Perpetual Trustee v Papantoniou [2014] NSWSC 685

Two brothers and a solicitor (who had been retained by one of the brothers) agreed that the solicitor would buy out their sisters’ shares in a property inherited by all of them, for the purpose of developing the property and earning a profit. After the purchase was agreed, the solicitor structured the buy out using finance, secured by guarantees given by the brothers and a mortgage over the property so as not to place her personal assets at risk. The solicitor defaulted on the mortgage and the lender claimed possession. The brothers claimed that their agreement with the solicitor was unjust and sought a variation of their guarantee to include an express indemnity for their losses including legal costs. The brother who was also the solicitor’s client sought equitable compensation for breach of fiduciary duty by the solicitor. The solicitor sought to be discharged from the loan.

The court found the agreement unjust because it imposed the whole of the risk that the solicitor would default on the brothers which was not reasonably necessary for the protection of her legitimate interests. The court said:

She was better placed than any of them to bear the risk of the financial failure of the project. Yet she sought to quarantine her assets and personal wealth from it. The contract was also unjust because the brothers did not have the capacity or opportunity to make an informed or real choice as to whether each of them should enter into the contract. It is this “combination of the operation of the contract and the manner in which it was made” that renders the provisions imposing that part of the financial risk that should have been borne by the solicitor upon the brothers unjust in all the circumstances of the case…. Mrs Papantoniou, as a legal professional did not refer her own client for legal and financial advice about the venture before entering into the contract.

The court took into account the relative lack of sophistication of the brothers, their trust in the solicitor and the particular vulnerability of one of the brothers who was also her client. In this regard, the court found a degree of undue influence over him and said:

He was extremely vulnerable. I accept that she was well motivated towards him, but that is not the point. Her dominant purpose was to make a profit from the development without personal risk. The finding that the contract was unjust that I have made is enhanced by the consideration that it is most unfair that a disability support pensioner with health and substance abuse issues, and an ordinary working member of the community, should underwrite the liabilities of a successful professional.

The court declared the agreement void in part to the extent it required the brothers to bear the risk of the solicitor’s default on her mortgage. The court found no disentitling conduct on their part. The court acknowledged that it had focussed on the buy out agreement rather than the guarantee with the lender, which was the correct approach.

The court also found that the solicitor breached her fiduciary duty to her client by entering into the agreement with him. The court said:

The real vice was in making a contract from which the solicitor stood to gain from any profit made, but the client would carry the can as to losses incurred. Mrs Papantoniou obtained a benefit at the expense of her client. That benefit was the client assuming responsibility for her liability. The fiduciary relationship of solicitor and client was the most significant factor bringing about this result.

The court found that the brother should be reimbursed for the extra amount he paid to the lender to acquire the property over and above the solicitor’s share, namely the extra amount paid to discharge the debt due to the lender.

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