Sewell v Zelden [2010] NSWSC 1180

Names of the parties and the court:

Plaintiff: (K) Mr Sewell

Defendants: (A) Henamast Pty Ltd, (D) Mr Zelden, (G) Mrs Zelden

The core of the issue relates to defendant 2, Mr Zelden.

Supreme Court of New South Wales - Equity Division

Procedural Posture

Facts

A encourages B, by breach of a fiduciary, to enter into a contract with C, which contract benefits C
directly and A indirectly.

Mr Sewell entered into a conveyancing transaction by which he purchased a property from

Henamast Pty Ltd (the second defendant). Mr Zelden acted as solicitor for Mr Sewell on the
transation. Henamast is a company in which at all times was owned by Mrs Zelden, who is the
solicitors wife. It is agreed that Mr Zelden provided advice on finances and suggested to Mr Sewell
that he purchase the property from Henamast. Mr Zelden allegedly failed to advise Mr Sewell that
Mrs Zelden was the holder of all shares in Henamast. Mrs Zelden was working under her maiden
name at the time of the issue and therefore her ownership of the company became unknown to Mr
Sewell. Mr Zelden also allegedly failed to obtain Mr Sewells informed consent when faced with real
or substantial possibility of conflict between duty to applicant and personal interest.

Issues

There are two issues at question in this case

Did the solicitor breach fiduciary duties to his client? And did the solicitor’s wife and company
owned by her have knowledge of the solicitor’s dishonest and fraudulent breach of fiduciary duty to
his client.

Holding of the case

It was held that Mr Zelden breached his fiduciary duty to Mr Sewell. It was also held that Mrs Zelden
and Henamast are liable for “knowing assistance” under the second limb of Barnes v Addy. Mr and
Mrs Zelden are to pay the amount of $60,000 for reason of Mr Zelden’s breach of fiduciary duty.

It was concluded that Mr Zelden did not tell Mr Sewell that the vendor was a company owned and
controlled by his wife, and that Mr Zelden’s conduct was designed to lure Mr Sewell into purchasing
a property for more than it was worth my planting the idea of him buying a second property and
then introducing to him the Eastwood property. It was concluded that Mr Zelden acted in total
disregard of his obligations to Mr Sewell as a client and that his behaviour amounted to dishonest
and fraudulent conduct. This is a direct breach of his fiduciary duties to Mr Sewell. The court also
reached the conclusion that Mrs Zeldon and Henamast were aware of Mr Zelden’s breach of duty to
Mr Sewell and engaged in deliberate conduct designed to disguise and obscure her relationship with
Mr Zelden.

Rationale

It is well established that a solicitor must put the client in the position where the latter is able to
make a free and informed decision about that proposed transaction.

The court considered Mr Sewell’s and Mr Zelden’s character in constructing their argument.

The court concluded that Mr Sewell was not a sophisticated man, as he demonstrated a lack of any
property grasp of property investment. Furthermore, the court found it clear that Mr Sewell was
completely trusting of what his lawyer told him. It was evidenced that Mr Sewell told Mr Zelden that
he had no objection to Mr Zelden acting for both himself and the vendor, which is indiciative of
naive trust and acceptance. More importantly, he quickly accepted the idea of buying a second unit
which idea was advanced by no one other than Mr Zelden. The fact that Mr Sewell did not view the
property he was purchasing or obtain a strata report is significant evidence of his naivity and blind
trust in his solicitor. Mr Sewell’s naive nature and trust in Mr Zelden is the major factor in
rationalising the courts belief of Mr Sewell’s facts.

A detailed consideration of Mr Zelden’s character is used to detail the process of the courts in
deciding the verdict. Mr Zelden had no notes of any conferences or conversation with Mr Sewell. It
was concluded by the court that a failure to at least note conversations by means of a file note,
particularly where the subject matter of the advice is relevant to the existence of a conflict of
interest is extradorinary and sufficiently remarkable to induce doubt in Mr Zelden and his account of
the events. The court did not find Mr Zelden’s evidence at all credible particularly given the fact that
the sale of the property was of interest to Mr Zelden, his wife and his wifes company. Mr Zelden
failed to advice Mr Sewell that Mrs Zelden was the holder of all shares in Henamast and its sole
director and shareholder. There was complete absence of any proper advice from Mr Zelden about
the nature of the conflict and its resolution.

The conclusion that Mr Zeldon did not tell Mr Sewell that the vendor was a company owned and
controlled by his wife, couples with the financial advice Mr Zeldon provided lead the court to
conclude that Mr Zelden acted in total disregard of his obligations to Mr Sewell as a client.

In reaching the courts decision towards Mrs Zelden’s conduct, the court considered what Mrs Zelden
would have known about Mr Zeldens conduct towards Mr Sewell. It was taken that Mr Zeldens
actions must be have known as Mr Zelden was acting as Mrs Zeldens agent, and therefore must have
known Mr Zelden had done on her behalf in reaching an agreement with Mr Sewell. It was also
concluded that Mrs Zelden, engaged in deliberate conduct designed to disguise and obscure her
relationships by avoiding the use of her married name as Mrs Zelden customarily used her married
name in relation to other property contracts.

The court relied heavily on the case Barnes v Addy in deciding Mrs Zeldens relation to Mr Sewell. The
court heavily relied on the principle established in Barnes v Addy of “knowing assistance” which
requires dishonest and fraudulent conduct by the trustee or fiduciary to impose liability on the third
party.