farah at 141. 82 This is not a case where a fiduciary (A) enters into a transaction with a client (B) to the detriment of B, and then pays some or all of the benefit to C. It is a case where A encourages B, by a breach of fiduciary duty, to enter into a contract with C, which contract benefits C directly and A indirectly. 83 Dealing with the plaintiff's case against Mrs Zelden and Henamast on the "knowing assistance" basis, I think that it is established on the balance of probabilities that Henamast (by its human agents) and Mrs Zelden knew that Mr Zelden was in breach of his fiduciary obligations to Mr Sewell, but if they did not, they wilfully shut their eyes to the obvious, wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make, or had knowledge of circumstances which would indicate the facts to an honest and reasonable person. It follows that Mrs Zelden and Henamast also had sufficient notice for the "knowing receipt" claim, but there is a difficulty in characterising the settlement cheques as the "trust property" and it is not necessary to decide whether there has been a receipt of trust property in the light of my conclusion on the "knowing assistance" claim. 84 A decision of Einstein J in Magafas v Carantinos [2007] NSWSC 917 was drawn to my attention and relied upon by Mrs Zelden and Henamast. In an earlier decision in the same matter (Magafas v Carantinos [2007] NSWSC 416), his Honour, applying the New South Wales Court of Appeal's decision in Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309, held that the wife and daughters of a director of the defendant company into whose names property had been transferred were liable as constructive trustees. The decision of the High Court in Farah was handed down before orders were finalised in Magafas and led Einstein J to reach a different conclusion. In the second judgment, his Honour noted at [14]-[16] that the plaintiff's case had originally been that Mrs Carantinos (the wife of the fiduciary) had left the task of selling the property in question to her husband and that the plaintiff later sought to make out a case that Mrs Carantinos had knowledge of the breach of trust. Einstein J held that the plaintiffs had not established that Mrs Carantinos knew that the money was received into the joint bank account, or of the way that her husband had chosen to apply the proceeds of that cheque, or "that she was aware that the $296,000 cheque [in favour of a company and endorsed by her husband] had been drawn": see [13]. 85 Mr Drew argued that Magafas is a very different case to the present one and does not offer any guidance as to whether or not Mrs Zelden and Henamast are shown to have had knowledge of circumstances which would indicate the facts to an honest and reasonable person, or wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make, or wilfully shut their eyes to the obvious. I accept that submission. 86 Mr Drew submitted that even if Mrs Zelden and Henamast did not have the requisite knowledge before the transaction, Heperu is authority for the proposition that a volunteer who has received funds traceable in equity from cheques misappropriated by an employee of a company will be liable to restore the value of the proprietary benefit derived from the receipt of those funds when he or she becomes aware of the misappropriation (see the judgment of Allsop P, with whom Campbell JA and Handley AJA concurred). I do not think that Henamast can be described as a volunteer, it having transferred title to the Eastwood property to Mr Sewell. It could be said that Mrs Zelden was a volunteer, but it is not necessary to determine the question because she was, in any event, a joint owner of the property with Mr Zelden and Henamast.

[72]

Remedy 87 There are two species of remedy available to a plaintiff where the defendant has breached his or her fiduciary duty - proprietary and personal remedies. The proprietary remedies are: (1) constructive trust; (2) equitable charge or lien; and (3) equitable right of subrogation see Boscauer v Bajwa [1996] 1 WLR 328 and Foskett v McKeown [2001] 1 AC 102. The personal remedies are: (4) an account of profits; (5) restoration of property; and (6) equitable compensation for loss caused see Nocton v Lord Ashburton [1914] AC 932 and see also A Stafford and S Ritchie, Fiduciary Duties: Directors and Employees (2008), Jordan Publishing Ltd, Bristol, in which the categorisation set out above is helpfully enumerated. 88 As I have noted, the only personal claim now advanced by Mr Sewell is (4), an account of profits. 89 It will be observed that since Henamast was the vendor on the conveyancing transaction, Mr Zelden has received no profit per se, since he did not own the property. The plaintiff's argument is that in fact the proceeds of sale, or at least a significant portion of the proceeds, did find their way to Mr Zelden, because the cheque paid by the plaintiff went to the NAB and thereby reduced the debt owed by Mr Zelden jointly with his wife, as well as Henamast's debt to the NAB. The solicitor obtained a "benefit", argues the plaintiff, and the cases do not limit the claimant to "profit" in the strict sense. In Phipps v Boardman [1967] 2 AC 46 and Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, there were statements indicating the width of the notion of "benefit". In Hospital Products, Mason J referred at page 107 to the principle that "the fiduciary cannot be permitted to retain a profit or benefit which he has obtained by breach of his fiduciary duty" (emphasis added). In Chan v Zacharia (1984) 154 CLR 178, Deane J expressed the view at pages 204-205 that the requirement for an accounting of benefit or gain was not necessarily as absolute as some of the earlier cases had viewed it, noting that there may be circumstances where it would be: "unconscientious to assert it or in which, for example, there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interests of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed". 90 In Warman International Limited v Dwyer (1995) 182 CLR 544, the High Court considered the appropriate remedy for the actions of a former employee of Warman who, in breach of his fiduciary duty to Warman, established two companies to operate as agents of an Italian manufacturing company with which Warman previously had an agency agreement. The Court concluded that the company in which Dwyer was one of the shareholders and the company in which he owned all of the shares were liable to pay two years of profits of their businesses to Warman. The Court said at pages 562-563: "it is firmly established that the liability of a fiduciary to account for a profit or gain made in breach of fiduciary duty does not depend upon the person to whom that obligation is owed suffering a loss or injury; and it is ordinarily immaterial to the fiduciary's liability to account that the person to whom the fiduciary obligation is owed could not have earned the profit or gain. The courts have always insisted on compliance by fiduciaries with strict and rigorous standards with a view to ensuring that they do not expose themselves to a conflict of interest and duty. The point is that a fiduciary is not entitled to make a profit out of, or by reason of, a fiduciary position without the knowledge and assent of the person to whom the fiduciary duty is owed. It follows that, if a profit has been made in breach of fiduciary duty, the person to whom the duty is owed is entitled to an account subject to the considerations discussed above and to the making of any appropriate allowance." (emphasis added) The Court also said at pages 556-558: "The remedy is ancient and notoriously difficult in practice and it gives rise to a liability, even in a case of a fiduciary, which is personal. In the context of patent infringement, the purpose of ordering an account is not to punish the defendant, but to prevent the defendant's unjust enrichment. But the liability of a fiduciary to account differs from that of an infringer in an intellectual property case. It has been suggested that the liability of the fiduciary to account for a profit made in breach of the fiduciary duty should be determined by reference to the concept of unjust enrichment, namely, whether the profit is made at the expense of the person to whom the fiduciary duty is owed, and to the honesty and bona fides of the fiduciary. But the authorities in Australia and England deny that the liability of a fiduciary to account depends upon detriment to the plaintiff or the dishonesty and lack of bona fides of the fiduciary. Gibbs J in Consul Development Pty Ltd v DPC Estates Pty Ltd stated: 'Where the rule applies, the liability of the person in a fiduciary position does not depend on the fact that the person to whom the duty is owed has suffered injury or loss.' A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves "at a level higher than that trodden by the crowd". The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage. … What is necessary however is to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty." (emphasis added) and said at page 559: "It is necessary to keep steadily in mind the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts." 91 Out of the settlement proceeds, a cheque for $217,662.63 was paid into the Zelden joint account and $43,741.41 was credited to the Henamast account, which Mr Zelden and Mrs Zelden had guaranteed. The total, approximately $260,000, is capable of being viewed as the benefit which Mr Zelden (and Mrs Zelden) obtained by the sale of the Eastwood property. If one were to focus only on Mr Zelden, the benefit might be viewed as a notional benefit to him of $130,000. I say "notional" because a joint account is in law "simply a debt owed to the account holders jointly": see M Hapgood, Paget's Law of Banking (13th ed., 2007), LexisNexis Butterworths, London citing In re Head, Head v Head (No. 2) [1894] 2 Ch 236. 92 The plaintiff claims that the "benefit" which Mr Zelden obtained was the discharge of the debt owed to the NAB and the mortgage, and hence an amount of $260,000, because that is what was paid to the NAB and it left the home of Mr and Mrs Zelden unencumbered. There are, I think, two essential problems with that. First, Mr Zelden and Mrs Zelden are joint tenants as to 70 per cent of the property, and Henamast is a tenant in common as to 30 per cent; and secondly, to require Mr Zelden to repay $260,000 to Mr Sewell would produce the result that Mr Sewell would receive a unit worth $280,000 in 2005 for approximately $55,000, which I think can only be described as a windfall. Mr Drew's riposte to the second issue is a bold "so what?" - that, he submits, is the remedy which courts will grant a person to whom a fiduciary obligation is owed when the obligation has been breached, particularly when the fiduciary has been dishonest and fraudulent. To the first point, Mr Drew's response, in effect, is that Mrs Zelden and Henamast were involved in the breach, and hence there is no need to apportion the benefit. 93 In my view, Mr Drew's submission as to the benefit to be disgorged treats the earlier authorities too literally, and more importantly, ignores what has been said in the High Court about proportionality of remedy, however Mr Zelden's conduct is categorised. So far as the first point is concerned, even if Henamast and Mrs Zelden were involved in the breach, it would still be necessary to consider what benefit was derived by them. Henamast, at least, did not obtain the benefit of the sale to Mr Sewell without transferring title to Mr Sewell. 94 The approach urged on behalf of Mr Zelden in relation to the account of profits was to deduct from the sale price of $315,000 the amount of $280,000 (that is, the agreed value), leaving $35,000, and to treat Mr Zelden has having received 50 per cent of that profit, that is $17,500. Reference was made to the statement in Warman International that has been extracted above, with focus upon the words "the true measure of the profit or benefit obtained by the fiduciary in breach of his duty" at page 558. Reference was also made to the decision of Bergin J (as her Honour then was) in Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 at [31]. 95 The first defendant's submissions pointed out that a constructive trust remedy is not a separate remedy, but rather it is a means of securing by a proprietary remedy profits made by a defaulting fiduciary that are traceable into property held by the fiduciary. I should note that the High Court in a number of cases, and most recently in John Alexander's Clubs Pty Limited v White City Tennis Club Limited; Walker Corporation Pty Limited v White City Tennis Club Limited [2010] HCA 19, has emphasised that the remedy to be granted ought to take into account the rights of third parties and that a constructive trust should be imposed only when that is absolutely necessary. 96 I think that the approach urged by the plaintiff produces a result that effectively gives a windfall to the plaintiff and does not adequately take into account the fact that he obtained a property with a market value then of $280,000, but the approach urged by the defendants is inadequate taking into account the benefit which Mr Zelden (and Mrs Zelden) obtained from the transaction and as a result of a very clear breach of fiduciary duty. Having regard to the broad principles discussed in Warman International, I think that the approach to be taken is to focus on the difference between what Henamast bought the property for in 2004 and what it sold it for in 2005 (that is, $255,000 and $315,000 respectively). That "profit" of $60,000, although derived by Henamast, is the amount that should be taken to be the benefit received by Mr Zelden and Mrs Zelden for which they are liable to account to Mr Sewell by reason of Mr Zelden's breach of fiduciary duty. It is an amount, it will be observed, which is less than 50 per cent of the $130,000 notional benefit to Mr Zelden to which I referred earlier, and it is an amount I would arrive at irrespective of whether Mrs Zelden and Henamast have an accessorial liability, as I have held they do.

Sewell v Zelden

At a glance

Court

Decision date

Before

Source

Judgment (75 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (30)

Cited By (2)