FITZPATRICK v WATERSTREET SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MASON P, BEAZLEY JA and SHEPPARD AJA 4 and 5 June 1998, 17 December 1998 Equity — fiduciary duty — solicitor and client — absence of retainer — content of duty — limited by services undertaken and extent of retainer — rights of recoupment and contribution — evidenced by agreement and common intention Serini Pty Ltd ('"'Serini'"), the second appellant was the company of Ms Fitzpatrick the first appellant. In 1982, Sereni and Mr Waterstreet, the first respondent acquired a flat in Elizabeth Bay as tenants in common in equal shares. In 1983, Waterstreet and Johnson (the second respondent) considered undertaking a joint borrowing in Swiss francs in order to rationalise 'theft. existing borrowings. After discussions between Waterstreet, Johnson and Fitzpatrick, a loan with European Asian Bank AG ("EAB") in Swiss francs was settled on 5 March 1984. In part, it was secured by a mortgage given by Waterstreet and Sereni over the Elizabeth Bay flat and a guarantee given by Sereni. Mr Johnson and his firm (Holman Webb) acted as solicitor for Fitzpatrick and Sereni in the transaction, without retainer or the charging of any fee. By July 1985, the borrowers were in default and were being pressed by EAB to increase loan repayments or realise the securities given. Fitzpatrick was highly reluctant to allow the sale of the Elizabeth Bay flat. In August 11986, Waterstreet and Fitzpatrick came to an agreement whereby Fitzpatrick agreed to allow the sale to go ahead, and abandoned any further claims in relation to the proceeds of sale of the flat in return for payments in her favour by Waterstreet. In 1990, Fitzpatrick and Sereni commenced proceedings against Waterstreet and Johnson for breach of fiduciary duty and fraudulent misrepresentation. Brownie J dismissed these claims, in large part based upon credibility findings favourable to the respondents and unfavourable to Fitzpatrick. In particular, Brownie J held that neither Waterstreet nor Johnson had breached their fiduciary duty as solicitors to the appellants prior to entry into the EAB loan in February 1984. During the hearing of the appeal it was abandoned against Waterstreet. HELD, dismissing the appeal; (1) Where a solicitor has an interest in a transaction with a client, the solicitor must ensure that the client is able to make a free and informed decision about the proposed transaction. Law Society of New South Wales v Moulton [1981] 2 NSWLR 736; O'Reilly v Law Society of New South Wales (1988) 24 NSWLR 204, considered. (2) The content of a solicitor's duty to a client depends upon the services required of the solicitor by the parties and the nature and extent of the particular retainer. Clark Boyce v Mouat [1994] 1 AC 428; News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410, applied. (3) Rights of recoupment or contribution touching sureties may be modified by agreement or evidence demonstrating a common intention. Coulls v Bagot's Executor & Trustee Co Ltd (1967) 119 CLR 460; Morgan Equipment Co v Rodgers (1993) 32 NSWLR 467, applied. Mason P Between 1979 and 1982 the first appellant (Ms Fitzpatrick) and the first respondent (Mr Waterstreet) lived together in a de facto relationship. Between 1982 and 1988 the relationship was cordial but not amorous. There was a serious falling out in 1988, and the proceedings which eventuated in this appeal were commenced in 1990 by Ms Fitzpatrick and her company Sereni Pty Ltd 2 UNREPORTED JUDGMENTS ("Sereni") against Mr Waterstreet, Mr Johnson a solicitor and Mrs Johnson his wife. The claims of the appellants/plaintiffs were dismissed in their entirety by Brownie J, in large part based upon credibility findings favourable to the respondents and unfavourable to the first appellant. Some of the issues fought below are no longer pressed. Many of the issues raised in the appeal are said by the respondents to be precluded by the pleadings and the manner in which the case was fought at trial. ACQUISITION OF THE POTTS POINT PROPERTY AND THE ELIZABETH BAY FLAT In 1979 Mr Waterstreet bought a property at 38 Victoria Street Potts Point ("the Potts Point property"). At least up until the trial in 1996 Ms Fitzpatrick claimed a 10% interest in that property. That claim was dismissed at trial. Although it is no longer pressed, its pendency until 1996 has relevance to other issues. In 1982 a flat at 3/86 Elizabeth Bay Road, Elizabeth Bay ("the Elizabeth Bay flat") was acquired by Sereni and Mr Waterstreet as tenants in common in equal shares. In fact what were acquired were shares in a company whose ownership gave the right to occupy the flat. Disputes concerning the equitable ownership of the flat were litigated at trial. The appellants' claims in this regard were dismissed. The appeal proceeded on the basis that the beneficial interest in the shares followed the legal interest. The purchase of the Elizabeth Bay flat (for $73,000.00) was funded as to $40,000.00 by a mortgage granted by Mr Waterstreet and Sereni to a Mr Thomas. Ms Fitzpatrick and her mother guaranteed Sereni's obligations under that mortgage. The Thomas mortgage secured a loan for a term of two years. The interest rate was 20% reducible to 17.5% for timely payment. $7,100.00, being one year's interest, was paid in advance. From 30 June 1983 onwards, Mr Waterstreet and Sereni were obliged to pay interest to Mr Thomas. They defaulted, and notices threatening the exercise of the mortgagee's power of sale were served in August and October 1983. Apart from the Thomas loan, the balance of the purchase price and associated expenses (including stamp duty and the first instalment of interest on the Thomas mortgage) was paid as to $8,700 by Ms Fitzpatrick, as to $27,939 by Mr Waterstreet. The $7,300 deposit was paid by one of them, but there was no finding to indicate who it was. At the time of its acquisition, the flat was in a run down condition. Mr Waterstreet agreed to pay for renovations. Renovation work which ultimately cost in excess of $13,200 was done by Leighton Properties Pty Ltd ("Leighton") by arrangement with a friend of Ms Fitzpatrick, Mr King. Ultimately this liability was met by Mr Waterstreet. Mr Waterstreet paid $2,000 off the Leighton's invoice in early 1983 and further amounts up to a total of just over $13,200 in 1984. Ms Fitzpatrick resided in the flat between June 1982 and March 1986 when she went to England. THE EAB SWISS FRANC BORROWING IN 1984 Mr Waterstreet and Mr Johnson were friends. In about June 1983 they commenced discussing a joint borrowing in Swiss francs. At this time such borrowings were very fashionable because they offered low interest rates, less than half the rate being charged on borrowings in Australian dollars; because the Australian dollar had not commenced to slide dramatically in value compared to URJ FITZPATRICK v WATERSTREET (Mason P) 3 the Swiss franc; and because the consequential risks of such a foreign exchange borrowing were not generally perceived. The evidence suggests that a minimum of $250,000 was required for such a borrowing, hence the proposal of concerted action by the two men. Mr Johnson first applied to European Asian Bank AG (EAB) on behalf of himself and Mr Waterstreet in July 1983, and received approval in principle in August 1983. Over the next 12 months the proposal was discussed and reformulated on a number of occasions. From Mr and Mrs Johnson's point of view, the loan offered the opportunity to make a property investment. From Mr Waterstreet's point of view, it had a similar attraction, although he also required money in order to discharge various debts, including a second mortgage over the Potts Point property and the debt owing under the Thomas mortgage. It was never intended that Ms Fitzpatrick or her company would borrow under this proposal. Nevertheless, from Ms Fitzpatrick's point of view the borrowing had perceived advantages, and these were discussed between her and Mr Waterstreet. The main advantage was that it would provide the funds to get Mr Thomas off the backs of Sereni and Mr Waterstreet, thereby enabling Ms Fitzpatrick to continue living in what she regarded as her home at the Elizabeth Bay flat; and freeing Ms Fitzpatrick and tier mother of the risk of a call under their guarantee. At the time of these discussions, the Swiss franc loan appeared to be particularly attractive in that it carried an obligation to pay interest at 6% per year, in contrast to Mr Thomas' loan, which had fallen into default and was accruing interest at the rate of 20%. What clearly emerges is that the Swiss loan transaction was seen by all players, Mr Waterstreet and Ms Fitzpatrick in particular, as offering a way (and probably the only way) to keep the Elizabeth Bay flat, at least for a time. The friendship between Mr Waterstreet and Ms Fitzpatrick during this period meant that Mr Waterstreet was willing to consider arrangements to this end. The loan documents for the Swiss franc borrowing were ready for execution in February 1984. Mr Johnson and his firm (Holman Webb) also acted for the lender EAB.. The first group of issues in the appeal relate to allegations that Mr Johnson breached his fiduciary obligations as a solicitor to the appellants in procuring the appellants' entry into the Swiss loan transaction. The appellants seek compensation for their losses. (During argument in the appeal, a similar case against Mr Waterstreet was abandoned.) The EAB loan was settled on 5 March 1984. The borrowers (Mr Waterstreet and Mr Johnson) borrowed $A410,000. The loan is evidenced by a Loan Agreement which referred to Mr Johnson and Mr Waterstreet as "the Borrower" and to Mrs Johnson and Sereni as "the Guarantor". Under the Agreement, interest was payable every six months and calculated according to a formula (the rate for the first payment was a fraction over 6%). The principal was repayable in instalments falling due on dates between two and four years after the drawdown date. The Loan was secured by:- (i) a first mortgage given by Mr Waterstreet over the Potts Point property; (ii) a first mortgage given by Mr and Mrs Johnson over a property they owned at Stanmore; (iii) a first mortgage given by Mr Waterstreet and Sereni over the Elizabeth Bay flat (being a non-recourse mortgage as regards Serini); (iv)a first mortgage over Mr Waterstreet's barrister's chambers on 16" Floor Wardell Chambers; and 4 UNREPORTED JUDGMENTS (v) a letter of Set Off relating to $100,000 of the moneys borrowed, which were deposited with European Asian of Australia Ltd (""EAAL"). It had been agreed between Mr Johnson and Mr Waterstreet that the $100,000 deposit would be held pending the purchase of an investment property to be shared as to 60% by Mr Waterstreet and 40% by Mr Johnson. The drawdown of $410,000 was divided between Mr Waterstreet and Mr Johnson as follows: 1. Mr Waterstreet received $280,000, which he applied as follows:- (i) $60,000 towards his share of the $100,000 investment with EAAL pending purchase of investment property;. (ii) $42,138 to discharge the Thomas mortgage over the flat (including solicitor's fees); (iii) $86,292 in repayment of moneys owing by him to State Bank; (iv) $84,379 in discharge of a mortgage over the Potts Point property; (v) $4,557 as his share of borrowing costs; (vi) $2,631 being a balance held in trust on his behalf. (I have ignored amounts less than $1.) 2. Mr Johnson received $130,000, which he applied inter alia as follows:- (i) $40,000 towards his share of the $100,000 investment with EAAL; (ii) $51,830 in discharge of two mortgages over Mr and Mrs Johnson's home at Stanmore, being the property which they offered by way of first mortgage to secure the borrowing. In a letter dated 13 March 1984 Mr Johnson provided Mr Waterstreet with settlement details. The letter noted:- It has been agreed between us that you will shoulder 28/41sts of the burden of the costs of the borrowing and repayments of the borrowing and I will shoulder 13/41sts of such costs of repayments. The EAB loan was drawn down on 27 February 1984 and, prior to settlement, invested at call. (Mr Johnson and Mr Waterstreet divided the interest earned until settlement on 5 March in the proportion of 13/41 to Mr Johnson and 28/41 to Mr Waterstreet.) Most letters from Holman Webb giving details concerning the settlement of the transaction were sent to Mr Waterstreet and to him alone. Practically all of the arrangements relating to the EAB Swiss franc loan had been made between the two legal practitioners. This is not to say that the two men may not have seen themselves as acting, at least in some loose way, on behalf of Mrs Johnson and Ms Fitzpatrick respectively. Mrs Johnson was a co-owner with her husband of the property at Stanmore whose existing loan had been discharged and over which a first mortgage was given as part of the security. And Ms Fitzpatrick and Serini were interested in the discharge of the Thomas mortgage. Clearly these matters were discussed between Mr Waterstreet and Ms Fitzpatrick. In the letter to Mr Waterstreet mentioned above, Mr Johnson reminded his friend of the advisability of taking out disability insurance and of providing in his will that Ms Fitzpatrick would take his half interest in the Elizabeth Bay property. "You really ought to make a will to protect Kate. I hope you both live forever." DEFAULT UNDER THE EAB LOAN OF SALE OF THE FLAT By July 1985 EAB was pressing the borrowers and, as the value of the Australian dollar fell in relation to the Swiss franc, the effective burden of the loan increased significantly. From September 1985 onwards, the two men made URJ FITZPATRICK v WATERSTREET (Mason P) 5 payments in reduction of interest and (in Mr Johnson's case) principal. By August 1986 Mr Johnson had repaid his share of principal, as between himself and Mr Waterstreet. But the loan remained in default. By January 1988 $386,502 still remained due to EAB. In December 1985 Mr Waterstreet instructed Mr Johnson to act on the sale of the Elizabeth Bay flat. A draft contract was forwarded to prospective purchasers. However, Ms Fitzpatrick refused to sign it on behalf of Serini. She protested to Mr Waterstreet about "her unit" being sold before "their houses" (AB 365), presumably a reference to Mr Waterstreet's Potts Point property and Mr and Mrs Johnson's Stanmore home. She told Mr Waterstreet: If the bank is going to sell I'm not going to make it easier for them. In February 1986 the two men negotiated with EAB to release the $100,000 invested with EAAL, and promised to arrange the sale of the Potts Point and Stanmore properties (possibly the refinancing of the latter). Mr Waterstreet told the EAB representative: I will arrange the sale of 68 Elizabeth Bay Road. However, I will need to pay Kate Fitzpatrick some of the proceeds of sale. Mr Waterstreet was told that the bank would require $75,000 from that sale. By March 1986 Mr Johnson was expressing concern to Mr Waterstreet that the latter should be doing more to repay his share of the outstanding principal. "The sooner the Elizabeth Bay unit is sold the better off we will be". On 21 May 1986 EAB gave consent (in a letter addressed to the borrowers) to the "immediate sale" of the Elizabeth Bay flat against receipt by EAB of not less that $75,000, the balance (not in any event to exceed a maximum total of $10,000) to be released by the bank to the borrowers. This $10,000 was ultimately used to pay Ms Fitzpatrick pursuant to an arrangement negotiated between her and Mr Waterstreet, through the agency of a Mr Parsons who was a solicitor from Allen Allen & Hemsley, and a friend of Ms Fitzpatrick. On 23 July 1986 EAB wrote to Mr Johnson agreeing to the release of the bank's first registered mortgage over Mr Johnson's Stanmore property. A condition of this release was that the bank receive on settlement CHF $170,179.01 representing the value of a forward contract Mr Johnson had entered into to cover the $A140,000 advanced to him by the Commonwealth Bank. Ms Fitzpatrick swore in an affidavit that in early 1985 Mr Waterstreet had told her that the bank was foreclosing on its mortgage over the Elizabeth Bay flat, and that he and Mr Johnson had lost everything. She protested, but he had said that it was out of his hands, and that the bank had decided. to sell the Elizabeth Bay flat first. Ms Fitzpatrick swore that she went to England in March 1986 because she was devastated about the sale of her home. Whilst she was there it was sold. She asserted that she had been given no independent advice about the matter, and that she bitterly opposed the idea of sale, but was told that nothing could be done to prevent it. This account was inconsistent with the objective circumstances, the independent evidence of a Mr Parsons, and otherwise lacked credibility. It was rejected by the trial judge. The facts as found by Brownie J were, that in early 1986 Mr Waterstreet told Ms Fitzpatrick that he could not afford to keep making interest payments in respect of the Elizabeth Bay flat, and that they could not afford to keep it. Then, in about February, Mr Parsons, a friend of Ms Fitzpatrick, approached him offering to help resolve the problem. Mr Parsons regarded himself as acting for Ms Fitzpatrick in a non- professional capacity. She executed a general power of attorney in his favour on 14 March 1986, shortly before her departure for 6 UNREPORTED JUDGMENTS England. Ms Fitzpatrick told Mr Parsons that she had reached an agreement with Mr Waterstreet, and he suggested that it be reduced to writing. He spoke to Mr Waterstreet and they agreed that Mr Parsons would prepare a form of agreement. He did so, using Ms Fitzpatrick's terminology, with minor amendments. Subsequently Mr Waterstreet signed the agreement and Mr Parsons signed it as Ms Fitzpatrick's attorney. It is dated 19 August 1986 and it provided that Mr Waterstreet would pay three sums to Ms Fitzpatrick: $10,000 on the earlier of the settlement of the sale of the Elizabeth Bay flat, or on 31 December 1986; a reasonable sum not exceeding $1,000 towards her removal expenses upon her moving out of the Elizabeth Bay flat; and $10,000 on the earlier of the settlement of the sale of the Potts Point property, or 31 December 1987. In consideration, Ms Fitzpatrick agreed to cause Serini to execute the agreement for the sale of the Elizabeth Bay flat, and to give vacant possession of that property. Mr Waterstreet confirmed that EAB consented to the release of $10,000 from the proceeds of sale of the Elizabeth Bay flat, and the document recorded that upon completion of the sale of the flat, Sereni would be released from its guarantee of 1984. Ms Fitzpatrick had claimed that just before she left for England on 15 March 1986, Mr Waterstreet brought papers for her to sign and told her she had to sign them. She described how she and her mother signed them, she crying on her bed because she had lost her life savings. She said that the agreement that Mr Parsons later reduced to writing was made after this event. In this and a number of other respects her evidence contradicted that of Mr Parsons. It was rejected by Brownie J, who held that Ms Fitzpatrick did agree with Mr Waterstreet that the Elizabeth Bay flat should be sold, because they could not afford to keep it. He also accepted that she later gave Mr Parsons the instructions to which he deposed, and that the flat was sold in accordance with the agreement that she had made and he recorded. Although there was an attempt to challenge these findings on various factual bases (Grounds 11-14) they are clearly beyond appellate review based as they are upon inherently credible material and the trial judge's assessment of the witnesses that he observed. In October 1986 the Elizabeth Bay flat was sold (for $88,000). Mr Parsons released the signed Transfer of shares to enable completion to occur, reminding Holman Webb of the arrangement that only $75,000 of the sale proceeds were to go to EAB. Of the sale proceeds, $10,000 was paid to Ms Fitzpatrick in accordance with the agreement of 19 August 1986. Mr Waterstreet paid the second $10,000 some time later. I assume that the $1000 contribution towards Ms Fitzpatrick's removal expenses was also paid by him. ISSUES LITIGATED AT TRIAL THAT ARE NO LONGER PRESSED Much of the trial was taken up with claims by the appellants which were dismissed and are no longer pressed. These included claims that: 1. Mr Waterstreet and Mr Johnson had promised Sereni that they would ensure that no call would be made on the security of the Elizabeth Bay flat, or alternatively that no such call would be made without recourse first being made to securities given by each of the men (Further Amended Statement of Claim, paral6); 2. Sereni's participation in the borrowing transaction was induced by fraudulent, alternatively negligent, misrepresentations by the two men relating to aspects of the transaction (see paral7); URJ FITZPATRICK v WATERSTREET (Mason P) 7 3. As regards the sale of the Elizabeth Bay flat, the appellants' case as pleaded included the allegation that Ms Fitzpatrick's execution of the, Sale Agreement on behalf of Sereni was induced by a fraudulent, alternatively negligent, misrepresentation made by Mr Waterstreet with the knowledge and consent of Mr Johnson and at Mr Johnson's request (see para20-para22). In dismissing these claims, the learned trial judge made findings adverse to Ms Fitzpatrick in relation to a meeting that took place in Mr Waterstreet's chambers on 22 February 1984 and certain events in the ensuing week. These findings are relevant to the appellants' continuing allegation of breach of fiduciary obligation on the part of Mr Johnson as a legal practitioner and I shall return to them. ISSUES PRESSED IN THE APPEAL The issues pressed on appeal in relation to what the appellants contend was the forced sale of the Elizabeth Bay flat were that:- 1. this was simply the consequence of the breaches of fiduciary obligation that occurred in 1984 and should be treated as part of the loss flowing from those breaches; 2. this betokened a separate breach of fiduciary obligation by Mr Johnson in 1986; and 3. this gave rise to a right of indemnity in favour of Sereni because that company was, in effect, a surety for the Waterstreet and Johnson interest. Before addressing, these issues, I turn to the critical findings relating to Ms Fitzpatrick's understanding in 1984 about the Swiss loan transaction and Mr and Mrs Johnson's interest in it. MS_ FITZPATRICK'S APPRECIATION OF THE SWISS LOAN TRANSACTION The appellants' case that Ms Fitzpatrick's participation (through Sereni) in the EAB loan was procured by misrepresentation was rejected at trial. It is clear that she understood the substance of the arrangement long before she was summoned to Mr Waterstreet's chambers on 22 February 1984. Nevertheless, the precise extent of her understanding about the arrangement, especially as regards the interests of Mr and Mrs Johnson is critical to the remaining claims of breach of fiduciary obligation. A major imperative for Mr Waterstreet from at least 1983 onwards was the need to put his financial affairs in order. Prior to entry into the EAB loan, a large amount was owing on the Potts Point property (nearly $85,000 in March 1984). The $40,000 Thomas mortgage over the Elizabeth Bay property was in default and the mortgagee had served statutory notices in August and October 1983. Over $11,000 was owing to Leighton Properties Pty Ltd for renovation done at the Elizabeth Bay flat. This was both a debt and an embarrassment in that the renovations had been arranged by Mr King, who was a friend of Ms Fitzpatrick and an employee of Leighton. I am not aware of there being much evidence about the actual income of Ms Fitzpatrick and Mr Waterstreet at the relevant time. However there is nothing to suggest that either of them was flush with funds. Quite the contrary. Mr Waterstreet's evidence was that during 1983 he found it difficult to meet all the interest which was accruing on his various borrowings in addition to the Thomas mortgage. These included mortgage payments on the Potts Point property and interest on money borrowed from the State Bank (which had largely 8 UNREPORTED JUDGMENTS been applied towards the purchase of the Potts Point property). Soon after the initial approach to EAB he spoke to Ms Fitzpatrick about the opportunity to refinance the two properties. They discussed their current financial difficulties, including those associated with the Thomas mortgage, and compared them with the apparent advantages of the Swiss franc loan with an interest rate of 6%. Mr Waterstreet said: "There are risks but it is the only way I can see to keep the flat". Thereafter the flat was inspected by a valuer after Mr Waterstreet had told Ms Fitzpatrick that "He [the valuer] is going to do a valuation for the refinancing". In a conversation in late 1983 or early 1984 Mr Waterstreet told Ms Fitzpatrick: I want to replace the loan from Thomas and the moneys I borrowed from the State Bank, most of which was to finance the flat, with a loan from the European Asian Bank. There was $40,000 we borrowed from Thomas and [I referred to an amount which to the best of my recollection was $27, 000] which I got from the State Bank to purchase the flat and then there is the money to pay Ashley. [Mr King] Your exposure, if all goes wrong, will be limited to the flat. This evidence is taken from Mr Waterstreet's affidavit sworn 29 August 1995. I infer that it was accepted by the trial judge. Ms Fitzpatrick's account of the events leading up to the meeting on 22 February 1984 suggests that Mr Waterstreet was more perfunctory in the explanation he gave, but even on her version she was told that Elizabeth Bay was required as security for a borrowing by Mr Waterstreet and Mr Johnson. In particular, according to her affidavit of 11 August 1995, Mr Waterstreet said: Well Mark Johnson and I are borrowing some money and we need to put the flat up as security. Nothing is going to happen to you it is just icing on the cake. My house is worth a lot of money, Mark Johnson's house is worth a lot of money and I have got my chambers. Your flat is not worth much money at all but the bank needs an extra bit for security. Because I own half of your flat you are legally obliged to do it. My house is worth more than the loan itself. Against this background I come to the critical events of late February and early March 1984. It was on 5 March 1984 that Sereni finally committed itself, through the non-recourse mortgage given by itself and Mr Waterstreet which was part of the security offered to secure the borrowing of $410,000 by Mr Waterstreet and Mr Johnson. On 22 February 1984 Ms Fitzpatrick, Mr Waterstreet and Mr Johnson met in Mr Waterstreet's chambers and discussed the mortgage of the Elizabeth Bay flat. Mr Johnson's evidence was accepted by the trial judge and is corroborated by a letter he sent on 2 March (to which reference will later be made). According to Mr Johnson the discussion lasted approximately one hour and, at its conclusion, Ms Fitzpatrick executed the (non-recourse) Mortgage of Shares on behalf of Sereni. Mr Johnson's recollection of the substance of what he said (not without interruption) was: Charlie and I propose refinancing our commitments and jointly borrowing from European Asian Bank the Swiss franc equivalent of A$140,000. My share of that borrowing is A$130,000 and Charlie's share is A$280,000. I will be responsible for my share and Charlie will be responsible for his. Part of Charlie's share is refinancing the flat at 68 Elizabeth Bay Road. The loan is repayable in about four years time. My firm acts for European Asian Bank and I am one of the borrowers. I cannot act for Serini and I think you ought to get independent legal advice. In any event, I want to tell you about the loan. As it is repayable in Swiss francs, which have to be purchased b Charlie and me to make the repayment, there is a risk that it will cost more than A$410,000 to make the repayment if the URJ FITZPATRICK v WATERSTREET (Mason P) 9 Australian dollar loses value against the Swiss franc during the period of the loan. There are a whole lot of factors which bear upon the value of one currency as against another and I do not understand this very well at all. I do know that the rate of inflation in Australia is much higher than the rate of inflation in Switzerland; therefore the value of money in Australia is decreasing more rapidly than in Switzerland. The loan is secured by certain mortgages. The mortgage which affects Serini is that over Serini's shares in the capital of 68 Elizabeth Bay Road Pty Ltd. If Charlie or I default in repayment of the loan, Serini's shares can be sold to make the payment. In effect, Serini is guaranteeing our obligations and the extent of the guarantee is the value of tile shares in 68 Elizabeth Bay Road Pty Ltd. This is a serious obligation. During the conversation Ms Fitzpatrick said words to the effect of I don't want to get another solicitor's advice. Iam happy with the arrangement. Charlie and I have some commitments to meet and this will enable us to meet them. On 2 March 1984 Mr Johnson sent a letter to Ms Fitzpatrick by express courier. The matter was hotly contested, but it was found that she received it sometime between the Friday when it was sent and the following Monday when she spoke again to Mr Johnson (see below). The letter said: We refer to the meeting in Mr Waterstreet's Chambers on 22 February 1984 attended by you and Mark Johnson of this office. We confirm that, at the meeting above mentioned, your company Serini Pty Ltd, executed a Loan Agreement between European Asian Bank AG, as Lender and Mark Johnson and Charles Waterstreet as Borrower and a Mortgage of Shares in the capital of 68 Elizabeth Bay Road Pty Ltd in favour of the Lender. We enclose copies of the Loan Agreement and Mortgage of Shares for your records. We confirm that, at the meeting, we advised you that we acted for the Lender in the matter and that Mark Johnson was in fact one of the Borrowers and that, in those circumstances, it would be inappropriate for us to act for Serini Pty Ltd and that Serini Pty Ltd should seek independent legal advice. We confirm that, notwithstanding that we were not acting for you in the matter, we advised you at the meeting in relation to the documents as follows namely:- 1. The Loan Agreement provides for a Loan in an amount of Swiss Francs or Alternate [sic] Currency equivalent of $4410,000. The Loan is repayable three years and eleven months from the date upon which it is made. In the meantime interest is payable on the Loan at the rate of 2% per annum above the Interbank Offered Rate for Swiss Francs or for the Currency borrowed. After two years the Borrowers are obliged to pay repayments of part of the principal. The Borrowers bear the risk of currency fluctuations. The Loan is secured by certain Mortgages. The Mortgage which affects Serini Pty Ltd is that over Serini's shares in the capital of 68 Elizabeth Bay Road Pty Ltd. If there be default in repayment of the principal or interest under the Loan by either of the Borrowers the Lender will be entitled to sell Serini's shares in 68 Elizabeth Bay Road Pty Ltd. In effect Serini Pty Ltd is guaranteeing to the Lender the performance by the borrowers of their obligations under the Loan Agreement. The extent of that Guarantee is the value of the shares in 68 Elizabeth Bay Road Pty Ltd held by Serini. 10 UNREPORTED JUDGMENTS We advise that the Loan will be settled on Monday 5 March 1984 at 11.30 am. If you have any enquiries or if you do not wish Serini Pty Ltd to enter into the Mortgage of the Shares in 68 Elizabeth Bay Road Pty Ltd please telephone Mark Johnson of this office at any time one half hour prior to the time appointed for settlement. The loan was to be completed on Monday 5 March 1984. At about 9.30 am that day Mr Johnson telephoned Ms Fitzpatrick and confirmed that she had received the letter. He apologised for having had to write so formally, but explained that he was concerned that she had no doubts about the nature of the transaction. She said that she understood that she was to be a guarantor for him and Charlie. "T am not getting anything out of this myself'. Mr Johnson said that he did not know what the arrangements were between herself and Mr Waterstreet, but that "we" hoped that "we" would be reducing the costs of our financial commitments. He told her that "if you are telling me to pull the plug on it I can still do that". She said that she did not want to do that, but that she was concerned that Charlie pay Ashley King. Mr Johnson said that he would remind Charlie, but that he didn't have a great deal of influence over that and she agreed that she would tell Ashley that Charlie now had funds available to pay him. Mr Johnson told her that in those circumstances the deal was going through. He thanked her for her assistance. The letter of 2 March and Mr Johnson's file note of 6 March (re his phone conversation of 5 March) have all the hallmarks of a person with legal training concerned to ensure that he has covered himself against liability. In saying this I do not intend to be critical. After all, a person acting in good faith (as Mr Johnson was found to have been) would be concerned to ensure that everything was covered, not only in the interests of a person who was a friend and a close friend of a friend, but also in his own interests. In accepting the evidence of Mr Johnson, and by inference, that of Mr Waterstreet who gave corroborating evidence on this matter, the trial judge explicitly rejected Ms Fitzpatrick's evidence that she did not know at that stage that the borrowing was to be in Swiss francs. He also found that Mr and Mrs Johnson were not anxious to proceed at that time, although they were ready to do so. There was, he held, no motive for wanting to conceal any aspect of the transaction, or to have been anxious to proceed in haste. The judge accepted the evidence of Mr Johnson and Mr Waterstreet as to what happened on the occasion of the meeting of 22 February, noting that, to the extent that there was any difference between the two of them, the evidence of Mr Johnson was more likely to be reliable. WAS THERE A BREACH OF FIDUCIARY DUTY IN 1984? In his judgment (p18) the learned judge noted that the plaintiffs asserted that the two legal practitioners had committed breaches of fiduciary duty in February 1984, even if their accounts of what happened at the meeting were accepted. Later in the judgment (p22-p23) he addressed the case of breach of fiduciary duty. He found that neither Mr Waterstreet nor Mr Johnson had acted for either Ms Fitzpatrick or Sereni in a professional capacity as "there was no retainer, or even the hint of a retainer, and there was no holding out by either man that he would act as an unpaid lawyer or adviser'. Later, he continued: URJ FITZPATRICK v WATERSTREET (Mason P) 11 Indisputably, Mr Waterstreet and Mr Johnson owed the plaintiffs some fiduciary duties, but the plaintiffs asserted the existence of a wide range of duties, apt for solicitors acting for clients retaining them, for a fee, to advise and represent them. That is not this case. Here, Miss Fitzpatrick and Serini were at all times co-venturers with Mr Waterstreet in relation to the Elizabeth Bay property; and once Miss Fitzpatrick accepted that she and/or Serini and Mr Waterstreet were well advised to discharge the Thomas mortgage and replace it with the EAB mortgage, because of the much lower interest rate it carried, she was in a similar position vis a vis Mr Johnson, with the added factor that she and Serini were also in the position of sureties, vis a vis Mr Johnson and Mr Waterstreet. As always, it is idle to talk about a fiduciary duty without spelling out the context. One person may owe another several fiduciary duties, but not owe others; and that is this case: Mr Waterstreet and Mr Johnson were not subject to the duties upon which the plaintiffs rely. The claim that Mr Waterstreet owed a fiduciary duty was maintained until the appeal, but abandoned in argument. However the appellants pressed their submission that Mr Johnson owed fiduciary duties, at least in 1984. Mr Johnson's firm did act for Sereni as well as all other parties (including the lender) to the 1984 refinancing transaction. As regards Sereni, he or his firm prepared the non-recourse mortgage, he procured its execution on 22 February 1984, and he handed that and the other security documents over to the lender on or after 5 March 1984 when the loan transaction was completed. The trial judge acknowledged that Mr Johnson owed the appellants some fiduciary duties. He also recognised that in some senses Mr Johnson and his firm acted for Ms Fitzpatrick and Sereni. However he rejected the claim that he acted for the purposes of advising them. The breaches of fiduciary obligation pressed in the appeal against Mr Johnson bear little relationship to those pleaded in paral7-paral9 of the Amended Statement of Claim. According to the appellants' Outline of Submissions, Mr Johnson's breach in 1984 was that he did not refuse and cease to act for Serini, nor did he make full disclosure of all material interests of himself and Mr Waterstreet (para21). It was also submitted that neither Mr Johnson nor Mr Waterstreet at any time informed Ms Fitzpatrick or anyone on behalf of Serini: (a) that there was no obligation for Serini to undertake guarantee obligations or to mortgage its shares to EAB by way of security for the total joint obligations of Waterstreet and Johnson as debtors; nor (b) that there were alternatives to the Serini guarantee (eg by Waterstreet and Johnson borrowing less); nor (c) that there was a conflict of interest, as Holman Webb acted for the lender, EAB; nor (d) that Serini could require the lender to agree directly with Serini to realise Serini's security last. (paral0) The asserted basis of the obligation to provide this information was said to be a chain of cases stemming from Law Society of New South Wales v Harvey [1976] 2 NSWLR 154, being Law Society of NSW v Moulton [1981] 2 NSWLR 736 esp at 758-9, O'Reilly v Law Society of NSW (1988) 24 NSWLR 204, Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642, Clarke v Barter [1989] ANZ Conv Rep 213 at 216-8 and Maguire v Makaronis (1997) 188 CLR 449. The appellants' case against Mr Johnson in the appeal builds upon the undoubted fact that he acted as solicitor for Sereni in the 1984 refinance transaction and the 1986 sale. We were reminded that there can be an implied 12 UNREPORTED JUDGMENTS retainer even though no fee is charged or intended to be charged: Blyth v Fladgate [1891] 1 Ch 337; Day v Mead [1987] 2 NZLR 443 at 459. It was, then submitted that a solicitor's fiduciary obligations flowing from such retainer are both stringent and well established. The particular obligation said to have been breached in the present case is that applying where a solicitor has an interest in a transaction with a client. Leaving to one side for the moment the situation that applies where the client rejects advice to seek independent advice, it is well established that a solicitor placed in such a situation must put the client in the position that 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 happen, a heavy burden indeed lies upon the solicitor to show that he has done everything in his power to protect the interests of his client and to ensure that the client is aware of every circumstance that is or might be relevant to his decision ". In O'Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 at 213, Mahoney JA said that: In principle, a solicitor owes to his client the duty to tell him of everything of which he knows which will be of assistance to the client in relation to the matters within his retainer. And, within such limits, he is to do what he can to further the client's interests. Kirby P expressed general concurrence (at 209). The stringency of the obligation in practice is illustrated by the discussion of what is involved in the case of a solicitor borrowing from a client in the judgment of Hutley JA in Moulton (at 758) and Kirby P in O'Reilly (at 209). Even if it were open to the appellants on the pleadings to advance the submissions now relied upon, the appellants have failed to establish that Mr Johnson breached any of his fiduciary obligations in his dealings with the appellants in early 1984. In the passages already set out, Brownie J was at pains to emphasise that his findings adverse to the appellants in relation to breach of fiduciary duty were responsive to the particular breaches pleaded. His Honour did not suggest that the two men owed no duties capable of being described as fiduciary. The authorities discussed above do not go so far as to preclude a solicitor from acting for one or more parties to a multilateral transaction, even when the solicitor is one of those parties. See also Clark Boyce v Mouat [1994] 1 AC 428; Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 412; Maguire at 466-7. Accordingly, the contention that there was a breach of fiduciary duty simply by reason of the fact that Holman Webb acted for the lender EAB cannot be sustained. Ms Fitzpatrick and, through her Serini, were clearly aware of this. The other asserted breaches of fiduciary duty (ie para(a), para(b) and para(d) above) are impossible to find within the pleadings. This is reason enough to reject the submissions, in the light of the clear evidence that the case was fought on the pleadings (see AB 6/1678 where a late application to amend to raise the issues now advanced was rejected). But even if the pleadings are to be ignored, the case fails. In Clark Boyce (at 436-7), the Privy Council emphasised that in determining whether a solicitor has obtained informed consent to act for parties with conflicting interests it is essential to determine precisely what services are required of the solicitor by the URJ FITZPATRICK v WATERSTREET (Mason P) 13 parties. See also News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 539. In my view, this is exactly what Brownie J did. I accept the appellants' submission that a solicitor who acts for a client in a particular legal transaction cannot exclude altogether fiduciary obligations by carving out an area of information or potential information touching upon the transaction and disclaiming responsibility in that area. The solicitor's fiduciary obligations flow from the trust and confidence reposed by a client in a solicitor who assumes to act on the client's behalf, whether for fee or otherwise. While that retainer exists, with the confidence appurtenant to it, the solicitor is subject to fiduciary obligations of stringency and antiquity. The duty to make full disclosure in a transaction in which the solicitor or a member of the solicitor's family has a financial interest, directly or indirectly, is well recognised: see, in addition to the cases cited above, McCarthy v Law Society of New South Wales (1997) 43 NSWLR 42. Breach of that duty may result in disciplinary action. But it may also attract equitable remedies requiring the solicitor to disgorge any profits or to compensate for any loss arising from the breach. But to say that there was a fiduciary obligation stemming from the retainer to do necessary conveyancing work in connexion with the 1984 loan and the 1986 sale really only brings one to the matter at issue. Brownie J was clearly correct to point out that "It is idle to talk about fiduciary duty without spelling out the context". A relationship may be fiduciary as to all, or as to only some, of its aspects: NZ Netherlands Society "Oranje" Inc v Kuys [1973] 2 All ER 1222 at 1225-6; Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR | at 15. In the context of a solicitor the same point is made by recognising, as Kirby P and Mahoney JA did in O'Reilly (at 209-10, 213) that the content of a solicitor's duty to a client depends upon the nature and extent of the particular retainer. In Clark Boyce Lord Jauncey said (at 437): A fiduciary duty concerns disclosure of material facts in a situation where the fiduciary has either a personal interest in the matter to which the facts are material or acts for another party who has such an interest. It cannot be prayed in aid to enlarge the scope of contractual duties. Thus, there being no contractual duty on Mr Boyce to advise Mrs Mouat on the wisdom of entering into the transaction, she cannot claim that he nevertheless owed her a fiduciary duty to give that advice. Furthermore any duty of disclosure can only extend to the solicitor's knowledge of facts and not to his lack of knowledge thereof. The appellants' case fails on the facts, because Mr Johnson made full and fair disclosure, and he clearly and repeatedly gave Ms Fitzpatrick the option to withdraw from the transaction. There was more than a hint (in the context) that withdrawal might cause the whole deal to fall through, with possibly catastrophic financial consequences to all concerned, including Ms Fitzpatrick and her mother in their status as guarantors of the Thomas mortgage. But this was a realistic appraisal of the situation, given the exposure under the Thomas mortgage and Mr Waterstreet's inability to pay his liabilities at the time. The EAB loan enabled Ms Fitzpatrick to continue in rent free accommodation at Elizabeth Bay for a further two years. Mr Johnson also explained and disclosed the benefits which he and Mr Waterstreet hoped to reap from the EAB transaction, and the extent of exposure to risk assumed by Serini under the non-recourse mortgage. Such explanation must also be viewed against the background of Mr Waterstreet's earlier discussions about the EAB transaction during the months leading up to March 1984. It is important not to confuse fiduciary obligations to make full disclosure 14 UNREPORTED JUDGMENTS with duties to give careful advice on the financial aspects of a particular transaction (see Citicorp Australia Ltd). No claim based upon negligence was pressed, so it is unnecessary to consider whether Mr Johnson's detailed and explicit warnings about the risks attendant on an "offshore" loan were deficient in any way. Since the appellants' entry into the EAB transaction involved no breach of fiduciary obligation on Mr Johnson's part, it follows that the 1986 sale of the flat cannot be seen as a compensable loss stemming from this event. That sale merely pre-empted imminent action by the mortgagee. Furthermore, it was effected with Ms Fitzpatrick's full consent through the agreement negotiated and documented by Mr Parsons. Mr Garnsey QC's submission that there were independent, additional breaches of fiduciary duty involving non-disclosure in 1986 lacks basis in the pleadings pursuant to which this hard fought trial was conducted. SERENI'S CLAIM FOR INDEMNITY OR CONTRIBUTION The appellants' claim for indemnity against Mr Johnson and Mr Waterstreet is based upon the two lawyers' position as principal debtors under the 1984 EAB transaction. The Loan Agreement treated the two men as "the Borrower" and Mrs Johnson and Serini respectively as "the Guarantor". As against the two principal debtors, Serini simply points to the (forced) sale of the Elizabeth Bay flat. It is trite law that a surety that is called upon to pay the principal's debt may, upon doing so, seek recoupment from the principal. Leaving aside interest, the indemnity sought is calculated as follows: Proceeds of sale of flat paid to EAB $75,000 Commission $ 2,800 $77,800 One half, representing Serini's half share in the flat $38,900 [I confess to not understanding why the commission figure is to be added, and not subtracted. ] Brownie J treated the whole of the $88,000 realised on the sale of the Elizabeth Bay flat as the sum prima facie contributed by Serini and Mr Waterstreet (as mortgagors under the non-recourse mortgage) by way of contribution to the discharge of the EAB loan. However, Brownie J offset two sums against the $88,000. First, he deducted $40,000 being the principal of the Thomas mortgage, which had been replaced by the loan from EAB. His Honour found that Ms Fitzpatrick, and therefore Serini, knew and approved of the replacement of the Thomas loan and mortgage by the EAB loan and mortgage. Accordingly, he held that Serini took the disadvantages of the EAB loan and mortgage, as well as its (apparent) advantage of reduced interest. On this basis, the repayment to EAB of "the appropriate fragment of the total sum borrowed from EAB" had to be taken into account. Serini submits that the discharge of the Thomas mortgage was irrelevant, because the discharge of that mortgage occurred in 1984, two years before the payment to EAB on the sale of the unit. URJ FITZPATRICK v WATERSTREET (Mason P) 15 The second offset allowed by the trial judge was the payment to Ms Fitzpatrick of $20,000 due under the agreement recorded by Mr Parsons. Serini submits that this too was irrelevant, especially since that payment went to Ms Fitzpatrick personally. It is also submitted that, if it were appropriate to identify the "consideration" for that payment, it related in part at least to her claims to a 10% interest in the Potts Point property. Equity looks to matters of substance rather than form. So too does the concept of unjust enrichment which provides a principled way of understanding rights of recoupment and contribution (Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342 at 350-1; Brook's Wharf and Bull Wharf Ltd v Goodman Bros [1937] 1 KB 532 at 544; Armstrong v Commissioner of Stamp Duties (1967) 69 SR (NSW) 38 at 47). One way in which regard for substance over form may reveal itself in this area is the allowance of extrinsic evidence to show that one of two debtors is really a surety for the other (AGC (Advances) Ltd v West (1984) 5 NSWLR 590) or that two persons are in substance each sureties for another's debt (Sherwin v McWilliams (1921) 17 Tas LR 9). Rights of recoupment or contribution touching sureties may be modified by agreement. Indeed there are authoritative statements that evidence showing a common intention, even falling short of agreement, will be sufficient to exclude or modify a right otherwise arising (Courts v Bagot's Executor & Trustee Co Ltd (1967) 119 CLR 460 at 480, 488; Morgan Equipment Co v Rodgers (1993) 32 NSWLR 467). Before seeking to apply these principles, some details need to be recorded. The flat was sold for $88,000. $2,800 for agent's commission and $2,082 for outstanding levies and land tax need to be deducted. This provides a net sum of $83,118 realised on the sale of the flat. $75,000 of this was paid to EAB pursuant to the arrangement negotiated by the borrowers with EAB in early 1986. Brownie J was correct to set off a sum in relation to the discharged Thomas debt. Serini may have been a guarantor qua EAB, but its relationship with Mr Waterstreet in relation to the 1984 EAB loan was akin to that of a joint venturer. In 1984, the foreign exchange loan presented itself as the only alternative to the forced sale of the flat by the mortgagee Thomas. Serini and those who had guaranteed its obligations under the Thomas mortgage (Ms Fitzpatrick and her mother) received the tangible benefit of the discharge of the Thomas mortgage with $42,138 of the moneys advanced to Mr Waterstreet and Mr Johnson and notionally applied (as to $280,000) to Mr Waterstreet. Serini's submission that the discharge of the Thomas mortgage is to be ignored because it occurred in 1984, two years before the payment to EAB on the sale of the flat, must be rejected. That was when the burden was assumed. It came home in 1986. How much should be appropriated in the borrower's favour on this account? Brownie J treated the offset as $40,000. Clearly it should have been at least $42,138 (the sum advanced out of the EAB loan moneys to discharge the Thomas mortgage including costs). Mr Waterstreet's counsel argued on appeal that $86,955 was the more appropriate sum. At the refinancing in Swiss francs in March 1984, the rate of currency conversion was 0.486 and the amount necessary to discharge the Thomas mortgage was SF86,704, the repayment of which in Australian dollars would have been $86,955 in September 1986. I would reject this reasoning, because the inquiry is focussed on the amount which the surety was actually required to contribute towards the principal's primary obligation. On this approach there would be a prima facie entitlement to recoupment in the sum of $16,431 (ie one half of $75,000 less $42,138) plus interest. However, the respondents (Mr Waterstreet in particular) argue that further deductions have to 16 UNREPORTED JUDGMENTS be made, having regard to Mr Waterstreet's disproportionate contribution to the purchase and renovation of the flat. I find it unnecessary to determine this issue because I would affirm the trial judge in bringing into account the implementation of the agreement of 19 August 1986. It was clearly intended to be a resolution of all outstanding claims touching the flat. EAB agreed to take $75,000 instead of the entire proceeds of sale. And Mr Waterstreet agreed to release $10,000 out of the sale proceeds to Ms Fitzpatrick. He had not conceded her entitlement to any share of the Potts Point property and, as between himself and Serini, he was probably entitled to an accounting in his favour with regard to his disproportionate expenditure in acquiring and renovating the Elizabeth Bay flat (in which Ms Fitzpatrick had lived rent free for some time). The agreement imports a common understanding that Ms Fitzpatrick abandon any further claims in relation to the proceeds of sale of the flat in return for the payments which Mr Waterstreet agreed to make in her favour. In my view, this common understanding effectively modified any claim for indemnity or contribution otherwise arising out of the sale of the flat. It would be unrealistic and inequitable to distinguish between Serini and Ms Fitzpatrick in this context, given that the discharge of the Thomas loan had procured the release of the personal guarantees of Ms Fitzpatrick and her mother. Serini was Ms Fitzpatrick's company, and she was its directing mind. It is also relevant that it was Ms Fitzpatrick who directed the payment of the agreed sums to her when they might naturally have gone to or through Serini. It is possible, through unclear, that Serini also seeks contribution from Mrs Johnson as a co-surety. But such a claim ignores the common understanding that, as between Waterstreet/Serini on the one hand and Mr and Mrs Johnson on the other, the EAB borrowing was intended to be treated as segregated into two parts (the Waterstreet/Serini share and the Johnson share). The claim also founders for lack of evidence that Mrs Johnson's burden in meeting the demands of EAB was disproportionate to that of Serini. For these reasons the appeal should be dismissed with costs. Beazley JA I agree with Mason P. Sheppard AJA In this matter I have had the advantage of reading the judgment to be delivered by Mason P. I am in agreement with his Honour's reasons and conclusions, and with the orders which he proposes. Appeal dismissed with costs Counsel for the appellant: J J Garnsey QC; A Pearman Solicitors for the appellant: Gillis Delaney Brown Counsel for the first respondent: N Hutley SC; N MacKrell (Sol) Solicitors for the first respondent: Lane & Lane Counsel for the second and third respondents: D Grieve QC; D Murr Solicitors for the second and third respondents: Holman Webb