Beach Petroleum v Abbott Tout Russell Kennedy

[2000] HCATrans 153

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S225 of 1999

B e t w e e n -

BEACH PETROLEUM NL

Applicant

and

ABBOTT TOUT RUSSELL KENNEDY AND ORS

Respondents

Application for special leave to appeal

GLEESON CJ
GUMMOW J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 14 APRIL 2000, AT 10.55 AM

Copyright in the High Court of Australia

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR J.C. KELLY, SC for the applicant.  (instructed by Piper Alderman)

MR T.E.F. HUGHES, QC:   If the Court pleases, I appear with my learned friend, MR J.W.J. STEVENSON, for the respondents.  (instructed by Minter Ellison)

GLEESON CJ:   Yes, Mr Jackson.

MR JACKSON:   Your Honours, the course which I propose to take is, if I may, indicate briefly the issues involved; secondly, demonstrate they do, in fact, arise in the case; and, thirdly, that this is in an appropriate case with which the Court might deal.

Your Honours, turning to the first of the issues.  The ultimate issue in the appeal, if special leave be granted, is which of the parties should bear a loss when a solicitor acts for, or advises, two parties to the one transaction and the transaction, without the solicitor’s knowledge, is a fraud on one party for the benefit of the other.  To put it another way, your Honours:  should the solicitor bear the loss on the basis that the fraud gives rise to an actual conflict of interest between the parties and it is the duty of the solicitor, it is fiduciary not to be in a position of conflict, regardless of the fact that the solicitor does not know of the fraud;  or, on the other hand, should the loss be borne by the victim of the fraud on the basis that, even though the fraud may give rise to an actual conflict of interest between the parties, the duty should be limited to not being in a position of known conflict?

Now, your Honours, we would submit - and if I can just indicate an outline of what we would seek to say about it that the fiduciary should bear the loss because, if I could take your Honours to what was said by Justices Gaudron and McHugh in Breen v Williams 186 CLR 71, it is in the book of cases, your Honours, behind tab 4, page 60 at the top right-hand corner. What was said was that the:

equity imposes on the fiduciary proscriptive obligations– not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict.

GLEESON CJ:   Does that mean that if a solicitor acts in a transaction between a husband and wife when, so far as the solicitor knows, their relations are perfectly amicable and unbeknown to the solicitor the husband is practising a fraud on the wife, the solicitor is liable to the wife?

MR JACKSON:   Yes, it may, your Honour, depending on the nature of the transaction, of course.

Now, your Honours, what we would submit is that it would perhaps be a curious result if a fiduciary who placed himself or herself in a position where the duty to one party may conflict - I will give your Honours a reference as to why I put it that way - with the duty of another were to be held to make good loss arising from the breach in conformity with the principles referred to, for example, by Lord Justice Millett, as he then was, in Bristol and West Building Society v Mothew, which is behind tab 5, the relevant page being page 101, at the bottom of the page, where he said:

A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty;  he puts himself in a position where his duty to one principal may –

and he emphasised the word “may”:

conflict with his duty to the other.

GLEESON CJ:   This would seem to produce the consequence that a solicitor could never safely act for two clients.

MR JACKSON:   Yes, your Honour, almost certainly, I accept that.

GLEESON CJ:   It would be good for the business of solicitors.

MR JACKSON:   Well, your Honour, it would be, perhaps, good too for some of the persons to whom they would otherwise owe duties.  There is nothing exceptionally heterodox or outrageous in that position, of course.  Your Honour will see that was something that was said by a Full Court of the Federal Court of which your Honour Justice Gummow was a member, in one of the cases to which we have referred and, your Honours, that is Commonwealth Bank v Smith, No 6 in that volume, at page 115.  Your Honours will see about three quarters of the way down the page:

(We pause to say that various courts in a number of jurisdiction have decried the practice of the one solicitor acting for both vendor and purchaser…..It is an undesirable practice and it ought not to be permitted.)

Now, your Honours, what I was seeking to say was that it would be strange, in our submission, if a fiduciary who places himself in a position where the duty to one party may conflict with the duty to another, would be held liable but a fiduciary, who was in a position where there was an actual conflict, was judged by a different and lower standard.  We would submit, the two impose a qualification on the duty of a fiduciary by reference to the state of mind of the fiduciary, is rather too generous and encourages neglect of their duties.

Your Honours, could I go on then to say one other thing before going to the suitability of the case, and that is that this connected matter is in relation to the question of causation.  Our submission is that an adequate and sufficient connection is established between breach and loss because of the solicitor, by being in a position of conflict, deprives the victim of the fraud of an opportunity to receive independent advice and facilitates its implementation.  Your Honours, in circumstances of that kind, it is not really to the point that the persons committing the fraud were determined to proceed, in any event, because the question is not whether if no breach of duty the fraud would have been prevented, but, rather, whether there being a breach of duty was the loss was facilitated?  Your Honours, a test of causation which relieved a fiduciary of the consequences of a breach of duty if the fiduciary could point to other, more weighty causes, is not justified, in our submission.

GUMMOW J:   I think that is consistent with what Justice McHugh said in Bennett’s Case.  It seems to have escaped the attention of the Court of Appeal.

MR JACKSON:   Your Honours, it is really a question of the way one looks at it, in that regard.  Could I refer also, your Honours, without going in more detail to them, to our written submissions in volume 2, pages 512 to 515, paragraphs 37 to 56 on that issue.  Now, your Honours, those are the essential issues in the case.  Could I come to the ‑ ‑ ‑

GUMMOW J:   I thought there was an issue about informed consent as well.

MR JACKSON:   Your Honour, I am sorry.  I am about to come to that after I referred to the suitability of the vehicle.  Your Honours, the case has had something of a slimming course since it commenced, if I can put it that way.  It involves much narrower issues than at first because of various findings that were not, in the end, in our favour.  But may I say that the proposed appeal, in our submission, is a suitable vehicle, the disposition of those issues, because it involves at least one, but, in our submission, three separate, but related, matters, each of which presents a different face, a different set of circumstances by reference to which the principles could be considered.

But could I come to one matter in relation to which there is no question at all about the existence of a retainer, and there has been a decision as to its ambit, and that is what is called, your Honours, “the currency swap”.  Your Honours, may I say very briefly what that is.  It is clear that the respondents were retained in the matter for both the applicant and the other side of the transaction, a company called Spargos Mining, no liability.  The transaction was one in which we had $5 million on deposit at Elders Finance and Investment Company, real money.  And, your Honours, that money was swapped for the equivalent sum in United States dollars, said to be held on deposit by Spargos at a Swiss bank known as Rahn & Bodmer.

The conflict point arises because there was no such deposit and the currency swap was a fraud on us for the benefit of Spargos, which needed money.  The respondents acted to implement the Sydney end of the transaction where the $5 million was paid away.  Now, your Honours, there is no doubt on the finding that there was a retainer but it was found to be a limited one.  It was said to be a limited one:

for completion and delivery of documents to implement a transaction which had already been agreed, was restricted to clerical acts that gave rise to no conflict of the relevant character.

That is referred to by the Court of Appeal at paragraph 427, page 467 in volume 2.

Could I say this, your Honours.  The acts in question consisted of the preparation of an authority to pay on our letterhead, and the delivery of that document to Elders, which held our money, and those acts were an immediate contributing cause to the loss.  And the respondents acted for both parties to the one transaction in relation to the very acts which implemented the fraud, without taking any steps to eschew conflict.

Your Honours, could I come then to interpolate the question of informed consent.  Because of the views taken by the Court of Appeal, that was not an issue which was strictly necessary for the court to deal with, however, the court did.  It was a matter raised by a notice of contention.  And the currency swap was one of the transactions to which the defence of informed consent by the applicant was held to apply.  Your Honours, we would submit that the question of the availability of such a defence where there is a fraud by those in control of the company to its members - because this was not a company that was just one in a wholly owned chain, we are a public company but with outside shareholders - is an issue meriting the grant of special leave.

Your Honours, to impute to the company on which they are working that they are fraud, the knowledge of fraudulent directors is, in our submission, a large step.  It renders the solicitor immune from suit for any breach of fiduciary duty which arose out of a secret fraud by the director on the client company, on whose behalf the instructions were given.  Secondly, a solicitor taking instructions for more than one party in the same matter from a person who is an agent for both, will be encouraged not to inquire about the potential conflict.

Your Honours, we would submit the case is one where it would be appropriate to apply the principle, or the proposition, stated in a number of cases but conveniently, in some observations in Lord Justice Buckley in the case which is behind tab 1, Belmont Finance Corporation Limited v Williams Furniture Limited (1979) 1 Ch 250, at page 4 in the book of documents. At the bottom of the page your Honours will see, about letter H:

As I have said, the company was a victim of the conspiracy.  I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company;  and indeed it is a well‑recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.

So, your Honours, if I could just pause to say in relation to one of the three areas involved, in our submission one has two issues that are of importance, and one has a case that directly raised in a short compass.

Could I go on then to the other two aspects of the case?  One concerns what is described as the advice of 2 May 1989 in the various documents.  This issue arises because, on that day, the directors of the various companies involved gathered in the respondents’ office in their boardroom and they were advised, amongst other things, that the applicant and each of the three companies in the IRL group who proposed to lend to us their, in effect, non‑existent deposits at Rahn & Bodmer to fund their fraudulent oil acquisition transaction, needed to have a Swiss bank account to record the series of assignments by means of which it was proposed that the loan be made and the purchase price paid.

Your Honours, the Court of Appeal proceeded on an assumption – and I will come to it in a moment – that the applicant, along with other companies in the group, had retained the respondents, and held that there was a potential conflict because the matter had passed, in a sense, beyond the theoretical.  But it disposed of the matter, your Honours, on the basis that the position of conflict never led to any relevant consequence.  That is at paragraph 433 at page 469 in volume 2.

Your Honours, there is one underlying factual issue which would need to be resolved in our favour, and may I come to that in just a moment.  Your Honours, in the approach taken by the Court of Appeal, it did not consider, in our submission, the implications of the fraud on us.  In particular, it did not deal with the fact that the advice in relation to the need for all parties, including the applicant, to have a Swiss bank account was in order to participate in a round robin of assignments of non‑existent deposits and that that, to put it shortly, assisted the implementation of the fraud.  In that way the breach was connected to the loss occasioned by way of the stream of notional, but non‑existent, repayments of the loan monies. 

Your Honours, without seeking to labour the point, what we would seek to say is that once one takes the view that every aspect of the proposed acquisition of the company, of the oil interests and the funding arrangements was a fraud intended to cause the assets of the company to be misappropriated for the benefit of other companies in the IRL group, there was an actual conflict of interest and that was something that, ultimately, resulted in the loss.

Your Honours, I said there was an issue that would need to be resolved in our favour.  That derives from the factual aspect which is at page 386 in volume 2, paragraph 236.  Now, your Honours, if I could just say this:  what occurred was that the primary judge had taken the view that, whilst various companies were discussed, mentioned and persons who were capable of representing them were present at the meeting, in fact the retaining of the solicitors to give advice, or to discuss the matter, was by a management company or by companies in the group by a company which was, in effect, a controlling company in the group.

The Court of Appeal, in lines 9 to about 23, seem to have some difficulty, in our submission, rightly, in agreeing with that view, and recognised the possibility that the various companies whose activities were involved were all involved in retaining.  But, your Honours, what they did not do - and your Honours will see at lines 24 to 26 - was to go to what, in our submission, was the obvious next and alternative step and that was to find that Beach was one of the ones retaining.  Now, your Honours, that is an issue on which we would have to succeed in this Court, I will accept that.  It is an issue which, in our submission, does not involve much at all in arriving at that conclusion.

The third matter, your Honours, concerns the section 12 notice.  This is a matter referred to, your Honours – if I can deal with this briefly - in our written submissions at page 510 of volume 2 in paragraphs 22 to 26. 

Your Honours, what we would seek to say is that if one looks at it, there is no doubt the solicitors were retained for us, and for other companies.  They effectively held the corporate “policemen” as it were, at bay, while the directors took steps to complete the various fraudulent transactions and, your Honours, that was something which, in our submission, was a step on the way to the completion of the fraud.  Your Honours, those are our submissions.

GLEESON CJ:   Thank you, Mr Jackson.  Yes, Mr Hughes.

MR HUGHES:   The salient feature of this case as it is now, your Honours, is that the applicant takes for granted that there are findings of breach of fiduciary duty and seeks to use that assumption as a basis for raising what is said to be important questions of law.  Our basic submission is that there are concurrent findings of fact adverse to the applicant on all the major issues in this case, and I need not cite authority to your Honours for the proposition that such concurrent findings pose a daunting task for an applicant for special leave.

GUMMOW J:   But what do you say about the currency swap?

MR HUGHES:   What we say about the currency swap is that there were findings not exactly concurrent, but findings which involved essentially a difference of emphasis.  The trial judge, your Honour, held that there was no retainer by Beach of Abbott Tout in relation to the currency swap.  The Court of Appeal said that there was a limited retainer confined to the clerical aspects of a transaction that had already been completed.  The trial judge, I should add, as to that particular point, formed the view correctly, we say – this is at volume 1 pages 115 and 116 – that there had been an antecedent assignment in equity, an enforceable assignment in equity of the deposits.

The Court of Appeal’s view - and this was a finding of fact in our respectful submission - was, that having regard to the very limited nature of what the respondents were asked to do for Beach in that transaction, there was no real sensible possibility of conflict.  That, when it is stripped down to essentials, is a finding of fact and it is a finding of fact that, if I may use this expression respectfully, talking of the Court of Appeal, substantially matches the conclusion of the trial judge.  So there are substantially consonant findings of fact in that area of the case.  The applicant has to establish a breach of fiduciary duty arising from the assumption of conflicting engagements, or potentially inflicting engagements, in relation to the currency swap.  That proposition has been negated at two levels.

What I have said to date leaves out of account the concurrent findings of the trial judge and the Court of Appeal on the important issue of causation.  The effect of those concurrent findings is that any assumed breach of fiduciary duty - and one has to make that assumption in this area of the argument - had no causal impact whatsoever on the loss sustained by Beach, because the directors, the fraudulent directors, were hell bent on pursuing their fraudulent scheme and nothing would have stopped them.  That was a finding of fact legitimately open in both courts below as a matter of inference and that finding of fact, as we understand it, is not challenged.  The attempt is made to sidestep it and, we submit, it cannot be sidestepped.

As to the restructuring, my learned friend has conceded in his argument this morning, the proposition that to get into that area of the case, the applicant has to overcome exactly concurrent findings of fact in each of the courts below because he has correctly pointed to page 386, lines 24 to 26, where one finds a conclusion by the Court of Appeal to the effect that Beach did not retain the respondents to consider, or advise upon, the restructuring proposals. 

It is true that the court went on to deal with an argument but an argument on an assumption that their findings – I have just referred to it – was, in effect, invalid.  But they took the assumption up, merely as an assumption for the purpose of argument, and said that, in any event, even if the assumption were correct, it would not avail the applicant because there was no connection between the assumed retainer to consider restructuring proposals and the Burbank acquisition.  What the Court of Appeal said, and this again is a matter of fact, was that the Burbank acquisition was treated as a datum point, a given, in the light of which the assumed retainer to deal with the restructuring proposals was undertaken.  But, again, it was only an assumed retainer, an assumption negated by the primary finding of the Court of Appeal, at page 386, line 24.

So that the applicants are confronted with what we venture to suggest, with respect, is an impenetrable barrier of concurrent or substantially concurrent findings of fact.  The currency swap is, in one respect, an exception.  But as I have venture to say, the difference between the Court of Appeal and the primary judge was one of emphasis rather than of substance.  The findings as to the absence of a causal link were very definite findings in both courts below.  There are, in effect – I can give your Honours the references as to where the concurrent findings are to be located in the papers, but that has been done already in our written submissions filed earlier, so I shall not take up time with that.

My learned friend seems to accept by process of omission - and I am not saying this critically – the concurrent findings of fact below that there was no retainer of the respondents by Beach to act on the charge and option agreement, and no retainer of the respondents by Beach to act for it on what was called, in the idiom of the case, the SCAFAs – Syndicated Cash

Advance Facility Agreements.  As to the retainer which was an admitted retainer, to act on the section 12 notices, there has been, again, a concurrency of findings below that the acceptance of that retainer involved no breach of fiduciary duty.  Your Honours will have read the reasons and it is a very distinct set of concurrent findings.  Overarching all this is a finding which we submit is totally sustainable by the Court of Appeal to the effect that the fraudulent directors at Beach, because they knew, your Honours, the facts relating to the assumed retainer to undertake divided duties, because they knew those facts must be taken as a matter of inference to have given an informed consent to the supposedly divided duties.

It is clear that the sort of case to which my learned friend adverted in the course of his submissions to this Court, Williams Furniture, is a case where the company sues the fraudulent directors for conspiracy.  In such a case, common sense dictates that the fraudulent directors, in an action brought by the company against them, cannot assert that their own knowledge of their own fraud is to be imputed to the company.  The position, in our respectful submission, is clearly different and this is no special leave point where the company is suing, in effect, a third party and the third party being the respondents.  And, we say, that the respondents, dealing as they did with the fraudulent directors, but in a condition so far as the respondents were concerned of total innocence, cannot be caught up by the directors’ fraud in that very different state of affairs.

So, to summarise, there is a layer of adverse findings of fact, most of them concurrent.  There is a sustainable finding of informed consent reached in the Court of Appeal, not by the primary judge because the primary judge thought that defence had not been raised.  There are definite strong findings on the issue of causation.  For those reasons, we say that this case is, on no view, a suitable vehicle for the grant of special leave.  And I simply say in conclusion that it is significant, perhaps, that my learned friends have not attempted, in argument here, to present any reasons why the concurrent findings should be disturbed.  If the Court pleases.

GLEESON CJ:   Thank you, Mr Hughes.  Yes, Mr Jackson.

MR JACKSON:   Your Honours, may I say four things in response to our learned friends.  First, our learned friends say the breach of duty is taken for granted.  But, your Honours, that is the point of the appeal.  Our submission is, there should have been a finding of breach and that the court, in not doing so, applied the wrong test, and it is the question of the appropriateness of the test that is the matter in issue.

Your Honours, secondly as to the question of the currency swap:  a difference of emphasis, our learned friend says, between the two courts below and that what was being done was a transaction that was already

completed.  Your Honours, that, with respect, really cannot be right, in our submission, in terms of any kind of application of a proposition to the facts.  Because if one looks at two documents, your Honours, which are in volume 2, you will see, at page 531, the document under the heading “Beach Petroleum”, that was the document that authorised the payment away of the deposits.  That was the document prepared by the respondents.

The second thing is, after the event, one sees at page 528, a letter reporting, in effect, to us referring to the transaction and what took place.  Now, your Honours, whether the companies had or had not resolved the effecting of the transaction took place with some intervention by the respondents.

The third feature, your Honours, concerns the finding in relation to the 2 May advice.  Now, our learned friend rightly says that the findings, perhaps, are not exactly concurrent.  But, in fact, they are really significantly different.  The obvious point of departure was that the Court of Appeal did not agree with the trial judge in finding that one company had been the company instructing the solicitors.  Your Honours, the obvious point of departure and the conclusion that one might have thought would follow from that, was that there was a retainer by the various companies that were involved.  Why the Court of Appeal did not take that further step, does not really appear at our submission.  That is a matter which is a small, but important, question.

The fourth thing, your Honours, it concerns informed consent.  If one creates the potential for conflict by acting for two companies, how can one say that one of the companies, the one defrauded, has given fully informed consent when it has been defrauded by some of those to whom a duty is owed by them?

GLEESON CJ:   We will adjourn for a short time to consider the course that we will take in this matter.

AT 11.32 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.38 AM:

GLEESON CJ:   The applicant complains of what are said to be errors of law made by the Court of Appeal of New South Wales in dismissing an appeal from the judgment and orders of Mr Justice Rolfe.  The respondents are a firm of solicitors.  The alleged errors concern the treatment of certain aspects of the law governing the responsibilities of fiduciaries, in particular: acting for two principals with conflicting or potentially conflicting interests; the requirements for informed consent by a corporate client whose directors themselves are acting in breach of their duties and, with respect to the recovery of equitable compensation, the authority to be accorded in Australia to the decision of the Privy Council in Brickenden v London Loan & Saving Co (1934) 3 DLR 456.

The respondents do not directly challenge the proposition that important questions of law could be involved.  However, they point to the findings of fact in their favour from which it would be necessary for this Court to depart before it could enter upon the issues of law and resolve them or it is so persuaded as the applicant would have it.  We agree.  While we are not to be taken necessarily to be supporting all that was said by the Court of Appeal on the legal issues, this is not an appropriate case for the grant of special leave.  The application is refused with costs.

AT 11.40 AM THE MATTER WAS CONCLUDED