Harle v Legal Practitioners Liability Committee
[2003] VSCA 133
•11 September 2003
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No. 2046 of 1999
| JOHN HARLE |
| v. |
| LEGAL PRACTITIONERS LIABILITY COMMITTEE |
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JUDGES: | CALLAWAY, BUCHANAN and CHERNOV, JJ.A. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 19 May 2003 | |
DATE OF JUDGMENT: | 11 September 2003 | |
MEDIUM NEUTRAL CITATION: | [2003] VSCA 133 | |
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Insurance – Professional indemnity – Solicitors – Civil liability in connection with legal practice – Exclusion clause – Liability for dishonest acts or omissions of assured excluded – Meaning of “dishonest” – Whether solicitor’s conduct dishonest.
Appeal – Question of fact – Review of judge’s findings – Principles governing appellate court.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr. M.G.R. Gronow | Mirabelli D’Ortenzio & Co |
| For the Respondent | Mr. M. Clarke | Hunt & Hunt |
CALLAWAY, J.A.:
I agree with Chernov, J.A., whose reasons for judgment I have read in draft form. Folly and fraud are conceptually distinct, but in practice they are not so far apart. A solicitor who conducts himself as irresponsibly as the appellant has only himself to blame if his conduct is found to have been dishonest.
BUCHANAN, J.A.:
In my opinion the appeal should be dismissed for the reasons stated by Chernov, J.A.
CHERNOV, J.A.:
This is an appeal against the decision of a judge of the Trial Division of the Supreme Court that the appellant, Douglas John Matthew Harle (“the appellant”), who is a solicitor, was not entitled to be indemnified under a professional negligence policy of insurance issued by the respondent, Legal Practitioners Liability Committee (“the insurer”), in respect of a claim made against him by his former client, Alianda Close Pty. Ltd. (“Alianda”), for damages for negligence and breach of duty which, it was said, resulted in it suffering a loss of $2m which it had placed in a fraudulent investment scheme. I will describe the proceeding in more detail later, but first I will summarise the background to it, drawing essentially on his Honour’s reasons and the helpful summary of facts that was prepared by the parties pursuant to this Court’s Practice Statement No.2 of 1995.
Alianda is the trustee of the Oz Family Trust, the principal beneficiaries of which are Sabit Ozuslu (“Ozuslu”), his wife Jennifer Mary Harle (“Ms. Harle”) and their children. Ms Harle is the appellant’s sister who was at all relevant times a director of Alianda. The appellant has been practising continuously as a solicitor since 1970, for most of that time as a sole practitioner. It seems that he has acted as solicitor for Ms Harle and her husband since prior to 1994. The appellant is also a
certified practising accountant, but the trial judge was satisfied that, although he used his accountancy skills in his legal practice and mentioned his CPA qualification on his solicitor's letterhead, he did not at any relevant time practice as an accountant. In 1994 Ozuslu and Ms Harle, who were then living in Turkey, instructed the appellant to act on their behalf in the purchase of their home in Australia and in relation to legal matters arising out of their move from Turkey to Australia including the transfer of funds to this country and the incorporation of Alianda. After Alianda was incorporated, it opened an account at the ANZ Bank and transferred to it the bulk of the proceeds of sale of Turkish businesses which had been under the effective control of Ozuslu.
In 1994 the appellant was introduced to an investment proposal, described as a “trading programme”, by William Stanley McKay (“McKay”) whom he had first met in late 1992 through a client. McKay told the appellant that he had almost 30 years' experience in the banking industry and that he had an opportunity to be involved in a “trading programme” with a United States company, Rache & Co. He showed the appellant documentation in relation to the proposed investment, including reports as to the probity of those involved in or associated with its operation. Although this investment proposal did not proceed, it seems that, according to the judge, the appellant’s discussions with McKay about its prospects convinced him that McKay was a person of some credibility.
In May 1995 McKay told the appellant that he knew of another opportunity to participate in a “trading programme”, this time through a company called Leveraged Equities Investments International Pty. Ltd. (“Leveraged”) the shareholders and directors of which were Kenneth Maxwell Steele (“Steele”) and Evelyn Burton (“Burton”). McKay said that he had worked with Steele in the Commonwealth Bank of Australia for over twenty years. The appellant was told that the investment essentially involved placing US$2m in a pooled or “Leveraged” investment for twelve months. The funds, it was said, would be invested through a charitable organisation and the return on the US$2m would be US$20m which would be paid at a rate of US$500,000 per week for forty weeks. The repayment of the loan at the expiration of the twelve months would be secured by a bank guarantee (“a prime bank guarantee”) from a “top 100 world ranked bank”. The trading programme and the use of investment funds, the applicant was told, would be controlled by a “master contract”, but it was emphasised that it would not be available for inspection “because the banks wouldn’t formally acknowledge that this form of trading existed”. McKay asked the applicant if he knew of anyone who might be interested in making such an investment.
As a result, the appellant mentioned the proposal to Osuzlu and his sister and a number of discussions regarding the proposal then took place between them during the latter part of May 1995 and the appellant kept McKay informed of these developments. During this period the appellant received from McKay various documents pertaining to the proposed investment, including a letter from his company, Enterprise Funding and Investment Pty. Ltd. (“Enterprise”), dated 11 May 1995, which essentially restated much of what McKay had earlier told the applicant about trading programme investments. More specifically, the letter said, amongst other things, that Enterprise had been offered an opportunity by Leveraged to participate in a “Leveraged Investment Programme sanctioned by the US Federal Reserve and operated through a leading Securities House in the US for the sole purpose of raising funds for refugee work in the Republic of Liberia”. It further stated that one Esther Nysletta Tubman (“Tubman”) “Counsellor at Law in Liberia …is the Founder and Administrator of a registered US charitable organisation, namely International United Charities Foundation U.S.A. (“IUCF”)” and that she had been introduced to a “Federal Reserve Trader who assisted in setting up this Programme with the Securities House”. From other documents which McKay provided to the appellant at the same time, the clear inference was that the “Securities House” referred to in that letter was Smith Barney Inc, a reputable U.S. broking house. McKay’s letter claimed that Enterprise had carried out a due diligence on the Programme and that it held copies of all relevant documentation to support Tubman’s claim. The appellant was told that Enterprise was “pleased to offer you One (1) of the Five (5) contracts it holds with [Leveraged]”. The letter concluded by effectively putting some pressure on the applicant to decide quickly whether to take up the offer. It said that the contracts had been issued to twenty potential investors and “will be received on first come first served basis until the five (5) contracts have been signed and completed. As time is of the essence with this offer your earliest reply would be appreciated as it is anticipated that all the contracts will be taken up by Friday 19th May 1995.”
During this period, the appellant also held meetings with McKay, Steele and Burton during which he was told, principally by McKay, that the Programme Manager would be Scotside International (Aust) (“Scotside”), the principal of which was Colin Mayman (“Mayman”). It was said that he was experienced in such ventures and had previously conducted them successfully with IUCF and Tubman. McKay explained that Alianda’s investment would be paid into a trust account of Smith Barney (at the Chemical Bank New York) and would be held there on trust and would be paid out to Scotside’s trading account only in exchange for a prime bank guarantee which would guarantee that the investment would be repaid at the expiration of one year and two weeks from the making of the deposit. The guarantee would be held, it was said, by Smith Barney on trust for Alianda.
At one of those meetings the appellant was also told that there was a master contract between Leveraged, IUCF, Chemical Bank, Smith Barney and Scotside under the terms of which the trading programme would be operated and which called for the provision of a prime bank guarantee. But he was also told that the terms of the master contract could not be disclosed to Alianda or other investors otherwise the trading programme would not proceed.
The appellant said in his evidence that he asked McKay to provide him with a letter signed by a partner of Smith Barney evidencing this arrangement. In fact, what the appellant received from McKay on 21 May 1995 in response to that request was an unsigned draft letter purportedly from Smith Barney. The appellant said that he made alterations to the draft to make the release of the investment moneys expressly conditional upon receipt by it of a guarantee from one of the top 50 world banks and faxed the amended draft back to McKay. McKay later told the appellant that the letter had not been signed by Smith Barney but that he had arranged for Tubman and Mayman to obtain a guarantee from a top 100 ranked world bank which was to go directly to the Chemical Bank and that it would not release the funds until it received the guarantee.
On or about 24 May 1995 Ozuslu and his wife decided to make the investment in the trading programme though Alianda. They did this after their discussions with the appellant over the previous week or so and after he told them, on that day, when asked for his view on the matter, that, provided the bank guarantee was obtained, the investment would be secure even if the promised trading profits were not earned. At or about that time, the appellant raised the question of his being paid a fee for his services in relation to the investment proposal. Although Ozuslu initially offered 20% of any profit earned, Ms Harle was not prepared to pay more than 10% of such profits and this was eventually accepted by the appellant.
His Honour considered that, on the basis of what the appellant had told his sister about the investment, she was satisfied that the principal would be guaranteed although she accepted the possibility that no trading profits would be earned through the investment. At some stage during their discussions, the judge said, Ms Harle told the appellant that she and her husband would rely on him as their lawyer to ensure that the investment was legal and above board and that all of the “i’s” were dotted and all of the “t’s” crossed so that there would be no risk that they would lose the capital sum. His Honour accepted that the appellant told his sister that, to the best of his ability, he had checked, and was satisfied with, the reputation of the people concerned with the investment and that all the legal documents were in order and that he did not see how they could lose. The judge found that the appellant also told the couple that, although he considered that the prospect of earning the profits that were forecast was only a possibility, rather than a certainty, even if the promised profits were not realised, at least the principal would be secure.
After the decision was made to proceed with the investment, the appellant received from McKay, on 25 May 1995, a number of documents which McKay had earlier received from Tubman. One document was a letter dated 19 May 1995 on the letterhead of “International United Charities (sic) Foundation USA” signed by Tubman. His Honour considered that “[m]any features of this extraordinary letter, like a number of other documents provided by McKay or Leveraged, should have been sufficient to put a competent professional on his guard concerning the bona fides of this so-called investment proposal”. In my view, nearly all the documents received by the appellant from McKay were couched in such flamboyant, but unintelligible, language such that a reader with a modicum of intelligence would have been bound to query the bona fides of the proposal. In order better to appreciate this it is necessary to set out some parts of this material. Thus, the above-mentioned letter of 25 May 1995 from Tubman was in the following terms.
“Dear Sir,
Re: Loan of US$2 million approved for I.U.C.F., USA/Ms. E. Nysietta Tubman
I am the Founding Director and sole Administrator of the above Charity which is Registered as a Corporation in Delaware USA under the Registration Code 209/1 – Tax Exemption Number 126-212. I.U.C.F., USA was established in December 1990 with my own personal funds, the blessing of my country of Liberia, and has since received full support from the Church of Christ Harlem New York and the African American Institute, United Nations New York USA. I.U.C.F. USA is a non-profit organisation that raises funds exclusively for the refugees of Liberia.
The funds that are raised by I.U.C.F. USA are used to purchase foodstuffs, clothing, medical services and to educate the numerous children in homes and orphanages in and out of Liberia. There are a number of education programs in existence at present as a result of funds raised by I.U.C.F. USA. In my capacity as a Counsellor at Law, I am also the authorised Trustee to sign on the accounts of I.U.C.F. USA both in the USA and Switzerland.
Thank you for the loan which you have arranged for the foundation, Banking co-ordinates are enclosed. Your lender’s funds are received into these Trust accounts that have been made available by the Banks and under instructions from the Lender and I.U.C.F. USA the Banks are not permitted to release the funds until a Bank Guarantee from a top 100 world Bank has been issued for the funds and they have authenticated same. I will personally oversee this procedure and will only sign the release for the funds when I can guarantee in my capacity as an Attorney that your Lenders capital has been secured without risk.
Your Lenders’ will receive interests and profits equal to their capital loan investment after the first four (4) weeks of trading and then each four (4) week period thereafter for a period of forty (40) weeks over a twelve (12) month period (this is allowing for Public Holidays and down time in Trading Dec/Jan each year).
The initial capital loan investment is US$2 million and the return is 0.5% per week for forty (4) weeks.
All payments are made direct to your Lender’s every four (4) weeks in arrears by Bank Endorsed Payment Order from I.U.C.F. USA’s Bank so your Lender will need to complete the enclosed Pay Order so that it can be lodged at the Bank for endorsement immediately funds are lodged with the Program Manager and trading commences.
I trust that I have given you enough comfort for your Lenders to participate in the Program.
Yours faithfully,
E. NYSIETTA TUBMAN,
Counsellor at Law,
Notary Public R.L.
Missionary Work in Liberia P.O. Box 1743 Manhattansville Station
New York N.Y. 10027 U.S.A.”
Another document that was received by the appellant from McKay at that time was a copy of a “Deed of Assignment and Memorandum of Understanding” (“MOU”) which was a pro forma “Agreement” dated 28 May 1995 between IUCF and Alianda. So far as is relevant, it contained the following provisions:
“Whereas:-
A.IUCF is a Charitable Organisation registered both as a Sierra Leone (N.G.O.) Non Governmental Organisation and a Delaware USA Organisation under Registration Code 209/1. IUCF also operates in Joint Venture with Missionary Work in Liberia USA, Registered as the appeal Branch of the Church of Christ, Harlem, New York, P.O. Box 1743, Manhattansville Station, New York N.Y. 10027, U.S.A. Tax Exemption Number 126-212, for the purpose of mass National and Worldwide appeal for the benefit of the Liberian children in need.
B.The Founding Director and Sole Administrator of IUCF is Counsellor at Law, Ms. Esther Nysletta Tubman (hereinafter collectively referred to as ‘IUFC’) of 85, Riverdale Avenue, Yonkers, New York, N.Y. 10791, U.S.A., who is also authorised to contractually bind IUFC. Ms. Esther Nysletta Tubman is also personal representative of Minister Dr. R.C. Wells, of the Church of Christ, Harlem, New York.
C.IUCF has as Patrons to the Charity a number of Security Traders and their Banks who are experienced in the management of the Secondary Security Market, trading Bank Instruments for profit.
D.The Lender has subject to the terms of this Agreement, agreed to lend to IUCF the sum of US Two Million dollars (US$2 million) (hereinafter called the ‘Loan Principal’).
E.IUCF has agreed to pay to the Lender the sum of US Five Hundred Thousand dollars (US$500,000) per week for Forty (40) weeks over a period of Twelve (12) months from the date of this Agreement by Four (4) weekly payments in arrears (hereinafter called the ‘Trading Profits’).
F.IUCF has agreed to provide certain Bank Securities to the Lender in respect of the Loan Principal and the Trading Profits.
Now it is Agreed
1.The Investor shall within Twenty Four (24) hours of execution of this agreement pay the Loan Principal to the Bank account of IUCF described in the Schedule, by Express Wire transfer. Such Express Wire transfer shall be generally in accordance with Annexure 'A' hereto and shall be expressly subject to the provision to the Transferor Bank on behalf of the lender of
(a)an unconditional, irrevocable Guarantee from a Top One Hundred (100) World ranking Bank (hereinafter called a 'Prime Bank') in favour of the Lender , guaranteeing the repayment of the Loan Principal by IUCF on the expiration of One (1) year and Two (2) weeks from the date hereof.
(b)a Pay Order generally in accordance with Annexure 'A' hereto to the Lender Bank account described in the Schedule from IUCF and endorsed by a Prime Bank.
Upon provision of the Guarantee and Pay Order described in sub-paragraphs (a) and (b) the Loan Principal shall be released to or to the order of IUCF. IUCF shall provide such Guarantee and Pay Order within Two (2) days of payment by the Lender of the Loan Principal."
The Schedule to the MOU provided that the bank into which the investment money was to be paid was the Chemical Bank in New York, that the account name was to be “Smith Barney Inc.” and that the bank officer was “Bill Sanders”.
The document also contained numerous clauses, many of which bordered on the incomprehensible and other clauses which seemed to be standard clauses that one might expect to find in an agreement dealing with the investment of funds although they seem to serve no obvious purpose in relation to the investment which Alianda was about to make. Overall, the document seems to have been have worded to create the appearance of a sophisticated legal agreement which was concerned with international investments, but which in fact should have put the appellant on notice that there was a considerable risk that Alianda would lose its investment unless it had control over an adequate bank guarantee.
On Thursday 25 May 1995, in anticipation of putting into effect the investment on behalf of Ozuslu and his wife through Alianda, the appellant arranged with one Skien at the ANZ Bank in Templestowe to take steps to cash in part of Alianda’s term deposit on the following day, 26 May 1995. He gave Skien a copy of the MOU, and told him that Alianda proposed to transfer US$2m into an investment in the United States in accordance with its terms.
Shortly after 1.00 p.m. on 26 May 1995, the appellant received by facsimile transmission from McKay a letter from Scotside which set out the account number of Smith Barney at the Chemical Bank and other details which were described as “co-ordinates” for the purpose of Alianda’s investment being paid into that account. But the letter also said that “no contact is to be made to Bank or Bank officer without authority otherwise, Transaction will be cancelled and Funds returned.” It seems that a copy of this letter was also given to the bank. Later that day, at approximately 4.30 p.m., Ozuslu, Ms Harle and the appellant attended the ANZ Bank where they were told by one of its officers that its head office considered that the proposed transaction was likely to be a “scam” and that, in the circumstances, the bank was not prepared to transfer Alianda funds to the Chemical Bank.
The appellant claimed in his evidence that when he went to the bank on the afternoon of 29 April 1995 he was satisfied that the trading programme was genuine, but became concerned when told by the bank that it was likely to be a scam. Consequently, he telephoned McKay from the bank premises and repeated to him what he had been told by the ANZ bank officer. McKay said that he would return his call. Approximately 10 minutes later, McKay rang back and told the appellant that he had related the bank’s concerns to Tubman and Mayman and that they said that it was not surprising that the bank made such claims because it was jealous of “outsiders” being involved in trading programmes and did not want to lose control of Alianda’s deposit. The appellant then telephoned Tubman who assured him that the trading programme was genuine, that the money would be protected at all times and that she would personally guarantee the return of the investment. The appellant also telephoned Mayman and was told much the same. Notwithstanding these assurances, which the appellant passed on to the bank and to his clients, the bank officers refused to take any action to transfer the funds. After they left the bank, the appellant repeated to Ozuslu and Ms Harle that that the bank’s refusal to transfer the money was motivated by its jealousy and desire to retain their funds. He then telephoned McKay and told him what had occurred and McKay said that he would make the transfer arrangements through Citibank. Not surprisingly, Ozuslu and Ms Harle became concerned about the transaction given what they were told by the bank. In his cross-examination, the appellant said that he, too, was concerned about the matter even after he had spoken with McKay and Tubman; he said that upon leaving the bank he was not totally satisfied about the bona fides of the transaction and that is why he sought written assurances about it (from McKay). He said that he told Ozuslu and his sister that he would make further enquiries and that McKay was to do the same. The appellant claimed that he telephoned McKay and asked him for written confirmation about the procedures relating to the investment and the parties involved.
On Saturday 27 May 1995 McKay telephoned the appellant and told him that Citibank would be happy to act as Alianda's banker and effect the transaction. McKay also said that he had spoken to Tubman, Mayman, Steele and Burton and had arranged that the prime bank guarantee would come from a top 25 world ranked bank and that the prime bank guarantee would also secure the payment to Alianda of interest at 8% per annum. That was the first time that there was any mention of the earnings being guaranteed by anyone, let alone a “prime bank”. Why such a guarantee was to be provided was not explained. McKay said that he would forward to the appellant a letter setting out all of the procedures when it was signed by Steele. Later that day McKay faxed to the appellant, inter alia, a copy of a letter dated 26 May 1995 addressed to McKay from Scotside signed by Mayman. The letter creates the impression that Scotside was prepared to do Alianda the “favour” of accepting its “late” investment moneys and paying the agreed yield.
Later that Saturday at approximately 7.00 p.m. the appellant received, by facsimile transmission, a letter from McKay in which he set out details which he claimed had been confirmed by Tubman, Mayman and an officer of Citibank, of the proposed processing of the investment funds at the Chemical Bank, emphasising the role of Smith Barney. Importantly, the letter said, in effect, that the Chemical Bank officer and Smith Barney were instructed that the “funds do not move out of the account until a Bank Guarantee from a Top 25 World Bank is in place and has been authenticated and despatched to [Citibank] and until then they are bonded (insured against fraud or defalcation by any of Smith Barney’s, Chemical’s or the Programme Manager’s staff)”. Although the letter is cast in terms which were obviously designed to allay any apprehension that its reader may have had about the security of the investment funds, in substance, it merely restated what the appellant had been told earlier about this aspect of the transaction by those who had a vested interest in procuring the investment from Alianda. The appellant, however, claimed in his evidence that it was this letter that finally gave him sufficient comfort to confirm to Ms Harle that Alianda could safely proceed with the investment. He said that he faxed the letter to Ozuslu and Ms Harle and later discussed its contents and the matter generally with Ozuslu by telephone.
Ms Harle’s evidence was that there were a number of telephone discussions with the appellant on 27 May 1995; sometimes he spoke with Ozuslu and sometimes with her but she said that, essentially, what the appellant told them on that Saturday was this. He said that he had spoken to McKay who told him that he was able to arrange for Citibank to transfer the funds. The appellant also told the couple that the "ANZ Bank did not know what they were talking about" and that McKay had assured him that everything “was alright” and that McKay was somebody they could rely upon. His Honour was also satisfied that the appellant told the couple that he had carefully examined all the relevant documents and had made enquiries of Tubman, Mayman, Burton and Steele and, as a result, was satisfied that the investment was bona fide. He also told the couple that he would be able to obtain guarantees from Burton and Leveraged in order further to secure the advance. The appellant testified that he believed the investment was genuine and that, if he had thought otherwise, would not have allowed Alianda to proceed.
Ozuslu left for Turkey at approximately 1.40 a.m. on Sunday 28 May 1995. Later that day, Ms Harle requested the appellant to confirm his oral advice in writing. The appellant did so and his Honour found that his letter of advice was typed on the evening of Sunday 28 May 1999, before he had spoken to Citibank, although it was delivered to Ms Harle on the following day, after he had confirmed with Citibank (to which he did not give a copy of the MOU) that it would transfer the funds. Omitting formal parts, the letter read as follows:
“ Re: Investment – United International Charities Foundation
I refer to our recent communications and to the documents provided to me in relation to same and confirm that I have examined the documents, have made enquiries of William McKay, Esther Tubman, Colin Mayman together with representatives of Citibank and advise that, on the basis of such examination and enquiries, I am satisfied that the investment proposal is bona fide and believe that you should proceed with same.
I have made clear to the parties I have spoken to that, through me, the company is entering into the investment in reliance upon their representations and, in such circumstances, the parties can be held responsible for any loss reasonably foreseeable as a consequence of such representations. I also understand that guarantees are available from Evelyn Burton and Leveraged Equity Investments International Pty. Ltd. and recommend that these be obtained. Finally, I also recommend that the wire transfer of funds to the account in the agreement be expressed to be conditional upon the terms of the master agreement between Smith Barney Inc, Chemical Bank and IUCF.
I will attend to the above recommendations prior to payment of investment monies.”
On 29 May 1995 the appellant received by facsimile transmission from McKay a copy counterpart of the MOU, the original of which had apparently been signed by Tubman. A copy was also sent by McKay to Ms Harle for execution by Alianda. Later that day the appellant and Ms Harle attended the offices of Leveraged where they saw Burton, who told them that the proposal was a genuine investment programme and that she had been involved in many such programmes. She gave them a written guarantee in respect of the transaction and his Honour considered that it was at that time that Ms Harle must have signed (or handed over) the MOU that was executed by Alianda. Shortly thereafter an amount equivalent to US$2m of the company’s funds was transferred to the Chemical Bank through Citibank.
The appellant never received or sighted a bank guarantee of the kind promised by the promoters of the scheme. The closest he came in that regard was to receive, on or about 22 June 1995, a pro forma guarantee apparently issued by an insurance company called “Condor”, operating in the West Indies. Needless to say, it was worthless. It was approximately one month after the funds were transferred that the appellant first told Ms Harle that there had been some hold up with “the [weekly] payments”. For some time thereafter, he continued to provide his sister with excuses as to why the supposed earnings were not being paid, although during this period he sought payment from her for the cost that he said he incurred in following up Alianda’s investment. Eventually, it became plain that the investment transaction was a scam and that the funds were lost.
The Proceeding
In 1999 Alianda brought the proceeding against Citibank (the first defendant) and the appellant (the second defendant) claiming damages arising out of the alleged negligence and breach of duty on the part of each of them which, it was alleged, resulted in the loss of US$2m of its funds in an investment “scam”. In relation to the appellant, Alianda alleged that he breached his retainer as its solicitor in relation to the investment. The appellant joined the insurer as a Third Party to the proceeding, claiming indemnity from it in respect of any damages that might be awarded against him in the proceeding. The insurer denied liability, claiming that the appellant did not act as a solicitor for the plaintiff company but as its business and financial adviser. It also contended that, even if the appellant acted as solicitor for the plaintiff, he did so fraudulently and dishonestly and, therefore, was not entitled to indemnity under the policy. Relevantly, clause 16, in conjunction with clause 22 of the policy, provided that the insurer would “not indemnify the [appellant] against any liability … [a]rising in whole or in part, directly or indirectly from, or brought about by –
(a)The dishonesty or fraudulent act or omission of any Insured on or before 31 December 1997 …”.
During the trial Alianda settled its claim against the two defendants (on the basis that the appellant would pay it $1.5m if he secured indemnity under the policy). Consequently, the proceeding between Alianda and the two defendants was effectively terminated. The appellant, however, pressed his claim against the insurer and sought from it indemnity in the sum of $1.5m which he had agreed to pay Alianda. Thus, there were two principal issues before the court for resolution. One, did the appellant act as solicitor for Alianda in respect of the investment transaction and two, did the above exclusion provision of the policy operate so as to deny him indemnity under it?
His Honour’s Findings
His Honour found against the insurer on the first issue, holding that the appellant acted for Alianda as its solicitor in respect of the investment transaction. But the judge found for it on the second issue on the basis that the appellant had acted dishonestly or fraudulently in respect of the investment transaction and that his liability to Alianda was “brought about” by his dishonest or fraudulent advice, given that his clients acted on his advice and would not have allowed the funds to be transferred had they been told by him that there were real risks associated with the investment. I will consider his Honour’s findings in a little more detail later, but for present purposes it is sufficient to note that the judge considered that the appellant’s advice to his clients post the ANZ Bank meeting, particularly that contained in his letter of 29 May 1995, was “both objectively and subjectively” dishonest given what it said and what it did not say. Moreover, the learned judge was satisfied that, at the relevant time, the appellant must have known that there was a real risk that Alianda “would lose its funds, a risk which he was prepared to take in the hope that he would earn US$2 million.”
Appellant’s contentions
I now turn to deal briefly with the appellant’s principal arguments on appeal. Subject to one matter to which I will refer later, the appellant did not contend that his Honour erred in formulating the test for establishing whether the appellant’s conduct amounted to dishonesty for the purposes of the policy. Rather, the appellant’s principal contentions were these.
(a)His Honour misapplied the test for dishonesty, essentially by treating the appellant’s gross negligence in advising Alianda as amounting to dishonesty.
(b)The findings made by his Honour as to the appellant’s conduct did not support a finding of dishonesty on his part.
(c)Even if it could be said that such findings as his Honour made as to the appellant’s conduct supported a finding of dishonesty, those findings were made against the evidence or the weight of the evidence.
(d)Moreover, the evidence on which his Honour relied to find dishonesty was not sufficiently clear or cogent within the meaning of Briginshaw v. Briginshaw[1] so as to justify a finding of dishonesty by the appellant.
[1](1938) 60 C.L.R. 336.
In any event, it was said, the appellant’s liability to Alianda was not “brought about” by, nor did it arise “directly or indirectly” from, the appellant’s dishonest conduct for the purposes of the exclusion clause.
Dishonesty
I now turn to the meaning of “dishonesty” as that word is used in the policy. It seems clear enough that where, as here, dishonesty is not used in a special sense in relation to statutory offences, it is not a term of art and is to be given its ordinary meaning.[2] It embraces deliberate conduct[3] which is considered to be dishonest by the standard of ordinary decent people[4], or, put another way, the ordinary standards of reasonable and honest people[5].
[2]McCann v Switzerland Insurance Australia Ltd (2000) 203 C.L.R. 579 at 596 per Gaudron J., Peters v. R. (1998) 192 C.L.R. 493 at 504 per Toohey and Gaudron, JJ., Macleod v. R. (2003) 197 A.L.R. 333 at [36] per Gleeson, C.J., Gummow and Hayne, JJ., McMillan v. Joseph (1987) 4 A.N.Z. Ins. Cas. 60-822 at 75,054 per Cooke, P., at 75,055 per Somers, J. and at 75,056 per Casey, J.
[3]H&R Nominees v. Fava [1997] 2 V.R. 368 at 421 per J.D. Phillips, J.
[4]Peters at 504 per Toohey and Gaudron, JJ. (unless the word “dishonesty” is used in a special sense in legislation that creates an offence). Approved in Macleod at [36]-[37] per Gleeson, C.J., Gummow and Hayne, JJ at [36]-[37] and at [100] per McHugh, J. See also McMillan at 75,055 per Somers, J. and at 75,056 per Casey, J. Their Honours considered that conduct would amount to dishonesty if it is dishonest according to the ordinary professional, in that particular case a solicitor.
[5]R v. Lawrence [1997] 1 V.R. 459 at 470-471 per Callaway, J.A. See also R. v. Ghosh [1982[ Q.B. 1053 at 1064 per Lord Lane, C.J.
Whether particular conduct amounts to dishonesty involves the consideration of the mental state – the knowledge, belief or intention – of the person whose conduct is impugned[6]. But, as has been made clear in Peters, this does not involve consideration whether, subjectively, the person realised that his or her conduct was dishonest by the above standard. In that case, the court reviewed the divergence in approach on this issue between the English authorities, of which Ghosh was a leading case, and the Australian decisions. Their Honours[7] effectively rejected the second limb of the dishonesty test that was adopted in Ghosh[8], namely, whether the person in question realised that his or her intent or acts were dishonest in accordance with the ordinary standards of reasonable and honest people.[9]
[6]McCann at 596 per Gaudron, J.
[7]At 503-504 per Toohey and Gaudron, JJ., at 530 per McHugh, J. (with whom Gummow, J. agreed) and at 552 per Kirby, J.
[8]At 1064.
[9]In McMillan, Cooke, P. rejected the view of the trial judge that the test as to what constitutes dishonesty “necessarily (involves) an intention to deceive”.
I have previously mentioned that, subject to one qualification, the appellant before us did not contend that his Honour erred in the formulation of the test for dishonesty. The one exception related to his Honour’s acceptance of the decision of Steele, J. in Abbey National Plc v. Solicitors’ Indemnity Fund Ltd.[10] that an ingredient of dishonesty is knowledge by the person in question that his or her impugned conduct was dishonest by the standard of ordinary decent people. The appellant argued, correctly, I think, that this approach was inconsistent with the decision in Peters where, as I have said, the court rejected the notion that dishonesty involves such a subjective element. In my view, however, nothing turns on this error for present purposes because, if anything, it favoured the appellant. In any event, it is difficult to know why his Honour accepted the test adopted by Steele, J. because, notwithstanding that he concluded that the appellant was dishonest, his Honour did not do so on the basis that he held a belief as to whether his conduct was dishonest by the ordinary standards of reasonable and honest people.
[10](1997) PNLR 306.
The proper course that should be pursued, in determining whether the conduct in question was dishonest, was explained by Toohey, and Gaudron, JJ. in Peters in the following terms[11]:
“In a case in which it is necessary for a jury to decide whether an act is dishonest, the proper course is for the trial judge to identify the knowledge, belief or intent which is said to render that act dishonest and to instruct the jury to decide whether the accused had that knowledge, belief or intent and, if so, to determine whether, on that account, the act was dishonest. ... If the question is whether the act was dishonest according to ordinary notions, it is sufficient that the jury be instructed that that is to be decided by the standards of ordinary, decent people”.[12]
Thus, while their Honours accepted the first limb of the test for dishonesty in Ghosh, namely, whether the acts in question were dishonest according to the current standards of ordinary decent people, as I have said, they (together with the other members of the court) rejected the second requirement in Ghosh that the person in question must have realised that his or her acts were dishonest in accordance with those standards.
[11]At 504.
[12]This passage was cited with approval in Macleod at [37] per Gleeson, C.J., Gummow and Hayne, JJ., at [99] – [100] per McHugh, J. and at [130] per Callinan, J.
An example of a recent case where the court had regard, inter alia, to the mental state of the person in question in determining whether his conduct was dishonest for the purposes of an exclusion clause in a professional indemnity insurance policy which was relevantly similar to the one under consideration here, is McCann. Gleeson, C.J., for instance, said in that case[13]:
[13]At 587-588.
“Mr. Powles did not intend that the Nauru Trust should lose the $US8.55 million. But he paid it away, in breach of his fiduciary responsibilities, without proper (or any) security knowing there was a risk of its loss, and impelled by his own need for money. He preferred his personal interests to those of his client. He permitted his urgent need to make a secret commission to prevail over his duty to protect his client’s funds. The Court of Appeal was right to find that his conduct in relation to the entire $US8.7 million was obviously dishonest and probably fraudulent.”
Gaudron, J., on the other hand, considered that it was Powles’ omission that amounted to dishonest conduct on his part for the purpose of the exclusion clause in the policy. Relevantly, her Honour said[14] “... the question whether a failure to act is dishonest is usually answered by considering whether that failure was motivated by a desire to conceal the truth or to obtain an advantage to which the person concerned knew he or she was not entitled.” A little later, her Honour said[15] that, in the circumstances:
“... the failure of Mr Powles to inform the Nauru Trust as to his knowledge of Linpar and of the pbi market and, also, of the unsuccessful attempt to purchase a pbi for it in the period prior to 15 January 1992 was a dishonest omission. That is because, as a solicitor, Mr Powles must have known that it was his duty to disclose those matters. And, on the facts found at first instance, it can only be concluded that he deliberately concealed those matters so that he could earn secret commissions from the involvement of the Nauru Trust in the pbi market.”
Kirby, J. noted[16] that Powles’ breaches of duty were numerous and deliberate and that he knew that he was using the money of the trust for a dishonest private business of his own when he had been instructed to place the money under the control of Allens. His Honour went on to say that[17]:
“Rational reflection for even a short time, if uncontaminated by the prospect of (and need for) dishonest secret commissions, would have led to the conclusion that the conduct in which Mr. Powles was undoubtedly engaged was likely to expose the fund received from the Trust to just the kind of loss at the hands of third parties that quickly ensued.”
Hayne, J. considered[18] that Powles’ omission to disclose his intention to profit from the transaction, and his acts in accepting instructions and later taking the money, were dishonest.
[14]At 596.
[15]At 597.
[16]At 607.
[17]At 607.
[18]At 618.
In the present case, the insurer alleged that the appellant’s relevant conduct was dishonest given that, in the circumstances described, his oral and written advice to which reference has already been made was, to his knowledge, false. Consequently, it was said, his liability to Alianda arose, in whole or in part directly or indirectly, or was brought about by, his dishonesty. It follows that, for the purpose of determining in this case whether the appellant acted dishonestly in advising Alianda, a matter that would require consideration is the appellant’s knowledge, belief or intention in respect of the advice which he gave to Alianda.
Appellant’s arguments
As I have mentioned, the appellant contended before us that the trial judge misapplied the test for dishonesty by treating what was really the appellant’s gross negligence in advising Alianda about the investment purpose as amounting to dishonesty on his part. In my view, however, this contention must be rejected. His Honour’s reasons for judgment make it plain that he well understood that mere gross negligence does not amount to dishonesty; he said so on a number of occasions in his reasons. The judge considered that the appellant’s relevant conduct went beyond mere gross negligence and amounted to dishonesty.
An important aspect of the appellant’s case was that his Honour simply did not make findings of fact capable of supporting the conclusion that the appellant’s negligent conduct was also dishonest. In my view, however, his Honour made at least three critical findings that could support the conclusion that the appellant had acted dishonestly. The first was that the appellant’s advice on 28 and 29 May 1995 was calculated to keep the full facts from his clients so as to mislead them into believing that the transaction was genuine, that the documents were in order and that it was appropriate to proceed with the investment. The second finding was that the appellant “must have known” that there was a real risk that the investment money would be lost if the transaction proceeded - a risk which he was prepared to take in the hope that it would earn him $US2 million being the 10 per cent agreed commission. In saying that “he was prepared to take” the risk, it is apparent that his Honour meant that the appellant was prepared to see his clients take the risk in the hope that the investment transaction would be successful and that (they and) he would profit from it. Thirdly, his Honour effectively found that the appellant knew that the investment program was fraught with risk and that Alianda might lose any funds it might place with it. If those findings were reasonably open to his Honour then so was his conclusion that the appellant had acted dishonestly in advising Alianda.
The appellant argued, however, that, accepting that his Honour made such findings, they were not reasonably open to him on the evidence. Counsel first said, in support of that contention, that the findings were at odds with his Honour’s effective acceptance of the appellant’s sworn evidence that he believed that, at all relevant times, the proposed transaction was bona fide and that the investment would be secure. It was claimed that his Honour did not say in his reasons that he rejected that evidence and, therefore, must be taken to have impliedly accepted it. In my view, however, it is plain from his Honour’s reasons that he rejected this aspect of the appellant’s evidence. He considered that the appellant’s conduct “throughout” had a degree of unreality about it and that this was not “dispelled in cross-examination”. Furthermore, his Honour did not accept that “any solicitor, having been warned by a reputable bank that the proposed investment may be a scam”, would have ignored that and all other warning signs that the proposal was not bona fide and press on until the client’s funds were lost. It is true that, in the very next sentence the judge noted “Nevertheless, negligence, even gross negligence, is not dishonesty”, but that observation does not detract from the inference that his Honour rejected the appellant’s claim that he was satisfied at the relevant time that the proposed transaction was bona fide, and that the investment would be properly secured. It seems to me that his Honour’s observation merely emphasised that even gross negligence did not, of itself, amount to dishonesty.
It was then said for the appellant that, if his Honour effectively found that the appellant lied in this aspect of his evidence, such a finding was against the evidence and that the judge “palpably misused his advantage” of seeing the appellant give evidence. It is true that, in Fox v. Percy[19] the High Court again reminded the intermediate appellate courts[20] that, subject to the constraint marked out by the nature of the appellate process, the appellate courts are obliged to conduct a “real review of the trial and .. of [the] judge’s reasons” and in doing so weigh conflicting evidence and draw their own inferences and conclusions. For example, the majority in that case[21] said[22] that “... the mere fact that a trial judge necessarily reached a conclusion favouring the witnesses of one party over those of another does not, and cannot, prevent the performance by a court of appeal of the functions imposed on it by statute. In particular cases incontrovertible facts or uncontested testimony will demonstrate that the trial judge’s conclusions are erroneous, even when they appear to be, or are stated to be, based on credibility findings.” Their Honours went to emphasise[23] that “…in every appeal by way of rehearing, a judgment of the appellate court is required both on the facts and the law. It is not forbidden (nor in the face of the statutory requirement could it be) by ritual incantation about witness credibility, nor by judicial reference to the desirability of finality in litigation or reminders of the general advantages of the trial over the appellate process.”
[19](2003) 197 A.L.R. 201.
[20]At [25].
[21]Gleeson, C.J., Gummow and Kirby, JJ.
[22]At [28].
[23]At [29].
Nevertheless, their Honours also recognised that, in reviewing the findings made below based essentially on the assessment of the credibility of a witness, the appellate court must give respect to the advantages of the trial judge in seeing and hearing the witness in the context of the trial and that, therefore, it should be slow to depart from the finding of a trial judge in that regard unless it is satisfied that the advantage “could not be sufficient to justify the trial judge’s conclusion” – Watt or Thomas v. Thomas[24] - or unless it is shown that the judge has failed to use or has misused that advantage – Pham v. Australian and New Zealand Banking Group Ltd.[25]. See also Abalos v. Australian Postal Commission[26]; Devries v. Australian National Railways Commission[27] and Walsh v. Law Society of New South Wales[28].
[24][1947] A.C. 484 at 488.
[25][2002] VSCA 206 at [35] per Charles, J.A. with whom Batt and Eames, JJ.A. agreed.
[26](1990) 171 C.L.R. 167 at 178-179.
[27](1993) 177 C.L.R. 472 at 479.
[28](1999) 198 C.L.R. 73 at 92.
In my view, for the reasons I give below, the judge did not misuse his position of seeing the appellant give evidence – it was well open to his Honour to reject his evidence concerning his belief about the bona fides and the security of the investment and to make the three findings to which I have referred earlier. First, the credibility of the appellant must have been placed in doubt in the course of his evidence and in cross-examination. For instance, his claim in his evidence the documentation given to him by McKay on the evening of Saturday 28 May 1995, allayed his apprehensions about the bona fides of the transaction would have sounded hollow to the judge. There was nothing of relevance in that documentation that had not already been presented to the appellant by the promoters of the scheme. Similarly, in his cross-examination the appellant made the dubious claim that, although before the ANZ Bank gave its advice referred to earlier, he regarded with scepticism the promise that the investment program would return profits of 1,000 per cent, he was duly satisfied that the investment would return profits of that extraordinary magnitude after having received assurances from McKay and his colleagues about the transaction.
Next, the circumstances in which the transaction took place made the appellant’s claim in that regard difficult to accept. In particular, I note the following circumstances:
(a)On the face of the information that was given to the appellant, an experienced commercial solicitor, it was almost inconceivable that the proposed (unexplained) program, which was said to be concerned with refugee work in Liberia, could produce a return of 1,000 per cent in one year. The suggestion that a very large amount of money should be placed in such an investment would ordinarily give rise to an apprehension that it might be no more than a device to persuade investors to part with their money. At the very least, it screamed out for an explanation as to how the money would be used to earn such staggering profits, and yet no such explanation was given to (or sought by) the appellant. The requirement for a full explanation would have been heightened by the lack of a rational reason as to why the appellant could not sight – even on a confidential basis – the master agreement which was supposed to govern the transaction.
(b)A reputable major bank, with international presence, advised that the scheme was probably fraudulent.
(c)The nature and the terms of the documentation that was provided to the appellant by McKay and to which I have referred raised further queries as to the genuineness of the transaction.
(d)During the period leading to the investment, the position of Smith Barney as a participant in the money flow and as trustee of the funds and of the prime bank guarantee, became progressively and increasingly vague, and later its role in that regard was effectively terminated. Moreover, during the period when Smith Barney was to be the trustee, no confirmatory letter was forthcoming from it. Worse still, McKay sought to fob off his promise of such a letter by producing an unsigned copy of a letter, purportedly from Smith Barney, the terms of which were unacceptable to the appellant and when he sought to change those terms to overcome the perceived deficiency, Smith Barney was effectively “taken off the scene”.
(e)No prime bank was ever nominated by the scheme promoters. Moreover, the bank guarantee, which was obviously a most critical document, was not provided to the appellant and his claim to his sister that the later produced pro forma guarantee referred to earlier was “just as good” as the promised guarantee, defied credulity.
The judge said that one could, perhaps, understand how, by a combination of “stupidity, gullibility, incompetence and cupidity, a solicitor might permit his clients to enter an investment proposal such as this one” notwithstanding the many unbelievable aspects of it and the lack of security in relation to it. But his Honour effectively concluded that he could not accept this as an explanation for the appellant’s conduct given that it would involve countenancing the appellant’s effective refusal to heed the advice of a reputable bank that the proposal was or might be a scam and all the other warning signs about the transaction to which I have referred. As Callaway, J.A. explained in R. v. Lawrence[29], although stupidity, for example, does not amount to dishonesty, it can be of such magnitude as to warrant rejecting the claim that the conduct was pursued in ignorance of the otherwise obvious facts on account of such a belief. It seems clear enough that the judge so concluded here and, as I have said, I consider that such a finding was well open to him.
[29]At 467. The passage of Callaway, J.A. in Lawrence was cited with approval in Macleod at [42] per Gleeson, C.J., Gummow and Hayne, JJ.
I am also of the view that his Honour’s finding that the appellant’s advice was intentionally false and misleading was reasonably open to him. It will be recalled that on Saturday, 28 May 1995, the appellant told his sister that he had carefully examined all the relevant documents and that everything was in order for the investment to proceed. The funds, said the appellant, would be secured. This representation was, as the appellant must have known, false. Even if one were to put aside the master contract on the basis that the appellant’s sister knew that it was not sighted by him, she had no such knowledge about the bank guarantee and, therefore, the representation that he had examined all the relevant documents necessarily included the representation that he had seen the bank guarantee. This was plainly false.
Furthermore, the letter written by the appellant in response to his sister’s request that he confirm his advice in writing, in which he set out reasons why Alianda should proceed with the investment, was even more misleading than his previous oral advice. The letter should be construed in the following context. First, the appellant’s clients were concerned about the propriety of the investment and about the safety of their funds should they proceed with it. This concern stemmed particularly from the advice the ANZ Bank had given them about the investment a day or so earlier. Secondly, they relied almost entirely on the appellant’s professional advice on these matters including the adequacy of the documentation for the purpose of having their interest protected. They had specifically asked him to ensure that all the “i’s” were dotted and all the “t’s” were crossed. Thirdly, as the appellant acknowledged, he had been asked by them to check all the documents. Next, it must have been plain to the appellant that the bank guarantee was of critical importance for the purpose of deciding whether the investment should proceed.
I note for completeness that, although his Honour said in his reasons that, in his letter, the appellant claimed to have examined “all documents” the letter itself speaks of “all documents provided to me” (emphasis added). In my view, however, the judge was well aware of that qualification, given that he set out its terms in his reasons and was obviously familiar with them. In any event, I think that nothing turns on his Honour’s failure to mention this qualification because on either reading of the letter, it was well open to his Honour to conclude that it was false and misleading for the following reasons.
First, given the appellant’s brief and his advice to the clients on the Saturday that he had examined all the relevant documents, the fact that the letter did not say that he had not sighted the bank guarantee created the false impression that this critical document had been checked by him and was found to be in order. After all, as I have said, the appellant acknowledged that he was asked by his clients to ensure that all documents were in order and that all the “i’s” were dotted and all the “t’s” were crossed. In any event, given the critical importance of the guarantee, it was important for the clients to be told, in order to enable them to make an informed decision whether to proceed with the investment, that the bank guarantee had not been sighted by him. In the circumstances, the appellant’s withholding of this information from his carefully worded letter could be seen as amounting to misleading conduct on his part which, in the circumstances, can only be characterised as having been intentional.
Next, as his Honour said, the letter effectively conveys that all the “i’s” were dotted and all the “t’s” were crossed in relation to the investment proposal and that, in those circumstances, it was appropriate to proceed with the investment. For reasons I have given, what the appellant was told by the promoters and by McKay after the ANZ Bank gave its advice did not add to what he knew before the bank meeting and, as I have said, he did not see the bank guarantee or even know which bank was to be the guarantor so that his effective claim in his letter that everything has been checked and was in order, was misleading, as he must have realised.
But even if these matters were not misleading or were not intentionally misleading, in my view, the reference in the letter to Citibank was plainly misleading, and was intentionally so. It suggests, as the appellant must have known, that he made enquiries of Citibank about the propriety of the investment. Nothing was further from the truth. The appellant only spoke to a Citibank representative but briefly and only for the purpose of confirming McKay’s advice that Citibank would transfer the funds. The bank was not shown the MOU or any other relevant document, nor was it told of the ANZ Bank advice as to the propriety of the proposed transaction and, importantly, Citibank gave no advice on that issue. As the learned trial judge noted, there was no purpose in the appellant referring in his letter to Citibank in the same context as he referred to McKay, Taubman and Mayman other than to create the false picture that Citibank – the only independent source – considered that the investment proposal was bona fide. In the circumstances, it was well open to his Honour to find that at least this important aspect of the written advice was false and misleading to the knowledge of the appellant.
In my view, it was also reasonably open to the judge to find that the appellant was aware that there was a real risk that Alianda would lose its funds if the transaction proceeded and that he intentionally did not tell his clients of that apprehension. As the learned judge pointed out in his reasons, why else would the appellant have referred in his letter of advice to holding Burton and others responsible for any loss from the investment? Plainly, it was in order to cover the risk that he thought existed in relation to the investment. The appellant sought to explain away his seeking of the guarantee from Burton by saying that he asked for the security from the promoters only in order to give his clients the maximum security possible and not because he thought that the investment carried with it a real risk. His Honour obviously rejected this explanation as he was entitled to do given the circumstances of the case.
It was said for the appellant that, on the evidence, his Honour’s conclusion that the appellant encouraged the transaction to proceed because he put his own interest of earning a profit ahead of his duty to his clients, was unsustainable. As I have explained, what his Honour effectively said in that regard was that the appellant was prepared to have his clients risk their funds in the hope that he would earn his commission. It is apparent that such an approach placed his own interest ahead of his duty to his clients. Given the circumstances of the transactions as found by his Honour which I have earlier set out, it was plainly open to him effectively to conclude that the appellant breached his duty to his clients in this way. No doubt, like Powles in McCann, the appellant hoped that the proposal was genuine and that the investment would be successful and that the money would be returned to Alianda. In the circumstances, there is also no basis in the appellant’s claim that it is inherently unbelievable that he would have knowingly permitted his sister and brother-in-law to enter into a transaction that would see them swindled out of their money with no prospect of his gaining an earning unless the transaction was successful. As I have said, the appellant no doubt hoped the investment would succeed and that the three of them would profit from it. But it does not follow that he did not appreciate that there was a risk associated with the investment, being one which he chose not to disclose to his clients.
In view of his Honour’s findings to which I have referred, it was open to him to conclude that the appellant was dishonest by the standards of ordinary decent people and thus, dishonest for the purposes of the policy.
Failure to decide according to Briginshaw standard
I am also of the view that there is nothing in the appellant’s claim that his Honour failed to determine the question of the appellant’s dishonesty in accordance with the standard of proof recognised in Briginshaw v. Briginshaw[30]. It was put that the judge’s reasons show that he gave no consideration to the seriousness of the finding that he was making, and thus for the need that the insurer establish its assertion in this regard to the requisite standard.
[30](1938) 60 C.L.R. 336.
But as Mr. Clarke for the respondent pointed out, the Briginshaw standard only requires that the judge be satisfied that there is clear or cogent evidence of the serious matter alleged, such as fraud or dishonesty. It does not call for the application of a standard of proof other than on the balance of probabilities. Moreover, as counsel said, it was not necessary for the learned judge to refer in terms to the Briginshaw test in order to demonstrate that he was satisfied of the existence of such evidence. Briginshaw was not referred to, for example, in McCann, yet it may be inferred that it was applied in that case. In my view, it is apparent from his Honour’s reasons for judgment that his Honour well realised the seriousness of the allegation of dishonesty and for the need to be satisfied about the matter with the appropriate level of certainty. As I have said, the mere fact that his Honour did not mention this requirement in terms does not mean that he did not have regard to it.
Moreover, there is also nothing in the appellant’s point that, because his Honour merely inferred that the appellant “must have known” of the risk and did not say positively that he found that he knew of it, the judge failed to make the finding to the level of the Briginshaw standard. An inference, properly and firmly drawn from the facts, as it was in this case, can satisfy the Briginshaw standard just as well as a finding couched in direct terms.
I mention for completeness that I also consider that there is nothing in the appellant’s claim that his Honour failed to determine whether the appellant’s relevant conduct was dishonest by the standard of “ordinary decent honest people”. The learned trial judge referred to authorities that postulated the test essentially in those terms and it is inconceivable that he would not have resolved the issue accordingly.
Exclusion clause operates
It was also contended for the appellant that, even if his Honour did not err in concluding that the appellant had acted dishonestly in relation to Alianda’s investment, he erred in deciding that such conduct fell within the exclusion clause of the insurance policy. His Honour found, as I have said, that the appellant’s liability to Alianda was “brought about by” or arose “in whole or in part, directly or indirectly” from his dishonest conduct for the purposes of the exclusion clause. It was said for the appellant, however, that there was an insufficient causal nexus between the appellant’s dishonesty and Alianda’s loss so as to bring his liability within the exclusion clause.
It seems plain enough that, as his Honour found, the clients would not have proceeded with the transaction “if they had received honest advice from the appellant as to the risks involved after their visit to the ANZ Bank". In certain circumstances this may not be sufficient to establish the relevant causal nexus between the dishonesty of the solicitor and the client’s loss – see, for example, Comino v. Manettas[31]. But in this case, the appellant, through his dishonest conduct, encouraged, facilitated and effectively persuaded Alianda to invest in the bogus transaction. It was the dishonest breach of his duty to Alianda that resulted in its funds being given to the fraudsters and thus, being lost to it. In the circumstances, it seems to me plain enough that, like the situation in McCann, there was here a direct or indirect connection between the appellant’s dishonest conduct and Alianda’s loss and thus, his “liability” for the loss arose relevantly from his dishonest conduct for the purposes of the exclusion clause. In the circumstances, I consider that the appellant’s present argument should also be rejected.
[31](1993) 7 ANZ Insurance Cases 61-162 at 77,869-77,870.
Conclusion
For these reasons, I would dismiss the appeal.
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