FEDERAL COURT OF AUSTRALIA
LEGAL PRACTITIONERS - professional duty - solicitor’s professional indemnity insurance - the concept of a solicitor’s professional legal practice contrasted with entrepreneurial and promotional activities undertaken by a solicitor - ordinary functions of a solicitor - activities of a solicitor having a professional character - the solicitor/client relationship - instructions from a client - dual activities of other professionals - the giving of “purely commercial” advice - ethical responsibilities of a lawyer in relation to law-related services - professionalism and the modern solicitor - whether retainer in relation to the acquisition of a kiwi fruit orchard was a retainer within the scope of practice as solicitors - whether liability incurred in the settlement of an action for damages arose in connection with the solicitors’ practice - whether marketing or promotion of investments in the area of property syndication, in conjunction with accountants seeking investment and taxation advantages for clients, part of the practice of a solicitor - negotiations of agreements for the sale and purchase of land, plant and equipment - purchase at auction - arrangement of finance for the purchase - receipt by solicitor of an acquisition fee expressed as a percentage of the purchase price - recruitment of partners in a syndicate.
INSURANCE - construction of insurance policies - scope of indemnity - whether weight to be given to the statutory context, origins and rationale of a policy.
PROFESSIONAL INDEMNITY INSURANCE - indemnity for costs reasonably and necessarily incurred in proceedings arising out of a claim against the insured following settlement of the claim against the insured - application to set aside settlement - meaning of “necessarily”.
Mann v Hulme (1961) 106 CLR 136, distinguished
Hawkins v Clayton (1988) 164 CLR 539, distinguished
Hill v Van Erp (1997) 142 ALR 687, distinguished
Drayton v Martin (1996) 67 FCR 1, distinguished
Leary v Federal Commissioner of Taxation (1980) 32 ALR 221, applied
Henderson v Amadio Pty Ltd (No 1) (1995) 62 FCR 1, applied
Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398, considered
Haseldine v Hosken [1933] 1 KB 822, considered
Restatement of the Law Governing Lawyers, Tentative Draft No 8, March 21, 1997, Section 79, p 124
State of Florida v Sperry (1962) Fla 140 So (2d) 587, considered
Sheinkopf v Stone 927 F 2d 1259, considered
Law Society of NSW v Harvey [1976] 2 NSWLR 154, considered
Federal Commissioner of Taxation v Snowden & Willson Proprietary Limited (1958) 99 CLR 431, applied
THE SOLICITORS’ LIABILITY COMMITTEE v GARRICK LEWIS GRAY and MICHAEL FREDERICK WINTER
No. VG 546 of 1996
Judges: Lockhart, Beaumont, Burchett JJ.
Place: Sydney (heard in Melbourne)
Dated: 21 July 1997
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY ) No. VG 546 of 1996
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: THE SOLICITORS’ LIABILITY COMMITTEE
Appellant
(Cross-respondent)
AND GARRICK LEWIS GRAY and MICHAEL FREDERICK WINTER
Respondents
(Cross-appellants)
JUDGES: LOCKHART, BEAUMONT & BURCHETT JJ.
PLACE: SYDNEY (HEARD IN MELBOURNE)
DATED: 21 JULY 1997
MINUTES OF ORDERS
THE COURT ORDERS:
1. That the appeal be allowed, with costs.
2. That the cross-appeal be dismissed, with costs.
3. That the judgment and orders made at first instance be set aside.
4. That, in lieu thereof, it be ordered that the application be dismissed, with costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA)
)
VICTORIA DISTRICT REGISTRY ) No VG 546 of 1996
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE
FEDERAL COURT OF AUSTRALIA
BETWEEN: THE SOLICITORS’ LIABILITY
COMMITTEE
Appellant
Cross Respondent
AND: GARRICK LEWIS GRAY and
MICHAEL FREDERICK WINTER
(trading as GRAY & WINTER)
Respondents
Cross Appellants
CORAM: LOCKHART, BEAUMONT and BURCHETT JJ.
PLACE: SYDNEY (HEARD IN MELBOURNE)
DATED: 21 JULY 1997
REASONS FOR JUDGMENT
LOCKHART J.
This is an appeal from the judgment of a judge of the Court (Olney J). The issue before his Honour (and on this appeal) arises from the terms of a contract of professional indemnity insurance between the appellant (‘the insurer’) and the respondents (‘the insured’). The issue is whether a liability incurred by the respondents, a firm of solicitors, in settling a claim for damages, was incurred in connection with their practice as solicitors.
The appellant appealed primarily from Olney J’s finding that the liability was incurred in connection with the respondents’ practice as solicitors. The respondents cross-appealed from Olney J’s finding that they were not entitled to be indemnified for their costs and expenses reasonably and necessarily incurred in certain matters and the appeals therefrom (Nos VG293, VG314 and VG315 of 1993) to which reference will be made later.
The proceeding was commenced in the Supreme Court of Victoria, but was later transferred to this Court pursuant to the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Vic).
Most of the relevant facts are not in dispute. In the main I shall take the statement of facts from the judgment of the learned primary Judge.
The respondents were at all material times solicitors admitted to practice in Victoria, holding current practising certificates and carrying on practice in partnership under the firm name of Gray & Winter.
The appellant is a body corporate established under s 88B of the Legal Professional Practice Act 1958 (Vic) (‘the Act’).
Section 88H(1) of the Act requires the appellant to carry on the business of providing for solicitors and firms of solicitors professional indemnity insurance, and to undertake liability under contracts of professional indemnity insurance entered into in accordance with the Act with solicitors and firms of solicitors. I shall return to the Act later because its provisions are important to the disposition of this matter.
The parties entered into a contract of professional indemnity insurance for the calender year 1993 (‘the insurance contract’) whereby the appellant agreed to indemnify the respondents against civil liability in connection with the private practice as solicitors carried on solely on their own behalf, in respect of claims first made against them during 1993. The insuring clause provides:
‘The insurer will indemnify the insured against any civil liability in connection with the Practice in respect of which a claim is first made against the firm during the Period of Insurance.’
The appellant also agreed to indemnify the respondents against costs and expenses reasonably and necessarily incurred in defending a claim, after notification of the claim to the appellant and before the appellant elected to take over the defence of the proceedings. The total liability of the appellant for each claim including such costs and expenses is limited to $1 million.
The respondent, Garrick Lewis Gray, has been in practice as a barrister and solicitor of the Supreme Court of Victoria since 1958. He practices in the areas of property, taxation and commercial law. Michael Frederick Winter became Mr Gray’s partner in 1988. Initially the firm name was Garrick Gray & Co, but this was later changed to Gray & Winter.
In the period 1976 to 1981 Mr Gray specialized in the area of personal tax minimization, an area in which there was a considerable demand from self-employed professional, business and farming people. Early in 1982 Mr Gray wrote to all clients who had participated in tax minimization arrangements and expressed the opinion that the age of artificial tax schemes had finished, and he advised clients to contemplate tax relief by entering into investments with tax incentives such as deductions for depreciation, investment allowances, negative gearing and non-taxable capital gains.
In 1987 taxation deductions, which had previously applied for certain primary production activities, had become less available; so following the stock market crash in October 1987 Mr Gray examined the feasibility of forming partnerships or syndicates for clients to invest in commercial properties. He started to practice in the area of property syndication in conjunction with accountants who saw investment and taxation advantages for their clients in such investments.
The usual practice was for a company controlled by Messrs Gray & Winter to take an option over a property which was thought to be a suitable investment for investors seeking to minimize their liability for income tax. Having acquired the option they would organize a syndicate to acquire the property and would arrange the necessary finance. They were recompensed by the payment of an acquisition fee, usually 7.5 per cent of the cost of the property. As part of their function they would attend to any necessary legal work. When interstate properties were acquired it was usual for local solicitors to be engaged to attend to the conveyancing.
In about late 1988 or early 1989, first Mr Winter, then later Mr Gray, met a Mr Neil Allan, a partner in the accountancy firm of Metzke & Allan at Shepparton, Victoria. Mr Allan was adept at producing computerized cashflow forecasts and cash returns from investment in property, and was engaged by Messrs Gray and Winter to do cashflows for projects in which they were interested.
Prior to 1989 various combinations of Victorian barristers had become involved in syndicates which purchased properties over which Messrs Gray and Winter had acquired options. In April 1988 four barristers entered into a contract for the purchase of a property at Marrickville, New South Wales, for a purchase price of $4 million, organized through Messrs Gray and Winter. In July 1988 four Melbourne barristers (including three of the four barristers who agreed to purchase the Marrickville property) entered into a contract for the purchase of a property at Wembley, Western Australia, for a total price of $1.99 million, also organized through Messrs Gray and Winter. The barristers contributed $75,000 between them, the balance being financed.
In about February 1989 three of the barristers acquired a one-third interest each in a property in Karratha, Western Australia which cost a total of $2.1 million (check). The barristers contributed $120,000 and the balance was financed.
In each case written instructions were given to Messrs Gray & Winter by the respective purchasers authorizing the firm to act in the matter.
In addition to these transactions, two of the barristers had been involved in a number of other tax minimization partnerships arranged by Mr Gray.
The practice of Messrs Gray & Winter was organized in such a way that a company controlled by the partners, Australian Investment Management Pty Limited (‘AIM’), administered the financial affairs of the partnership. AIM was set up as an administration company in the same way that other professional people, such as accountants and doctors, establish administration companies to receive fees, make payments and otherwise administer their practices.
In late October 1989 Mr Gray was contacted by Mr Allan who told him that a Kiwi fruit property in the Murray Valley was to be auctioned on 15 November 1989. Mr Allan said that the property had cost over $6 million to purchase and develop, but it was likely to sell at auction for under $1.5 million. He said it would be a good investment for the barristers. Mr Gray said that he would mention the matter to the barristers. Shortly afterwards, Messrs Gray & Winter met Mr Allan at his office in Shepparton and discussed the matter in detail. Mr Gray also discussed the proposal with a Mr Corboy, an experienced manager and fruit grower, and they later inspected the property.
A day or so after returning to Melbourne (having been at Shepparton and inspected the Murray Valley Kiwi fruit property) Mr Gray spoke to Mr Hedigan (one of the interested barristers) on the telephone and mentioned the project to him. He told Mr Hedigan that Mr Allan had recommended it as being suitable for ‘your barristers’ with ‘good tax deductions’. Mr Hedigan replied that only Mr Guest (another of the barristers) and himself were around at the time and invited Mr Gray to ‘bring it in to us’. On that or the following day both Messrs Gray and Winter met with Messrs Hedigan and Guest at Mr Hedigan’s chambers where they outlined the proposal. In the course of the meeting Mr Gray said that he and Mr Winter would be interested in becoming part of the syndicate. Mr Hedigan said that he was interested in having a further look it and Mr Guest said that he too was interested. Mr Hedigan said that Mr O’Callaghan and Mr Chernov (both barristers involved in the property transactions previously mentioned) would probably be interested. Mr Gray also mentioned a Mr Manford (who is not a barrister and who lives in Perth) as someone who could be interested. In the course of the meeting Mr Gray said:
‘If we purchase the property at auction we would be interested in putting up the deposit, arranging finance to purchase the property, and pay any acquisition costs such as agent’s commission, we’ll fund whatever is necessary to acquire it.’
and also:
‘If we put up all the money to acquire the property at auction, we’d want an acquisition fee of 10 percent of the purchase price.’
The primary Judge assumed, and the contrary is not suggested, that by referring to ‘we’ Mr Gray meant himself and Mr Winter.
Within a couple of days after the initial meeting at Mr Hedigan’s chambers, Mr Hedigan told Mr Gray on the telephone that he had spoken to Mr O’Callaghan and Mr Chernov who had both expressed interest in becoming involved. Mr Gray and Mr Hedigan also discussed options for financing the project. Mr Gray and Mr Hedigan met at the Melbourne Cup Carnival races in early November 1989 to discuss the project further.
On 10 November 1989 a celebration was held to mark Mr Gray’s 60th birthday. The guests included Mr Hedigan, Mr Guest, Mr O’Callaghan and Mr Winter. Mr Winter was seated at the same table as Mr O’Callaghan and Mr Guest and he discussed with both of them the Kiwi fruit proposal. Mr Guest said he had already spoken to Mr Corboy who was interested. Mr O’Callaghan also expressed interest subject to a suitable funding package being worked out.
Between 10 and 15 November 1989 Mr Gray had several discussions with Mr Hedigan to ascertain the commitment of the barristers to the venture. He was concerned that Messrs Gray & Winter and companies associated with their firm had not previously entered into a contract to acquire a commercial property in their own name. Mr Gray did not want to be placed in the position of either having to complete the contract or lose a deposit in excess of $100,000.
In response to Mr Gray’s enquiry about the statement that he would be interested in having a share in the syndicate, Mr Hedigan told Mr Gray that the barristers only wanted barristers to be involved.
In the period between the signing of the contract on 15 November 1989 and the final settlement of the purchase, Mr Hedigan acting on his own initiative, without the involvement of either Mr Gray or Mr Winter, met with both Mr Corboy and Mr Allan to discuss matters associated with the Kiwi fruit property.
At the auction on 15 November 1989 an agent acting on Mr Gray’s instructions was the highest bidder at $1.1m but the property was passed in. After negotiation, an offer of $1.265m was accepted, being $1,110,000 for the land and irrigation equipment and $155,000 for machinery and other equipment. Separate contracts were executed for the property and for the equipment. The purchaser in each case was ‘Covent Pty Limited or nominee’. Covent was a shelf company then controlled by Mr Allan which he made available for Mr Winter on the day of the auction. Mr Winter signed the contracts on behalf of Covent and he also executed a personal guarantee.
The contract provided for a deposit of $111,000 to be paid as to $50,000 on the signing of the contract and as to $61,000 by 20 November 1989, with the balance of purchase price to be paid on 15 December 1989. Mr Winter paid the initial deposit of $50,000 with a cheque drawn on the account of Mount Dunnead Pastoral Company Pty Limited, the trustee of his family trust. There is no evidence as to the payment of the balance of the deposit, but it is common ground that it was paid. On the day of the auction Mr Gray told Mr Hedigan of the purchase by telephone. He said that the contract had been signed in the name of the shelf company which Mr Allan had provided. He asked Mr Hedigan to let the other syndicate members know.
Contracts signed by Mr Winter on behalf of Covent on 15 November nominated Messrs Riordan & Partners as the purchaser’s solicitors. Messrs Riordan & Partners is a firm of solicitors practising at Shepparton. Mr Riordan is the partner in the firm who had the conduct of the transaction on behalf of Covent.
In November 1989 Mr Riordan was introduced to Messrs Gray and Winter by Mr Allan. They had lunch together. Mr Allan was a client for whom Mr Riordan's firm had acted. At lunch Mr Gray indicated that he was interested in purchasing three kiwi fruit properties in the Shepparton area with a view to cornering the kiwi fruit market. Not long after the day of this meeting Mr Allan told Mr Riordan that Mr Gray had purchased one of the properties for $1.1 million and that Messrs Riordan & Partners would be instructed to act for the purchaser. He was told that the contract was in the name of a nominee company and that it was probable that the property would ultimately be purchased by some Melbourne barristers.
It was a matter of immediate concern to Mr Riordan that there was a prospect of the ultimate purchasers being nominees of the purchaser. The basis of his concern was that proposals were then being mooted which, if implemented, would have had the effect of rendering stamp duty payable on both the initial contract and on the further conveyance effected by the nomination. He was concerned to know the identity of the purchasers so that the nomination could be made in case the law changed. He raised with both Messrs Winter and Allan on a number of occasions the need to get the details of the purchasers clear. He explained the reason for his concern to Mr Winter both verbally and by letter; and as the date for settlement approached the need to know who the purchasers were became more urgent.
The contract with Covent contained a covenant on the part of the vendor that it would, pending settlement, farm and manage the orchard in a proper and husbandlike manner according to the normal methods accepted throughout the district (special condition 6). During December 1989 Mr Winter asserted that the vendor was in breach of special condition 6 and sought to use that breach as a lever to obtain an extension of time for settlement. On 11 December 1989 Messrs Gray & Winter wrote to the vendor's solicitors seeking an extension and, by letter dated 18 December 1989, the vendor's solicitors wrote to Messrs Riordan & Partners refusing the extension and requiring immediate settlement. On 20 December 1989 Messrs Riordan & Partners advised Messrs Gray & Winter that they did not consider there was any realistic prospect of Covent being able to rescind the contract of sale for breach of special condition 6, and urged that they take every step necessary to be in a position to settle at the earliest possible date.
By letter dated 20 December 1989 the vendor's solicitors served notice of default under the contract on Covent and on Mr Winter.
On 4 January 1990 Messrs Riordan & Partners informed Messrs Gray & Winter that the vendor's solicitors had indicated that the vendor might extend settlement if Messrs Gray & Winter could procure the execution of substitute contracts of sale by prominent barristers as purchasers in substitution for Covent. There then followed an exchange of correspondence in which various proposals were put forward by Messrs Riordan & Partners on behalf of Messrs Gray & Winter and Covent. First, it was suggested that Covent would nominate Messrs Hedigan, Guest and Chernov as additional purchasers in return for an extension of time; then there was an offer to procure by 25 January 1990 substituted contracts naming Messrs Hedigan, Guest and Chernov as purchasers.
By letter dated 24 January 1990 Messrs Riordan & Partners informed Messrs Gray & Winter that the vendor's solicitors had advised that the vendor had refused to extend the time specified in the notice of default beyond 4.00pm on 26 January 1990. However, on 31 January 1990 the vendor's solicitors wrote to Messrs Riordan & Partners stating that the vendor had agreed to extend the time for completion to 1 March 1990 on condition that by 4.00pm on 5 February 1990 substitute contracts were signed by the barristers and exchanged. On 1 February 1990 Messrs Riordan & Partners wrote to Messrs Gray & Winter saying that, if they wished to seek a further extension for exchange of the substitute contracts, they should deal directly with the vendor.
Following an exchange of correspondence between Messrs Gray & Winter and a representative of the vendor, the vendor's solicitors informed Messrs Riordan & Partners by letter dated 7 February 1990 that the vendor had agreed to extend time to 1 March 1990 on condition that by 4.00pm on 12 February 1990 substitute contracts of sale were executed by the barristers. On 9 February 1990 Mr Winter instructed Messrs Riordan & Partners to prepare substitute contracts naming the barristers as purchasers in place of Covent; and on 12 February 1990 he instructed Messrs Riordan & Partners to seek one final extension for obtaining the execution of the substitute contracts until 16 February 1990 on condition that a photocopy of the face page signed by Messrs Hedigan, Guest and O'Callaghan, with advice that they would exchange the contract when it had been signed by Messrs Chernov and Myers (who were then in Perth), would be provided by facsimile to the vendor's solicitors that day.
On 12 February 1990 Messrs Riordan & Partners sought the extension in accordance with their instructions and it was refused. The vendor's solicitors stated that the deposit had been forfeited and that the land, the orchard and the plant and equipment would again be placed on the market. This information was conveyed to Messrs Gray & Winter by letter dated 12 February 1990.
On 16 February 1990 Mr Winter and a representative of the vendor negotiated a fresh agreement for the sale and purchase of the land, the orchard and the plant and equipment to the barristers in substitution for the contracts with Covent.
Substitute contracts were prepared by the vendor's solicitors naming the five barristers as purchasers. The documents were signed by four of the barristers in late February 1990. As Mr Chernov was not available to sign, his name was struck out and the words ‘and/or nominee’ added after the other names. This was done on Mr Riordan's advice. Subsequently, the four signatories nominated themselves and Mr Chernov as the purchasers. Settlement took place on 2 March 1990.
The Kiwi Fruit Action
On 14 July 1993 the partnership known as Murray Valley Fruits (which included the five barristers) instituted proceedings in the Supreme Court of Victoria (No 7480 of 1993) claiming damages from Messrs Gray & Winter and others (‘the Kiwi Fruit action’) and on 23 July 1993 Messrs Gray & Winter gave notice of such claim to the respondent. The kiwi fruit action was transferred to this Court on 11 November 1993 (No VG 479/93). On 17 November 1993 the respondent informed Messrs Gray & Winter that it refused to indemnify them and refused to take over or continue their defence of the Kiwi Fruit action which they thereafter conducted at their own cost. Subsequently, the five individual members of the Murray Valley Fruits partnership were substituted as applicants in the Kiwi Fruit action. They are Messrs Hedigan, Guest, O'Callaghan, Chernov and Myers, then all barristers practicing at the Victorian Bar.
The claims pleaded against Messrs Gray & Winter were in respect of three causes of action. The facts pleaded in respect of each claim are summarized below.
1. Claim pursuant to theFair Trading Act 1985 (Vic)
a) Messrs Gray & Winter were beneficially interested in and controlled Covent which was used as the corporate vehicle by which they entered into two contracts each dated 15 November 1989 whereby Covent agreed to purchase from Murray Valley Kiwi Fruit Pty Ltd (the vendor) certain land at Nathalia (the land) together with the kiwi fruit orchard business conducted on the land (the orchard) and certain plant and equipment relating to the conduct of the orchard.
b) Prior to completion of the contracts of sale, the barristers and Messrs Gray & Winter agreed that the barristers would assume the obligations of Covent under the contracts of sale and would purchase the land, the orchard and the plant and equipment and would pay Messrs Gray & Winter a fee of $126,500.
c) In order to induce the barristers to enter into the agreement Messrs Gray & Winter made certain representations about the anticipated yield of the orchard, the cash flow to be produced by the orchard, and the value of the land and orchard.
The representations were constituted by:
i) cash flow budgets prepared by a firm of accountants dated 21 December 1989, 22 December 1989, 4 January 1990, 14 February 1990 and 16 February 1990;
ii) a valuation of the land and the orchard dated 24 January 1990;
iii)statements made to Messrs Hedigan, Guest and Chernov in early January 1990; and
iv) statements made to Messrs Hedigan, Guest, O'Callaghan and Myers on 18 February 1990;
d) Acting in reliance on the representations the barristers entered into the agreement, purchased the land, the orchard and the plant and equipment and paid the fee to Messrs Gray & Winter.
e) Each of the representations was made in trade and commerce.
f) Each of the representations was false, misleading and deceptive, or likely to mislead or deceive.
g) Insofar as the representations were made with respect to future matters, there were no reasonable grounds for making them.
h) By reason of the foregoing matters, Messrs Gray & Winter engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in contravention of s 11 of the Fair Trading Act 1985 (Vic).
2. Claim in Negligence
a) At the time of making the representations Messrs Gray & Winter intended, knew or ought reasonably to have known or foreseen that the barristers would rely on them in deciding whether or not to enter into the agreement;
b) Messrs Gray & Winter owed a duty to the barristers to take reasonable care in making the representations;
c) In breach of such duty, Messrs Gray & Winter failed to take reasonable care in making the representations.
3. Claim for breach of fiduciary duty
a) In and between November 1989 and February 1990 Messrs Gray & Winter promoted to the barristers an undertaking, scheme or enterprise whereby they would acquire the land, the orchard and the plant and equipment and would thereafter conduct the business of the orchard in partnership or joint venture (the scheme);
b) Messrs Gray & Winter owed the barristers a fiduciary duty to make a full and fair disclosure of all matters within their knowledge which were material to the making of a decision by the barristers as to whether or not to participate in the scheme;
c) In breach of the fiduciary duty Messrs Gray & Winter did not disclose various matters (to which reference will be made later) each of which matters was material to be known by each of the barristers prior to deciding whether or not to participate in the scheme;
d) If the undisclosed matters had been disclosed to them none of the barristers would have entered into the agreement.
Messrs Gray & Winter denied liability, and as will be seen from what follows, the issues pleaded against them were never litigated. Accordingly, no findings have ever been made in respect thereof and none is called for in this proceeding.
The trial of the Kiwi Fruit action was due to commence on 29 August 1994, but did not proceed. On 30 August 1994 the action was settled by the parties entering into an agreement (the settlement agreement) under which Messrs Gray & Winter agreed to pay the barristers $500,000, and the parties to the action agreed to pay their own costs.
On 1 September 1994 the barristers applied to the Court by motion on notice for an order enforcing the settlement agreement (the enforcement motion). On 5 September 1994 Messrs Gray & Winter filed an application seeking, inter alia, a declaration that the settlement agreement was void and of no effect and an order that the settlement agreement be rescinded (the rescission proceeding).
The enforcement motion and the rescission proceeding came for hearing before Olney J on 6, 7 and 8 September 1994. On 19 September 1994. His Honour -
(a) dismissed the rescission proceeding with costs; and
(b) ordered Messrs Gray & Winter to pay the barristers $500,000 in accordance with the settlement agreement together with the costs of the enforcement motion.
Messrs Gray & Winter appealed against the decisions in respect of both the enforcement motion and the rescission proceeding. On 6 October 1994 a Full Court of this Court dismissed both appeals with costs.
The claim made in the present proceeding relates to the liability incurred by Messrs Gray & Winter in settlement of the Kiwi Fruit action and the costs of that action.
Messrs Gray & Winter asserted in the trial (and the appellant denied) that -
i) Insofar as they were involved in any arrangement or agreement with the barristers and/or the making of any representations in connection therewith and/or any failure to disclose material matters they were so engaged in connection with their practice as solicitors carried on solely on their own behalf;
ii) The claim of the barristers was one in respect of which they are entitled to indemnity under the insurance contract;
iii)The enforcement motion and the rescission proceeding and the appeals arising therefrom were proceedings brought as part of their defence of the barristers' claim against them.
iv) The appellant is in breach of the insurance contract.
Messrs Gray & Winter claim an indemnity in respect of the sum of $500,000 for which they settled the Kiwi Fruit action and for their costs of that proceeding, the enforcement motion, the rescission proceeding and the appeals, including costs awarded against them. As the total of the costs is said to exceed $500,000 they seek judgment for $1 million being the total liability of the respondent under the insurance contract.
The substantive issue determined by Olney J was that the liability incurred by Messrs Gray and Winter pursuant to their settlement of the claim against them by the five barristers in the Kiwi Fruit action was incurred by them in connection with their practice as solicitors. It is this finding which is central to the appeal.
His Honour also found that the liability incurred by Messrs Gray and Winter ‘in connection with the practice’ of solicitors did not include the costs and expenses reasonably and necessarily incurred in the enforcement motion, the rescission proceeding and the appeals therefrom including the costs awarded against them in those proceedings. In his Honour’s opinion those proceedings did not fit within the description of proceedings arising out of a claim in respect of which the appellant is liable under the insurance contract. His Honour said that those proceedings, all occurred after the Kiwi Fruit action, had been settled and that the settlement put an end to the proceeding. Thereafter, there was no proceeding to defend. The post-settlement proceedings may, his Honour said, conveniently be classified as proceedings arising out of the settlement but not out of the claim. Hence in his Honour’s opinion those costs were not recoverable from the appellant.
Messrs Gray and Winter cross-appealed from these findings of his Honour with reference to costs.
I set out earlier the text of the insuring clause from which the liability of the appellant depends. Certain other clauses of the policy of insurance must be recited. In addition to the clause mentioned earlier, the insurance policy provides that the insurer (i.e. the appellant) will also:-
'(i)indemnify the Insured against costs and expenses reasonably and necessarily incurred in defending any proceedings arising out of a claim in respect of which the Insurer is liable to indemnify the Insured, where such costs and expenses are incurred after notification of the claim to the Insurer and before the Insurer elects to take over the defence of the proceedings; and
(ii)pay the costs and expenses of the solicitors appointed by the Insurer to take over and conduct any proceedings arising out of or relating to a claim against the Insured.'
The policy defines ‘the Practice’ as follows:
'(h)“The Practice” means the private practice of a solicitor carried on by the Firm solely on its own behalf and includes any personal appointment of a Principal or Employee to act as a director, secretary or officer of a body corporate or as a trustee, executor, attorney-under-power or tax agent, but only where any fee or other remuneration from such appointment is payable to the Firm or, where there is no fee or other remuneration, the Firm expressly approved the appointment, but does not include:
(i) acting in the course of employment by an employer who is not a solicitor in private practice; or
(ii)accepting moneys for investment, or making investments, other than as a trustee and in strict accordance with the requirements of the Law Institute of Victoria and the Australian Securities Commission.'
The exclusions from liability of the appellant include the following:
'(ii) arising out of any trading or personal debt incurred by any Insured;
...
(iv) under or for a breach of any warranty, guarantee or indemnity given by any Insured other than as agent for and with the express authority of a client;
(v) arising, in whole or in part, directly or indirectly, from or brought about by the dishonesty or fraudulent act or omission of any Insured, other than liability for any pecuniary loss from any defalcation committed by an Employee to the extent that the Solicitors’ Guarantee Fund is not liable to pay compensation for that loss;
...
(x) arising out of any investment made after 31 December 1992, or any advice, representation, recommendation, endorsement or opinion given or made after 31 December 1992 favouring investment, in any fund, scheme, business, arrangement or entity in which at any relevant time there was a Related Interest including investment by way of a loan to any such fund, scheme, business, arrangement or entity;'
The expression ‘Related Interest’ is defined as meaning any interest beneficially held, whether directly or indirectly, through any firm, company, trust or other entity, by or on behalf of any one or more of the firm, any principal or any relative of any principal.
The word ‘principal’ is defined to mean, where the practice is carried on by a firm a partner of the firm and, where the practice is carried on by a sole practitioner that practitioner and, where the practice is carried on by an incorporated practitioner a director or employee of that incorporated practitioner with the right to participate in distributions of profit of that incorporated practitioner.
There are many decided cases on the question of what constitutes the practice of a solicitor. We were referred to a large number of them in the course of argument and in the written submissions of counsel for both parties. What is important, however, is to remember that we are considering the scope of the practice of a solicitor in the 1990s, in particular in Australia. The scope of a solicitor’s practice has widened considerably in recent time, reflecting the increasing involvement of the Commonwealth Parliament, the Parliaments of the States and Territories and their respective Executive Governments in human affairs. Virtually nothing today is free from the influence of legislation or decisions of the Executive Governments and administration. Necessarily, therefore, solicitors are involved in advising their clients in these burgeoning areas of government activity, appearing for them in court cases and instructing counsel.
It is well known and has been so for many years that some solicitors accept appointments to the boards of companies including blue chip public companies. Indeed, this is expressly recognized by the insurance policy in this case in paragraph (h) of the definition of ‘practice’ mentioned earlier. Work of solicitors in advisory matters ranges from advice in relation to complex international financial transactions to the country solicitor who advises his or her client on matters that are perhaps not strictly within the scope of the solicitor in the usual sense but include, for example, certain advice with respect to investments. The country solicitor is usually a respected figure whose advice is valued by his clients and whose wisdom is respected.
I say all this because it is important not to take a narrow view of the role of a solicitor in modern times or the scope of a solicitor’s practice. This role of a solicitor must also be reflected in the interpretation of insurance policies between the solicitor and the insurer.
There must, however, be some point reached where the solicitor ceases to engage in his practice as a solicitor and enter other areas of activity, particularly business activity. This case is an excellent example of the grey dividing line between the two.
The point of central importance is that the insurer of the respondents is the Solicitors’ Liability Committee, the body established for the very purpose of providing professional indemnity insurance to solicitors, thus reflecting the Victorian Parliament’s view that it is in the interests of the community as a whole, clients and solicitors themselves, that indemnity insurance of this kind must be provided in the age in which we live. Although this does not call for any narrow view of the scope of the insurance policy with which this case is concerned it does focus attention upon the fact that it is truly the practice of a solicitor that is central to the resolution of the question before this Court, a practice which as I have said calls for a broad and liberal definition.
It is, however, important to view the activities of the respondents as a whole, although with particular relevance to the transactions with which this case is concerned.
The primary Judge concluded that the retainer accepted by Messrs Gray and Winter in relation to the acquisition of the Kiwi Fruit orchard was within the scope of their practice as solicitors. His Honour said that he reached this conclusion on the basis of eleven findings to which I shall now turn. Many of these findings were challenged on one basis or another by counsel for the appellant.
(i) Mr Gray and later Messrs Gray and Winter had a long established practice in the field of providing legal advice to clients in relation to tax minimization.
This statement is not challenged, but counsel for the appellant submitted that it said nothing about the question whether the activities of Messrs Gray and Winter with which this case is concerned were within the scope of a solicitor’s practice.
(ii)That their practice was a legitimate activity for a firm of solicitors to engage in.
This statement was not challenged.
(iii) In the course of their practice they had on a number of occasions before November 1989 performed services in relation to tax minimization schemes on instructions from Mr Hedigan and other barristers with whom Mr Hedigan was associated.
This statement was not challenged.
(iv)When the taxation laws changed so as to render unsuitable the type of schemes previously used to minimize tax, Messrs Gray and Winter directed their attention to other lawful methods of achieving tax savings.
This statement was not seriously challenged.
(v) In their past dealings with Mr Hedigan and the other barristers with whom they had an association, Messrs Gray and Winter held themselves out as solicitors and conducted their dealings in that capacity.
This statement was not challenged except that it was submitted that the real question was whether the activities with which this case is concerned could be said to have been the conduct of solicitors in that capacity.
(vi)Although the Kiwi Fruit scheme differed from previous schemes involving the acquisition of commercial properties in that previously Messrs Gray and Winter had acquired only an option, the substance of the Kiwi Fruit scheme was essentially the same as the earlier schemes in that it involved the purchase of property and the financing of it from an outside source.
This statement was not challenged by counsel for the appellant except as to its relevance.
(vii) At no stage did Messrs Gray and Winter claim to have acquired any personal interest in the properties the subject of the Kiwi Fruit scheme. They referred to Mr Hedigan the offer to on-sell at a substantial profit.
Again, this statement was not challenged, but its relevance was questioned.
(viii) Messrs Gray and Winter played no part in organizing the syndicate which purchased the property. This was done by Mr Hedigan. When Mr Gray expressed an interest in being involved he was rebuffed.
Counsel for the appellant submitted that this finding was in error because Messrs Gray and Winter did everything to put the syndicate together. There was no aspect of it in which they were not involved. It was said that Mr Hedigan did speak to the other barristers about it, but it was Mr Winter who organized the finance.
In my opinion this submission of counsel for the appellant is correct. The facts establish that Messrs Gray and Winter were the primemovers in organizing the syndicate including the purchase of the property which formed the basis of the Kiwi Fruit scheme.
(ix)Financial contributions made by the barristers in relation to the Kiwi Fruit scheme were directed to Messrs Gray and Winter who paid them into the trust account which they were required to maintain as practising solicitors.
Counsel for the appellant said there was only marginal evidence to support this; but in any event it did not matter because it threw little, if any, light on the true analysis of the activities of Messrs Gray and Winter with which this case is concerned.
(x) Although Messrs Gray and Winter left themselves in a vulnerable position by the manner in which the property was acquired, the transaction was carried through to completion in the manner initially planned, and they made no profit other than the agreed fee.
Counsel for the appellant used this finding to support his argument that the payment of the agreed fee to them was more consistent with their activities being outside the scope of the practice of a solicitor than within it.
(xi)The sole purpose of the transaction was to enable Mr Hedigan and the other barristers enlisted by him to obtain a financial advantage by taking part in a tax incentive scheme.
Counsel for the appellant said that this was an irrelevant finding because the question is whether all that was done by Messrs Gray and Winter was within their practice as solicitors.
It was submitted on behalf of the appellant that his Honour really asked the wrong question in making these eleven findings of fact.
In my opinion, when the whole of the evidence relevant to the characterization of the activities of Messrs Gray and Winter is examined, the following facts are established:
(a) They promoted and sold commercial properties to prospective purchasers.
(b) They entered into contracts of sale for the purchase of properties without having instructions from clients to do so and for the purpose of nominating another purchaser; indeed, for the purpose of promoting partnerships and to recruit partners in syndicates to purchase the properties.
(c) They were paid an acquisition fee or an acquisition fee and a risk fee which ranged from 7.5% to 10% of the purchase price of the property acquired and syndicated.
(d) The syndication work was carried out, not by Messrs Gray and Winter themselves, but by companies owned or controlled by them: the two principal companies used were Australian Investment Management (Holdings) Pty Ltd and Graywinter Properties Pty Limited.
(e) From time to time they expressed opinions concerning the value of properties to be purchased.
(f) They gave forecasts and made predictions of values of properties which they were examining for the purposes of syndication.
(g) They gave forecasts and made predictions of changes in values of properties in the future.
(h) They speculated in the property market by searching for and locating properties being sold, for the purpose of approaching prospective purchasers to acquire the properties.
These are the relevant findings by way of background which it is necessary to have in mind when considering the activities of Messrs Gray and Winter with which this case is concerned.
As mentioned earlier, the claims pleaded against Messrs Gray and Winter by the barristers in the action in this Court which led to the settlement fell into three categories: first a claim pursuant to the Fair Trading Act 1985 (Vic); secondly, a claim in negligence; and thirdly, a claim for breach of fiduciary duty.
It is essential to examine the nature of these claims because it was the making of them which led to the settlement on 30 August 1994 of the claim whereby Messrs Gray and Winter paid the barristers $500,000. There is no other way of determining what the settlement monies were paid for.
The allegations in respect of the claim pursuant to the Victorian Fair Trading Act were that Messrs Gray and Winter were beneficially interested in and controlled Covent which was the corporate vehicle used by Messrs Gray and Winter to purchase the relevant land for the Kiwi Fruit scheme together with the orchard business and plant and equipment relating to the conduct of the orchard. The barristers and Messrs Gray and Winter agreed that the barristers would assume Covent’s obligations under the contract for sale. In order to induce the barristers to enter into the agreement Messrs Gray and Winter made representations concerning the anticipated yield of the orchard, the cashflow to be produced by it and the value of the land and orchard.
It was alleged that the barristers relied on the representations much of which was false, misleading and deceptive or likely to mislead or deceive and as a result they suffered damage.
I pause at this point to observe that none of these representations could be said to have been made by Messrs Gray and Winter in the course of their practice as solicitors. Plainly they were made as syndicate promoters.
The claim in negligence was based on the same facts that support the claim under the Fair Trading Act.
The claim for breach of fiduciary duty was also based on substantially the same facts as the other claims, but were said to give rise to a fiduciary duty to make full and fair disclosure of all matters within the knowledge of Messrs Gray and Winter which were material to the making of a decision by the barristers whether or not to participate in the Kiwi Fruit scheme.
The circumstances in which an appellate court can reverse the findings of fact of a trial Judge are well established. The critical issues of fact do not turn on the credibility of any witness in this case. Objective facts and the inferences to be drawn from them are the nucleus of the factual matrix on which this case turns: see Warren v Coombes (1979) 142 CLR 531.
When the background facts mentioned earlier are considered in the light of the allegations in the claim by the barristers against Messrs Gray and Winter which led to the settlement, in my opinion the conclusion is inevitable that the activities of Messrs Gray and Winter were not part of a practice of a solicitor.
The ‘practice’ as defined in the policy means the private practice of a solicitor carried on by the firm of Gray & Winter. I do not think the activities with which they were concerned that led to the claim against them by the barristers and then the ultimate settlement answer this description. They were engaged in the business of syndicating property transactions. Any work which they did in relation to that as solicitors was peripheral to the claims made against them. The centre of activity was property syndication.
In my opinion the proper conclusion to be drawn from the evidence on which the case turns, in order to characterize the true nature of the relevant activities of Messrs Gray and Winter with which this case is concerned, is that the liability incurred by Messrs Gray and Winter in settling the claim for damages brought against them by the five barristers was not incurred in connection with their practice as solicitors.
That leaves the cross-appeal; but in the light of my findings concerning the appeal the issues raised by the cross-appeal do not arise.
I propose the following orders:
1. That the appeal be allowed.
2. That the cross-appeal be dismissed.
3. That the orders of the learned primary Judge be set aside.
4. That the application which commenced the proceeding at first instance be dismissed.
5. That Messrs Gray and Winter pay the costs of the appellant of the proceeding at first instance, including any reserved costs, and the appellant’s costs of the appeal and cross-appeal.
I hereby certify that this and
the preceding forty-one (41)
pages are a true copy of the
reasons for judgment herein of
the Honourable Justice Lockhart.
Associate
Dated: 21 July 1997
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY ) No. VG 546 of 1996
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: THE SOLICITORS’ LIABILITY COMMITTEE
Appellant
(Cross-respondent)
AND GARRICK LEWIS GRAY and MICHAEL FREDERICK WINTER
Respondents
(Cross-appellants)
JUDGES: LOCKHART, BEAUMONT & BURCHETT JJ.
PLACE: SYDNEY (HEARD IN MELBOURNE)
DATED: 21 JULY 1997
INDEX TO REASONS FOR JUDGMENT
BEAUMONT and BURCHETT JJ
INTRODUCTION..................................................................................................................... 1
THE STATUTORY CONTEXT OF THE INSURANCE COVER............................................. 2
THE TERMS OF THE INDEMNITY......................................................................................... 4
THE CASES PLEADED BY MESSRS GRAY AND WINTER................................................. 7
THE ORDERS MADE AT FIRST INSTANCE IN THE PRESENT PROCEEDINGS.............. 9
THE APPEAL AND THE CROSS-APPEAL........................................................................... 10
THE REASONING AND FINDINGS MADE AT FIRST INSTANCE RELEVANT TO THE QUESTIONS ARISING IN THE APPEAL............................................................................. 10
His Honour’s description of the character of the claims made by the Partners against Messrs Gary and Winter............................................................................................................ 10
1......... The Partners’ claim pursuant to the Fair Trading Act 1985 (Vic)....................... 10
2......... The Partners’ claim in negligence........................................................................ 11
3......... The Partners’ claim of breach of fiduciary duty................................................... 11
His Honour’s findings of fact.......................................................................................... 12
1. As to the practice of Messrs Gray and Winter................................................... 12
2. As to the acquisition of the kiwi fruit orchard..................................................... 13
3. As to the role of Riordan & Partners................................................................. 14
4. As to the execution of the contracts by the Partners........................................... 16
5. As to the retainer.............................................................................................. 16
His Honour’s reasoning and conclusions on the legal questions........................................ 18
1. The expert evidence........................................................................................... 18
2. The test of what amounts to the “practice” of law................................................ 19
3. His Honour’s application of this test................................................................... 20
4. The ultimate question: whether the liability incurred in the settlement of the Kiwi Fruit Action arises “in connection with” the solicitors’ practice..................................... 21
THE COMMITTEE’S GROUNDS OF APPEAL..................................................................... 21
THE CONTENTIONS OF MESSRS GRAY AND WINTER ON THE APPEAL................... 22
CONCLUSIONS ON THE APPEAL...................................................................................... 22
The general concept of a solicitor’s professional legal practice contrasted with the conduct of entrepreneurial activities and other businesses................................................................. 22
Decisions of the High Court of Australia......................................................................... 23
Decisions of this Court................................................................................................... 25
Decisions of the New South Wales Court of Appeal....................................................... 26
Decision of the Supreme Court of Victoria..................................................................... 27
Decision of the Supreme Court of Queensland................................................................ 28
The position in England.................................................................................................. 28
Decisions of United States Courts.................................................................................. 30
A Canadian decision...................................................................................................... 31
Decisions dealing with unlicensed persons acting in legal matters...................................... 31
The rules of professional conduct and the changing profile of lawyers.............................. 32
Dual activities of other professionals............................................................................... 33
The meaning of the present insuring provisions................................................................ 36
Should the relevant activities of Messrs Gray and Winter be characterised as “professional” or “entrepreneurial”?.......................................................................................................... 37
The ultimate question: whether the liability incurred in the settlement of the Kiwi Fruit Action arises “in connection with” the solicitors’ practice............................................................ 38
CONCLUSIONS ON THE CROSS-APPEAL........................................................................ 38
ORDERS PROPOSED............................................................................................................. 40
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY ) No. VG 546 of 1996
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: THE SOLICITORS’ LIABILITY COMMITTEE
Appellant
(Cross-respondent)
AND GARRICK LEWIS GRAY and MICHAEL FREDERICK WINTER
Respondents
(Cross-appellants)
JUDGES: LOCKHART, BEAUMONT & BURCHETT JJ.
PLACE: SYDNEY (HEARD IN MELBOURNE)
DATE: 21 JULY 1997
REASONS FOR JUDGMENT
BEAUMONT and BURCHETT JJ.
INTRODUCTION
The respondents and cross-appellants, Garrick Lewis Gray and Michael Frederick Winter, sued the appellant and cross-respondent, the Victorian Solicitors’ Liability Committee (“the Committee”) on several claims made under a contract of professional indemnity insurance (“the Indemnity”). The Committee denied liability on the ground that each of the claims fell outside the terms of the insurance cover. A Judge of the Court held that Messrs Gray and Winter were entitled to succeed on part of their claim and made orders accordingly, including an order that Messrs Gray and Winter recover judgment against the Committee in the sum of $500,000. It was also declared that the Indemnity extended to costs incurred by Messrs Gray and Winter in other proceedings. The Committee has appealed from these orders. However, Messrs Gray and Winter failed in respect of their claim to be indemnified for certain other costs, to be identified below; and they have cross-appealed in respect of these other costs.
The central questions in the litigation, both at the trial and before us, concerned the true construction of the cover provided by the Indemnity. There was little, if any, room for dispute about the background facts, notwithstanding their apparent complexity. But the parties were at issue as to the meaning of the insuring clauses and as to their applicability in the present circumstances. Specifically, the primary question which arose was whether the Indemnity covered the liability of Messrs Gray and Winter to a group of investors who claimed that they had been induced to acquire a business by the alleged misleading conduct or negligence of Messrs Gray and Winter; and that Messrs Gray and Winter had, in that connection, acted in breach of fiduciary duties owed to the investors. A secondary question, which grounds the cross-appeal, arose as to whether the cover extended to the costs of certain collateral proceedings.
The statutory CONTEXT OF the insurance COVER
The indemnity was issued pursuant to the provisions of the Legal Profession Practice Act 1958 (Vic.). Reference should be made to this statutory context. As Samuels JA. (with whom Moffitt P. and Glass JA. agreed) said in Miltenburg v AMP Fire General Insurance Co. Ltd (1981) 1 ANZ Ins Cas 60-442 (at 77, 327):
"What is in contention here is the construction of the policy and, although it is a statutory policy which the employer was required to have and the defendant compelled to issue in the terms laid down by the Act, it is to be construed according to its terms; although it is legitimate to take into account the provisions of the Act and its legislative intention."
See also Brakespeare v The Northern Assurance Co Ltd (1959) 101 CLR 661 at 668 and CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 141 ALR 618 at 634-5.
In moving the Second Reading of the Legal Profession Practice (Amendment) Bill (Vic.) in the Legislative Assembly the Minister said (Hansard, 31 October 1985 at 1573):
“Finally, and perhaps the most important aspect of this Bill, are the provisions relating to the Law Institute of Victoria’s provision for insurance to its practising members against professional negligence claims.
Professional indemnity insurance is presently provided by means of a master policy arranged through insurance brokers in Australia, principally Lloyds of London. The claims experienced in a number of recent years has resulted in a sharp escalation in premiums. Earlier this year, the Law Institute became aware that the premiums for 1986 would be increased by 125 percent if current arrangements were to continue. These premiums would be so high as to raise serious questions about the ability of many suburban and country practitioners, in particular, to afford them. They would also pose considerable barriers against entry into the profession, thereby reducing competition. Consequently, the Law Institute of Victoria decided to investigate the possibility of a self-insurance scheme as a means of reducing the extent of premium increase in 1986 and subsequent years.” (Emphasis added)
The Minister added (at 1573):
“The scheme proposed would make use of an exemption under the Commonwealth Insurance Act. As from 1 January 1986, the Law Institute would be required by the law of Victoria to carry on the business of insuring solicitors and former solicitors. A committee would be established to be responsible for the investment of the premiums, the handling of claims, and the arranging of stop loss insurance. (Emphasis added).
The amount of the contributions - which will be paid at the time of solicitors applying for annual practising certificates - and the level of cover will be prescribed by the Governor in Council on the recommendation of the Law Institute and the committee established to manage the scheme.”
Division 5A (ss.88A - 88D) of Part V of the Legal Profession Practice Act deals with “Professional Indemnity Insurance” relevantly as follows:
· The Committee is required (a) to carry on the business of providing professional indemnity insurance for solicitors, former solicitors and firms of solicitors; and (b) to undertake liability under contracts of professional indemnity insurance entered into in accordance with that Division with solicitors, former solicitors and firms of solicitors (s.88H(1)).
· “Professional indemnity insurance” is relevantly defined (by s.88A) to mean -
“[I]nsurance against loss arising from claims in respect of civil liability incurred by -
(a) a solicitor, former solicitor, or firm of solicitors in connexion with -
(i) the practice or former practice of the solicitor or firm; or
(ii) any trust of which the solicitor is or was an executor or trustee; or (Emphasis added)
(b) ...”
· The Committee, with the approval of the Council of the Law Institute, may determine:
“(a) the amount of contribution payable by classes of solicitors, former solicitors or firms of solicitors for each class of contract of professional indemnity insurance; and
(b) the period for which professional indemnity insurance is provided for each class of contract; and
(c) the date on which contributions are payable; and
(d) the rate of interest payable on contributions not paid by the due date; and
(e) the date on which the number of employees of a solicitor or firm of solicitors should be assessed for the purpose of determining the contribution payable by that solicitor or firm of solicitors; and
(f) any other terms and conditions of any class of contract of professional indemnity insurance.”
(Section 88H(2A)).
· A practising certificate must not be issued to a solicitor unless the solicitor-
“(a) has entered into a contract of professional indemnity insurance for that year with the Committee and paid to the Committee the contribution to the Fund payable in respect of that contract; or
(aa) is a solicitor for whom a contribution is required to be paid by another person and the contribution has been paid; or
(b) is exempt from compliance with this section.”
(Section 88K - emphasis added).
· A contract of professional indemnity insurance entered into between the Committee and a solicitor or firm of solicitors in respect of a period entitles the solicitor or firm, subject to the terms and conditions of the contract, to indemnity from the Fund in respect of claims against the solicitor or firm first made during that period (s.88L).
The statutory definitions of “solicitor”, “practice as a solicitor” and “the practice of a solicitor”, for the purposes of Division 5A of Part V, should also be noticed (see s.51(1)). Relevantly for our purposes, a “solicitor” means: (i) a “practitioner” (defined as a “person who has been admitted and enrolled as a barrister and solicitor of the Supreme Court and who continues to be on the roll”) practising as a solicitor within the meaning of Part VII either solely on his, her or its own account or in partnership with any other practitioner; (ii) a “practitioner” who is employed by and in connexion with the practice of a “solicitor” or a firm of such “solicitors”; and (iii) any other “practitioner” not engaged in practice exclusively as a barrister who is declared by the Council of the Institute published in the Government Gazette to be a solicitor, or who comes within any class of practitioners so declared by the Council to be solicitors for the purposes, inter alia, of Division 5A. For present purposes, the expressions “practise as a solicitor” and “the practice of a solicitor” have corresponding interpretations.
The terms of the indemnity
The terms of the relevant insuring clauses of the present cover, which is described as a “Contract of Professional Indemnity Insurance”, are as follows:
“(a) The Insurer will indemnify the Insured against any civil liability in connection with the Practice in respect of which a claim is first made against the Firm during the Period of Insurance. (Emphasis added)
(b) The Insurer will also:
(i) indemnify the Insured against costs and expenses reasonably and necessarily incurred in defending any proceedings arising out of a claim in respect of which the Insurer is liable to indemnify the Insured, where such costs and expenses are incurred after notification of the claim to the Insurer and before the Insurer elects to take over the defence of the proceedings; (Emphasis added) and
(ii) pay the costs and expenses of the solicitors appointed by the Insurer to take over and conduct any proceedings arising out of or relating to a claim against the Insured.”
The “Insured” is relevantly defined to mean:
“(i) the Firm;
(ii) each Principal;
(iii) ...
(iv) each service, administration, trustee or nominee company the sole business of which is conducted in connection with the Practice; and...
(v) ....”
The “Firm” is relevantly defined to mean:
“(i) ...;
(ii) where the Practice is carried on by a firm - the firm as constituted from time to time; and
(iii) ....”
The policy defines “the Practice” thus:
“(h) ‘The Practice’ means the private practice of a solicitor carried on by the Firm solely on its own behalf and includes any personal appointment of a Principal or Employee to act as a director, secretary or officer of a body corporate or as a trustee, executor, attorney-under-power or tax agent, but only where any fee or other remuneration from such appointment is payable to the Firm or, where there is no fee or other remuneration, the Firm expressly approved the appointment, but does not include:
(i) acting in the course of employment by an employer who is not a solicitor in private practice; or
(ii) accepting moneys for investment, or making investments, other than as a trustee and in strict accordance with the requirements of the Law Institute of Victoria and the Australian Securities Commission.” (Emphasis added)
The exclusions from liability in the Indemnity include the following -
“(ii) [claims] arising out of any trading or personal debt incurred by any Insured;
....
(iv) [claims] under or for breach of any warranty, guarantee or indemnity given by any Insured other than as agent for and with the express authority of a client;
(v) [claims] arising, in whole or in part, directly or indirectly, from or brought about by the dishonesty or fraudulent act or omission of any Insured, other than liability for any pecuniary loss from any defalcation committed by an Employee to the extent that the Solicitors’ Guarantee Fund is not liable to pay compensation for that loss;
...
(x) [claims] arising out of any investment made after 31 December 1992, or any advice, representation, recommendation, endorsement or opinion given or made after 31 December 1992 favouring investment, in any fund, scheme, business, arrangement or entity in which at any relevant time there was a Related Interest, including investment by way of a loan to any such fund, scheme, business, arrangement or entity;” (Emphasis added).
(The events now in question occurred in 1989 and 1990).
“Related Interest” is defined as follows:
“‘Related Interest’ means any Interest beneficially held (whether directly or indirectly through any firm, company, trust or other entity) by or on behalf of any one or more of:
(i) the Firm;
(ii) any Principal;
(iii) any Relative of any Principal.”
“Principal” is relevantly defined to mean:
“(i) ...
(ii) where the Practice is carried on by a firm - a partner of that firm; and
(iii) ....”
As has already been observed, reference should be made to the statutory context in which the Indemnity was provided but any question of interpretation of the terms of the Indemnity is, in the end, to be resolved by reference to the language of the Indemnity (see Brakespeare v The Northern Assurance Co. Ltd above at 668). Yet it is of assistance here to consider the statutory context, origins and rationale of the Indemnity, noting that, in any event, there appears to be no material contradiction at all between the provisions of the statute and those of the Indemnity (see CIC Insurance Ltd v Bankstown Football Club Ltd above at 634-5).
The case pleaded by Messrs Gray and Winter
It is necessary to identify the nature of the claims that were made upon Messrs Gray and Winter by the investors in respect of which Messrs Gray and Winter claimed to be indemnified.
By their statement of claim in this matter, Messrs Gray and Winter pleaded the foregoing terms of the cover provided by the insuring clauses in the Indemnity, and then referred to civil proceedings brought against them in this Court (No.VG479 of 1993) by five senior barristers, John Joseph Hedigan, Paul Marshall Guest, Peter John O’Callaghan, Allan Jones Myers, and Alex Chernov ( “the Partners”) as follows:
“10. By [the Partners’] Statement of Claim, [the Partners] claimed against Gray & Winter in the said proceedings that Gray & Winter was liable to [the Partners] for damages in circumstances where:
(a) [the Partners] and Gray & Winter entered into an agreement in respect of which [the Partners] assumed the obligations of a company Covent Pty Ltd under a Contract of Sale being [certain]... land [at Nathalia]... and in respect of which a fee of $126,500.00 would be paid to Gray & Winter;
(b) in order to induce [the Partners] to enter into the agreement, Gray & Winter misrepresented to [the Partners] matters concerning the yield of a kiwi fruit orchard business conducted on the said land, the profits that would be derived from the operation of such business and the market value of the land and/or orchard thereon;
(c) Gray & Winter in breach of a fiduciary [duty] owed to [the Partners], failed to make full and fair disclosure of matters within the knowledge of Gray & Winter which were material to [the Partners’] decision to enter into the agreement.
11. Gray & Winter denied liability to [the Partners].
12. Insofar as Gray & Winter was involved in any arrangement or agreement with [the Partners] and/or the making of any representations in connection therewith and/or any failure to disclose material matters (all of which allegations were denied), then Gray & Winter were so engaged in connection with its practice as solicitors carried on solely on its own behalf.
13. In the premises, [the Partners’] claim was one in respect of which Gray & Winter is entitled to indemnity under and pursuant to the terms of the said Indemnity Insurance Contract.
14. The trial of the said proceedings [brought by the Partners] commenced on 29 August 1994 and on 30 August 1994, the proceedings were settled by the parties [to the proceedings] entering into an agreement upon [certain] terms and conditions, including the term and condition that Gray & Winter pay to [the Partners] the sum of $500,000.00 and that the parties to the proceedings bear their own costs of the same (‘the settlement agreement’).
15. As a result of Gray & Winter becoming aware of certain information after the settlement agreement, on 31 August 1994 Gray & Winter sought to avoid and/or repudiated the settlement agreement.
16. On 1 September 1994, [the Partners] by Motion on Notice sought to move [this]... Court... to enforce the settlement agreement.
17. On 5 September 1994, Gray & Winter issued proceedings No. VG 293 of 1994 in [this]... Court... seeking, inter alia, a declaration that the settlement agreement was void and of no effect and an Order that the settlement agreement be rescinded...
18. On 19 September 1994,... Olney [J.] made Orders that:
(a) proceeding No. VG 293 of 1994 be dismissed;
(b) the costs of [the Partners] of and incidental to the proceeding be paid by Gray & Winter;
(c) Gray & Winter pay to [the Partners] the sum of $500,000.00 in accordance with the settlement agreement;
(d) [the Partners’] costs of and incidental to the said Motion be paid by Gray & Winter.
19. On 20 September 1994, Gray & Winter issued Notices of Appeal against the said findings and Orders of... Olney [J.] in Appeals No. VG 314 of 1994 and VG 315 of 1994 respectively.
20. On 6 October 1994, the Full Court... dismissed the said Appeals with costs.
21. In the premises, the said Motion and further proceeding No. VG 293 of 1994 and the Appeals thereon numbered VG 314 and VG 315 of 1994 respectively were proceedings brought as part of Gray & Winter’s defence of [the Partners’] claim against Gray & Winter.”
Particulars of alleged loss and damage were then given by Messrs Gray and Winter against the Committee as follows:
· The sum of $500,000.00 paid and/or payable by Gray & Winter to the Partners pursuant to the settlement agreement.
· Gray and Winter’s costs of and incidental to their defence of the Partners’ claim in proceeding No. VG 479 of 1993.
· The costs Gray and Winter were ordered to pay the Partners in respect of proceeding No. VG 293 of 1994.
· The costs Gray and Winter were ordered to pay the Partners in respect of the Appeals No. VG 314 and VG 315 of 1994 respectively.
THE ORDERS MADE AT FIRST INSTANCE IN THE PRESENT PROCEEDINGS
As has been noted, the learned primary Judge ordered that Messrs Gray and Winter recover judgment against the Committee in the sum of $500,000. His Honour further declared that Messrs Gray and Winter were entitled to be indemnified by the Committee for costs and expenses reasonably and necessarily incurred after 23 July 1993 (being the date of notification of the insurance claim) in defending proceeding No. VG 479 of 1993 in this Court. But no declaratory or other order was made on the submission by Messrs Gray and Winter that they were entitled to be indemnified in respect of the other proceedings mentioned in their statement of claim.
THE APPEAL AND THE CROSS-APPEAL
The Committee now appeals from the orders made at first instance. Messrs. Gray and Winter cross-appeal from his Honour’s refusal to find that they were entitled to be indemnified in respect of their costs reasonably and necessarily incurred in the enforcement motion, the rescission proceeding and the appeals therefrom (that is, proceedings Nos. VG 293, VG 314 and VG 315 of 1993).
We turn now to the appeal and will come to the cross-appeal later.
In order to understand the issues which arise in the appeal, it will first be necessary to refer in some detail to the reasoning and findings at first instance.
THE REASONING AND FINDINGS MADE AT FIRST INSTANCE RELEVANT TO THE QUESTIONS ARISING IN THE APPEAL
His Honour’s description of the character of the claims made by the Partners against Messrs Gray and Winter
His Honour first noted that in proceeding No. VG 479 of 1993 (“the Kiwi Fruit Action”) the Partners had pleaded three causes of action against Messrs Gray and Winter to the following effect:
1. The Partners’ claim pursuant to the Fair Trading Act 1985 (Vic)
The learned primary Judge noted that the Partners had made the following claims in this regard:
· That Messrs Gray and Winter had been beneficially interested in and controlled Covent Pty Ltd (“Covent”), which had been used as the corporate vehicle by which they had entered into two contracts, each dated 15 November 1989, whereby Covent had agreed to purchase from Murray Valley Kiwi Fruit Pty Ltd (“the vendor”) the land at Nathalia (“the land”) together with the kiwi fruit orchard business (“the orchard”) conducted on the land and certain plant and equipment relating to the conduct of the orchard.
· That prior to completion of the contracts of sale, the Partners and Messrs Gray and Winter had agreed that the Partners would assume the obligations of Covent under the contracts of sale and would purchase the land, the orchard and the plant and equipment and would pay Messrs Gray and Winter a fee of $126,500.
· That in order to induce the Partners to enter into the agreement, Messrs Gray and Winter had made certain representations as to the anticipated yield of the orchard, the cash flow to be produced by the orchard, and the value of the land and orchard.
· That the representations were constituted by cash flow budgets prepared by a firm of accountants dated 21 December 1989, 22 December 1989, 4 January 1990, 14 February 1990 and 16 February 1990; a valuation of the land and the orchard dated 24 January 1990; statements made to three of the Partners, Messrs Hedigan, Guest and Chernov, in early January 1990; and statements made to four of the Partners, Messrs Hedigan, Guest, O’Callaghan and Myers, on 18 February 1990.
· That, acting in reliance on the representations, the Partners had entered into the agreement, purchased the land, the orchard and the plant and equipment and paid the fee to Messrs Gray and Winter.
· That each of the representations was made in trade and commerce, and was false, misleading and deceptive, or likely to mislead or deceive; and that insofar as the representations were made with respect to future matters, there were no reasonable grounds for making them; and that, by reason of the foregoing matters, Messrs Gray and Winter had engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in contravention of s.11 of the Fair Trading Act.
2. The Partners’ claim in negligence
His Honour next noted that the Partners had claimed that at the time of making the representations Messrs Gray and Winter intended, knew or ought reasonably to have known or foreseen that the Partners would rely on them in deciding whether or not to enter into the agreement; that Messrs Gray and Winter had owed a duty to the Partners to take reasonable care in making the representations; and that in breach of such duty, Messrs Gray and Winter had failed to take reasonable care in making the representations.
3. The Partners’ claim of breach of fiduciary duty
The trial Judge further noted that the Partners had claimed that in and between November 1989 and February 1990, Messrs Gray and Winter had promoted to the Partners an undertaking, scheme or enterprise whereby the Partners would acquire the land, the orchard and the plant and equipment and would thereafter conduct the business of the orchard in partnership or joint venture (“the scheme”); that Messrs Gray and Winter had owed the Partners a fiduciary duty to make a full and fair disclosure of all matters within their knowledge which were material to the making of a decision by the Partners as to whether or not to participate in the scheme; that in breach of the fiduciary duty, Messrs Gray and Winter had not disclosed certain of these matters, which were material, to the Partners, prior to their deciding whether or not to participate in the scheme; and that if the undisclosed matters had been disclosed to them, the Partners would not have entered into the agreement.
His Honour next noted that the Kiwi Fruit Action had been settled; that Messrs Gray and Winter had agreed to pay the Partners the sum of $500,000; and that each party had agreed to pay his own costs.
His Honour’s findings of fact
After describing the nature and form of the evidence before him, the primary Judge said (at 11):
“There is no substantial issue of fact in dispute and no question turns upon the credibility of the witnesses. Much of the evidence is to be found in contemporaneous documents which are not controversial. To the extent that Gray gave evidence of conversations with Hedigan (who was not called) I accept his evidence as probative of the facts asserted.”
His Honour made these findings of fact:
1. As to the practice of Messrs Gray and Winter
His Honour found that Mr Gray, who had previously specialised in the area of “personal tax minimisation”, had written to his clients in 1982 expressing the opinion that “the age of artificial tax schemes had finished” and had advised clients “to contemplate tax relief by entering into investment with tax incentives such as deductions for depreciation, investment allowances, negative gearing and non-taxable capital gain”. The learned primary Judge went on to make this finding (at 13):
“By 1987 generous taxation deductions which had previously applied for some primary production projects had been whittled down and following the stock market crash in October 1987 Gray examined the feasibility of forming partnerships or syndicates for clients to invest in commercial property. He started to practice in the area of property syndication in conjunction with accountants who saw investment and taxation advantages for their clients in such investments. The usual practice was for a company controlled by Gray & Winter to take an option over a property which was thought to be a suitable investment for investors seeking to minimise their liability for income tax. Having acquired the option, Gray & Winter would organise a syndicate to acquire the property and would arrange the necessary finance. For their trouble they were paid an acquisition fee, usually 7½% of the cost of the property. As part of their function they would attend to any required legal work. When interstate properties were acquired, it was usual for local solicitors to be engaged to attend to the conveyancing.” (Emphasis added).
In late 1988 or early 1989, Messrs Gray and Winter met Neil Allan, a partner in the accountancy firm of Metzke & Allan at Shepparton. Mr Allan, his Honour found, was “adept” at producing computerised cash flow forecasts from property investments and was engaged to do this for projects in which Messrs Gray and Winter were interested.
Prior to October 1989, several of the Partners had become involved in a number of syndicates which purchased properties over which Messrs Gray and Winter had acquired options.
The practice of Gray & Winter was organised in such a way that a “service” company controlled by the Partners, Australian Investment Management Pty Limited (“AIM”), administered the partnership’s financial affairs in a “tax effective” way. Fees payable to Gray & Winter for professional work done were “on occasions”, the trial Judge found, paid directly to AIM.
2. As to the acquisition of the kiwi fruit orchard
His Honour found (at 15) that in October 1989, Mr Allan informed Mr Gray that the Murray Valley Kiwi Fruit property was to be auctioned in November; that the property “had cost over $6 million to purchase and develop”; that it was likely to sell at auction for under $1.5 million; and that it would be a good investment for the Partners.
Shortly afterwards, the proposal was further discussed with Mr Allan by Messrs Gray and Winter at a meeting held in Mr Allan’s office in Shepparton. At this time, Mr Gray also discussed the proposal with Mr Corboy, an experienced fruit grower, and inspected the property.
Soon after this, the primary Judge found (at 16), Mr Gray telephoned Mr Hedigan and mentioned the proposal. Messrs Gray, Winter, Hedigan and Guest then met to discuss it. Mr Gray indicated that he and Mr Winter would be interested in becoming part of any syndicate that was formed. Mr Hedigan said that he was interested in considering the matter and so did Mr Guest. Mr Hedigan suggested that Messrs O’Callaghan and Chernov would probably be interested too. Mr Gray said that if he and Mr Winter were to put up all the money to acquire the property at auction, they would want an acquisition fee of 10% of the purchase price.
His Honour noted that other discussions subsequently took place which he later dealt with in the context of “ the retainer” (see below).
At the auction on 15 November 1989, an agent acting for Mr Gray was the highest bidder at $1.1 million, but the property was passed in. After negotiation, an offer of $1.265 million was accepted on the day of the auction, being $1.1 million for the land and $155,000 for machinery and equipment.
On the day of the auction, the Judge found (at 17), Mr Gray telephoned Mr Hedigan and notified him of the purchase. Mr Gray said that the contract had been signed in the name of a “shelf” company provided by Mr Allan. Mr Gray asked Mr Hedigan to let the other proposed syndicate members know.
Separate contracts were executed for the property and for the equipment. The purchaser in each case was “Covent Pty Limited or nominee”. Covent was a “shelf” company controlled by Mr Allan. Mr Winter signed the contracts on behalf of Covent; he also executed a personal guarantee. A deposit of $111,000 was to be paid, consisting of a payment of $50,000 on the signing of the contract, and a payment of $61,000 by 20 November 1989. The balance of the purchase price was to be paid on 15 December 1989. Mr Winter paid the initial deposit of $50,000 with a cheque drawn on the account of Mount Dunnead Pastoral Company Pty Limited, the trustee of his family trust. It was common ground that the balance of the deposit was paid. His Honour said that there was no direct evidence as to how it was paid, although there was evidence that between 16 and 27 November 1989, cheques of $15,000, $35,000 and $61,000 were drawn on the office account of Garrick Gray & Co. (as the firm was known earlier) in favour of Mount Dunnead Pastoral Company Pty Limited.
3. As to the role of Riordan & Partners
The contract signed on behalf of Covent nominated Riordan & Partners, a firm of Shepparton solicitors, as the purchaser’s solicitors. His Honour found that Mr Allan had previously introduced Messrs Gray and Winter to Mr Riordan at a luncheon meeting at which Mr Gray indicated that he was “interested” in purchasing three kiwi fruit properties in the Shepparton area with a view to “cornering” the kiwi fruit market.
Because of concerns about possible liability for additional stamp duty, Mr Riordan raised with Mr Winter and Mr Allan the need to get details of the names of the ultimate purchasers to be nominated by Covent.
His Honour next proceeded, as follows, to state a number of the facts pleaded by the Partners in their claim for breach of fiduciary duty, of which, the Partners claimed they were not informed:
(i) The contract with Covent had contained a covenant on the part of the vendor that it would, pending settlement, farm and manage the orchard in a proper and husbandlike manner according to the normal methods accepted throughout the district (special condition 6). Yet during December 1989 Mr Winter had asserted that the vendor was in breach of special condition 6 and had sought to use that breach as a lever to obtain an extension of time for settlement. On 11 December 1989, Messrs Gray and Winter had written to the vendor’s solicitors seeking an extension; but in a letter dated 18 December 1989, the vendor’s solicitors had written to Riordan & Partners refusing the extension and requiring immediate settlement. On 20 December 1989 Riordan & Partners had advised Messrs Gray and Winter that they did not consider that there was any realistic prospect of Covent being able to rescind the contract of sale for breach of special condition 6 and had urged that they take every step necessary to be in a position to settle at the earliest possible date.
(ii) By letter dated 20 December 1989, the vendor’s solicitors had served notice of default under the contract on Covent and on Mr Winter.
(iii) On 4 January 1990 Riordan & Partners had advised Gray & Winter that the vendor’s solicitors had indicated that the vendor might extend settlement if Messrs Gray and Winter could procure the execution of substitute contracts of sale by prominent barristers as purchasers in substitution for Covent. There then had followed an exchange of correspondence in which various proposals were put forward by Riordan & Partners on behalf of Gray & Winter and Covent. First it had been suggested that Covent would nominate Messrs Hedigan, Guest and Chernov as additional purchasers in return for an extension of time; then an offer had been made to procure by 25 January 1990 substituted contracts naming Messrs Hedigan, Guest and Chernov as purchasers.
(iv) By letter dated 24 January 1990, Riordan & Partners had informed Messrs Gray and Winter that the vendor’s solicitors had advised that the vendor had refused to extend the time specified in the notice of default beyond 4.00 p.m. on 26 January 1990. However, on 31 January 1990 the vendor’s solicitors had written to Riordan & Partners advising that the vendor had agreed to extend the time for completion to 1 March 1990, on condition that by 4.00 p.m. on 5 February 1990 substituted contracts were signed by the Partners and exchanged. On 1 February 1990 Riordan & Partners had written to Messrs Gray and Winter saying that if they wished to seek a further extension for exchange of the substituted contracts, they should deal directly with the vendor.
(v) Following an exchange of correspondence between Gray & Winter and a representative of the vendor, the vendor’s solicitors had advised Riordan & Partners, by letter dated 7 February 1990, that the vendor had agreed to extend time to 1 March 1990 on condition that by 4.00 p.m. on 12 February 1990 substituted contracts of sale were executed by the Partners. On 9 February 1990, Mr Winter had instructed Riordan & Partners to prepare substituted contracts naming the Partners as purchasers in place of Covent. On 12 February 1990, he had instructed Riordan & Partners to seek one final extension for obtaining the execution of the substituted contracts until 16 February 1990 on condition that a photocopy of the face page signed by Messrs Hedigan, Guest and O’Callaghan (with advice that they would exchange the contract when it had been signed by Messrs Chernov and Myers) be provided to the vendor’s solicitors that day.
(vi) On 12 February 1990, Riordan & Partners had sought the extension in accordance with their instructions, but it had been refused. The vendor’s solicitors had advised that the deposit had been forfeited and that the land, the orchard and the plant and equipment would again be placed on the market. This information had been conveyed to Messrs Gray and Winter by letter dated 12 February 1990.
(vii) On 16 February 1990, Mr Winter and a representative of the vendor had negotiated a fresh agreement for the sale and purchase of the land, the orchard and the plant and equipment to the Partners in substitution for the contracts with Covent.
4. As to the execution of the contracts by the Partners
His Honour went on to find that substituted contracts were prepared by the vendor’s solicitors naming the five Partners as purchasers; that the documents were signed by four of the Partners in late February 1990; that, as Mr Chernov was not available to sign, his name was struck out and the words “and/or nominee” added after the other names; that this was done on Mr Riordan’s advice; that, subsequently, the four signatories nominated themselves and Mr Chernov as the purchasers; and that settlement took place on 2 March 1990.
5. As to the retainer
In elaborating upon his earlier summary of this evidence, his Honour said (at 22):
“The evidence of Gray, which is uncontradicted and which I accept as probative of the facts asserted, is that a day or so after returning to Melbourne, after having been at Shepparton and inspected the property, he spoke to Hedigan on the telephone and mentioned the project to him. He told Hedigan that Allan had recommended it as being suitable for ‘your barristers’ with good tax deductions. Hedigan responded that only Guest and himself were around at the time and invited Gray to ‘bring it in to us’. On that or the following day, both Gray and Winter met with Hedigan and Guest at Hedigan’s chambers when they outlined the proposal. In the course of the meeting Gray said that he and Winter would be interested in becoming part of the syndicate. Hedigan said that he was interested in having a further look at it and Guest said that he was interested too. Hedigan said that O’Callaghan and Chernov would probably be interested. Gray also mentioned one Manford (who is not a barrister and who lives in Perth) as someone who could be interested. In the course of this meeting Gray said:
‘If we purchase the property at auction we would be interested in putting up the deposit, arranging finance to purchase the property, and pay any acquisition costs such as agent’s commission, we’ll fund whatever is necessary to acquire it.’
and also:
‘If we put up all the money to acquire the property at auction we’d want an acquisition fee of 10% of the purchase price.’
I infer from the context that by referring to ‘we’ Gray meant himself and Winter as the partners in Gray & Winter.”
Between 10 and 15 November 1989, the Judge found, Mr Gray had had several discussions with Mr Hedigan “to ascertain the commitment of the barristers to the venture”. His Honour said (at 24):
“According to Gray’s evidence which I accept, his discussions with Hedigan were to the following effect:
Gray: ‘Jack, Michael and I are going up to Shepparton and will be discussing tactics for bidding at the auction with Neil Allan and Ellis Gough’.
Hedigan: ‘Paul Guest and I are in. I think Peter O’Callaghan will be in and I believe Chernov will be in also. If not, I would have other barristers interested who would make a partnership of five.’
Gray: ‘In that case we will bid at the auction and see what happens. We won’t be buying it unless we can get it for less than 25% of its cost.’
Hedigan: ‘Are you sure we can get finance on it?’
Gray: ‘Yes’.
Hedigan: ‘Okay, go ahead.’
On the basis of this evidence taken in the overall context of the past dealings between the parties involved, I find that Hedigan engaged Gray & Winter to endeavour to acquire the kiwi fruit property on behalf of himself and a then undefined group of barristers for a price of less than $1.5 million.”
The primary Judge said that confirmation of this conclusion could be found in the following circumstances:
First, his Honour found (at 25) that, on the day of the sale, Mr Gray had telephoned Mr Hedigan and the following conversation had taken place:
“Gray: ‘Congratulations Jack, you are the proud owner of a kiwifruit farm.’
Hedigan: ‘How much did we get it for.’
Gray: ‘$1,110,000 for the land and irrigation equipment and $155,000 for machinery and other equipment.’
Hedigan: ‘That’s a pretty good result.’
Gray: ‘We’ve signed the contract in the name of a shelf company which Neil Allan provided and have paid a deposit of $125,000.’
Hedigan: ‘Well I had better get the other fellows together and go up there to have a look and speak to Neil Allan and John Corboy about it.’
Gray: ‘Let me know when you want to go so I can arrange it.’”
Secondly, the Judge found (at 25) that a few days after the auction, Mr Gray had been informed of a written offer by some of the original owners to purchase the property for $1.55 million. Mr Gray had asked Mr Hedigan his attitude to this offer. Mr Hedigan had said:
“We won’t be selling it. We didn’t buy the orchard to sell it for a small profit like that.”
Thirdly, the Judge found (at 26) that between 15 November 1989 and completion of the purchase, Mr Hedigan, acting on his own initiative, had discussed matters associated with the property with Messrs Corboy and Allan.
His Honour said (at 26):
“These several matters all point to the fact that Gray & Winter were retained to act in relation to the acquisition of the kiwi fruit property and that the acquisition was not something undertaken for their own benefit other than for the agreed fee.”
His Honour’s reasoning and conclusions on the legal questions
The primary Judge said (at 29) that the question for determination was “whether the retainer accepted by Gray & Winter and the work done in relation thereto can properly be regarded as being in connection with their practice as solicitors”.
1. The expert evidence
His Honour described (at 29-31) expert opinion evidence of Andrew Joseph, an experienced conveyancing solicitor. Mr Joseph said that it was not, in his view, part of the practice of a solicitor to engage in the marketing or promotion of investments in real estate, with the exception of procuring mortgage investment; in particular, in his opinion, it was not part of the practice of a solicitor to disseminate and to endorse marketing material for the promotion and sale of a commercial property; to promote and sell commercial property to prospective purchasers; to enter into a contract of sale for the purchase of a property without having instructions from a client to do so; to enter into a contract of sale for the purchase of a property for the purpose of nominating another purchaser without having instructions from a client to do so; to promote a partnership and to recruit partners in a syndicate to purchase a commercial property; to give forecasts and make predictions of property values in the future; to express an opinion as to the value of property; to give forecasts and make predictions of changes in the value of property in the future; or to speculate in the property market by searching for and locating properties being sold for the purpose of canvassing prospective purchasers to acquire such properties.
On the other hand, Mr Joseph’s opinion evidence was that it was part of the practice of a solicitor to sign a contract of sale of a property on behalf of a client when instructed to do so; to negotiate a sale price for a property on behalf of a client when instructed to do so; to advise a client when retained or requested to do so about the legal consequences of representations made or to be made in connection with the promotion of property ventures or investment; and to bid at an auction for the sale of a property on behalf of a client when instructed to do so.
2. The test of what amounts to the “practice” of law
The trial Judge said (at 31):
"[Mr] Joseph’s evidence is of course only part of the story. Understandably he has not dealt with the aspects of a solicitor’s practice relating to litigation but nor has he dealt with the general advisory role of a solicitor in fields other than the purchase and sale of property."
His Honour cited (at 32) the following passage from the opinion of O’Connell J in State of Florida v Sperry (1962) Fla 140 So. (2d) 587 at 591:
"It is generally understood that the performance of services in representing another before the courts is the practice of law. But the practice of law also includes the giving of legal advice and counsel to others as to their rights and obligations under the law and the preparation of legal instruments, including contracts, by which legal rights are either obtained, secured or given away, although such matters may not then or ever be the subject of proceedings in a court.
We think that in determining whether the giving of advice and counsel and the performance of services in legal matters for compensation constitute the practice of law it is safe to follow the rule that if the giving of such advice and performance of such services affect important rights of a person under the law, and if the reasonable protection of the rights and property of those advised and served requires that the persons giving such advice possess legal skill and a knowledge of the law greater than that possessed by the average citizen, then the giving of such advice and the performance of such services by one for another as a course of conduct constitutes the practice of law."
His Honour went on to say (at 32):
“The giving of advice concerning lawful means of minimising a client’s liability for income tax would by any test amount to the practice of the law and be properly regarded as part of the practice of a solicitor.”
3. His Honour’s application of this test
The Judge held (at 32) that the retainer accepted by Messrs Gray and Winter in relation to the acquisition of the kiwi fruit orchard was a retainer within the scope of their practice as solicitors; this conclusion was not, his Honour said, contrary to Mr Joseph’s evidence, for the following reasons (at 32-4):
· Mr Gray, and later Messrs Gray and Winter, had a long established practice in the field of providing legal advice to clients in relation to tax minimisation; this practice was a legitimate activity for a firm of solicitors to engage in; in the course of their practice they had on a number of occasions before November 1989 performed services in relation to tax minimisation schemes on instructions from Mr Hedigan and other barristers with whom Mr Hedigan was associated; when the taxation laws changed, so as to render unsuitable the type of schemes previously used to minimise tax, Messrs Gray and Winter directed their attention to other lawful methods of achieving tax savings.
· In their dealings with Mr Hedigan and the other barristers with whom they had an association, Messrs Gray and Winter held themselves out as solicitors and conducted their dealings in that capacity; although the kiwi fruit scheme differed from previous schemes involving the acquisition of commercial properties, in that previously Messrs Gray and Winter had acquired only an option, the substance of the kiwi fruit transaction was essentially the same as the earlier schemes (introduced by Messrs Gray and Winter to members of the Bar including some of the Partners), in that it involved the purchase of property and the financing of it from an outside source.
· At no stage did Messrs Gray and Winter claim to have acquired any personal interest in the property - they referred to Mr Hedigan the offer to on-sell at a substantial profit; Messrs Gray and Winter played no part in organising the syndicate which purchased the property - this was done by Mr Hedigan, and when Mr Gray expressed an interest in being involved he was rebuffed; financial contributions made by the Partners in relation to the kiwi fruit transaction were directed to Messrs Gray and Winter who paid them into the trust account they were required to maintain as practising solicitors; although Messrs Gray and Winter left themselves in a vulnerable position by the manner in which the property was acquired, the transaction was carried through to completion in the manner initially planned and they made no profit other than the agreed fee; and the sole purpose of the transaction was to enable Mr Hedigan and the other barristers enlisted by Mr Hedigan to obtain a financial advantage by taking part in a tax effective scheme.
· His Honour held (at 34) that Messrs Gray and Winter were not promoters of the scheme. They did introduce the scheme to their clients, but apart from this, their only involvement was in the carrying through of the original proposal in accordance with their instructions.
4. The ultimate question: whether the liability incurred in the settlement of the Kiwi Fruit Action arises “in connection with” the solicitors’ practice
His Honour first held that the meaning of the phrase “in connection with” depended upon its statutory context.
In concluding that the liability did arise “in connection with” the solicitors’ “practice”, the Judge said (at 35-6):
"The kiwi fruit action arose out of the [Partners’] dissatisfaction with the end result of the scheme. Whether or not they entered into the substitute contract as a result of misleading or deceptive conduct or a breach of a duty of care or of a fiduciary duty owed to them by Gray & Winter, the proceedings arose out of a transaction which Gray & Winter as solicitors were engaged to carry through to finality."
THE COMMITTEE’S GROUNDS OF APPEAL
By its grounds of appeal, the Committee challenges his Honour’s conclusion that the civil liability incurred by Messrs Gray and Winter, arising from the Kiwi Fruit Action, was incurred “in connection with” their practice, as defined in the Indemnity.
In the first place, the Committee’s challenge proceeds upon the assumption, accepted by the Committee only for the purposes of this branch of its argument, that all of his Honour’s findings of fact are to be accepted. Even on those findings, the Committee submits, what Messrs Gray and Winter did, for which they were sued in the Kiwi Fruit Action, was not done by them “in connection with” their “practice” within the meaning of the insurance.
In an alternative argument, the Committee challenges several of his Honour’s specific findings, namely that Mr Hedigan engaged Gray & Winter in relation to the acquisition of the orchard within the scope of its practice as solicitors; that the date when the Partners were finally committed to proceeding with the proposal to purchase the orchard had no bearing on any issue in the proceeding; that the payment of the fee to AIM rather than to Messrs Gray and Winter had no bearing on any issue in the proceeding; that Messrs Gray and Winter could not be regarded as having been promoters of the kiwi fruit scheme; that the evidence of Mr Gray was uncontradicted; that the sole purpose of the transaction was to enable Mr Hedigan and the other barristers enlisted by Mr Hedigan to obtain a financial advantage by taking part in a tax effective scheme; that AIM was merely an administration company of Gray & Winter; and that there was nothing in the evidence to suggest that the role of AIM was anything other than an administration company conducted in connection with the practice of Gray & Winter. On this alternative argument, the Committee also submits that on the undisputed primary facts, his Honour should have held that the claims made in the Kiwi Fruit Action were not covered.
THE CONTENTIONS OF MESSRS GRAY AND WINTER ON THE APPEAL
For their part, Messrs Gray and Winter seek to uphold the judgment at first instance by four main arguments.
First, they submit that the critical facts found by his Honour, now sought to be challenged by the Committee, depended essentially upon an assessment of the credibility of the witnesses concerned, but that no ground for appellate interference with those findings has been demonstrated.
Secondly, they contend that the transactions and dealings which occurred in the present circumstances and, in substance, what his Honour found, should be characterised as activities within the scope of the ordinary functions of a solicitor.
Their third argument is that, alternatively, if the instant activities did not lie directly within the ordinary functions of a solicitor, they were actions that were incidental to those functions and were thus covered.
Finally, and also in the alternative, it is submitted that, even if Mr Winter misunderstood the actual position, and even if Mr Hedigan had not, at the time Covent acquired the property, given definite instructions to Mr Gray to buy the property, nonetheless Mr Winter honestly believed that he was purchasing a property for a client; and this kind of activity fell within the insurance cover.
CONCLUSIONS ON THE APPEAL
It is convenient to consider first the question of construction of the insuring clauses of the Indemnity.
The construction of the Indemnity
As has been seen, central to the operation of the relevant insuring clauses is a “civil liability in connection with the Practice in respect of which a claim is... made”. Further, “the Practice” is relevantly defined to mean “the private practice of a solicitor carried on by the Firm solely on its own behalf...”
The general concept of a solicitor’s professional legal practice contrasted with the conduct of entrepreneurial activities and other businesses
It will be necessary later to consider in their detail the full text of the insuring provisions of the Indemnity, including their exemptions, but we propose at this stage to refer to the position more generally and, in particular, to consider the position when a solicitor conducts a business other than a professional legal practice. This is done in an endeavour to ascertain the background, setting or context of the Indemnity, with a view to establishing its true meaning (cf. CIC Insurance, above, at 634-5). In other words, this is something done only as an aid to the process of interpretation. It is not, and could not be, suggested that any of it is decisive of the questions of construction that arise for determination.
The distinction between these two kinds of activities was described by Brennan J., when a member of this Court, in a frequently cited passage in Leary v Federal Commissioner of Taxation (1980) 32 ALR 221 (at 240):
"It has not been material to consider whether it is possible for the role of a professional adviser and the role of an entrepreneur properly to coincide or overlap, but the appearance of solicitors performing these respective roles in the present case leads me to invite attention to significant differences between the two functions. These differences do not arise out of any judicial view as to the lawfulness or morality of tax avoidance.... They arise because the field of professional activity is co-extensive with a lawyer’s professional duty. That duty is to give advice as to the meaning and operation of the law and to render proper professional assistance in furtherance of a client’s interests within the terms of the client’s retainer. It is a duty which is cast upon a lawyer, as a member of an independent profession, whether his services are sought with respect to the operation of taxing statutes, the provisions of a contract, charges under the criminal law or any other of the varied fields of professional concern. It is a duty which arises out of the relationship of lawyer and client.
But activities of an entrepreneur in the promotion of a scheme in which taxpayers will be encouraged to participate [fall] outside the field of professional activity; those activities are not pursued in discharge of some antecedent professional duty. Entrepreneurial activity does not attract the same privilege nor the same protection as professional activity; and the promotion of a scheme in which particular clients may be advised to participate is pregnant with the possibility of conflict of entrepreneurial interest with professional duty." (Emphasis added).
It will further be recalled that, in his expert evidence, Mr Joseph expressed the opinion that it was not part of the practice of a solicitor to engage in the marketing or promotion of investments in real estate, except in the area of mortgage investments.
However, we were referred by counsel to several other decisions, including overseas decisions, in this area. These cases, and others, are considered below. As will be seen, some of them support the approach taken by Brennan J.; and some are, in our view, distinguishable for present purposes.
Decisions of the High Court of Australia
In Mann v Hulme (1961) 106 CLR 136, moneys were received by a partner in a firm of solicitors for investment. The solicitor gave the clients a promissory note “as added security” for the investment. It was held that the collateral arrangement for the giving of the promissory note as “added security”, whilst most unusual, afforded no ground for saying that the receipt of the moneys was not in the ordinary course of the solicitors’ partnership business.
This case is distinguishable since no investment of the funds of a client entrusted to his solicitor for investment was involved in the present matter.
Generally with respect to dealings in land, in Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146, it was held that the authority of a solicitor, retained by an owner of land in connection with a proposed sale of the land, to enter into a contract for sale must be given expressly or by necessary implication.
In more recent times, the High Court has considered whether a solicitor may be liable, beyond a specific professional relationship, under the general law of negligence.
In Hawkins v Clayton (1988) 164 CLR 539 it was held, by a majority, that a solicitor was liable to an executor for failure to locate a will. Deane J. said (at 579-580):
"The relationship of solicitor and client is, as has been seen, a relationship of proximity which ordinarily involves the combination of those elements with respect to foreseeable loss which may be caused to the client by the performance of professional work. It is a relationship of proximity of a kind which may well give rise to a duty of care on the part of the solicitor which requires the taking of positive steps, beyond the specifically agreed professional task or function, to avoid a real and foreseeable risk of economic loss being sustained by the client. Whether the solicitor-client relationship does give rise to a duty of care requiring the taking of such positive steps will depend upon the nature of the particular professional task or function which is involved and the circumstances of the case. While the present case is plainly a borderline one and I am conscious of the force of the reasoning which has led the Chief Justice and Wilson J. to reach a contrary conclusion, it seems to me that, for the reasons which follow, the solicitors were under a relevant duty to take such positive steps.
In drawing and supervising the execution of the testatrix’s will and undertaking responsibility for its custody in the present case, the firm was acting professionally as the testatrix’s solicitors. In accepting responsibility for custody of the testatrix’s will after her death, the firm effectively assumed the custodianship of the testatrix’s testamentary intentions." (Emphasis added).
Again the case is, we think, distinguishable here. The duty of care, which flowed out of the professional relationship, had no entrepreneurial context.
A question somewhat similar to that raised in Clayton, and likewise distinguishable, arose in Hill v Van Erp (1997) 142 ALR 687. It was there held, by a majority, that a solicitor owed a duty of care to a beneficiary under a will.
Decisions of this Court
Leary’s Case has already been mentioned.
It has been held in this Court that, for the purposes of the Trade Practices Act and similar legislation, solicitors and other professionals can provide their services in trade or commerce and not only pursuant to their profession (see Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd (1987) 14 FCR 215; Argy v Blunts and Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112; cf. Prestia v Aknar (1996) 40 NSWLR 165). But whether, for the purposes of the Trade Practices Act and similar legislation, the present activities could be characterised as in trade or commerce is not material for our purposes.
In Henderson v Amadio Pty Ltd (No.1) (1995) 62 FCR 1 Heerey J. applied the distinction drawn in Leary. Coincidentally, Heerey J. considered the role of Messrs Gray and Winter in promoting an investment scheme. The details of the circumstances need not be repeated, but his Honour said (at 133):
"Gray & Winter did not owe a solicitor’s duty of care to the applicants. Although they were introduced to most of the applicants as solicitors, the work they did was not in my opinion the work of a solicitor. Their brochure did not refer to them as solicitors. They did not render an account for work done as solicitors. They acted as promoters of an investment scheme." (Emphasis added).
Heerey J. went on to say (at 135):
"Notwithstanding Gray & Winter’s admission on the pleadings of a limited retainer to act as the applicants’ solicitors ‘to negotiate the acquisition of the property on their behalf’ (which falls well short of a retainer to act generally in the purchase and mortgage) on the terms of the Gray & Winter instruction letter, I find no such retainer in truth existed. The inconsistency between the role of Gray & Winter as promoters or entrepreneurs (which they undoubtedly filled) and their suggested role as solicitors for the investors is demonstrated by the... passage from the judgment of Brennan J in Leary... at [239-240]." (Emphasis added).
After referring to a letter authorising Gray & Winter “to instruct solicitors to act in the conveyance of the property and the mortgages”, his Honour said (at 136):
"If [Gray & Winter] wished to assume the rights and obligations that go with a solicitor’s retainer they could have done so very simply. On the contrary, the terms of the letter made it clear that a signatory would be authorising Gray & Winter to carry out the task of instructing other solicitors to act.
This is not surprising. Although Mr Garrick Gray was, in verbal dealings with potential investors, happy enough to exploit the cachet of being a Melbourne solicitor, it would be a different matter to stipulate formally in the instruction letter that Gray & Winter, the indirect beneficiary of a million dollar acquisition fee if the transaction went ahead, would also be solicitors for the investors. That such a conflict would exist is in itself a circumstance pointing against a conclusion that Gray & Winter accepted a retainer as solicitors: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd [(1986) 160 CLR 226] at 234; Leary."
In Tarzia v National Australia Bank, 12 October 1995, unreported, Einfeld, Olney and von Doussa JJ. said (at 28):
"It is not generally the task of solicitors to explain the financial result or prudence of the transactions involved in documents they are merely instructed to explain. Unless they undertake the task of doing so, or are specifically retained to perform it and supplied with the necessary information and documentation, they will not be negligent for failing to do so: Hogan & Anor v Howard Finance Limited & Anor [1987] ASC 55-594 per Hope JA at page 57, 539; O’Brien & Anor v Hooker Homes Pty Ltd & Ors [1993] ASC 56-217 at page 58, 270. In certain situations it may be negligent of a solicitor not to ensure that his client has good financial advice, particularly when the client is at a disadvantage with respect to the other parties to the transaction, and where the results are potentially disastrous for the client: McNamara v Commonwealth Trading Bank of Australia [1984-5] 37 SASR 232 at 241 per King CJ."
See also Krambousanos v Jedda Investments Pty Ltd (1996) 64 FCR 348 per Branson J. at 365.
Decisions of the New South Wales Court of Appeal
In Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642, the Court of Appeal, by a majority, following Hawkins v Clayton, found a solicitor liable in tort for negligence, holding that the scope of the duty of care of a solicitor to the client is not confined to the subject of the contract of retainer. The loss arose out of a conveyancing transaction; again, there was no entrepreneurial element involved.
In Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398, it was held that, unless it is part of the terms of their retainer or within the ambit of any assumed responsibility relied upon, solicitors, when retained to act on a purchase or mortgage for their skill in the law, have no general duty to inform clients for whom they so act of their views about the financial prospects of the purchase or mortgage where they feel, or ought reasonably to feel, that there is a risk of cost to the clients, nor can the fact that a contract for sale contains special conditions making it subject to the client obtaining evidence, impose such a duty. (It may be, of course, that particular circumstances might give rise to an obligation to furnish some advice.)
Sheller JA. said (at 418):
"[The suggested] duty [said to be imposed upon a solicitor to explain what the proposed finance involved in terms of the borrowers’ capacity to repay] would require solicitors, retained to act on a purchase or mortgage for their skill in the law, to inform every client for whom they so acted of their views about the financial prospects of the purchase or mortgage where they felt or ought reasonably to have felt that there was risk of loss. One consequence of this would be to require solicitors to give opinions, which they were not qualified to give, with the obvious consequence that if they were wrong and the client had acted on the basis of those views, they would be liable in negligence. For good reason such a proposition is contrary to authority. The solicitor’s duty is found in the terms of the retainer and the ambit of any additional assumed responsibility relied upon."
In Purkiss v Hannigan, Court of Appeal, 13 February 1997, unreported, a solicitor conducted a “mortgage practice”, where funds were received from investors, usually clients, and lent out on mortgage security. Investors’ funds were deposited to the credit of the solicitor’s trust account, but the lending out was on mortgages taken in the name of a company controlled by the solicitor. The solicitor sold his practice, excluding the mortgage practice from the sale. Later the administration of the mortgage practice was handed over to a firm of accountants. Funds were lent unsecured and lost. It was held that the solicitor was liable as well as the accountants.
Giles AJA. said (at 15-16):
"Mr Hannigan [the solicitor] was a trustee of funds received from these investors prior to the handover; they were also his clients in a general sense. There was an existing professional relationship, at the least in relation to management of the investments, which called for care and skill not only in the mechanics of lending the funds out but also in ensuring appropriate procedures to safeguard the investors’ funds from just what happened to them. Undoubtedly the investors relied on Mr Hannigan to exercise that care and skill, and he knew that they did, and in my view that carried with it an assumption of responsibility (to take up the concept in Hawkins v Clayton) to endeavour to put in place a similarly protective structure for the continued mortgage practice or inform investors of the changes which might imperil funds invested in the future in the belief that there were no such changes." (Emphasis added).
Decision of the Supreme Court of Victoria
In Henderson v Gray & Winter and Solicitors Liability Committee, Eames J., 20 October 1995, unreported, another case coincidentally involving Messrs Gray and Winter, his Honour expressed the view (at 56), without finally deciding the point, that activities relating to the promotion or syndication of the sale or purchase of real estate were “entrepreneurial activities of a kind which may well not constitute claims in connection with the practice of the solicitor or Firm” within the meaning of the professional indemnity insurance provided for by s.88A of the Legal Profession Practice Act.
Decision of the Supreme Court of Queensland
In Orszulak v Hoy [1989] Aust Torts R 80-293, the Full Court held that the extent of a solicitor’s duty to the client depends upon the terms and limits of the retainer; that where the only retainer was to act in relation to a conveyance, the solicitor was not under a duty to give what was, in effect, commercial advice as to the advisability of entering into the purchase transaction; and that the acceptance of a retainer imposing the duty of giving business or commercial advice can only be established by an express provision; or, in an appropriate case, by inference from conduct, for instance, where the solicitor is held out as having the necessary skill and experience in that area.
The position in England
A solicitor has no authority to bind the client in a contract to buy land unless expressly authorised, or where this authority is necessarily implicit in the terms of the retainer (see Halsbury’s Laws of England, 4th Ed. (Reissue), Vol.44(1), para.125).
Normally, it is no part of a solicitor’s business in England to receive clients’ money for the purpose of paying it out in unspecified investments or otherwise, or to hold clients’ money for a long period. However, it is a question of fact in each case; so that, where a firm negotiated loans and took shares for transmission to lenders as security for loans, a misappropriation by a partner of shares deposited for such a purpose was held to be an act for which the firm was liable. On the other hand it is within the scope of a solicitor’s business to advise trustees whether a particular mortgage or investment is one in which trust money can be invested without breach of trust, and the firm will be liable for the act or omission of a partner in allowing trustees to invest in a security which he should have known was unauthorised. The distinction between money received to be invested in, e.g., a specific mortgage or for investment in an unspecified security originates with the distinction between the business of attorneys and the business of scriveners (see Halsbury, op. cit. para.129; see also McPherson v Watt (1877) 3 App. Cas. 254 per Lord Blackburn at 270).
The duty of a solicitor to his client when effecting an investment of the client’s money depends on the nature of the retainer. The solicitor may be employed either to advise the client on the whole matter, including the sufficiency of the security, or to carry out an investment on a particular security chosen by the client. In the former case the solicitor undertakes responsibility to take appropriate steps to see that the security is good, and may even constitute himself a trustee of the money he receives from his client. But he will not be liable for insufficiency of value where his advice is founded on reports of competent surveyors, and each transaction is referred to the client, who concurs in it. In the latter case the solicitor is under no duty to inquire into the value of the property which is to afford security for the investment. In England, the fact that a solicitor is asked to “find” a suitable investment of the type indicated by the client will not exonerate the solicitor if the investment subsequently proves to be unsound, since it is implied that the solicitor’s task is to find an investment which is good and to advise the client thereon with reasonable skill and care. The solicitor may, however, rebut the presumption as to the soundness of the investment if he informs the client, in terms, that he expresses no opinion as to its soundness and advises the client to seek an expert’s opinion. (See Cordery’s Law Relating to Solicitors, 8th Ed. at 143 and 147).
It has been held in England that a solicitor has no duty to advise whether a sale is prudent (see Bowdage v Harold Michelmore & Co. (1962) 106 Sol Jo 512).
The early functions of a solicitor, attorney, conveyancer or scrivener included the sale of real estate, but this should now be viewed in its proper historical perspective, including the modern trend towards professionalism (see Simpson, A History of the Common Law of Contract at 253-5; Holdsworth, A History of English Law, Vol.XII at 53-4; J. Stuart Anderson, Lawyers and the Making of English Land Law 1832-1941 at 315-319).
One of the Oxford Dictionary definitions, based on historical principles, of “Solicitor” now relied upon by Messrs Gray and Winter is “One who conducts, negotiates, or transacts matters on behalf of another or others; a representative agent or deputy”. However, this definition is stated to be obsolete now. In McPherson v Watt, above, Lord Blackburn (at 270) referred to “money scriveners” who also acted as brokers in the purchase and sale of estates. These functions are far removed from the professional model of the modern solicitor in this country. It is relatively uncommon for a solicitor in Australia also to carry on the business of an estate agent (see G.E. Dal Pont, Lawyers’ Professional Responsibility in Australia and New Zealand at 411; see also the ruling of the Victorian Law Institute, below).
In Haseldine v Hosken [1933] 1 KB 822, a solicitor took out an indemnity policy insuring him against “loss arising from any claim... made against [the firm]... by reason of any neglect, omission or effort... on the part of the firm... in or about the conduct of any business conducted by or on behalf of the firm... in their professional capacity as solicitors”. The solicitor sustained loss through having, without realising the fact, entered into a champertous agreement.
It was held that a claim in respect of the loss was not maintainable. In the first place, the agreement, being champertous, was illegal and contrary to public policy. Further, the loss did not arise by reason of any neglect committed by the solicitor in his professional capacity.
Greer LJ. said (at 837-8):
"With regard to the policy sued on it is important that its construction should be approached from the point of view that it was not intended to indemnify against a criminal act. What it was intended to do was to cover the case of a solicitor who, in conducting the business of his client, either in conveyancing or when representing him in litigation, made a mistake about the facts or a mistake about the law, or did something while acting on behalf of his client which rendered him, the solicitor, liable to a third party. The acts intended to be covered were those he was doing not to secure a benefit for himself, but those he was doing on behalf of his client. Read in that way this policy does not indemnify Mr Haseldine in respect of the consequences of his making the two agreements by which he was to secure an interest in the result of the litigation - agreements which, in view of the law of this country, he ought not to have made. The damage that arose did not arise owing to any neglect, omission or error of Mr Haseldine in his professional capacity as a solicitor, and therefore was not covered by the policy sued on." (Emphasis added).
Slesser LJ. said (at 839):
"In my view, looking at the agreements made by Mr Haseldine, and quite apart from any question of champerty, they were agreements by which he was undertaking a personal speculation and was not acting as a solicitor. It seems to me to be playing with words to say that when a solicitor assists litigation for the purpose of making a private profit out of the transaction, it can be described as a profit, if it be ultimately acquired, obtained in his professional capacity as solicitor, because from the very nature of the case he would have to account, if he were acting as solicitor, to his client." (Emphasis added).
Decisions of United States Courts
The present question has been considered in several cases dealing with the vicarious liability of a law firm for the conduct of any of its principals or employees. In the United States, a law firm is subject to civil liability for injury legally caused to a person by any wrongful act or omission of any principal or employee who was acting (a) in the ordinary course of the law firm’s business or (b) with actual authority (see Restatement of the Law Governing Lawyers, Tentative Draft No.8, March 21, 1997, Section 79, p.124). Even when there is no actual or apparent authority, the firm is liable for acts in the ordinary course of business, that is, acts of the sort the firm performs, performed within the time and place where the actor was authorised, and intended at least in part to serve the firm. Liability under this last head in effect permits a partner to expand the business of the partnership, even if without actual or apparent authority of the partnership, so long as the three elements are present (ibid. at 127). The ordinary course of business of a law firm includes the practice of law and various activities normally related to it. Thus, liability is imposed for legal malpractice by any firm lawyer for other liabilities arising from abuse of the professional relationship etc. (ibid).
According to the Draft Restatement (at 127-8):
"But non-firm business or other acts, such as entry by a law-firm principal into an unrelated business partnership that is not part of the firm’s practice of law and its ancillary activities, are not within the ordinary course of a law firm’s business. Also excluded are acts of non-principals that are not within the scope of their employment, for example the writing of a will by a non-lawyer firm librarian not authorized to do so. The scope of a firm’s course of business is determined from its own activities; a particular firm may have an ordinary course of business broader or narrower than those of otherwise comparable firms. For example, if other lawyers in a firm know that a firm lawyer has engaged in the practice of making investments for firm clients from the proceeds of recoveries or the like, that may warrant a fact finder in concluding that the firm’s ordinary course of business includes making such investments for clients. Likewise, activities such as the provision of title insurance can be within the ordinary course of the business of a law firm. When a firm or its principals own an enterprise that is not engaged in the practice of law, the corporate or other form of that enterprise may limit the liability of its owners; the professional rules of the jurisdiction may nonetheless subject the firm’s principals to obligations other than civil liability respecting the enterprise." (Emphasis added).
In Entente Mineral Co. v Parker 956 F 2d 524 (5th Cir. 1992), a law firm was held not liable when a lawyer bought a royalty interest from a client, thus interfering with the client’s contract with the plaintiff.
In Sheinkopf v Stone 927 F 2d 1259 (1st Cir. 1991), a law firm was held not liable for the acts of a lawyer who solicited a “non-client’s” investment in an outside business venture. Selya J said (at 1265):
"Human beings routinely wear a multitude of hats. The fact that a person is a lawyer, or a physician, or a plumber, or a lion-tamer, does not mean that every relationship he undertakes is, or can reasonably be perceived as being, in his professional capacity. Lawyers/physicians/plumbers/lion-tamers sometimes act as husbands, or wives, or fathers, or daughters, or sports fans, or investors, or businessmen. The list is nearly infinite. To imply an attorney-client relationship, therefore, the law requires more than an individual’s subjective, unspoken belief that the person with whom he is dealing, who happens to be a lawyer, has become his lawyer. If any such belief is to form a foundation for the implication of a relationship of trust and confidence, it must be objectively reasonable under the totality of the circumstances." (Emphasis added).
See also First Bank & Trust Co. v Zagoria 302 SE 2d 674 (Ga. 1983); Shelton v Fairley 356 SE 2d 917 (NC App 1987); Heath v Craighill, Rendleman, Ingle & Blythe PA 388 SE 2d 178 (NC App 1990); Husted and Husted and Husted v McCloud 450 NE 2d 491 (Ind. 1983); Reiner v Kelley 457 NE 2d 946 (Ohio App 1983); Roach v Mead 722 P 2d 1229 (Or. 1986); Eisenberg v Gagnon 766 F 2d 770 (1985).
A Canadian Decision
Hazlewood v Travelers Indemnity Company of Canada [1979] 2 WWR 271, was an appeal from a judgment at first instance that a solicitor acting in the capacity of a commission agent was not entitled to claim under a policy of insurance covering his omissions in his capacity as a lawyer. The appellant had invested moneys on instructions from a client. They were misused and lost. The client successfully sued the solicitor on the basis of a contractual obligation as a guarantor of the investment. The British Columbia Court of Appeal dismissed the appeal on the basis that the appellant had not met the burden of showing that the loss was a loss arising out of the performance of professional services.
Decisions dealing with unlicensed persons acting in legal matters
As has been seen, the learned primary Judge in the present matter relied on United States cases dealing with contempt of court for the unauthorised practice of law (see State of Florida v Sperry, above; The Florida Bar v Town Fla (1965) 174 So 2d 395). We were also referred to similar decisions in other jurisdictions, e.g. Barristers’ Board (WA) v Palm Management Pty Ltd (1984) WAR 101; Barristers’ Board (WA) v Central Tax Services Pty Ltd (1984) 16 ATR 115; Attorney-General (WA) v Quill Wills Ltd (1990) 3 WAR 500; Auckland District Law Society v Dempster [1995] 1 NZLR 210; and Regina v Nicholson (1979) 96 DLR (3d) 693.
In our opinion, these cases do not address the present question, that is whether, as Brennan J. held in Leary, a distinction should be drawn between a lawyer’s professional functions undertaken on behalf of the client on the one hand and, on the other, personal entrepreneurial activities engaged in on the lawyer’s own account.
The Rules of Professional Conduct and the Changing Profile of Lawyers
It has been observed that “many clients, particularly commercial clients, require their lawyers to be competent business advisers. These clients expect their lawyer to be commercially aware, to have a good sense of judgment and to be capable of providing prompt practical advice” (The College of Law Sydney, Professional Program: Study Guide, at para.3-8); see also, to similar effect Disney, Basten, Redmond & Ross, Lawyers at 62-3). It should be, and is, accepted by practitioners that sound legal advice should be practical, and thus should take into account its context, be it commercial, personal or other; this has always been the position at common law and in practice in all common law jurisdictions.
But this is not to say that, ordinarily at least, a solicitor is professionally responsible for giving purely “commercial advice” or suggestions. Indeed, in some situations, the solicitor should not deal with the client at all. In Law Society of NSW v Harvey [1976] 2 NSWLR 154, Street CJ. said (at 171):
"A conflict of interest which is avoidable, and ought to be avoided, is that which arises from a deliberate proposal of the solicitor that his client deal with him. If, for example, a client seeks aid or advice from a solicitor concerning lending or borrowing, or the acquisition or disposal or dealing with assets, the solicitor will disregard his primary duty as a solicitor referred to so trenchantly by Lord Westbury, if he uses the occasion to become the party who deals with his client. It can make no difference if he is not a party directly, but the transaction is with a company in which he has an interest. Even the tender of advice to his client to have independent legal advice, although of importance, does not really overcome the objection to the solicitor having proposed, invited or encouraged the client to deal with him or his company in the proposed transaction. We need not pause to analyse the differing problems which arise where the client rejects the advice to seek such independent advice, and the solicitor continues to act, or the client acts for himself or where he has independent advice either just for the transaction or has a permanent new solicitor. In varying degrees the trust of and reliance upon the solicitor to act fairly and independently arising from the initial preparedness of the solicitor and client to trade may remain as the reason why the client ultimately deals with the solicitor and not somebody else. It is difficult to be sure it does not. In the absence of very special circumstances, a solicitor who promotes himself as the dealer with his client misuses his position. A solicitor who constantly promotes dealings with various clients clearly misuses his position, and puts it beyond his capacity to observe his primary duty to his clients. The price of being a member of an honourable profession, whose duty to his client ought not to be prejudiced in any degree, is that a solicitor is denied the freedom to take the benefit of any opportunity to deal with persons whom he has accepted as clients. Therefore, he ought neither to promote, suggest nor encourage a client to deal with him, but rather should take all reasonable steps positively to avoid dealing directly, or indirectly, with his client. There are of course exceptional cases where the transaction may be in the special interest of a particular client, but such cases will be isolated and need to be dealt with [with] conscientious regard for the procedures already referred to." (Emphasis added).
However, the content and application of the rules of professional misconduct cannot be decisive of the present question. (See Maguire v Makaronis, High Court of Australia, 25 June 1997, unreported, per Brennan CJ, Gaudron, McHugh and Gummow JJ at 13). In most common law jurisdictions, special ethical rules have been framed to deal with a legal practitioner’s ethical responsibilities for “law-related services” (see, e.g. The American Bar Association, Model Rules of Professional Conduct (1994), Rule 5.7 at 85-7; Halsbury, op. cit. para.75). Indeed, the Council of the Law Institute of Victoria specifically permits qualified solicitors to practise as estate agents from the same premises on their undertaking to: (a) maintain two separate trust accounts; (b) place all deposits from the sale of land in the solicitor’s trust account; (c) appoint the same persons as auditor of both trust accounts; (d) allow Law Institute personnel full access to the estate agent trust account and other records associated with the agency (subject to provisions and restrictions of the Estate Agents Act 1958 (Vic)); (e) maintain in their dealings as estate agents the same ethical standards expected in their capacity as solicitors; and (f) obtain separate insurance cover for real estate agent functions to a level not less than that of the compulsory professional indemnity insurance required to be carried by solicitors in Victoria.
But, as has been said, whilst ethical considerations can throw some light on the present problem, they cannot be decisive of the question whether, for our purposes, a line should be drawn, as was done in Leary, distinguishing professional functions from entrepreneurial activities. In the present context, that distinction remains valid.
Dual activities of other professionals
A similar distinction (i.e. professional versus personal or entrepreneurial) has been drawn in professional insurance contexts beyond the context of legal professional insurance.
In FAI General Insurance Co. Ltd v Gold Coast City Council (1993) 7 ANZ Ins Cas 61-153, the Council insured under a professional indemnity policy against any claim “for breach of professional duty in the conduct of the practice [of ‘Municipal Authority’]”. The Council was successfully sued for negligence consisting of a misstatement by one of its employees as to the location of a water main. It was held that the claim fell outside the scope of the policy.
McPherson, Davies and Moynihan JJ. said (at 77, 812):
"The definition of risk and the measure of the obligation to indemnify in a professional indemnity policy in terms of breach of professional duty in the conduct of the practice of Municipal Authority requires that effect be given to the word ‘professional’. It is not every breach of duty in the course of the conduct of the ‘practice’ or ‘business’ of ‘Municipal Authority’ which will be a breach of professional duty. The meaning of ‘professional’ will, of course vary with context. ‘Professional’, however, connotes ‘pertaining or appropriate to a profession’, ‘engaged in one of the learned professions’.
The point is illustrated by the decision of the British Columbia Court of Appeal in Chemetics International Ltdv Commercial Union Assurance Co of Canada 11 DLR (4th) 754. In that case the policy excluded liability in respect of the rendering of ‘professional services’. The relevant failure was to give proper operating instructions in a manual. The manual was prepared by a qualified engineer. That was, however, held to be irrelevant to determining whether the particular instruction in issue was characterised as a professional service. It was held not to be. The provision of operating instructions was not the provision of professional services; the service was not one which could usually be expected to be provided only by a professional engineer. It was simply part of a service provided by a vendor to a purchaser of the particular plant.
This may be contrasted with Baltzam v Fidelity Insurance Company of Canada (1932) 3 WWR 140. There the indemnity was in terms of ‘in the practice of his profession’. An injury to a patient because an X-ray table was improperly locked by the doctor was, not surprisingly, held to be within the terms of the indemnity.
In the present case the Respondent’s servant did no more than convey factual information which was incorrect and upon which it may be accepted that a professional judgment was exercised by those responsible for the design of the Plaintiff’s building. That, however, did not impart any ‘professional’ component to the Respondent’s duty to provide correct information in the circumstances." (Emphasis added).
In Drayton v Martin (1996) 67 FCR 1, an accountant, who was primarily engaged in business as an investment adviser, gave investment advice to a client. The client later made a claim against the accountant, alleging breach of duty. The accountant settled the claim and the question arose whether it fell within the scope of the accountant’s professional indemnity policy, and in particular, whether the liability incurred by the accountant was incurred “in connection with” his practice as an accountant.
Sackville J. said (at 34):
"The simple fact of the matter is that, so far as the Draytons were concerned, Mr Martin’s advice to them to invest in the cash flow plan was, to use his words ‘inextricably interwoven’ with his role as their accountant and his business or profession as an accountant. In practice, the stringent demarcation identified by Mr Williams was blurred, at least in Mr Martin’s dealings with the Draytons. His work as the accountant for the tractor business provided the impetus for his recommendation that the Draytons participate in the tax-driven cash flow plan. His role as an accountant was undertaken at the same time as his role as an investment adviser. His function as an adviser, however imperfectly performed, depended on information obtained as the accountant for the Draytons. In these circumstances, it seems to me inevitable that the liability Mr Martin incurred to the Draytons was incurred ‘in connection with’ his practice as an accountant." (Emphasis added).
An appeal to the Full Court by parties involved in cross-claims to the principal proceedings in Drayton v Martin, above, was dismissed by Davies, Wilcox and Branson JJ. in HIH Casualty and General Insurance Ltd v FAI General Insurance Co Ltd, 10 February 1997, unreported. The Full Court was of the view that the question was one of fact only, that no question of principle was raised, and that there was no good reason for interfering with the trial Judge’s findings on the facts.
Wilcox J. said (at 5-6):
"As his Honour said, it was Mr Martin’s work as accountant for the Draytons in connection with the tractor business that provided the impetus for his recommendation that they participate in what his Honour called the ‘tax driven cash flow plan’. ... Mr Martin says he told Mr Drayton that the plan ‘might help to reduce your tax liability. You still have a large amount of money on deposit and you could have tax problems this year and in the future’. He then enlarged on the virtues of the plan.
I think a simple way of testing whether the liability arose out of Mr Martin’s practice as an accountant would be to ask what would have been his position if, after referring the Draytons in general terms to the plan, and recommending it as something for their consideration, he had sent them off to an entirely independent investment adviser who completed the negotiations and signed them up on the plan. Would Mr Martin have been liable? In my view he undoubtedly would have been. I say this because it is quite plain that the plan was only a useful acquisition for the Draytons if the otherwise assessable income of the tractor business was sufficient to support the interest payments that would be required, and indeed to make the incurring of those payments worthwhile. It is clear it was not. At the relevant time the tractor business was operating at a loss and there was nothing to indicate that, in future, it would receive profits of the dimensions necessary to require consideration of a plan such as this.
In other words, the scheme was fundamentally flawed from the outset. Mr Martin, as the Draytons’ accountant, should have known this." (Emphasis added).
Again, there is nothing in this case that detracts from the drawing of the professional/entrepreneurial distinction explained in Leary. As we followed the reasoning of Sackville J. and of the Full Court, their Honours have held that the relevant activity was, in truth, professional, either because it was advice given by an accountant wearing an accountant’s hat, or because any “commercial” suggestion offered was “inextricably intertwined” with the technical, i.e. professional, advice. However, in the present case, as will appear below, we are of the view that no technical, i.e. legal or professional, advice was given by Messrs Gray and Winter at all.
The meaning of the present insuring provisions
It will be remembered that the principal provision expressed the cover as an indemnity “against any civil liability in connection with the Practice...”; and that “the Practice” relevantly means “the private practice of a solicitor carried on by the Firm solely on its own behalf...”.
There are further provisions to which we will return, but pausing at this point, the provisions mentioned above should, we think, be construed so as to cover liability having some nexus with (i.e. “in connection with”) the professional functions of a solicitor (i.e. “the Practice”). In other words, the cover does not extend to liability for an entrepreneurial activity which has no real nexus with the Practice.
This conclusion is supported by the statutory context which, as we have seen, emphasises the need to provide professional indemnity insurance. Moreover, as has been noted, the professional character of the cover is indicated by its entitlement as a “Contract of Professional Indemnity Insurance”.
It is also supported by the unlikelihood that the Indemnity was intended to cover liability for any activity associated with the conduct of a solicitor’s practice, when the practice is viewed as a going business concern. Take the illustration of a solicitor who conducts a practice from premises owned by the solicitor, who enters into a contract to sell the premises, but not the practice, and is alleged to have defaulted in the performance of that contract. In our opinion, such a claim was not intended to fall, and does not fall, within the scope of the policy, because such a claim does not arise out of any professional relationship.
Do the succeeding provisions of the cover affect this conclusion?
It will be recalled that the definition of “The Practice” went on to include “any personal appointment of a Principal or Employee to act as a director, secretary or officer of a body corporate or as a trustee, executor, attorney-under-power or tax agent, but only where any fee or other remuneration from such appointment is payable to the Firm or, where there is no fee or other remuneration, the Firm expressly approved the appointment...”. This provision is consistent with an interpretation that the scope of the cover is restricted to professional activities, the Firm’s involvement in which will be indicated either by receipt of fees, or by the express grant of its approval.
The definition of “The Practice” goes on to exclude “acting in the course of employment by an employer who is not a solicitor in private practice”. This is a further indication of an intention to confine the cover to professional activities.
The definition also excludes “accepting moneys for investment, or making investments, other than as a trustee and in strict accordance with the requirements of the Law Institute of Victoria and the Australian Securities Commission”. Again, this exclusion is consistent with the inclusion in the cover of activities having a professional quality, as distinct from unrestricted entrepreneurial activities.
Reference should also be made to the several specific exclusions from the policy.
In our opinion, to exclude claims for trading or personal debts and for breach of warranty, guarantee or indemnity (other than as agent for, and with the express or implied authority of, a client) again emphasises the professional character of the cover.
The exclusion, to some extent at least, of claims arising from dishonesty, or from certain investments in schemes involving a “Related Interest” is, perhaps, an equivocal consideration on the present point of interpretation.
When the Indemnity is considered as a whole and in its statutory context, it appears that claims arising from professional functions fall within the scope of the cover, but that claims arising from entrepreneurial activities are not covered.
The learned primary Judge appears to have accepted this distinction but only as a matter of principle, since his Honour held that there were no entrepreneurial activities here. He cited (at 36-7) the judgment of Eames J. in Henderson, above, including its reference to “entrepreneurial activities” consisting of the promotion and syndication of investment schemes involving real estate. However, the trial Judge went on to say (at 37) that such activities “have no relevant similarity to the facts of this case”. This is suggestive of the view that the activities here should be characterised as professional rather than entrepreneurial. In other words, his Honour so characterised what Messrs Gray and Winter did by an inference drawn from the circumstances of the case. So viewed, it must follow that this is an area in which an appellate court may review the matter and reach its own conclusions as to the inferences to be drawn from the primary facts found by the learned trial Judge (see Warren v Coombes (1979) 142 CLR 531 at 553). Having given full weight to the conclusion reached by the primary Judge, we cannot, with all respect, agree with it for the reasons which now follow.
Should the relevant activities of Messrs Gray and Winter be characterised as “professional” or “entrepreneurial”?
In our opinion, when the conduct of Messrs. Gray and Winter is considered as a whole, the inference should be drawn that the things they did were done as the actions of businessmen, rather than as solicitors. In other words, they acted as entrepreneurs rather than as legal professionals.
There are many indicia to support this inference. Messrs Gray and Winter first heard of the proposal, through Mr Allan. They were prepared to enter into the contract to buy through their corporate vehicle. They were also prepared to terminate that contract. In introducing the proposal to the barristers, they nominated an “acquisition fee” of about 10 per cent of the purchase price. They did not perform any of the legal work - the conveyancing was done by Mr Riordan; it was Mr Allen who gave some (limited) tax advice on the depreciation available. Messrs Gray and Winter gave no tax or any other technical or legal advice.
Significantly, Messrs Gray and Winter were not sued by the barristers in respect of any legal or tax advice tendered by them. On the contrary, the complaints made by the barristers went to misrepresentations by Messrs Gray and Winter as to commercial aspects of the venture, or to their failure, as promoters, to disclose some facts. They were not sued as professionals. Nor could they have been. They never undertook any relevant professional responsibilities. Their sole interest was in obtaining the 10 per cent “acquisition fee” (i.e. profit) from the barristers acting at arms’ length from them. In all of this, they were not wearing the hat of a solicitor.
The ultimate question: whether the liability incurred in the settlement of the Kiwi Fruit Action arises “in connection with” the solicitors’ practice
It must follow that the claims made by the barristers were outside the scope of the policy, and that the appeal should be allowed.
CONCLUSIONS ON THE CROSS-APPEAL
Having regard to the dismissal of the application pursuant to the appeal, the cross-appeal must fail. However, the point it raises is important, and we should say something about it. The question is whether the further proceedings, following the settlement of the claim made against Messrs Gray and Winter, were so integrally related to the claim that the costs thereby incurred should be seen as part of the costs of “defending any proceedings arising out of [the] claim”, and also as “reasonably and necessarily [so] incurred”, within the meaning of clause (b)(i) of the insuring clauses.
The costs were incurred, in part, in resisting a motion brought against the cross-appellants for the entry of judgment in the action against them for $500,000 pursuant to the settlement, in part in connection with a separate application they made to set the settlement aside, and in part in connection with their unsuccessful appeal against the allowance of the motion and the dismissal of their application. So far as the motion and the appeal against the order made upon it were concerned, they were in the very proceeding which had been brought to enforce the claim the subject of the insurance. Quite literally, those costs were incurred in defending a proceeding which arose out of the claim - in order to avoid a judgment being entered in that proceeding for the amount of the settlement. A similarly worded clause was held to cover the costs of an appeal in Karenlee Nominees Pty Ltd v ACN 004 312 234 Ltd (1995) 8 ANZ Ins. Cas. 75,655 at 75,661. See also Edwards v Insurance Office of Australia Ltd (1933) 34 SR(NSW) 88 at 95, 98. The separate application to set aside the settlement might conceivably be seen in a different light. But it was brought only in support of the defence of the motion for judgment. There is authority that, where a new trial is sought upon the ground “that the verdict was obtained by fraud or by surprise”, the preferable course is to bring a separate proceeding, rather than move in the original proceeding: McDonald vMcDonald (1965) 113 CLR 529 at 533, per Barwick CJ, with whom Kitto J agreed; Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (No 2)(1992) 37 FCR 234 at 239. Accordingly, the course taken was procedurally appropriate, since Messrs Gray and Winter were alleging the settlement was obtained by misrepresentation and surprise, so that judgment should not be entered pursuant to it, but instead a new trial should be had.
Upon this analysis, all the costs should be seen as incurred in defending the principal proceedings. The language of the insuring clause is wide enough to cover both solicitor and client costs payable by the cross-appellants in respect of their own representation and party and party costs incurred by orders made against them in the proceedings. Were the costs, however, “reasonably and necessarily” so incurred? The contentions urged by Messrs Gray and Winter failed, but that cannot be determinative. The unreported decision on the appeal in Gray vHedigan (Burchett, Foster and O’Loughlin JJ, 7 October 1994) does not suggest the matter was unarguable. The problems that beset the parties during the negotiations were real, and real issues were decided by the Full Court. In these circumstances, the costs were certainly incurred “reasonably”, so that the only remaining question is whether they were also incurred “necessarily”.
“Necessarily” is a strong word. Its use in the context of the insuring clauses requires consideration to be given to whether it was intended to have the full strength of its meaning. In an absolute sense, the necessity of almost any expenditure - at least in relation to professional costs and fees - in litigation could nearly always be disputed. The clause could hardly mean that. There are authoritative precedents for construing “necessary” and “necessarily” as referring to the appropriateness of whatever is in question to the achievement of some contemplated goal. So, Higgins J in The Commonwealth and the Postmaster-General vThe Progress Advertising and Press Agency Company Proprietary Limited(1910) 10 CLR 457 at 468 - 469 thought a power to make regulations for “matters and things which may be necessary for carrying out [an] Act” did not mean “absolutely or essentially necessary”, but “appropriate, plainly adapted to the needs of the Department”. And Dixon CJ, in Federal Commissioner of Taxation v Snowden & Willson Proprietary Limited (1958) 99 CLR 431at 436-437 explained that s 51 of the Income Tax and Social Services Contribution Assessment Act1936 used the expression “necessarily incurred in carrying on a business” in order “to place a qualification upon the degree of connexion between ... expenditure and the carrying on of [a] business”. In that context, his Honour said:
“Logical necessity is not a thing to be predicated of business expenditure. What is meant by the qualification is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business.”
Similarly, logical necessity is not to be predicated of expenditure in litigation, and what is meant by “necessarily” in clause (b)(i) is that the expenditure must be dictated by appropriate litigious ends, that are truly incidental to the litigation. So understood, the requirement included in the clause was satisfied in the circumstances of this case.
Accordingly, had we held that the respondents were entitled to indemnity, we would have allowed the cross-appeal. But as they are not, the cross-appeal must be dismissed with costs.
ORDERS PROPOSED
We would order that the appeal be allowed, with costs; that the cross-appeal be dismissed, with costs; that the judgment and orders made at first instance be set aside; and that, in lieu thereof, it be ordered that the application be dismissed, with costs.
I certify that this and the preceding thirty-nine (39) pages are a true copy of the Reasons for Judgment herein of their Honours Justices Beaumont and Burchett.
Associate:
Dated: 21 July 1997
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Counsel for the Appellant (Cross-respondent): |
R A Finkelstein QC with M Clarke |
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Solicitor for the Appellant (Cross-respondent): |
Deacons Graham & James |
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Counsel for the Respondents (Cross-appellants): |
P K Searle |
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Solicitor for the Respondents (Cross-appellants): |
Garrick Gray & Co |
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Dates of Hearing: |
11 March 1997 |
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Date of Judgment: |
21 July 1997 |
