Pavan v Ratnam

(1996) 23 ACSR 214

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(Decision by: Beazley JA)

Pavan and Anor
vRatnam - BC9605648

Court:

Judges: Mahoney ACJ
Meagher J

Beazley JA

Hearing date: 18 October 1996
Judgment date: 26 November 1996

Sydney

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Decision by:
Beazley JA

This is an appeal from a decision of Young J in which his Honour held there was no fiduciary relationship between the appellants and the respondent. The appellants appeal against that finding. The appellants also appeal against the trial judge's failure to deal with their claims in negligence and contract. The appellants, while critical of the extent of the trial judge's findings of fact, do not seek to disturb those findings. Nor does the respondent seek to do so save in one important respect, namely, whether the appellant knew that the land, subject of the transaction which caused the appellant's loss, was mortgaged.

BACKGROUND FACTS

Because, in the main, the findings of fact are not in issue, it is not necessary to recount them in the detail which might otherwise have been required. The central facts are as follows. The first appellant is a specialist medical practitioner. The second appellant is a company controlled by the first appellant. As it is the relationship and dealings between the first appellant and the respondent which is relevant to the appeal, I will refer to the first appellant as the appellant.

The respondent is an accountant. The appellant was one of his clients, the respondent acting as the appellant's tax accountant. The appellant contends that the respondent also gave him investment advice, albeit related to tax. The trial judge did not make any finding as to whether the respondent was, in fact, a financial adviser. Indeed, it is apparent that his Honour did not find it helpful to characterise the relationship merely by giving it a label. Rather, his Honour considered, correctly, that an analysis of the nature of the relationship or the circumstances of the transaction had to be considered to determine whether there was a fiduciary relationship. His Honour did find, however, that in the course of the tax accountant/client relationship and under the respondent's guidance, the appellant formed the second appellant and purchased some residential property.

In about late 1983, the respondent was proposing to engage in the development of an industrial unit site at Penrith. Nupace Pty Ltd (which was the second defendant in the court below) was incorporated in late 1983 for the purposes of becoming the vehicle through which the development was to be carried out. The respondent and his wife became the shareholders of Nupace Pty Ltd. The respondent was also a director.

The appellant decided to purchase one of the industrial units. His decision to do this was made in late 1983. It appears that the respondent initially raised the investment with the appellant on a social occasion. The trial judge found that the proposal that the appellant acquire one of the units arose because the appellant wished to deal with his expected high income in that year in a tax effective way. In addition, the appellant had a long term financial strategy of investing in real estate to provide long term financial benefits for himself and his family as he did not have any superannuation (the first finding). The appellant committed himself to the investment in December 1983 by paying the sum of $60,000 to Nupace Pty Ltd.

In February 1984, Nupace Pty Ltd settled its purchase of the land upon which the industrial units were to be built. The whole of the land was mortgaged to Westpac at the time of settlement of the purchase. (The trial judge found that the appellant was not aware of the mortgage. The respondent challenges that finding). Subsequently, in July 1984, the borrowing secured by the mortgage was converted to a foreign currency loan.

In June 1984, the appellant executed a contract for the purchase of two industrial units in the development (the purchase of two rather than one being due to a change in floor plan and did not involve an increase in the overall purchase). There is some confusion about the effect of the contract. The trial judge found:

"The contract was prepared by [the respondent] and was signed towards the end of June 1984. The way in which the property is dealt with in the income tax returns shows that this is probably so. The reason for generating the contract was not so much providing security for [the appellant] or for furnishing a document which would be the first document in the usual conveyancing transaction: it was mainly to be provided to show the Commissioner of Taxation if he enquired that the sale had been agreed before the end of June 1984."

(the second finding)

It is difficult to discern from this finding whether his Honour accepted that this contract was a binding contract between the parties whereby the appellant purchased the land, although both parties proceeded on the appeal as if that was the case. The contract recorded that a deposit of $60,000 had been paid. There was no dispute that the only $60,000 paid was that paid in December 1983. Counsel for the appellant, for the purposes of one aspect of his submission, placed some reliance upon the fact that the contract stated that the deposit was paid to the vendor as stakeholder. However, this submission probably cannot be made good as, to the best one is able to discern from the poor reproduction of the contract in the appeal book, the words " as stakeholder" were struck out. In any event, as no reliance was placed on that matter at trial, it cannot be raised on appeal, as it involved factual matters that may have required investigation at the trial: Coulton v Holcombe (1986) 162 CLR 1.

In August 1984, Nupace Pty Ltd wrote to the appellant in these terms:

"I have set down below the basis of our recent telephone conversation with respect to the purchase, by Gowshan and Associates Pty Ltd of the Strata Office Unit at Lethbridge Court, Penrith from Nupace Pty Ltd:-

The Balance of $110,000 to be financed by Nupace Pty Ltd follows:-

Effective Date - due on the 7th of each month beginning from 7th July 1984 made payable to Nupace Pty Ltd. Perhaps it may be more convenient to have a bank deduction authority effected from Gowshan and Associates Pty Ltd to Nupace Pty Ltd.

I trust the above terms meets (sic) with your approval. Please do not hesitate to contact me if you have any further enquiries."

The trial judge found that this document:

"was arrived at because the [respondent] had disclosed to [the appellant] that he was getting a good rate of interest and the 13.5% was less than the bank was offering."

(the third finding)

Thereafter, the appellant made monthly payments in accordance with the terms of the letter until May 1989. However, by that time, Nupace Pty Ltd had fallen victim to the adverse currency fluctuations which affected many foreign currency loans and it was unable to service the mortgage. A receiver was appointed to the property and in 1988 sold the property. The proceeds of sale were not sufficient to pay out the loan. It was not until July 1989 that the respondent informed the appellant that the property had been sold.

FINDINGS OF THE TRIAL JUDGE

The trial judge was faced with some difficulty in his fact finding task, having found both the appellant and the respondent to be unsatisfactory witnesses, although he considered that the documentary evidence supported part of the respondent's evidence and he found his evidence to be slightly more reliable than that of the appellant. In the result, his Honour found four "basal facts". I have referred to those (the first, second and third) findings. The fourth was that in about 1987, the respondent informed the appellant that "there were some difficulties about the bank, but [the appellant] insisted that he was entitled to have the units conveyed to him and continued to make the payments".

EXISTENCE OF FIDUCIARY RELATIONSHIP

Despite some shifting on this issue, it appears that the appellant accepted that the respondent did not act in the capacity of "financial adviser" as such. However, it was submitted that in the circumstances where:

"[The respondent]:

(a)

was at least a tax advisor concerned with investment albeit related to tax;

(b)

obviously had extensive business experience relating to property transactions of the kind;

(c)

prepared, on his version, a contract which reasonably related to the transaction;

(d)

did encourage the investment by [the appellant] and was [the appellant's] tax advisor and did discuss investments with [the appellant];

(e)

did accept the moneys paid and arranged the loan moneys in August and obviously knew that they were to be held for completion of the purchase; and

(f)

knew that [the appellant] had not agreed to the moneys paid or provided being used for any purpose other than the purchase and that [the appellant] had not engaged a solicitor."

The respondent:

"had a duty of a fiduciary character either springing from the circumstances in which the moneys were paid or provided and/or from his particular relationship with [the appellant] as his tax advisor and accountant, to take steps to secure the funds either by securing them himself or by appropriate advice to [the appellant]. [The appellant] was entitled to rely on him to take those steps."

There is no doubt that a fiduciary relationship may arise in either of the two circumstances referred to in this submission. It was not suggested, however, or at least it was not forcefully suggested, that in this case, the tax accountant/client relationship fell within the accepted fiduciary relationships of trust and confidence or confidential relations.

The courts have recognised that there is no single definition which can be given to identify a fiduciary relationship. The difficulty of definition and identification was clearly recognised in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41.

Mason J stated at 96-97:

". . .it is important in the first instance to ascertain the characteristics which, according to tradition, identify a fiduciary relationship. As the courts have declined to define the concept, preferring instead to develop the law in a case by case approach, we have to distil the essence or the characteristics of the relationship from the illustrations which the judicial decisions provide. In so doing we must recognize that the categories of fiduciary relationships are not closed: Tufton v Sperni [1952] 2 TLR 516 at 522; English v Dedham Vale Properties Ltd [1978] 1 WLR 93 at 110.

The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman [1967] 2 AC 46 at 127), viz, trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions "for", "on behalf of", and "in the interests of" signify that the fiduciary acts in a "representative" character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.

It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed."

Dawson J stated at 141-142:

"Notwithstanding the existence of clear examples, no satisfactory, single test has emerged which will serve to identify a relationship which is fiduciary. It is usual - perhaps necessary - that in such a relationship one party should repose substantial confidence in another in acting on his behalf or in his interest in some respect. But it is not in every case where that happens that there is a fiduciary relationship.

...

There is, however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other: see Tate v Williamson (1866) 2 Ch App 55 at 60-61."

The characteristics of a fiduciary have been dealt with recently by the Supreme Court of Canada in Hodgkinson v Simms et al 117 DLR (4th) 161, where La Forest J at 175 described the fiduciary duty as "until recently...a legal obligation in search of a principle".

In identifying a fiduciary, his Honour stated at 176:

"...outside the established categories, what is required is evidence of a mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party."

So defined, the relationship between the respondent and the appellant could not be described as involving a fiduciary relationship. However, this statement is too narrow (and too narrow in terms of his Honour's overall identification of the fiduciary obligation). For example, so expressed, it fails to acknowledge that a fiduciary may, with the informed consent of the party to when the duty is owed, act in the fiduciary's own interest: see Hospital Products per Mason J at 103; Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 at 401. Nor does it recognise that a fiduciary may act jointly in the interests of the fiduciary and the other party to the relationship: Hospital Products per Mason J at 99, a matter which La Forest J recognises later in his judgment. See also PD Finn, Contract and the Fiduciary Principle (1989) 12 UNSWLJ 76; PD Finn, Fiduciary Obligations.

In my opinion, despite the optimism of La Forest J, there are difficulties in attempting to find an all embracing statement of principle to categorise a relationship which, as Mason J pointed out in Hospital Products is "infinitely varied". It is preferable to approach the matter by looking at all the circumstances of the case and determining whether there are factors which solely, or in combination, establish the nature of the relationship as a fiduciary one. This is the approach to be found in Hospital Products and also finds expression in Lloyds Bank Ltd v Bundy [1975] QB 326 per Sachs LJ at 341:

"Such cases tend to arise where someone relies on the guidance or advice of another, where the other is aware of that reliance and where the person upon whom reliance is placed obtains, or may well obtain, a benefit from the transaction or has some other interest in it being concluded. In addition, there must, of course, be shown to exist a vital element which in this judgment will for convenience be referred to as confidentiality. It is this element which is so impossible to define and which is a matter for the judgment of the court on the facts of any particular case."

The cases establish that a number of factors may characterise a relationship as being of a fiduciary nature. They include: vulnerability, reliance and the presence of loyalty, trust and confidence. The notion of vulnerability, as used in this context, is not to be understood in the sense of any "weaker party" concept. Rather, it refers to the circumstance where another party agrees (not necessarily contractually) "to act on behalf of or in the interests of another and, as such, is in a position to affect the interests of that other person in a legal or practical sense. As such, fiduciary relationships are marked by vulnerability in that the fiduciary can abuse the power or discretion given him or her to the detriment of the beneficiary": see Hodgkinson per La Forest at 168. Reference is also usefully made to Professor Finn's (now Justice Finn of the Federal Court of Australia) description in "The Fiduciary Principle" at 50-1:

"...fiduciary responsibities will be exacted where the function the advisor represents himself as performing, and for which he is consulted, is that of counselling an advised party as to how his interests will or might best be served in a matter considered to be of importance to his personal or financial well-being, and in which the adviser would be expected both to be disinterested, save for his remuneration, and to be free of adverse responsibilities unless the contrary is disclosed at the outset."

In determining whether the circumstances in this case gave rise to a fiduciary relationship, the following characteristics of the relationship are relevant:

(i)

the respondent and the appellant were in a tax accountant/client relationship;

(ii)

in the course of and as part of that relationship, the respondent, from time to time, advised the appellant on appropriate financial structures and investment directions;

(iii)

in 1983, the appellant was concerned to minimise his tax liability;

(iv)

at that time, separate from his accountancy practice, the respondent had himself decided to pursue a particular investment opportunity, namely the development of land at Penrith upon which he proposed to build industrial units;

(v)

the respondent acquired Nupace Pty Ltd as the investment vehicle;

(vi)

there was no contractual relationship between the appellant and the respondent in respect of the project, although the respondent "introduced" the appellant to the project; and

(vii)

there was no evidence of any representation by the respondent to the appellant that any monies he committed to the project were to be held "on trust", or were to be kept separate from Nupace Pty Ltd's monies; or were not to be utilised by Nupace Pty Ltd during the course of the development.

None of these circumstances point to the existence of a fiduciary relationship. Although the appellant undoubtedly had confidence that the project would be successful and it may well have been that that confidence was engendered by the fact the respondent was involved with it, there are none of the indicia of vulnerability, reliance or confidence in the sense which those matters bear in the context of a fiduciary relationship.

Accordingly, this ground of appeal must fail.

TRUST RELATIONSHIP

Senior counsel for the appellant submitted that the monies paid by the appellant in respect of the project were paid for a specific purpose and thus invested with a trust: see Barclays Bank Ltd v Quistclose Investments [1970] AC 567.

This issue was not raised at trial. It clearly raises questions of fact which might have called for exploration at the trial. Accordingly, leave to raise the issue on appeal should be refused: see Coulton v Holcombe (1986) 162 CLR 1.

CLAIM IN NEGLIGENCE AND CONTRACT

The appellant's claim was also brought in negligence and in contract. The trial judge did not deal with either claim in his judgment as he ought to have. This raises the question of what course should be pursued by this court in relation to those claims.

As both parties accepted that it was open to this court to determine the claim for itself, I consider that is the appropriate course. In doing so, it is convenient to deal only with the claim in negligence as counsel for the appellant conceded that the two claims were co-extensive. A further reason for adopting this approach is that the claim in negligence was only made at the conclusion of the evidence at trial and leave to amend to include the claim was only granted on the basis that no further evidence was adduced.

The essential aspect of the claim made in negligence was that "from time to time, [the respondent] provided the plaintiff with financial advice." Unfortunately, and notwithstanding that this appears to have been the second amendment, the duty owed and the breach of that duty does not find clear expression in the further amended statement of claim. In his written submissions, senior counsel for the appellant identified the alleged duty of care, in the context of the respondent having, over a number of years, given taxation and investment advice to the appellant, as being a duty:

"to take reasonable care not to recommend an improvident investment or to allow the investment to become improvident, to protect the funds committed by [the appellant] to [the respondent's] care and to warn [the appellant] of the dangers involved in the transaction and of leaving the monies paid [by the appellant] unprotected."

In my opinion, notwithstanding the accountant/client relationship, no such duty arose. Rather, as I have already stated, the appellant entered into an investment in which the respondent had an interest through Nupace Pty Ltd in the manner I have described. Accordingly, the claim in negligence and therefore in contract must fail.

In my opinion the appeal should be dismissed with costs.

Representation:

Counsel for the appellant: RJ Ellicott QC/WG Muddle

Solicitors for the appellant: Gunesekera Barone and Cavanagh

Counsel for the respondent: MLD Einfeld QC/S Habib

Solicitors for the respondent: Hegarty and Elmgreen