Rahme v Benjamin & Khoury Pty Ltd

BATHURST CJ: I have read the judgment of Macfarlan JA in draft. I agree with the orders his Honour has proposed and with his Honour’s reasons.

MACFARLAN JA: In August 2005 D Tannous No 2 Pty Ltd (“Tannous”) and J & J Rahme Pty Ltd (“J & J Rahme”), companies controlled by Mr Gabriel Rahme, each entered into a Lease Indemnity Deed with their Gosford shopping centre landlord, Bevillesta Pty Ltd. Under the deeds, Bevillesta agreed to indemnify those tenants in respect of any liability that they might incur to pay income tax on the amount of any fit-out contribution paid by the landlord to the tenants in connection with the lease.

After incurring (but not paying) such tax liabilities, Tannous sued Bevillesta for indemnity in proceedings commenced in the Common Law Division of the Court in October 2008. J & J Rahme was subsequently joined as a plaintiff. Mr Rahme made a separate claim in the proceedings against Bevillesta but ultimately did not pursue it.

In the course of the proceedings, Benjamin & Khoury Pty Ltd (“B&K”), an incorporated legal practice and the present first respondent, commenced to act for Tannous, J & J Rahme and Mr Rahme in lieu of their previous solicitors. Mr Dieb Khoury, the present second respondent, was the principal of B&K with carriage of the proceedings on behalf of the plaintiffs. After considerable legal costs were incurred and both tenants were placed into administration, Mrs Dana Rahme, the first appellant and Mr Rahme’s wife, agreed with B&K to assume responsibility for their past and future costs in relation to the proceedings, and to give security to support that commitment.

In the present proceedings entered in the Professional Negligence List of the Common Law Division, Mrs Rahme seeks, inter alia, declarations of the unenforceability of her agreements with B&K and reimbursement of money she paid to it in respect of legal costs. Mr Rahme also made claims against B&K but these were not pursued.

Mrs Rahme made her claims on a number of bases. The only bases that remain relevant on appeal are breach of fiduciary duty by B&K and unfairness of its agreements with Mrs Rahme in accordance with the Contracts Review Act 1980 (NSW). Mrs Rahme also claims against Mr Khoury individually, the only presently relevant basis for her claim being that Mr Khoury breached fiduciary duties owed to her.

After a five day hearing, Emmett AJA rejected all of Mrs Rahme’s claims and gave judgment for the defendants. In those circumstances, his Honour found it unnecessary to reach final conclusions as to whether the defendants would have been entitled to reductions of any judgments against them by reason of contributory negligence on the part of Mrs Rahme or on the basis of proportionate liability. As to the latter, the defendants contended that Mr William Washington, barrister, and Mr Michael Soulos, solicitor, were concurrent wrongdoers who were liable to Mrs Rahme in respect of the same damage as that for which the defendants were alleged to be liable.

Nor did his Honour find it necessary to quantify the amount to which Mrs Rahme would have been entitled if she had been successful. The quantum of her monetary claim as finally formulated was $342,193.69, relating to amounts for costs paid to B&K and paid or payable to third parties as a result of the conduct of B&K of which she complained. His Honour said that he did not understand there to be any remaining issues in respect of the quantum of Mrs Rahme’s claim.

On appeal, Mrs Rahme’s submissions were confined to challenging the primary judge’s conclusions that (i) at material times neither B&K nor Mr Khoury owed her fiduciary duties, (ii) in any event, consequent on her having received independent legal advice, Mrs Rahme gave fully informed consent to any breach of fiduciary duties and (iii) her agreements with B&K were not unfair for the purposes of the Contracts Review Act.

In the course of the appeal hearing, the Court gave B&K leave to file a Notice of Contention seeking findings as to its defences of contributory negligence and proportionate liability. As those issues had not already been addressed in submissions, the Court also made directions for supplementary written submissions to be lodged as to the availability of these defences. The Court indicated that if the defences were found to be available in principle, it would be necessary for the remaining issues to which those defences gave rise to be remitted for relevant findings to be made at first instance.

For the reasons that follow, I consider that Mrs Rahme’s appeal in relation to the dismissal of her claim against B&K should be allowed but that her appeal in relation to the rejection of her claim against Mr Khoury should be dismissed.

The Lease Indemnity Deeds contained the following presently relevant provisions:

By Statement of Claim filed in the Common Law Division on 27 October 2008, Tannous claimed from Bevillesta indemnity under its Lease Indemnity Deed for a liability of it for income tax of $1,437,000. Later, the other tenant, J & J Rahme, was joined as a plaintiff and made a claim for indemnity for a tax liability of $1,035,681.90 under its Lease Indemnity Deed with Bevillesta. Mr Rahme claimed amounts allegedly due to him under an agreement that he would act as Centre Manager.

On 12 August 2008, Hall J rejected an application by Bevillesta for the summary dismissal of Tannous’ proceedings ([2009] NSWSC 782). His Honour stated that the Lease Indemnity Deed was drafted by solicitors acting for Bevillesta “apparently after discussions between those solicitors and Spanko Soulos & Co who acted on behalf of” Tannous. He referred to a letter dated 24 May 2005 from Spanko Soulos & Co to the other solicitors referring to (at [37]):

His Honour referred to Bevillesta’s argument that cl 4.1 of the Lease Indemnity Deed was effectively “a statute of limitation provision” as a result of which Tannous’ claim was time barred (at [18]). His Honour said that the contrary view was “at least open to argument” and raised a “question to be determined at a final hearing” (at [43]).

His Honour also said the following concerning an argument by Bevillesta that Tannous was not entitled to indemnity until it paid any income tax for which it was liable (at [44]):

In December 2009 B&K commenced to act in the proceedings as solicitors for the plaintiffs. Soon after, B&K briefed Mr Washington of counsel to advise in relation to the proceedings. By a letter of 5 February 2010, Mr Khoury, assisted by Mr William Musgrave of his firm, reported to Mr Rahme on a conference held with Mr Washington. They referred to complexities of the proceedings and to the need for considerable work to be done in progressing them.

In a letter of 4 March 2010 to Mr Rahme, B&K referred to two accompanying reports and to “discussions regarding the climbing legal costs, expenses and disbursements in your proceedings”. One report attached was a detailed bill of costs in the amount of $32,069.23. It is not clear what the other report was but it may have been a detailed bill of costs dated 28 February 2010 in an amount of about $24,000. The letter continued:

Entries in B&K’s costs records for 11 February and 17 March 2010 refer to subpoenas having been prepared and served on a number of parties, including Spanko Soulos, the solicitors for the tenants at the time that the Lease Indemnity Deeds were entered into.

B&K’s costs records note the following in relation to a conference held on 29 March 2010:

Ms Fiona Shand and Mr Jerry Kekatos, referred to in the record, were the solicitor for Bevillesta and Mr Rahme’s accountant, respectively.

In a letter to Mr Rahme of 1 April 2010, B&K noted that additional costs were being incurred and made “a new estimate in the amount of $50,000 in addition to your previous estimate plus GST, expenses and disbursements”. They continued:

By a Further Amended Statement of Claim filed on 29 April 2010, J & J Rahme was added as a plaintiff. It claimed inter alia an indemnity from Bevillesta under its Lease Indemnity Deed for $1,035,681.90 for which it alleged it had a relevant tax liability. Objections to the filing of the new pleading were rejected by Barr AJ in a judgment of 7 May 2010. His Honour also declined to make an order that the plaintiffs provide security for the defendants’ costs.

By letter of 17 May 2010, B&K provided to the three plaintiffs its bill of costs as at 30 April 2010.

On 17 June 2010 a Second Further Amended Statement of Claim was filed in the Bevillesta proceedings. This removed Mr Rahme as a plaintiff.

On 18 June 2010 Mr Rahme, as sole director of each company, placed Tannous and J & J Rahme into administration on the grounds that they were insolvent.

By letter of 28 June 2010, the administrators, Mr Ozem Kassem and Mr Andrew Barden, requested correspondence in respect of the Bevillesta proceedings and the “prospects of success and the estimated costs of the proceeding”.

By letter of 12 July 2010 B&K responded to the administrators with a report that included the following:

On 29 July 2010 Mr Washington sent a letter to B&K stating that there were fees of $16,920 owing to him in respect of work in the Bevillesta proceedings done since February 2010. The evidence does not clearly reveal what amounts were owing to B&K at that time.

On 13 July 2010, the administrators authorised B&K to act on their behalf in the Bevillesta proceedings for a limited period, on the basis that B&K’s fees would be paid “directly” by Mr Rahme.

On 23 July 2010 Mr Khoury, Mr Kekatos and Mr Rahme discussed a proposal that an equitable charge over a property owned by Ms Mary Rahme, who is Mr Rahme’s sister, be made available to B&K to secure its fees. Mr Khoury stated that, as Tannous and J & J Rahme were under external administration, he was not prepared to continue to act unless both past and future costs were secured.

On 30 July 2010 the administrators sent an email to Mr Kekatos, that included the following:

On 11 August 2010 Mr Kekatos sent an email to the administrators stating:

After some negotiations, the offer was accepted on about 20 August 2010 upon the basis that the administrators’ entitlements to a percentage of any settlement achieved would be 20%. On 7 September 2010 Mr Rahme advised Mr Musgrave that because his sister Mary Rahme was becoming bankrupt, she would not, as previously proposed, be making a property available as security. Instead, his wife would put up her property.

On 13 September 2010 B&K wrote to Mr and Mrs Rahme attaching for their execution forms of a costs agreement and costs disclosure in relation to the Bevillesta proceedings. The letter stated:

Mr and Mrs Rahme were each described in the form of costs agreement as a “Client”. Joseph Rahme Investments Pty Ltd, which was referred to in the letter, was incorporated on 10 September 2010 with a view to it being the purchaser from the administrators of the choses in action comprising Tannous and J J Rahme’s rights of action against Bevillesta. Mrs Rahme was the sole director and secretary of Joseph Rahme Investments Pty Ltd and Mr and Mrs Rahme were both shareholders of that company. Mrs Rahme asserted in evidence, which the primary judge found was “likely to be correct”, that she had no knowledge of being a director or shareholder of the company (at [41]). Accordingly, if Mrs Rahme had a possible financial interest in the outcome of the proceedings against Bevillesta (because she was a shareholder of the company proposing to purchase the rights of action), she had no knowledge of it.

The facsimile was copied to Mr Michael Soulos, of Spankos Soulos & Co, who was referred to in the letter to Mr and Mrs Rahme as “your solicitor”.

On 13 September 2010 Mr and Mrs Rahme met with Mr Soulos at his home. After receiving advice from Mr Soulos, Mrs Rahme signed a number of documents including the forms of costs agreement and costs disclosure, an Acknowledgement of Legal Advice received by Mrs Rahme and deeds of equitable charge in favour of B&K and the administrators over her property at Oaklands.

The Standard Costs Agreement of 13 September 2010 provided that Joseph Rahme Investments Pty Ltd, Dana Rahme and Gabby Rahme would “assume all liability joint and severally … of all past professional costs, disbursements and expenses including counsel fees in B&K matter numbers 1017 and 1049 on an account stated basis.”

The Standard Costs Disclosure of 13 September 2010 included the following estimate of costs:

The Standard Costs Agreement also provided that:

The Deed of Equitable Charge Over Land dated 13 September 2010 granted an equitable charge over Ms Rahme’s property in favour of B&K as security for costs up to an amount of $250,000. On the same day, Mrs Rahme executed a similar deed granting an equitable charge over her property in favour of Mr Andrew Barden as security for costs incurred in the administration of Tannous and J & J Rahme up to $50,000.

The primary judge found that at their meeting on 13 September 2010 Mr Soulos gave Mrs Rahme advice as follows (at [47]):

In the Acknowledgement of Legal Advice of the same date, Mrs Rahme stated that she had been given advice that “included”:

Mr Khoury’s fee record for 13 September 2010 included the following:

It is unclear whether this note records a conversation that Mr Khoury had with Mr Soulos or simply one that he intended to have.

On 16 September 2010 Mr Soulos wrote to Mrs Rahme confirming that she had signed deeds of charge to secure an estimated amount of $250,000, and other documents. He continued:

Tannous and J & J Rahme were placed in creditors’ voluntary liquidation on 24 September 2010. The previous administrators became the liquidators.

On 5 October 2010 B&K sent to Mr and Mrs Rahme amended forms of the 13 September documents for their execution. Most importantly, the documents included a form of Deed of Variation whereby Mrs Rahme was to agree that the companies in liquidation would have the benefit of the charge she had given. Mrs Rahme signed the documents after receiving advice from Mr Soulos on 5 or 6 October 2010. The documents included an amended costs agreement, and an Acknowledgement of Legal Advice in similar terms to that which she signed on 13 September 2010.

On 6 October 2010 Mr Soulos wrote to B&K indicating that the draft documents B&K had supplied had been signed by Mrs Rahme but were being held “in escrow pending a meeting” between Mrs Rahme and Mr Khoury scheduled for the following week. Mr Soulos said that Mrs Rahme “is unfamiliar with [the litigation’s] status and has expressed to us certain concerns following the company being placed into liquidation”. There followed a list of eight issues that Mrs Rahme “would like to have clarified in writing to prepare her for the meeting next week”. These issues all related to the costs or timing of the proceedings. Mr Soulos concluded by saying that Mrs Rahme was “unable to get any clear understanding of these issues from Gaby Rahme”.

B&K responded to Mr Soulos on 13 October 2010, providing information as to the progress of the proceedings. He gave his current estimate of professional costs and disbursements (including counsel’s fees) as $250,000 and indicated that the total amount outstanding at that time, including counsel’s fees, was $115,545.17.

On 13 October 2010 B&K sent to Mr and Mrs Rahme, and copied to Mr Soulos, a letter confirming that they had assumed liability “for all professional legal costs, expenses and disbursements inclusive of Counsel fees from the date our firm was first instructed in these proceedings”. The letter was signed by Mr and Mrs Rahme and witnessed by Mr Soulos on 14 October 2010, as was a Deed of Variation Of Equitable Charge signed on that day. Mr Soulos gave evidence that on that day he met with Mrs Rahme and referred to a proposal that the choses of action against Bevillesta be assigned to her and that she become the plaintiff in the proceedings against Bevillesta. He said that he told her that:

When asked whether he gave any recommendation to Mrs Rahme as to whether she should agree to that occurring he said:

A letter dated 15 October 2010 from Mr Soulos to Mrs Rahme included the following:

Mr Soulos’ letter dated 15 October 2010 to B&K included the following:

By letter of 25 October 2010 to Mr and Mrs Rahme, B&K noted that it had been agreed at a meeting with them on 22 October 2010 that Mrs Rahme would acquire the tenants’ rights of action against Bevillesta as well as the contemplated action against the tenants’ former solicitors. It continued:

Steps to arrange this purchase culminated in B&K providing to Mrs Rahme a draft deed pursuant to which she would purchase the choses in action (the “Deed of Sale”). She signed the document at a meeting with Mr Soulos on 3 December 2010. He gave evidence that he advised her that “she didn’t have to proceed, she could pull out, and that [he] had no idea as to whether the litigation would be successful or unsuccessful” (emphasis added). He also told Mrs Rahme that “litigation’s a lottery, you know, no guarantee you’re going to win this. And the downside risks are costs”. During their meeting, Mr Soulos had a loud speaker telephone conversation with Mr Musgrave of B&K, in Mrs Rahme’s presence. Mr Musgrave told them that the draft deed had been approved by counsel and would be put to the creditors’ meeting by the liquidators for approval.

In a letter to Mrs Rahme of 3 December 2010 B&K stated:

On 9 December 2010 Mrs Rahme met with Mr Soulos and signed an amended deed relating to the purchase of the choses in action. She signed an Acknowledgement of Legal Advice in similar terms to those which she had previously signed.

On 22 December 2010 Mr Soulos wrote to Mrs Rahme referring to the conference he had had with her on 3 December 2010 and saying:

On 19 January 2011 Mrs Rahme swore an affidavit in support of her application to be joined as a plaintiff in the Bevillesta proceedings. She said that she had received “independent legal advice” from Mr Soulos in relation to the Deed of Variation of Equitable Charge referred to at [52] above. She said that she was aware that Mr Soulos had “acted for the two companies in liquidation, myself, and is also a creditor of the two companies in liquidation. I am aware that some may [take the] view that his independent status could be compromised because of his position as a creditor and as a former solicitor for the companies now in liquidation”. Mrs Rahme also said that the decision to engage Mr Soulos on her purchase of the choses in action was “solely [her] choice”. She also said that she had then been made aware of the costs and other consequences if the proceedings were unsuccessful and that:

Mr Soulos swore an affidavit on 19 January 2011 in similar terms but which did not include the just quoted statement.

In 2011 administrators were appointed to Bevillesta and proofs of debt were lodged by Mrs Rahme on behalf of Tannous and J & J Rahme. They were rejected by the administrators.

According to Mrs Rahme’s affidavit evidence, on 13 March 2012 she was told by a barrister then retained on her behalf that because the tenants’ agreements with Bevillesta said that their rights against it could not be assigned “you don’t have a case, you have wasted your money”.

On 4 April 2012 a Deed of Settlement and Release was entered into as a result of which Mrs Rahme and the tenants released and discharged Bevillesta from all claims against it. In consequence, a Notice of Discontinuance of the Bevillesta proceedings was filed on 13 August 2012.

The primary judge said that the most significant question raised in the proceedings was when did Mrs Rahme become a client of B&K.

His Honour found that Mrs Rahme did not become a client of B&K until after completion of the Deed of Sale on 9 December 2010 and that neither B&K nor Mr Khoury owed her any fiduciary duty prior to that time. When, prior to that time, Mrs Rahme signed documents for the benefit of B&K she was advised by Mr Soulos and was a “third party payer” within the meaning of s 302A(1) of the Legal Profession Act 2004 (NSW). His Honour referred in this regard to s 322 of that Act which contemplated that costs agreements may be made not only between the client and the law practice but between “a law practice and an associated third party payer”. “Third party payer” was defined as follows:

His Honour’s conclusions were expressed as follows:

The primary judge noted (at [150]) that:

His Honour then noted that Mr and Mrs Rahme contended that there was a conflict of interest between Mr and Mrs Rahme on the one hand and B&K on the other in that the latter had an interest in obtaining the agreement of Mrs Rahme to pay their fees and give security for their payment. His Honour continued:

His Honour then noted that B&K had charged fees at the higher rate to other clients in the surrounding months and had also obtained deeds of equitable charge to secure fees in other matters. His Honour concluded:

The primary judge gave the following reasons for rejecting Mrs Rahme’s claims under the Contracts Review Act (at [187]):

His Honour noted that these conclusions rendered it unnecessary for him to deal with a contention of B&K that Mrs Rahme’s claim was time barred by reason of s 16 of the Contracts Review Act.

In light of his Honour’s rejection of Mrs Rahme’s claim on other grounds, the defence of proportionate liability did not arise for determination. Nevertheless, his Honour made observations which included the following.

In relation to Mr Soulos, who was originally a defendant in the proceedings but with whom Mr and Mrs Rahme compromised, his Honour said:

After referring to the role of Mr Washington, barrister, in relation to the proceedings, his Honour said (at [210]):

His Honour concluded (at [213]):

His Honour’s observations concerning the contention that Mrs Rahme was guilty of contributory negligence concluded as follows (at [216]):

The issues on appeal were as follows:

The primary judge found that Mrs Rahme did not become a client of B&K until after completion of the Deed of Sale on 9 December 2010 and that neither B&K nor Mr Khoury owed Mrs Rahme any fiduciary duty prior to that time. Those conclusions were it seems based on two matters.

First, his Honour considered that until Mrs Rahme purchased the choses in action against Bevillesta (and therefore became entitled to be substituted as plaintiff in the proceedings against it), the obligations of B&K to act in and in relation to those proceedings, as recorded in the September and October Costs Agreements, were owed only to Tannous and J & J Rahme and their representatives, those companies then being the plaintiffs in the proceedings against Bevillesta. His Honour referred to B&K’s clients at this time as being “the Companies [that is, Tannous and J & J Rahme] and the Liquidators” (at [146]). Elsewhere his Honour however said that “the clients in the September Costs Agreement were Mr Rahme and Joseph Rahme Investments Pty Ltd and the client in the October Costs Agreement was Mr Rahme” (see [68] above), despite Mrs Rahme having been named as a client in, and having signed, both of those Costs Agreements.

Secondly, his Honour seemingly considered that the fact that at relevant times Mrs Rhame was being advised by Mr Soulos resulted in her not being a client of B&K.

I do not, with respect, agree with his Honour that Mrs Rahme could not properly be described as a client of B&K until 9 December 2010. By the September and October Costs Agreements, B&K undertook to Mrs Rahme to act in relation to the proceedings, in the ways there described for the consideration of her secured promise to pay its fees. That was sufficient to constitute her a “client”, notwithstanding that she was at that time receiving advice from Mr Soulos: B&K commenced to do legal work for her in return for her promise to pay its fees. The Agreements stated that the work B&K was instructed to do (plainly a reference to instructions from the persons named in the Agreements as “clients” which included Mrs Rahme) included:

In my view, it does not matter that Mrs Rahme was receiving advice from another solicitor (irrespective of whether it was adequate and he was independent). The fact was that B&K had undertaken, for consideration moving from Mrs Rahme, to do extensive legal work on her behalf. As Mr Khoury accepted in cross-examination, being a client named in the September Costs Agreement, Mrs Rahme was entitled to give B&K instructions in relation to the legal work they agreed to do.

In any event, neither Mr Rahme nor Joseph Rahme Investments Pty Ltd, whom the primary judge identified as the clients under the September Costs Agreement, was a current plaintiff in the Bevillesta proceedings. The former had ceased to be a plaintiff on 17 June 2010 and in September 2010 Joseph Rahme Investments Pty Ltd was at most an intended plaintiff in the proceedings. By October 2010, Mrs Rahme had become the intended plaintiff in the proceedings but his Honour still did not regard her as a “client” under the October Costs Agreement.

Whilst I have concluded that Mrs Rahme could properly be described as B&K’s client at relevant times, the presently critical question of whether B&K owed Mrs Rahme fiduciary duties is not necessarily answered by that conclusion. The contrary conclusion would not necessarily mean that no fiduciary duties were owed. As Mrs Rahme contended both at first instance and on appeal, fiduciary duties may, and ordinarily will, be owed in the course of negotiations for and steps taken to establish a fiduciary relationship. Thus, such duties will be owed in respect of the entry into a solicitor/client relationship, that being undoubtedly fiduciary in character.

As stated in Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31 at [71], quoting Norberg v Wynrib [1992] 2 SCR 226 at 272, “[t]he essence of a fiduciary relationship … is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other” (see also Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-7; [1984] HCA 64). One aspect of the fiduciary relationship is that a fiduciary “is not allowed to put himself in a position where his interest and duty conflict” (Chan v Zacharia (1984) 154 CLR 178 at 198; [1984] HCA 36 quoting Bray v Ford [1896] AC 44 at 51).

In the present case, at the time that she entered into the September and October Costs Agreements, Mrs Rahme’s interests sharply conflicted with those of B&K. For her part, she was assuming liability for inter alia a large sum of money outstanding to B&K in respect of costs incurred by B&K during the preceding period of almost a year during which B&K had acted for the plaintiffs in the Bevillesta proceedings. As well, Mrs Rahme was agreeing to give a charge over her personal property to secure her obligations. For its part, B&K obtained a considerable financial advantage in procuring those commitments, in circumstances where their two plaintiff client companies had been placed in administration, or by the time of the October Costs Agreement, in liquidation, and the former principal of those companies, Mr Rahme, was not able to pay the costs.

B&K recognised the existence of this conflict and sought, by referring Mrs Rahme to Mr Soulos for advice, to ensure that Mrs Rahme gave her fully informed consent to the arrangements. The primary judge likewise recognised the appropriateness of Mrs Rahme obtaining independent advice.

The salutary effect of fiduciary duties would be considerably diminished if soon-to-be fiduciaries could ignore conflicts of interest, or fail to disclose material facts, in the creation of their fiduciary relationships. Authority does not countenance this.

In Law Society of New South Wales v Foreman (1994) 34 NSWLR 408 Mahoney JA at 435-6, in discussing the practice of a particular solicitor’s firm in obtaining costs agreements from persons who became clients, said:

In Chan v Zacharia, to which Mahoney JA referred, Deane J at 198 referred to a fiduciary’s liability to account for personal benefits or gains and said:

Deane J thus contemplated the existence of a fiduciary duty in respect of the entry into an agreement that would give rise to a fiduciary relationship. Likewise in United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; [1985] HCA 49, to which Mahoney JA also referred, Mason, Brennan and Deane JJ said at 11-12:

UDC v Brian was relied upon by Baker and Burton JJ in Symond v Raphael (1998) 148 FLR 171 at 187-8 to support their finding that fiduciary duties were owed by a solicitor to the wife in proceedings before the Family Court in relation to their entry into a Costs Agreement which enabled the solicitor “to charge not only solicitor’s costs but also to incur counsel’s fees at amounts well in excess of the scale fixed by the rules of court”. The Court held that this arrangement conferred a significant financial advantage upon the solicitor. This case is cited in Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th ed, 2014) at [5-130] for the proposition that fiduciary duties may exist “even before the solicitor is actually retained”.

In the present case, by the time the September and October 2010 Costs Agreements and equitable charges were signed, the Bellevista proceedings, to which they related, had been on foot for a considerable period and steps had been taken by those concerned with the plaintiffs’ conduct of the litigation to involve Mrs Rahme. According to her affidavit evidence, Mrs Rahme’s husband told her in June 2010 that “you are going to be given the chose in action, if you don’t do this we will lose my money”. Further, the administrators were told of Mrs Rahme’s proposed involvement, evidenced in an email of 30 July 2010 (see [32] above) and an offer was made to the administrators on her behalf on 11 August 2010 to purchase both choses in action (see [33] above). Agreement on the purchase was reached on about 20 August 2010.

It is plain that, from the time she signed the September Costs Agreement, Mrs Rahme placed her trust and confidence in B&K to act in her best interests in relation to the legal work that it promised for consideration to do in connection with the Bevillesta proceedings. In accordance with the authorities to which I referred in [87] above, this gave rise to a fiduciary relationship between Mrs Rahme and B&K.

I accordingly conclude that B&K owed Mrs Rahme fiduciary duties at the time that she executed the September and October Costs Agreements and the equitable charges.

Whilst Mrs Rahme argued at first instance that the existence of a fiduciary duty owed to her by B&K was not dependent on her establishing that she was at relevant times a “client” of B&K, the primary judge only dealt with a limited, and present irrelevant, aspect of that argument. This was that B&K was obliged to disclose to Mrs Rahme that the charge rates in the September and October Costs Agreements were higher than in the costs disclosure earlier made to Mr Rahme (see [69] to [71] above).

As B&K owed Mrs Rahme fiduciary duties at the material times and as B&K’s interests conflicted with those of Mrs Rahme, a finding of breach by B&K of those duties would follow unless B&K established that Mrs Rahme gave her fully informed consent to enter into the agreements. As indicated by the plurality in Maguire v Makaronis (1997) 188 CLR 449 at 467; [1997] HCA 23, there is no duty on a fiduciary to obtain an informed consent, “[r]ather, the existence of an informed consent [will go] to negate what otherwise was a breach of duty”. Their Honours said at 466-7:

The question is whether the person in question has been “fully informed of his rights ‘and of all the material facts and circumstances of the case’” (Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 393, citing Turner LJ in Life Association of Scotland v Siddal (1861) 3 De GF&J 58 at 73).

These statements of principle give rise to two questions: (1) whether the “independent” advice of Mr Soulos upon which B&K relied was in fact “independent” in the relevant sense; and (2) whether Mrs Rahme in any event received from Mr Soulos sufficient advice to warrant the conclusion that she entered into the September and October Costs Agreements with fully informed consent. I turn to the second question first.

There is no doubt that Mr Soulos advised Mrs Rahme about the effect of the documents that she signed. He described to her the essence of the liabilities she assumed under the documents and told her that she did not have to go ahead if she did not want to (at [43] and [44] above). It is also clear however that he did not advise her about an issue that was fundamental to her making an informed judgment about whether to proceed. That was whether the Bevillesta proceedings were or were not likely to succeed. Advice on this issue was central to any reasonable assessment of whether she should sign the documents and in particular to whether she had a realistic prospect of recouping the substantial amounts for which she assumed responsibility, by obtaining payment of the costs by Bevillesta or by recoupment from judgment proceeds.

Moreover, it is not clear that Mrs Rahme had any prospect of obtaining a benefit from the proceedings succeeding other than by such a payment or recoupment of the costs for which she was agreeing to be responsible. The evidence suggests that she was, or was to be, a shareholder in Joseph Rahme Investments Pty Ltd, the company originally intended to be substituted as plaintiff, but to what extent and on what terms is not known. Later, that company ceased to be proposed as the new plaintiff and Mrs Rahme personally took assignments of the choses in action against Bevillesta and became the plaintiff in the proceedings against it. Whether under such arrangements as she may have had with her husband this would have entitled her to the whole or a defined part of any judgment proceeds is again not clear.

What is clear however is that Mrs Rahme could not make an informed judgment without knowing what prospects the proceedings had of succeeding. If the proceedings failed, the commitments she undertook in the September and October Costs Agreements to B&K were likely to have disastrous financial consequences for her, as she was the only person or entity with the ability to pay the litigation costs.

The principal items of evidence concerning advice as to the likelihood of the proceedings succeeding were as follows:

To ensure that consent is fully informed, independent advice must be “meaningful” advice enabling the person advised to make an independent, intelligent choice concerning the transaction (Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30 at 36 per Street J; Paul Finn, Fiduciary Obligations (Republication, 2016)). In Bester, Street J held that the advice of a solicitor was inadequate in circumstances where the solicitor “read the document through” and “invite[d] questions of the plaintiff” but did not give the plaintiff “advice as to whether or not she should sign the document” (at 33-5).

Whilst Mr Soulos adequately advised Mrs Rahme as to the legal effect of the documents she signed, he did not, as he repeatedly informed her, give her any advice as to the prospects of the Bevillesta proceedings succeeding. He made that clear not only to Mrs Rahme but also to B&K (see [55] above). As Mrs Rahme did not receive independent advice about this fundamental matter from any other source, and as she was unqualified to assess the position herself, she was unable to make an independent, intelligent choice. Her consents to the agreements with B&K were therefore not fully informed.

This conclusion is not contradicted by authorities that state that a lawyer does not ordinarily have an obligation to advise his or her client as to the wisdom of a transaction (Polkinghorne v Holland (1934) 51 CLR 143 at 158; [1934] HCA 28; Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398 at 418). Here the issue which needed to be the subject of advice was not of that character but one well within the ordinary purview of a lawyer, namely the prospects of particular litigation succeeding. I note in passing that, even if the relevant issue is as to the commerciality of a transaction, it may in some circumstances be a solicitor’s obligation to advise his or her client to obtain commercial advice to ensure that the client is aware of the practical implications of entering into the transaction (Provident Capital Ltd v Papa (2013) 84 NSWLR 231; [2013] NSWCA 36 at [80]).

I add that it is not a question here of whether B&K took reasonable steps to ensure that Mrs Rahme obtained meaningful independent advice. Rather, the question is whether she did in fact obtain such advice. If she did not, B&K will have not established its defence of fully informed consent. Outside the realm of fiduciary relations, the position may be different. For example, in light of the steps it had taken, the lender in Provident Capital v Papa was found in a Contracts Review Act context to be entitled “to assume, and proceed upon the basis, that Mrs Papa had obtained advice of the type that a reasonably prudent solicitor would have given” (at [114]).

What I have said thus far is sufficient to indicate that Mrs Rahme did not give her fully informed consent. A further reason for the same conclusion however is that Mr Soulos was not, by reason of the following circumstances, “independent” in the relevant sense.

According to Mr Rahme’s evidence, he was introduced to Mr Soulos by Mr Rahme’s accountant, Mr Jerry Kekatos, within whose office Mr Soulos had his own office. Mr Soulos gave evidence that in about 2004 and 2005 he acted for Tannous and J & J Rahme “on around a dozen subleases for various shops in a shopping centre” at Gosford built, owned and managed by Bevillesta. He said that Mr Rahme was the sole director and secretary of the companies. Mr Rahme gave evidence to similar effect. These transactions included the obtaining by Mr Soulos’ client companies of the Lease Indemnity Deeds which were the subject of the litigation against Bevillesta referred to in the present proceedings. Mr Soulos’ firm was involved on behalf of his clients in discussions with Bevillesta’s solicitors that led to the Lease Indemnity Deeds being drafted by the latter (see [14] above). In her affidavit of 19 January 2011 Mrs Rahme said that Mr Soulos’ firm was a creditor of the lessee companies for when he had acted.

This Court’s attention was not drawn to any other work that Mr Soulos did for Mr Rahme’s companies, or Mr Rahme, prior to 2010. The work to which I have referred however indicates that prior to September 2010 a substantial solicitor and client relationship had existed between Mr Soulos and Mr Rahme (or at least companies that he controlled).

Moreover, there is a question of whether Mr Soulos again commenced to act for Mr Rahme (as well as Mrs Rahme) in September 2010. B&K’s request of 13 September 2010 for the signing of the September Costs Agreement and other documents was directed to both Mr and Mrs Rahme and copied to Mr Soulos, who B&K referred to as “your solicitor” (see [35] above). When Mrs Rahme met with Mr Soulos on the same day to sign the documents, Mr Rahme was present.

Whether or not it can be said that in September 2010 and following there was a solicitor and client relationship between Mr Soulos and Mr Rahme, the following matters rendered Mr Soulos insufficiently independent to provide the advice to Mrs Rahme that she needed in order to render her consent fully informed: (i) Mr Soulos’ past association with Mr Rahme, (ii) Mr Rahme’s involvement in Mr Soulos advising Mrs Rahme in September and October 2010, (iii) the conflict of Mr Rahme’s interests with those of Mrs Rahme, and (iv) Mr Soulos’ firm’s apparent status as a creditor of Mr Rahme’s companies.

Mr and Mrs Rahme’s interests conflicted because Mr Rahme was already responsible to B&K for the substantial fees that had been generated in relation to the Bevillesta proceedings. Although Mr Rahme’s companies were by then the plaintiffs in the litigation, Mr Rahme had previously been a plaintiff and had given B&K his commitment to pay their fees, at least by reason of a costs agreement made between B&K and Mr Rahme on about 18 June 2010. It was therefore for Mr Rahme’s financial advantage in September 2010 that Mrs Rahme agreed to become jointly liable with him for those, and ongoing, fees. Moreover, it was clear that the litigation would not proceed, and therefore Mr Rahme’s companies would lose their hope of success in the proceedings and prospects of recoupment of costs already incurred, unless Mrs Rahme agreed to be responsible for B&K’s fees and agreed to make her property available as security.

The insufficiency of Mr Soulos’ advice to Mrs Rahme was accentuated by Mr Rahme’s presence when the advice was given in September 2010. It must have been apparent to Mr Soulos that Mrs Rahme was heavily dependent on the directions and advice of Mr Rahme in relation to his business affairs. Proper, independent advice could not be given to Mrs Rahme unless she was isolated from Mr Rahme’s undoubted enthusiasm for the litigation continuing.

Although it does not appear that Mr Rahme was present when Mr Soulos gave advice to Mrs Rahme on subsequent occasions, the reasons that I have given for Mr Soulos not being independent in the relevant sense remained applicable so as to deprive B&K of a defence of fully informed consent on the part of Mrs Rahme.

The primary judge rejected Mrs Rahme’s claim that her agreements with B&K were unfair contracts under the Contracts Review Act, in essence, because, as his Honour found, B&K did not breach any fiduciary duty that it owed and Mrs Rahme entered into the agreements after receiving “full and frank” independent advice (see [72] above). His Honour did not indicate what view he would have taken of the Contracts Review Act claim if, as I have held to be the case, those reasons were not well-founded.

In these circumstances, and as Mrs Rahme did not contend that she would be able to obtain significant relief under the Contracts Review Act that was not available to her on her breach of fiduciary duties claim, it is inappropriate for me to deal with the Contracts Review Act claim.

In the final iteration of her Statement of Claim, Mrs Rahme contended first that Mr Khoury owed fiduciary duties to her comparable to those owed by B&K and secondly that Mr Khoury was “knowingly concerned” in B&K’s breaches of fiduciary duties.

No attention was paid on appeal to Mr Khoury’s position as distinct from that of B&K. The claim against him must therefore be determined on the basis of principle, without the assistance of submissions by the parties. Doing this, I reject the claim against him.

First, as he, as distinct from B&K, did not undertake to Mrs Rahme to act on her behalf, I conclude that he did not personally owe fiduciary duties to Mrs Rahme. Secondly, Mrs Rahme’s undoubtedly correct assertion that he was “knowingly concerned” in what was done by B&K did not allege matters that would render him liable for participating in B&K’s breaches of fiduciary duty. To render liable a third party, as Mr Khoury effectively was so far as the fiduciary duties owed by B&K to Mrs Rahme were concerned, the third party must either have received relevant trust property or knowingly assisted “in a dishonest and fraudulent design” on the part of the party owing the fiduciary duties (Farah Constructions v Say-dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [110]-[113] referring to the rule in Barnes v Addy (1874) LR 9 Ch App 244).

Whilst fees paid by Mrs Rahme in relation to the Bevillesta litigation may be regarded for this purpose as trust property, because their payment was secured by breaches of fiduciary duty, the payments were made to B&K and any dealing with them by Mr Khoury was as agent for the firm only. Further, whilst I have found that B&K committed breaches of fiduciary duty, Mrs Rahme did not allege, and there was then of course no finding that, B&K acted dishonestly or fraudulently.

B&K and Mr Khoury contended that any judgment to which Mrs Rahme was otherwise entitled should be reduced by reason of her contributory negligence, she having failed to take reasonable care of her own interests. The primary judge concluded that there was a sound factual basis for this contention (see [78] above).

As noted at [10] above, on appeal the parties were given leave to lodge supplementary submissions as to the availability in principle of this defence (and also the defence of proportionate liability, with which I deal next).

For the following reasons I find that as a matter of principle a defence of contributory negligence is not available as an answer to a claim for breach of fiduciary duties such as that of Mrs Rahme.

Unless there is a statutory basis for such a defence, authority indicates that the defence is not available (Pilmer v Duke Group Ltd (2001) 207 CLR 165; [2001] HCA 31 at [86]; Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th ed, 2014) at [2-345]; T G Youdan (ed), Equity, Fiduciaries and Trusts (1989) at 82-7). As statutory authority for the defence, B&K and Mr Khoury rely on the Civil Liability Act 2002 (NSW). Whilst addressing a contributory negligence defence in ss 5R-T, the Civil Liability Act does not create that defence. Rather, it modifies the operation of the defence of contributory negligence created by s 8 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW) (ACQ Pty Ltd v Cook (2008) 72 NSWLR 318; [2008] NSWCA 161 at [158]-[159]; Perpetual Trustee Company Ltd v Milanex Pty Ltd (in liquidation) [2011] NSWCA 367 at [84]-[89]).

Section 9(1) of the 1965 Act is in the following terms:

As is apparent from its terms, it is necessary for sub-s 9(1) to apply that there inter alia be a “wrong” on the part of the defendant. Section 8 defines “wrong” in the following manner:

As a liability for breach of fiduciary duties is not a “liability in tort” and as no defence of contributory negligence was “available at common law” (or indeed in equity) in respect of such a claim, paragraph (a) of the definition is inapplicable. Likewise, paragraph (b) is inapplicable because Mrs Rahme’s claim based on breaches of fiduciary duty was not a claim that B&K or Mr Khoury had breached “a contractual duty of care”.

The provisions of the Civil Liability Act dealing with contributory negligence are also inapplicable, at least for the reason that the Part 1A of the Act, in which they appear, is only applicable to claims for damages “for harm resulting from negligence” (s 5A). For this to be so, negligence must be an element of the plaintiff’s claim (Milanex at [87]; Monaghan Surveyors Pty Ltd v Stratford Glen-Avon Pty Ltd [2012] NSWCA 94 at [76]-[80] stating a presently inapplicable qualification), which it is not in a claim for breach of fiduciary duties.

As indicated earlier, the primary judge did not find it necessary to make any final determination concerning the availability of a defence of proportionate liability (see [74]-[77] above). His Honour did however make some observations on the topic and conclude that reductions of B&K’s and Mr Khoury’s liability may have been appropriate (see [77] above).

Proportionate liability is dealt with in Part 4 of the Civil Liability Act. Section 34(1) in that Part indicates that Part 4 only applies to certain specified types of claims:

The present case is not concerned with an action for damages under the Fair Trading Act or the Australian Consumer Law. As a result, s 34(1)(b) is inapplicable.

For s 34(1)(a) to apply the plaintiff’s claim must inter alia be one “arising from a failure to take reasonable care”. As I concluded in Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2) [2013] NSWCA 58, it is necessary for this purpose that the absence of reasonable care was an element of the, or a, cause of action upon which the plaintiff succeeds. I repeat as follows the reasons I there gave:

Whilst Barrett JA expressed a different view in the same case ([37]-[42]) the approach which I consider to be correct is supported by the reasoning in Milanex and Monaghan Surveyors, to which I have referred above at [135], and of Emmett AJA (with whom Sackville AJA relevantly agreed) in Cassegrain v Cassegrain [2016] NSWCA 71 at [83]-[84].

I accordingly find that as a matter of principle a defence of proportionate liability was not available in the present case.

Having succeeded in her claim against B&K for breach of fiduciary duty, Mrs Rahme is entitled to have an amount equivalent to the legal costs that she paid B&K paid back to her by way of restitution and to obtain from B&K equitable compensation for the amount she paid to third parties in consequence of B&K’s breaches of fiduciary duty. If she incurred liabilities to third parties in such circumstances, she is entitled to compensation in respect of the liabilities also even if she has not yet satisfied them. These amounts appear to total $342,193.69, plus interest. As noted earlier, the primary judge said that he did not believe that there were any outstanding issues in respect of the quantum of Mrs Rahme’s claim.

The parties should be ordered to bring in Short Minutes of Order providing for judgment for this amount and any orders setting aside costs agreements or judgments that are necessary.

The Short Minutes of Order should also deal with costs. B&K should be ordered to pay Mrs Rahme’s costs in respect of the proceedings at first instance and on appeal. Because of the lack of reference on appeal to the claim against Mr Khoury individually, I would not make any order for the costs of the appeal relating to the claim against Mr Khoury. He is however entitled to an order for his costs at first instance.

For these reasons I propose the following orders:

McCALLUM JA: I agree with Macfarlan JA.