Fairclough v the Law Society of SA No. Scgrg-96-851 Judgment No. S6968

FAIRCLOUGH and ANOR v THE LAW SOCIETY
OF SOUTH AUSTRALIA
[1998] SASC 6968

PERRY J. This case concerns the trial as a preliminary issue of a question of law.
The proceedings were instituted in 1996 when the appellants lodged a notice of appeal against the rejection by the Law Society of South Australia (“the Law Society”) in its capacity as trustee of the Legal Practitioner’s Guarantee Fund, of a claim against the fund by the appellants. In their claim the appellants alleged an entitlement to a payment from the fund arising out of the “fiduciary and/or professional default” of Stephen Dowd (”Dowd”), a former legal practitioner.
During the course of pre-trial directions, I ordered that the appeal proceed by the filing and delivery of points of claim and points of defence.
In paragraph 3(3) of its points of defence, the Law Society pleaded:
“... any actual pecuniary loss sustained by the appellants was not sustained as a result of a fiduciary or professional default by Stephen Dowd and S.J. Dowd Pty Ltd in its/his character or capacity as a legal practitioner and therefore is not compensable out of the Legal Practitioners Guarantee Fund.”
On 1 July 1998, pursuant to Rule 75.02, I ordered that the question of law raised by paragraph 3(3) of the points of defence “be disposed of before proceeding to trial of the facts, on the assumption that the facts alleged in the points of claim are made out”.
At this stage, it is convenient to refer to the factual background.

Factual background

The facts must be taken to be those asserted in the points of claim taken at their highest. That is, the Court must assume ultimate findings of fact derived from the facts alleged in the points of claim, most favourable to the appellants.
The appellant Linden Francis Fairclough (“Linden Fairclough”) held a practising certificate under the Legal Practitioners Act 1981 (“the Act”) from February 1978 to 31 December 1993, and subsequently for the period from 1 July 1994 to 12 September 1996.
The appellant L.F. Fairclough Pty Ltd (“the company”) held a practising certificate under the Act between 1 January 1984 and 31 December 1992. Between 1984 and 31 July 1992, the company carried on the business of a barrister and solicitor under the name “Linden Fairclough & Co”. In May 1992, Linden Fairclough and the company agreed that the business carried on under that name would be transferred to Linden Fairclough as from 1 August 1992. Amongst the assets of the business transferred to Linden Fairclough pursuant to that agreement included client files of the company in respect of which there was unbilled work in progress.
It was a term of the agreement that Linden Fairclough would collect the moneys in respect of the unbilled work in progress for and on behalf of the company.
Thereafter, Linden Fairclough carried on the business of the legal practice from 1 August 1992 to 4 April 1993 under the same name, that is, Linden Fairclough & Co.
At all relevant times to and including 31 December 1995, Dowd held a practising certificate pursuant to the Act. In about March 1993, Linden Fairclough and Dowd agreed to carry on business in partnership as legal practitioners, and that they would effectively take over the business of Linden Fairclough & Co.
The agreement pursuant to which Dowd and Linden Fairclough agreed to conduct the business include the following express terms (these are extracted from paragraph 13 of the points of claim):
“(a).. The initial capital of the partnership would consist of the assets (excluding work in progress but including the goodwill) of the firm of Linden Fairclough & Co less the liabilities of such firm as at the close of business on the 5th day of April 1993;
(b)Commencing on the 5th day of April 1993 the partnership would provide professional services in respect of all matters in respect of which the appellants were instructed prior to the 5th day of April 1993 in lieu of the said firm of Linden Fairclough & Co;
(c).... In respect of any work in which the appellants were instructed prior to the 5th day of April 1993 in which the partnership provided any professional services the partnership would be entitled to render professional charges both in respect of the work done by the appellants and by the partnership provided that upon receipt of monies in settlement of any such charges the partnership would account to the appellants for the value of the work done by the appellants in respect of such matters prior to the 5th day of April 1993;
(d)Neither the first appellant nor Dowd would without the consent in writing of the other, employ any of the monies, goods or effects belonging to the partnership, or engage to the credit thereof (sic), in any matter or thing, except on account for the use and benefit of the partnership;
(e).... Both the appellant and Dowd would at all times during the continuance of the partnership, diligently and faithfully employ themselves in and about the affairs of the partnership and carry on the business of the partnership for the greatest benefit and advantage of the partnership;
(f)Each of the first appellant and Dowd would be just and faithful to the other in all dealings and transactions in respect of the business;
(g).... Each of the first appellant and Dowd would on request, give, make and render to the other a just and faithful account of the partnership, when and so often as the same shall be reasonably required;
(h)Each of the first appellant and Dowd would at all times, upon the reasonable request of the other deliver up or communicate to the other all such letters, accounts, writing and other things as shall or may come into his hands or knowledge in any way touching the trade or business in the partnership;
(i).... The first appellant would be at liberty, from time to time, to draw out of the partnership any sum or sums, not exceeding the sum of $20,000.00 per month for his own use;
(j)Dowd would be at liberty to draw out of the partnership any sum or sums, not exceeding the sum of $8,000.00 per month for his own use;
(k).... That in the event that the retirement of one of the partners the partnership would cease and be determined;
(l)Upon the termination of the partnership, either as provided for in the partnership agreement or otherwise by law, the assets of the partnership would be realised as soon as was conveniently possible and the net proceeds after the discharge of the liabilities and the payment of the expenses of the winding up would be applied in the following order of priorities:
(i).... in repayment of any loan made by a partner to the partnership;
(ii) in payment to each partner of any share and (sic) profits due in respect of the business of the partnership for any year other than the year of the winding up;
(iii).. in repayment to each partner equally of the capital of the partnership; and
(iv) the balance, if any, remaining after the above accounts have been paid in full would be divided equally between the partners.
(m).. That the first appellant and Dowd would share equally in the distribution of the capital of the partnership in dissolution of the partnership and share equally in the profits of the partnerships as made from time to time and in any given year.”
In November 1993, Linden Fairclough was certified by a medical practitioner as being unfit for work. Thereafter, he worked in the partnership on an irregular and fragmentary basis, averaging less than two hours per week. Soon thereafter, namely, on 31 December 1993 when Linden Fairclough ceased to hold a practising certificate pursuant to the Act, the partnership was dissolved by operation of law.
In about mid-January 1994, Dowd informed Linden Fairclough that he was taking possession of all of the assets of the former partnership.
Dowd was declared bankrupt on 2 November 1995.
The appellants assert that during two periods Dowd misappropriated moneys. The first period alleged is the period of operation of the partnership between Linden Fairclough and Dowd, that is, between 5 April 1993 and 31 December 1993. It is alleged by the appellants, and for present purposes must be assumed to be the fact, that throughout that period the partnership received and banked in its bank account payments in respect of work undertaken by the appellants before 5 April 1993 (described in the points of claim as “the 1993 money”).
The alleged misappropriation is that Dowd withdrew the 1993 money from the bank account of the partnership and applied some of it to his own use, that is, other than for the purposes of the partnership.
Further acts of misappropriation on the part of Dowd are alleged to have occurred during the period between the dissolution of the partnership between Dowd and Linden Fairclough and the date upon which Dowd was declared bankrupt, that is, 2 December 1995. More particularly, it is alleged that during that period, that is, between 1 January 1994 and 2 November 1995, Dowd received further amounts of what I have described as the 1993 money, together with moneys payable with respect to work undertaken by the company prior to 1 August 1992 (described in the points of claim as “the 1994 money”) and moneys due in respect of work undertaken by the partnership between Linden Fairclough and Dowd during the currency of that partnership, that is, between 5 April 1993 and 31 December 1993 (“the 1995 money”). It is further alleged that Dowd applied the 1994 and 1995 moneys solely to his own use.
Standing back from the detailed facts to which I have so far referred, the appellants’ case is that throughout the relevant period, Dowd failed properly to account to the appellants for moneys paid by clients or former clients with respect to work done both before and after the commencement of the partnership between Linden Fairclough and Dowd.
The moneys for which Dowd is alleged to have failed to account were the subject of the claim by the appellants upon the Law Society advanced by letter dated 20 November 1995 requesting that the Law Society as trustee of the Legal Practitioner’s Guarantee Fund, make a payment out of the fund to the appellants in respect of those moneys. By letter dated 11 January 1996, the Law Society refused the appellants’ request. The request was renewed by the appellants by letter dated 31 January 1996, following which, by letter of 3 May 1996, the Law Society again refused the claim.
Pursuant to s63 of the Act, upon a claim being made against the guarantee fund, the Society must determine whether the claim is a valid claim, and must inform the claimant of its determination. S63(4) provides:
“A claimant who is aggrieved by a determination of the Society under this section may appeal to the Supreme Court against the determination”.
The appeal to this Court is brought pursuant to that subsection. No point was taken as to whether or not an appealable determination had been made, and whether it was constituted by the first or second rejection of the appellants’ claims.
In effect, I have been invited to proceed on the basis that a determination by the Law Society has been made adverse to the claim. The sole question for me to determine is whether, in the circumstances which I have summarised, the appellants have suffered loss “as a result of a fiduciary or professional default”, namely, by reason of the actions of Dowd to which I have referred.
It will have been seen from my earlier citation of paragraph 3(3) of the points of defence, that it refers also to “S.J. Dowd Pty Ltd”, which I assume was a limited company through which Dowd at one stage practised. No point was made on the appeal, which would make it necessary to distinguish between the actions of Dowd and the company. I will hereafter refer simply to Dowd.

The statutory provisions

The Act repealed the Legal Practitioners Act 1936-1979 (“the old Act”). The old Act constituted the Law Society as a body corporate, that corporate personality being perpetuated under the Act. Pursuant to s57(1) of the Act, the Law Society is obliged to “continue to maintain the Legal Practitioner’s Guarantee Fund”, that fund having been established by the old Act.
For present purposes, it is sufficient for me to confine myself to the provisions of the Act. Under Part 4, Division 1, the Act creates the combined trust account, being an account from which a proportion of every practitioners trust account, the proportion being regulated by a statutory formula, must be deposited into the combined trust account.
Pursuant to Part 4, Division 2, the Law Society is under an obligation to continue to maintain the statutory interest account, which again, was an account established under the old Act. The sole source of income for the statutory interest account is the interest on deposits in the combined trust account.[1] After making provision for defraying any management or other fees or expenditure associated with the statutory interest account, with exceptions which are not relevant for present purposes, the Law Society must pay the balance of the moneys in the statutory interest account as to five-eighths to the Legal Services Commission, and as to three-eighths to the guarantee fund (s56(5)).
[1] See s56(2).
S57(3) provides:
“The guarantee fund consists of-
(a).... the money paid into it from the statutory interest account; and
(b)all money recovered by the Society under Part 5; and
(c).... a prescribed proportion of the fees paid in respect of the issue or renewal of practising certificates; and
(d)costs recovered by the Attorney-General, the Board or the Society in disciplinary proceedings against legal practitioners or former legal practitioners; and
(da).. any fee paid to the Board; and
(e)any money that the Society thinks fit to include in the guarantee fund; and
(f).... the income and accretions arising from the investment of the money constituting the guarantee fund.”
As to s57(3)(b), presumably this relates to the recovery of moneys by the Law Society in the exercise by it of its entitlement, pursuant to s65 of the Act, to subrogation to the rights of a claimant against the guarantee fund, vis a vis third parties.
In s57(3)(d) and 3(da), the references to the Board are to the Legal Practitioners Conduct Board.[2]
[2] See the interpretation section 5.
S57(4) of the Act provides, inter alia, that the guarantee fund may be applied for the purpose of paying out any claim against the fund (see s57(4)(g)).
Claims against the guarantee fund are dealt with in Division 4, Part 5 of the Act headed “Claims Against Guarantee Fund”, comprising sections 60 to 67A inclusive. For present purposes, it is sufficient to refer to s60 which is as follows:
“60.(1)... Subject to this Part, where-
(a)a person suffers loss as a result of a fiduciary or professional default; and
(b).... there is no reasonable prospect of recovering the full amount of that loss (otherwise than under this Part),
the person may, by instrument in writing served personally or by post on the Society, claim compensation under this Part.
(2) The amount of a claim cannot exceed-
(a).... the actual pecuniary loss suffered by the claimant in consequence of the fiduciary or professional default (including the reasonable costs of making the claim); less
(b)any amount that the claimant has received, or may reasonably be expected to recover (otherwise than under this Part) in reduction of that loss.
(3)... If a valid claim has not been satisfied as provided by this Part at the expiration of 12 months from the day on which it was lodged with the Society it is then, to the extent to which it has not been satisfied, increased by interest at a prescribed rate calculated from the expiration of that period.
(4) No claim can be made under this Part-
(a).... in respect of a fiduciary or professional default occurring before 4 December 1969; or
(ab)in respect of a fiduciary or professional default occurring outside this State unless it occurs in the course of, or incidentally to-
(i).... legal work arising from instructions given in this State; or
(ii)legal work substantially carried out in this State; or
(b).... in respect of a liability for which indemnity is provided under a scheme of professional indemnity insurance under Division 13 of Part 3.”
The words “fiduciary or professional default” which appear in s60(1)(a), are defined in s5 of the Act as follows:
“’fiduciary or professional default’ in relation to a legal practitioner means-
(a).... any defalcation, misappropriation or misapplication of trust money in the charge of the legal practitioner or of a firm of which the legal practitioner is a member; or
(b)any wrongful or negligent act or omission occurring in the course of the practice of the legal practitioner, or a firm of which the legal practitioner is a member
whether committed by the legal practitioner, an employee of the legal practitioner or any other person;”
Put shortly, the position of the appellants is that by reason of the failure by Dowd to account for the moneys to which I have referred, they have suffered a “fiduciary or professional default” within the meaning of that definition.

The arguments

Mr Wells QC for the appellants contended that the points of claim identified three categories of “fiduciary or professional default”, namely:

(a)Payments for pre-partnership work in progress received by the partnership but misappropriated by Dowd during the partnership.
(b)Payments for pre-partnership work in progress received by Dowd post-partnership and misappropriated by him.
(c)Payments for partnership work received by Dowd post-partnership and misappropriated by him.

He further contended that losses flowing by reason of the misappropriations identified in all three categories came within the definition of “fiduciary or professional default”, in the first place, because they represented a “misappropriation or misapplication of trust money in the charge of (Dowd) or the firm with which (Dowd) is a member”.
In support of this argument, Mr Wells QC referred to the definition of “trust money” in s5 of the Act, which is that “trust money ‘means money received by a legal practitioner to which the practitioner is not wholly entitled both at law and in equity’”.
In my opinion, Mr Wells QC is correct in asserting that, having regard to that definition, the words “trust money” are not confined to money in a practitioner’s trust account. But I would have some difficulty in construing the words “trust money” to include moneys as to which no client or former client or other third party made any claim, and as to which the only fetter upon the practitioner’s right of retention or disposal of the moneys were those imposed by reason of his obligations as a partner of another practitioner, or by reason of fiduciary duties arising in consequence of a previous partnership agreement.
S31 of the Act provides in part:
“31(1).. Subject to subsection (2), a legal practitioner must, as soon as practicable after receipt of any trust money in the course of practice, deposit the money in a trust account and must not withdraw or permit it to be withdrawn except as authorised by this Part.
(2).... Where at or before the time that a legal practitioner receives trust money the practitioner is given a written direction by the person entitled to the money to dispose of it in a manner specified in the direction, it is lawful for the legal practitioner to act in accordance with that direction.
(3).... ..........”
On Mr Wells QC’s argument, if fees received by one partner which fall to be accounted for to another partner or partners are received by a partner, they would have to be placed in the trust account and could not be withdrawn except in the circumstances postulated by s31.
To construe the Act in that way would be to impose an unreal and pointless obligation upon legal practitioners.
If a practitioner completes a matter, sends a bill and the client pays the bill, the receipt by the practitioner of the moneys cannot sensibly be regarded as the receipt by him or her of moneys to whom the practitioner “is not wholly entitled both at law and in equity”, even if the practitioner owes duties to account for the moneys to a partner.

I realise that in his summary of the three categories of payment identified by Mr Wells QC, as to categories (a) and (b), he refers to “pre-partnership work in progress”. The words “in progress” do not appear in the description of the work with respect to which the payments were received, contained in the points of claim. But even if there is some ambiguity and the payments may, at least in part, properly be regarded as payments made with respect to matters still in hand and uncompleted, the result would be the same. In such circumstances, there may be an obligation upon the practitioner to deposit the moneys in a trust account unless and until a bill “specifying the total amount” of the costs has been delivered or posted to the client or other person liable to pay the costs.[3]
[3] See s41(1) of the Act.
Even if one was to suppose that it was possible that some of the payments misappropriated by Dowd were payments with respect to costs not specified in a bill complying with s41(1) of the Act, any loss suffered by the appellants would not, in my opinion, be a loss suffered by reason of a “fiduciary or professional default”. In such a case, the loss would a loss suffered by the appellants by reason of the breach by Dowd of the obligations which he owed to the appellants pursuant to the partnership agreement, or by reason of his fiduciary duties owed as a former partner. In my opinion, Mr Whitington QC for the Law Society is correct in his contention that misappropriation cannot properly be regarded as a “fiduciary or professional default” as defined in the Act unless it is made by the practitioner in his character or capacity as a legal practitioner.
In my opinion, it cannot sensibly be inferred that the intention of Parliament in enacting the relevant provisions of the Act was that the guarantee fund should be available to underwrite all dealings of lawyers with third parties, no matter what the context or the capacity in which the legal practitioner is engaged.
As was suggested during the course of argument, if it could not, for example, be suggested that the guarantee fund could sensibly be made available to compensate for the loss occasioned a church congregation whose collection moneys were gathered up by a practitioner in his capacity as a church warden and subsequently misappropriated by him or her. Many other examples could be given.
It is sufficient for present purposes to hold, as I do, that the relevant provisions cannot sensibly be construed so as to allow the guarantee fund to compensate for losses suffered between legal practitioners who are partners of each other and who, by reason of a misappropriation or other breach of fiduciary duties, inflict a loss on other partners in circumstances where no other third party is affected.
Furthermore, it seems to me that s60(4) tends towards the view that the Act is only intended to apply to fiduciary or professional defaults occurring in the course of carrying out legal work.
I have already set out s60 in full. It will have been seen that s60(4) provides that no claim may be made against the guarantee fund:
“(ab)..... in respect of a fiduciary or professional default occurring outside this State unless it occurs in the course of, or incidentally to-
(i).... legal work arising from instructions given in this State; or
(ii)... legal work substantially carried out in this State; .....” (emphasis added)
It would be a strange result if fiduciary or professional defaults occurring outside the State could only give rise to a valid claim against the guarantee fund if they occurred “in the course of, or incidentally” to legal work, but no such limitation applied in the case of fiduciary or professional defaults occurring within the State.
It seems to me that it must be regarded as implicit in the definition of “fiduciary or professional default” in s5 of the Act, and in the provisions relating to a claim against the guarantee fund, that the guarantee fund is intended to provide a degree of protection to clients or other members of the public who deal with legal practitioners, rather than to compensate for a loss suffered as a result of a breach of the professional relationship between legal practitioners, when the incidence of any such loss is confined to the practitioners concerned. In this context, in my opinion, a literal reading of the relevant provisions must yield to a construction which is calculated to give effect to the evident purpose of the legislation.
In adopting that approach, I apply the dictum of McHugh J in Saraswati v R[4] when he said:
“In many cases, the grammatical or literal meaning of a statutory provision will give effect to the purpose of the legislation. Consequently, it will constitute the ‘ordinary meaning’ to be applied. If, however, the literal or grammatical meaning of a provision does not give effect to that purpose, that meaning cannot be regarded as ‘the ordinary meaning’ and cannot prevail. It must give way to the construction which will promote the underlying purpose or object of an Act: Interpretation Act, s33.[5] In Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation,[6] Mason and Wilson JJ said:
‘when the judge labels the operation of the statute as “absurd”, “extraordinary”, “capricious”, “irrational” or “obscure” he assigns a ground for concluding that the legislature could not have intended such an operation and that an alternative interpretation must be preferred. But the propriety of departing from the literal interpretation is not confined to situations described by these labels. It extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions.’
Moreover, once a court concludes that the literal or grammatical meaning of a provision does not confirm to the legislative purpose as ascertained from the statute as a whole including the policy which may be discerned from its provisions, it is entitled to give effect to that purpose by addition to, omission from, or clarification of, the particular provision: see Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd;[7] Jones v Wrotham Park Settled Estates;[8] Cooper Brookes;[9] In Re Lockwood.[10]”
[4] (1990-91) 172 CLR 1 at 21.
[5] In South Australia, the corresponding provision is s22(1) of the Acts Interpretation Act 1915.
[6] (1981) 147 CLR 297 at 321.
[7] [1971] AC 850 at 880-882.
[8] [1980] AC 74 at 105.
[9] (1981) 147 CLR 321-323.
[10] [1958] Ch 231 at 238.
In my opinion, there are equally sound reasons for rejecting the alternative argument advanced by Mr Wells QC. That argument was that the second limb of the definition of “fiduciary or professional default” where it appears in s5 of the Act, is of application. It will be recalled that that part of the definition reads:
“(b).. any wrongful or negligent act or omission occurring in the course of the practice of the legal practitioner, or a firm of which the legal practitioner is a member. .....”
In construing that limb of the definition, I would adopt an approach similar to that which I have applied to the construction of the first limb, for similar reasons. There is the added argument that the words “in the course of the practice of the legal practitioner ...” emphasise that the relevant act or omission must occur in the course of the carrying on of the practice of a legal practitioner, rather than in the course of dealings between a practitioner and a fellow practitioner with whom he or she happens to be in partnership.
For these reasons, I would order that the question of law raised by paragraph 3(3) of the points of defence be answered as follows:
“Paragraph 3(3) of the points of defence filed by the Law Society of South Australia is, on the assumption that the facts alleged in the points of claim are made out, a good defence to the whole of the appeal.”
It follows that, if the respondent moves the court for the dismissal of the appeal, my ruling on the point of law affords a proper basis for such an order to be made.

See s56(2).

See the interpretation section 5.
See s41(1) of the Act.
(1990-91) 172 CLR 1 at 21.
In South Australia, the corresponding provision is s22(1) of the Acts Interpretation Act 1915.
(1981) 147 CLR 297 at 321.
[1971] AC 850 at 880-882.
[1980] AC 74 at 105.
(1981) 147 CLR 321-323.
10 [1958] Ch 231 at 238.

[1998] SASC 6968

25 November 1998