McCann & Ors v Switzerland Insce

[2000] HCATrans 316

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S229 of 1999

B e t w e e n -

HARRY KEVIN McCANN (for himself and representing each of the persons identified in Schedule 1 to the notice of appeal)

Appellants

and

SWITZERLAND INSURANCE AUSTRALIA LIMITED

First Respondent

AMP GENERAL INSURANCE

Second Respondent

GIO AUSTRALIA LIMITED

Third Respondent

GLEESON CJ
GAUDRON J
KIRBY J
HAYNE J
CALLINAN J 

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 2 AUGUST 2000, AT 9.32 AM

(Continued from 1/8/00)

Copyright in the High Court of Australia

GLEESON CJ:   Yes, Mr Young.

MR YOUNG:   If the Court pleases, overnight we have prepared several documents containing references for the assistance of the Court.

GLEESON CJ:   Thank you.

MR YOUNG:   Can I hand those to the Court?  Can I take a moment to explain the documents.  There are four documents.  The first two simply provide a road map of the references I have been taking the Court to.  The first headed State of Affairs at 4 December 1991 is material I covered yesterday; that aggregates the references.  The second document headed NPRT Transaction gives a road map of the material I am presently going to.  I am dealing at the moment with item 2 and have almost completed that.

The next two documents are in response to a request from Justice Kirby, namely that we itemise for the assistance of the Court the concurrent findings of the trial judge and the Court of Appeal that are of importance to the issue.  The final document itemises those findings of the Court of Appeal which went further than the findings of the trial judge.  Ultimately it is our submission that the additional findings by the Court of Appeal, whilst of assistance to the appellants, do not make any significant difference to the outcome of the issue.

KIRBY J:   Assistance to the appellants or respondents?

MR YOUNG:   I am sorry, to the respondents, your Honour.  The concurrent findings of the trial judge and the Court of Appeal amply support the conclusions reached by the Court of Appeal.

KIRBY J:   I do not want to take you off your course but, at some time before you sit down, would you explain to me a bit better than I understand at the moment how the Law Society’s standard…..came to be devised and how it came to be applicable in your insurance and whether it would have been open to you to have varied the particular exception as, for example, by adding the words “directly or indirectly” – not now, because you are going through the facts, but at some stage.  That is the thing that is puzzling me.

MR YOUNG:   We did propose to come back to that, your Honour.

GLEESON CJ:   Mr Young, may I ask you a question about these concurrent findings of fact, in particular paragraph 1(c).  The proposition that Allens assumed Trust duties of “ensuring the safe custody of the funds pending delivery of the instrument” might be a proposition of fact or a proposition of law.  In so far as you assert that that was a finding of fact, was it based upon some primary fact relating to the retainer of Allens or was it treated as being the legal consequence of the responsibility that Allens undertook by taking control of the funds themselves?

MR YOUNG:   The answer is a mixture of the two, your Honour.  It was based upon primary findings of fact from the documents by Mr Justice Hunter and endorsed by the Court of Appeal primarily by reference to the letter of 13 December that I took the Court to yesterday, what might be called the mandate letter or the letter setting out the terms and conditions upon which Allens were to hold the funds, sole purpose and full use only for the purposes of the instrument, for the full accounting thereafter.  That is at volume 3 page 581.

HAYNE J:   A letter which it is common ground, is it, was in Mr Powles’ files?

MR YOUNG:   Yes, your Honour.  Next, the second aspect of the primary finding was premised upon Powles’ own acknowledgment that he held the funds upon trust conditions, in effect, in his letter to Patterson of 27 December at page 633 of the same volume, at the end of the first paragraph.  Next, in terms of primary findings – and these are matters I am coming to – there were a succession of letters from Powles direct to the Trust during the course of January acknowledging the basis upon which the moneys were held.  They include, for instance, Mr Powles’ letter of 6 January 1992 at page 664 of the same volume.  It is a letter on the letterhead of Allens saying:

We confirm that all funds to be paid to us pursuant to this Programme will be either held in trust in our United States dollar account at Westpac Banking Corporation, London, or applied in payment for Prime Bank Promissory Notes -

et cetera.  That letter encompassed both the first tranche of $8.7 million and the expected second tranche of $19.3 million which arrived, or starting arriving, with Allens on 31 January 1992.

There are other letters through the course of January as well that would constitute the primary factual basis for the finding of the assumption of trust duties by Allens.  I said the answer was a mixture, but based upon those primary documents and findings of fact based upon them, the learned trial judge went on to conclude, probably as a proposition of mixed fact and law, that Allens had assumed trust obligations of the kind that we have described.

GLEESON CJ:   There is probably another relevant consideration, is there not?  That is, that it is hard to think of any other reason why you would involve a solicitor in a transaction like this, other than for the purpose of controlling the application of the funds.

MR YOUNG:   Yes, your Honour.  Yes, indeed ‑ ‑ ‑

KIRBY J:   Or maybe adding to the credibility, appearance of security, trust of the client.

MR YOUNG:   Well, the answer to both your Honours is “yes”, but the two matters ‑ ‑ ‑

GLEESON CJ:   For the same reason.

MR YOUNG:   For the same reason, they are linked is what I was going to say.  The very reason why the transaction went forward was Allens’ representation that it would hold the moneys in trust, with all that carried in terms of Allens’ repute and integrity and the assurance that the funds would be held pursuant to prudential obligations.

KIRBY J:   Yes, this was not just an ordinary sole practitioner solicitor, this was a very well-known largest firm with a very high reputation.

MR YOUNG:   Yes, I took the Court briefly to the internal statement by another uncorrupted trust officer to the effect that Allens were a firm of the highest integrity and the proposition that Allens would be holding the funds was quite central to the decision to proceed, including the fact that they vouched for Linpar and its integrity.

Now, before I return to the factual explanation by reference to our second road map, headed “NPRT Transaction”, can I briefly mention facts supporting two propositions that I submitted yesterday.  The first was that the entire prime bank instrument purchase market was bogus.  The Court of Appeal so found at paragraph 7 at page 407, endorsing a finding of Mr Justice Hunter.  Mr Justice Hunter’s findings are worth reading.  He set them out at the outset of his judgment in volume 1, commencing at page 15.  I do not suggest we read them now, but what his Honour said commencing at page 15, line 34, was that it was almost certain that the pbi market was a bogus market.  His Honour then set out at pages 16 to 18 and following extracts from an ICC Commercial Crime Bureau report for the International Chamber of Commerce about the bogus features of this market.

HAYNE J:   What are we to take from that?  Are these matters said to be known to Powles at some relevant time or are they simply background ‑ ‑ ‑

MR YOUNG:   No, they are.  That is what I am coming to, your Honour.  They are known to Powles because Powles was called in by Scotland Yard to be interviewed over one of the earlier frauds in which he was involved, that involving Clayton and a Mr Wynn.  The police record of interview with Powles appears at pages 63 to 65.  At 64, lines 17 to 19, Powles is told that all the operators in the market are fraudulent and none of the offers made by any of them lead to real transactions.

GLEESON CJ:   When?

CALLINAN J:   Whereabouts is ‑ ‑ ‑

MR YOUNG:   He is told this in – I think it is 11 March 1992, it seems, your Honour.

HAYNE J:   After the events with which we are concerned.

MR YOUNG:   Yes.

HAYNE J:   Well, what is the point of taking us to them?

CALLINAN J:   Mr Justice Hunter has found expressly at page 15 that Powles was taken in by the apparent legitimacy of the market which seems to be directly contrary to what you have submitted.

MR YOUNG:   The point of taking the Court to it was I was asked yesterday about the Antiguan side of the documentation and why that should exist.  We would say it is apparent that that was nothing more than a paper trail designed to camouflage the real transaction and the effect of the findings is that Powles knew that.

CALLINAN J:   I am sorry, Mr Young, I have problems about that submission in view of the finding at page 15, at the end of the page, by Mr Justice Hunter, where his Honour says that he did not doubt that Powles was taken in by the “apparent legitimacy” of the market.

MR YOUNG:   Yes, well, my submission was not directed to that, your Honour.  It was directed to the fact that in the middle of January Powles knew, and was apprised of the fact, that the moneys were to go to the Barclays’ account for them to be placed under the control of a Mr Glasby who appeared to be taking instructions from Searle.  Searle was one of these fraudsters in the market and the Court of Appeal found that Powles knew that he was probably dishonest.  So Powles placed the funds under the control of a Mr Searle and a Mr Glasby and the exchanges of documents with Antigua and the Commonwealth National Bank really had no bearing on the actual flow of the funds.

CALLINAN J:   What is the evidence of the finding of Powles’ knowledge of Searle’s dishonesty?  Where is the evidence for that?

MR YOUNG:   The evidence is found in Justice Hunter’s findings in relation to a transaction called Ward Investments.  I will take the Court to that.  It is fair to say that the Court of Appeal went a measure further, not much further, but a measure further than Justice Hunter in relation to their finding that Powles knew that Searle was probably dishonest.

KIRBY J:   Would you remind me, did Justice Hunter say at any stage that the belief that Mr Powles had was as a result of his hopes and expectations of personal gain?  I mean, are we to read that passage at 15 with another passage where his Honour said that the hope or the wish was the father to the expectation?

MR YOUNG:   Yes, he made several findings to that effect.  They include these:  at 187 – these are principally in relation to the next tranche – lines 30 to 35; at 199, line 35; and at 270, line 23 ‑ ‑ ‑

KIRBY J:   That one at 199 is quite a strong finding.

CALLINAN J:   But Mr Young, is not the problem about this that Mr Powles had an expectation of making further profits on further like transactions?  Must he not have believed that the market was a true market, otherwise there was no point in it.

MR YOUNG:   Yes.  We are not contesting that finding of Justice Hunter that he believed wrongly that the market was a true market.  But, I submitted yesterday that the finding of Justice Hunter was that it was in fact a bogus market and that there was a lot of papering over of the trail with misleading correspondence.  I only went back to that because that is relevant to a lot of the Commonwealth National Bank documents that are generated during the course of January, because they have nothing to do with the true movement of the funds.  But the answer to Justice Kirby is that both in relation to the future expected circulations of the $8.7 million, the future anticipated receipt of $19.3 million to buy another bank instrument, and in relation to the actual derivation of secret commissions on the $8.7 million, there are concurrent findings by Justice Hunter and by the Court of Appeal that Powles’ purpose was to derive those unlawful commissions and that that was his underlying and driving self-interest through these transactions.

CALLINAN J:   But it is a different matter from saying that he knew that this was not a real market, which is the submission that you did make.

MR YOUNG:   No, with respect ‑ ‑ ‑

CALLINAN J:   There are findings to that effect.

MR YOUNG:   With respect, your Honour, I thought I was careful not to make that submission.  I made the submission that in point of fact, not in terms of Powles’ belief, the market was bogus and that fact explains some of the correspondence that we are about to come to.

GLEESON CJ:   Does the outcome of this case turn upon fine distinctions about Mr Powles’ state of mind on 15 January?

MR YOUNG:   No, we say absolutely not, your Honour.

GLEESON CJ:   Having regard to what we know as to circumstance in which that man found himself in mid-January 1992, he must have been nearly demented.

MR YOUNG:   Well, your Honour, the findings to that effect are that he was driven by overriding self‑interest to steal funds to camouflage past frauds and sooner or later it was going to unravel.  It must have unravelled.  There had been 17 of these transactions during which investors funds had been fraudulently appropriated by dealers in the market.  He was about to embark upon another one at a higher scale, many millions of dollars, with perhaps a hope – it could not be described any better – a hope that this time an instrument might eventuate but with a purpose of stealing the differential and going on doing the same.

In the end what he did, he went off to Switzerland and went skiing and some of these letters were signed in this fashion:  he had left behind some blank pages with his signature at different points of the blank page and some of the letters, the instruction to Antigua, was signed in that fashion; the letter was typed up in London and was sent off, but what he basically did was to abandon the transaction, to abandon control of the funds to Searle and others whilst he was skiing in Switzerland.  So perhaps out of sight, out of mind, but it was not as if he was exercising any control in performance of his trust duties and obligations.  But it does not turn on fine distinctions, your Honour, because no matter where you stop the clock, he had assumed obligations that placed him under equitable duties to account and to make full and proper disclosure to his clients of the true state of affairs.

All the risks attending the market, which he knew full well:  the existence of fraudsters in the market; the fact that the moneys were not being held in the trust account; the fact that the moneys were going to be paid away without an instrument in hand, et cetera, et cetera; no matter where you stop the clock, Allens were liable in equity to account for whatever losses flowed and no matter how they arose.  To take up our learned friend’s challenge, if following that whole series of fraudulent reports commencing with the first reference letter and running right through January, if somehow an instrument this time had been purchased from some nickel and dime bank in the Caribbean and the obligor under the instrument had defaulted, it still would have been asserted that Allens were liable and quite properly so.

They are breaches of trust that caused the moneys to be lost and they were liable to account, no matter where you stop the clock, be it 31 December or 6 January or 15 January and so forth.  Their liability arose because of their breach of their trust obligations and the question of what event was the last cause or event leading to financial loss is not a relevant question going to Allens’ liability, but that is ‑ ‑ ‑

GAUDRON J:   Well, it may be for the purposes of this case though.

MR YOUNG:   Well, we say not, your Honour, because the question is liability brought about.

GAUDRON J:   If you look at it in purely factual terms on the basis of the facts as they have appeared in argument here, one is that Powles was the victim of fraudsters; the other is that he was part of the fraudulent ring aiming to scoop off the 8.55 million and you certainly have not got a finding to the last effect.

MR YOUNG:   Well, we say we have, your Honour.

GAUDRON J:   And you have not got a finding that Powles misappropriated the 8.55 million.

MR YOUNG:   No, but we have a finding that Powles engaged in a purposeful course of conduct replete with misrepresentations ‑ ‑ ‑

GAUDRON J:   For what purpose?

MR YOUNG:   ‑ ‑ ‑ and fraudulent concealment at every step of the way.

GAUDRON J:   But for what purpose?  The purpose may become relevant.

MR YOUNG:   Yes.  For the purpose of deriving secret gain out of the first transaction and transactions he expected to follow.

HAYNE J:   Do you submit that a loss because Powles deliberately acted in breach of trust or fiduciary duty by letting the money out of control is sufficient without more to bring you into the exception brought about by “dishonest or fraudulent act or omission” or is there any extra element?

MR YOUNG:   Can I answer in two steps, your Honour.  In this case we say there is an extra element because at all times he was actuated, his moving purpose was that of private and secret gain through the theft of part of the Trust moneys and that, beyond doubt, puts it into the category of dishonesty and fraud.  But going back to your Honour’s question, we submit that in the circumstances of this case, even without that where you have a series of false misrepresentations and fraudulent concealments about the true facts and the true risks, it would nonetheless without that additional element be dishonest and fraudulent.  It is those acts that brought about Allens’ liability.

GLEESON CJ:   That is the central issue, is it not?  You do not say that he misappropriated the 8.55 million; you say he misapplied it?

MR YOUNG:   Yes, your Honour.

GLEESON CJ:   Then the question is whether his misapplication of it was dishonest or fraudulent.

MR YOUNG:   Yes, your Honour, that is so.

GLEESON CJ:   Wherein do you say lay the dishonesty or fraud in his misapplication of the $8.55 million?

MR YOUNG:   Again, your Honour, in the application itself we say the fraud and dishonesty lay in knowingly putting that money at risk of theft by persons he knew to be probably dishonest, in particular Searle and Madden, who had offered secret commissions in relation to the very transaction, knowing but having regard to the obligations he had assumed with full knowledge, he had no right to put the client’s money at risk in circumstances where putting it at risk was an essential component of his ability to derive secret gains both in connection with that transaction by later divvying up the $145,000 differential and by promoting further similar investments by the Nauruan Trust.

I am sorry to harp on it, your Honour, but we do contend that dishonesty cannot be so surgically isolated as to confine yourself to the payment away because, if we stop the clock immediately before the payment away, he has participated in misrepresentations to the Trust that an instrument has already been acquired, that a profit will be made on that transaction, that the moneys had been in the Allens’ trust account.

KIRBY J:   This was after the loss though.

MR YOUNG:   No, this is before the loss he is doing this.  Indeed, on 16 January in the midst of the Barclays transaction he is making false reports.  It is not just the positive false representations he is making about the safety of the funds; it is the fraudulent concealment of the dishonesty of Linpar going back to the reference he gives to Linpar.

KIRBY J:   But the loss happened after the Barclays’ transaction.  Barclays is Croydon, is it not?

MR YOUNG:   The payment away was the Barclays’ transaction.

KIRBY J:   The payment away to Barclays in Croydon, the 8.5 million was not at that stage lost.  The Croydon bank account of Barclays would have been ‑ ‑ ‑

MR YOUNG:   They were put into complete control with persons that Powles had no control over and so ‑ ‑ ‑

KIRBY J:   On one theory the loss occurred immediately after that when the 8.5 moved from that account not into the purpose that Mr Powles had but into the purpose which the fraudsters had.

MR YOUNG:   Certainly the last proposition is correct but ‑ ‑ ‑

GLEESON CJ:   I may have misunderstood your case but I thought it was that the misapplication of the funds arose in the payment to the account of A. M. Glasby.

MR YOUNG:   That is so.

GLEESON CJ:   And that if action had been brought by the client against Allens at that stage, Allens would have been liable.  But the quantum of their liability may have been minimised by their ability to recover the whole or part of that money.

MR YOUNG:   Yes, exactly.  Can I give the Court the key dates before I embark further on the facts?  The $8.7 million arrived at the Westpac account on 23 December 1991.  Between 31 December 1991 and 13 January 1992, Powles had abandoned control of the money already.  It came to nothing because it was undone but what he did was to authorise the purchase of a bank draft in favour of the Union Bank of Switzerland and to hand the bank draft to Mr Madden, the person who had offered him illegal commissions.  Mr Madden took the bank draft and hawked it around Europe, presumably.  No instrument was purchased.  It was returned and the funds went back into the Westpac account on 13 January 1992.  During that exercise Madden and Powles are falsely representing the position to Nauruans, telling them that, “We have already purchased an instrument”.

CALLINAN J:   But if there had not been any false representation the position would not have been any different.  Does that not make that false misrepresentation irrelevant?

MR YOUNG:   It does not make it irrelevant, your Honour.  It makes it a foundation of liability ‑ ‑ ‑

CALLINAN J:   Well, it is dishonest conduct.  There is no doubt about that.  But had that conduct not been engaged in, it would not have made any difference, would it?

MR YOUNG:   Well, it may not have given rise to a loss, but that is why we say one must adhere to the correct question, that is, what is the source of Allens’ liability?

HAYNE J:   Liability for what?  It is liability against which Allens are to be indemnified.  It is liability giving rise to loss.  You cannot segregate liability from loss any more than you can segregate loss from liability, can you?

MR YOUNG:   But if we look at it this way, your Honour, it is possible that the moneys might have been lost in whole or in part during any of these nefarious exercises during January.  At whatever point, Allens would have been liable for whatever loss arose.  The question is not what is the last cause or event that generates the particular loss.  The question is, “Was Allens liable and was the foundation of liability one that is to be found in dishonest or fraudulent acts?”

CALLINAN J:   But there cannot be any liability until there is a loss sustained, surely.

MR YOUNG:   Strictly speaking, that is not correct.  There is a liability to account and Allens, if the clock had stopped at any point, would have to have made a full account to Nauru ‑ ‑ ‑

CALLINAN J:   But Allens could have accounted then and that would have discharged the liability.

MR YOUNG:   Yes, they could have, but we say you cannot divorce what ultimately happened in terms of its characterisation as dishonest from all of that that surrounds it and, moreover, is connected with it.  But at the moment I am not suggesting anything more than these are the relevant dates to keep in mind.  There was an attempt ‑ ‑ ‑

CALLINAN J:   Excuse me, the money went back ‑ ‑ ‑

MR YOUNG:   The money went back into the Westpac account.

CALLINAN J:   Went back into the Westpac ‑ ‑ ‑

KIRBY J:   Or balance.

CALLINAN J:   On the 13th, was it?

MR YOUNG:   No, this is all the – I am sorry, yes, the balance – 8.55 went back; 8.55 had been put into a bank draft, handed to Madden – indeed, it is a slightly different figure – 8.525 on this first occasion, and then restored to the Westpac account.  The second application of the funds is an attempted transfer of the funds to a Barclays’ bank account on 15 January, which failed.  It failed because the wrong account holder was given.  The account holder was described as Commonwealth National Bank.  It was not the account holder.  Mr A. M. Glasby was, so that transaction did not go through.

At that point, Powles instructed Westpac not to look to him for instructions, but to look to Searle for instructions.  That is Anton’s evidence which is in the papers.  Searle instructed Anton to transfer the money to a differently styled account at Barclays, some adjustment to it that made it clear that A.M. Glasby was the account holder.  That transfer went through at 10.22 am on 17 January.  So that is the application that put it out of Powles’ control and into the hands of Mr Glasby.

CALLINAN J:   At which bank was that, Mr Young?

MR YOUNG:   That was at Barclays Bank in London.

CALLINAN J:   Barclays.

MR YOUNG:   But at that point of time there had been a misapplication for which there was a liability and moneys could have been arrested more easily at that point.

GLEESON CJ:   Well, if a solicitor misapplies a client’s money, the client may or may not be able to recover it.  In the application of this insurance policy, the critical question is, is it not, whether the misapplication was dishonest or fraudulent?

MR YOUNG:   Yes.

GLEESON CJ:   Not whether the inability to recover the money from the person who got his hands on it, either immediately or ultimately, was a consequence of the dishonesty of that person.

MR YOUNG:   Yes, exactly, your Honour, and that is the distinction that lies at the heart of our submission.

HAYNE J:   Is that right, given the terms of the insuring clause?  The insuring clause is against all loss arising from claims made in respect of liability.

MR YOUNG:   Yes.

HAYNE J:   First catch your loss.  Absent loss, no insuring clause, no exception.

GLEESON CJ:   And that means loss to Allen Allen & Hemsley.

MR YOUNG:   It means loss to Allen Allen & Hemsley, not loss ‑ ‑ ‑

GLEESON CJ:   Not loss to the client.

MR YOUNG:   Exactly, and the loss includes defence costs.  It just underscores the point that it is the loss to Allen Allen & Hemsley.  You do not have to find a loss to the client to trigger the insuring clause.  You need a loss to Allen Allen & Hemsley.  Obviously, the two will go in companion, but the amounts will not be the same necessarily.

HAYNE J:   What is the liability that Allens would have to a client that has suffered no loss, against which there could be indemnity under the insuring clause.

MR YOUNG:   If we stopped at the transfer to the A.M. Glasby account, that was a transfer undertaken fraudulently, misapplying trust funds.  Whatever loss is associated with that, even if they only be the transaction costs, or the recovery costs would be recoverable against Allens by the client.  Yes, it may be a very small amount of loss, but Allens’ liability in respect of that small amount of loss would be brought about by the dishonest or fraudulent acts of omissions of Powles who has transferred the money.  The fact that there is a larger loss because the moneys go out of the English banking system into the Swiss banking system and are thereby harder to trace ultimately meant that of the $US60 million that was stolen from the Naruan Trust, or misapplied from the Naruan Trust moneys through Powles, they recovered some $US39 million, and their insurance claim was for a portion of the balance.  Had it been arrested in England in the Barclays Bank account, they may have lost some, but it may have been a very different quantum.  More may have been recovered.  That only demonstrates that there is a significant difference between what brought about the liability of Allens and the quantum of the loss that is ultimately the subject of the claim under the insurance policy.

The other point is, at the end of day, the amount of the claim under the insurance policy here was voluntarily dissected by Allens into two components.  They had a private fidelity insurance policy and they had a professional indemnity insurance policy.  They claimed the 8.55 component and interest associated with it, their liability to Nauru to that extent, which was artificially calculated by them, it was simply an apportionment of their overall liability to Nauru.  They chose to claim that under the pi policy.  They claimed the balance, the thefts of the differentials under the fidelity policy.

The fact that Allens chooses to reduce its claim under the pi policy in that fashion, cannot really have the consequence that that is going to dictate the operation of the exclusion.  But that, in effect, is the argument.

GLEESON CJ:   Your reference to a fidelity policy may have some bearing upon some questions of construction that have been adduced.  I do not think I had noticed that before, but I gather from that that in addition to a policy of professional indemnity of the kind that we are looking at, it is possible to arrange, and Allens, in fact, did have, a policy protecting themselves against dishonesty and fraud by partners.

MR YOUNG:   Yes, your Honour, they did.  The backdrop, of course, is ultimately they could choose to seek recourse to the fidelity fund under the Legal Profession Act.  But they did not ‑ ‑ ‑

HAYNE J:   Allens could or the clients could?

MR YOUNG:   The client.

HAYNE J:   The client could only if it had exhausted all remedies against the solicitors, I would have thought.

MR YOUNG:   No, your Honour.

HAYNE J:   That is not so?

MR YOUNG:   I think I mistake the position because of my somewhat lack of familiarity with the New South Wales provisions, but I think the position is that Allens could claim under the fidelity fund – I am sorry, the correct position is as your Honour said, the client claims and then the fund, the Law Society, is subrogated to the client’s rights against the solicitor.

GLEESON CJ:   But that has nothing to do with a policy of fidelity insurance.

MR YOUNG:   No, it does not, your Honour.  That is, in a sense, why we say the policy considerations urged about the construction of these clauses is really beside the point.

GLEESON CJ:   But leaving aside the statutory regime that is established by the legislation and by the Law Society to protect the interests of clients, as a matter of contract and insurance, a solicitor can obtain insurance cover against negligence of the kind that we are looking at here, and also insurance cover against dishonesty and fraud of a partner.

MR YOUNG:   Yes, your Honour.

GLEESON CJ:   Which you have referred to as a fidelity policy.

MR YOUNG:   Yes.

CALLINAN J:   Mr Young, is there evidence of what you are talking about?

MR YOUNG:   Yes, there is, your Honour.  It is only in Justice Hunter; he deals with it at page 221, line 29.

CALLINAN J:   What is the relevance of it?  How does it help us to construe the policy we have to construe in this case?

MR YOUNG:   It helps us in two ways, your Honour.  As a matter of construction, what has been urged is that for policy reasons it is desirable to give a strict or narrow interpretation of exclusion so that solicitors have the widest possible insurance cover in respect of civil liability, and that fraud or dishonesty is only excluded from cover on a very narrow reading of the exception.  That is the argument.  What is prayed in aid is the statutory regime that involves the Law Society approving solicitors’ professional indemnity insurance policies.  It is our respectful submission that that process of approval plainly only applies to the primary cover.  It has no application or no relevance if a solicitor chooses to go out and negotiate an insurance policy for professional indemnity insurance with excess insurers, as happened here.  The contest here is between my clients, the excess insurers, under the excess insurance policies and Allens.

CALLINAN J:   I understand the argument.  Where is the reference to it, again, page 229, did you say?

MR YOUNG:   Page 221.  The other ‑ ‑ ‑

GAUDRON J:   I cannot see what you are referring to.

MR YOUNG:   No, that is only part of it, your Honour.  There is another passage at 81 to 82.  This is something that was only touched upon in a couple of places.

CALLINAN J:   Well, the reference to – I see, yes.

MR YOUNG:   It is really line 25 and following.  There is this fidelity statement that related to the fidelity insurance that Allens had taken out.

CALLINAN J:   And are the terms of the fidelity insurance to be found in the statute, in the New South Wales statute?

MR YOUNG:   No, your Honour.  That is the fidelity fund, if I can call it that.  This is private insurance for dishonesty.

CALLINAN J:   So we do not really know precisely what it covers unless the policy itself got into evidence or, so far as your argument is concerned, the extent to which it is possible to obtain fidelity coverage.  There would be no evidence of that.

MR YOUNG:   We will have to check whether it is in evidence, your Honour.  A fidelity statement that was filed in connection with the fidelity policy to the fidelity insurers was certainly in evidence and his Honour refers to it.

CALLINAN J:   Any rate, your argument simply is you can obtain fidelity insurance and that is an answer to any argument that you should construe this relevant policy too broadly.  That is the argument in essence, is it not?

MR YOUNG:   Yes, that is so.

CALLINAN J:   Even though we do not know precisely what you can obtain under fidelity insurance.

MR YOUNG:   Yes.

GAUDRON J:   There is no real problem about construction though in this case, is there?

MR YOUNG:   Well, we say not, your Honour, but ‑ ‑ ‑

GAUDRON J:   It is a question of characterisation.  If there is a problem, it is how for the purposes – it is the process in which you engage in characterising the conduct for the purposes of an exception.

MR YOUNG:   Well, there is a construction point, your Honour, because what the appellants do is to introduce into the characterisation process a different proposition, namely what gave rise to the loss and was what gave rise to the loss, that is the ultimate financial amount that is claimed by Nauru arising from the misapplication, is that something which was brought about by dishonesty or fraud.  If you eliminate loss and go back correctly, we would say, to the liability, it is a different question.

GLEESON CJ:   Well, there may be two tasks.  One is accurately to identify that which has to be characterised.

MR YOUNG:   Yes.

GLEESON CJ:   And the second is accurately to characterise it.

MR YOUNG:   We would agree with that, your Honour, and we say at both levels the appellants misstate what is to be characterised and then they do not properly characterise it in any event.  Can I give one final reference on the insurance claims.  At 319 to 320 there is some further and, again, less than elaborate references by the trial judge to the nature of the claims, but the second point I was saying that it is relevant to is we only have a loss that is referrable to the 8.55 that has been claimed under the professional indemnity policy because that is the way in which Allens chose to apportion their overall liability of some, in the end, $11 million or so to Nauru.

They artificially apportioned it into two segments.  One they would claim under this policy by reference to the 8.55 and its consequences and the other amount, being the misappropriated differentials and plain other misappropriations, that they would claim under their fidelity policy and that dividing up of the loss in that way, we would say, really cannot be used to control the question of whether liability was brought about by dishonesty or fraud, but that, in effect, is what has happened when you allow the quantum of the ultimate loss to be the identified question and what caused it.

Finally on dates ‑ and I think I did not get to the last date I meant to mention.  The moneys were transferred from the Barclays account direct to the Kantonal Bank of Switzerland in a transaction that commenced at the English end late on 20 January and the moneys arrived at the Kantonal Bank on Tuesday 21 January 1992.

CALLINAN J:   Is that assumed ‑ ‑ ‑

MR YOUNG:   No.  The moneys were telegraphically or electronically transferred to the Kantonal Bank.  Once they hit the Kantonal Bank, although they briefly did pass back through the Barclays account on 28 January, the effect of the findings was once they left the English banking system and went to the Swiss banking system the process of tracing them and recovering them became multiplied in its difficulty and funds were ultimately stolen from various Swiss accounts untraceably.

KIRBY J:   I thought Swiss banking law had been changed to permit traces.

MR YOUNG:   This is back in 1992, your Honour.  It may have.  There is a chart that Justice Hunter sets out and I do not suggest the Court do other than glance at it, but the chart sets out the myriad transactions that the money went through in the Swiss banking system.  It is at 382 of volume ‑ ‑ ‑

KIRBY J:   Just for curiosity, is it known who were the ultimate beneficiaries?

MR YOUNG:   Well, they included some of the dealers.

KIRBY J:   I am sorry?

MR YOUNG:   Some of the people involved in this transaction:  Rice and others, Scheri.

KIRBY J:   Even as we labour over this they are no doubt on a Swiss slope having a stiff martini.

MR YOUNG:   Now, can I turn, if the Court pleases, and I will try and do this as efficiently as I can, to going through the facts in January and taking the Court to some of the primary documents.

The position about the duty of Allens I covered largely yesterday.  In the document we handed up yesterday in landscape format we deal with a proposition that it is some kind of answer that Powles believed he was entitled to act on Linpar’s instructions in paying away the money.  We have given the references there.  It was rejected by both the trial judge and the Court of Appeal.  The simple answer really to the idea that Linpar gave instructions that Powles could rely upon to excuse his dishonesty in this rhetorical question:  having fraudulently procured the moneys by giving a false reference about Linpar and having agreed with Linpar to share secret commissions on the transaction, how could Powles honestly believe that he was entitled in this transaction to act on the instructions of Linpar to the prejudice of the Nauruan Trust?

KIRBY J:   To the prejudice and/or risk.

MR YOUNG:   Yes.

CALLINAN J:   Because he then thought that he would be able to do it again and they would be able to make more money in similar future transactions.

KIRBY J:   To his advantage.

MR YOUNG:   That was undoubtedly his purpose, your Honour, but it does not mean that he has an answer to allegations of dishonesty to say, “I acted on Linpar’s instructions”.

GLEESON CJ:   That might explain why he thought it was expedient to do it.

MR YOUNG:   Yes, your Honour, or why he thought he had a paper trail that excused him from doing so.  Can I turn briefly to the letters that the appellant mentioned as being the source of Allens’ obligations in volume 3.  As we submitted yesterday, we say the critical letter is the Nauruan Trust letter of 13 December that laid down conditions about sole purpose, Trust account, et cetera.  At page 595 there is a letter from Linpar to Nauru that the appellants said was one of the two relevant documents.  The point in going to that is really to point out that even if it is regarded as relevant, being a letter going the other way from Linpar, all it does is to confirm that the moneys are requested to be sent to the account of Allen Allen & Hemsley.  It goes on to request that Linpar have authority to work with the subject funds and in the third‑last line it speaks of the funds being “remitted in full” to the purchasing Trust.

That letter was preceded by a letter of 17 December from Linpar, again to the Trust, at 596.  Relevantly that letter represented that the first purchase had already been arranged, which was a falsehood.  The second‑last line on the page speaks of “the initial advance of the USD $8.7 Million to Allen’s trust account at WESTPAC in London.”  On 19 December there is a further communication at page 601 from Linpar to Mr Powles.

KIRBY J:   Was Mr Madden in fact one of Her Majesty’s counsel?

MR YOUNG:   I believe so, your Honour.  In the criminal proceedings against Mr Powles in Melbourne, he was not charged, as I understand it, but he was one of the named conspiracies in the charges of conspiracy to defraud.  This letter of 19 December at 601 indicates that there were parallel communications going on, not always to the same effect.  The second paragraph of the letter makes it clear that already there is a plan to generate a differential:

the cost to Merrill Lynch (USD $8.3 to USD $8.45 M.) to purchase the Instrument.  The balance is held for LIN/PAR in the trust account.

The second letter that our learned friends relied upon is the letter at 604 of 20 December.  That again speaks about the instrument being purchased in the name of Allen Allen & Hemsley in trust for Nauru Trust in the name of Allens.  This letter was sent to Powles.  A copy of it was found in the files of Mr Dougall.  It is not clear when it got there or who else saw it but it is clear from other documents that later emanate from Nauru Trust that they believed that the purchase price of the instrument which had been purchased for them in January was the full 8.7 million and that there was no differential.

Now, next, having dealt with the duty and the so-called ability to act on Linpar’s instructions, the next fact we say is relevant is that there were false representations that the purchase price of the instrument would be the full US$8.7 million.  The Court of Appeal made a finding to that effect at paragraph 59 at page 422.  In that paragraph they concluded that:

virtually all communications between Powles and the Nauruan Trust were on the basis that the US$8.7 million (of which the subject US$8.55 million is part) would be used for the sole purpose of obtaining a letter of credit –

et cetera.  I have taken the Court to several letters that indicate that.  There are some others.  Can I very quickly refer the Court to them?  Page 655, firstly, in volume 3.  This is the Nauruan Trust writing to Amex, which was their banker, and the banker was concerned about the custody of the funds and the instruments.  Third and fifth paragraphs:

The Trust has taken a decision to considerably broaden its Pledged Investments by purchasing…..Prime…..notes…..via the services of Allens.

Two paragraphs on:

We have already purchased a prime bank note for US$8.7M –

It is 3 January 1992.

KIRBY J:   Why are you showing us this?  Simply to confirm that that was their understanding on the basis of what Mr Powles had told them.

MR YOUNG:   Yes, and because an argument is advanced in the reply submissions by the appellants to the effect that contrary to the findings and contrary to the primary documents, Nauru ought to have known that there would be a differential.  They do not go so far as to say that Nauru ought to have known that there would be a differential that would be stolen but ‑ ‑ ‑

GLEESON CJ:   What do you mean by Nauru?

MR YOUNG:   The Nauruan Trust.

GLEESON CJ:   Mr ….. or the Commissioners of the Trust.

MR YOUNG:   The Commissioners, yes, your Honour.  Very quickly, your Honours, there are like communications with or from the Nauruan Trust at these pages:  at 705 in this volume, second paragraph.  This is 10 January:

In regard to the US$8.7million –

stand by letter of credit –

please confirm the rate and amount of interest earned while the funds were in your Trust Account –

and they are writing to Powles.  Then, in volume 4, there are two relevant documents at 819, firstly – last two paragraphs of the letter from the Nauruan Trust at 819.  In the same volume, page 970 ‑ ‑ ‑

KIRBY J:   What was the response to that question in the memorandum on 819, the second‑last sentence, “confirm” that it stands “to our credit”  ‑ ‑ ‑

MR YOUNG:   Powles writes a little bit later and confirms that a sum of the $125,000 profit on the transaction has been segregated and is standing to the credit of the Nauruans.

KIRBY J:   Does he answer the specific question, “Will you please confirm”?

MR YOUNG:   No, he does not.  I am sorry.  Yes, I am mistaken.  If your Honour goes on two pages.  This is one of the false reports, 16 January 1992.  This is the day before the money goes to Barclays:

This letter will confirm that Linpar Limited has completed the purchase on your behalf of a US$10,000,000 Letter of Credit.

We are now awaiting delivery of the original instrument registered in the name of your Trust.

Mr Madden and I met today with…..Voellmin…..and have made firm arrangements for the sale of this and future instruments.

When they met with Voellmin they offered him a secret commission.  That was one of the false reports directly sent by Powles to Nauru in the midst of the Barclays transaction because the Barclays transaction was first attempted on the 15th and then effectively repeated, transferring it to Glasby, on the 17th.

Page 970 was the other reference I gave in this volume, and this goes to the understanding of the Nauruan Trust.  It is the second sentence of the letter of 3 February.  Finally, and I will not take the Court to it, Powles repeats the lie that the – I am sorry, perhaps it is best to go to it.  Volume 5, page 1022.  This is the other part of the answer to the question of what happened to confirm the outcome of the first transaction.  The Court will see at page 1022, Mr Powles writes to the Nauruan Trust:

I confirm that completion of the second USS8.7 million purchase on the Trust’s behalf has been effected and that the profit funds should be remitted through our US Dollar Account no later than the beginning of next week.

Interest earned - $14,000.

The profit from the first Buy Sell Roll-over transaction was $US125,000 which means that the total amount held on your behalf in this connection is approximately $US139,000.

I understand that the $US19.3 million deposit is ready to be transferred.

KIRBY J:   So the first two sentences are the softeners and the punch line is in the third paragraph.

MR YOUNG:   Yes, your Honour.

KIRBY J:   And all of these letters are written on the letterhead of the appellant.

MR YOUNG:   The next step is the purpose of stealing the differential that was to be created in the first transaction.  The findings of both courts are clear that Powles never disclosed that the intended difference would be diverted and shared by Powles, Madden and others, which in fact occurred.  The findings by both courts are very clear to that effect.      In the Court of Appeal the findings are at paragraphs 46 and 47 of page 419.

KIRBY J:   Where are you on the documents that you handed up this morning?

MR YOUNG:   I am at 4, “The differential was to be stolen”.  I have set out on that document the references.  I do not know if the Court is assisted by me in taking the Court to the paragraphs of the judgment at this point.

GLEESON CJ:   No, we can look at those for ourselves.

HAYNE J:   Can I just understand then, the way in which the case is put.  If we strip out the descriptors “fraudulent” and “dishonest” for the moment.  As I understand it, the case is this:  one, Nauru Phosphate Trust authorised Powles to buy a prime bank instrument; two, the authority was to spend $US8.7 million and keep it safe; three, Powles did not.  He spent $8.55 million unsafely; four, he wanted to take the balance of $150,000 to which he was not entitled and to which he knew he was not entitled.  He did.  Five, he told lies to Nauru Phosphate Trust about what he would do and about what he had done; six, though this is a subject of difference between trial and appeal, you say he told lies to Nauru Phosphate Trust about Linpar, or at least did not tell Nauru Phosphate Trust the whole truth about Linpar and the market; seven, the money which Powles spent for a prime bank instrument was lost?  Is there more to it than that, if we take out the descriptors?

MR YOUNG:   There is, your Honour.  Your Honour’s summary is largely correct, but what your Honour leaves out of account is findings both by Mr Justice Hunter and by the Court of Appeal that at all points there was an obligation to make full and frank disclosure on Allens as trustee of the fraudsters in the market, the past track record of Linpar, the seamy relationship, to use Justice Hunter’s words, with Madden and Linpar under which they had both made misappropriations from the US dollar account, the risks inherent in the market, the fact that no such instrument had ever been successfully purchased in 17 transactions and investors’ funds had been lost.

All those matters were not disclosed, and had they been disclosed, there would have been no authority at all to purchase a bank instrument, so your Honour’s summary relies upon the proposition or instils into the proposition the idea that Powles had a general authority that remained extant and valid throughout to purchase a bank instrument.  The fact is, we would say, that any general authority he had in accordance with the cases was only an authority to act honestly to effect the authority and what Powles did, both in procuring the authority, in concealing the true facts and then misusing it throughout, was dishonest and vitiated the authority.

So to get to your Honour’s point, paid the money away for the bank instrument which he was authorised to do, he was not legally authorised to make a payment away at all.

HAYNE J:   You have embroidered the statement.  The statement was simply, “the money that Powles spent was lost”.  The point you have made I have tried to encompass under point 6 that he did not tell Nauru the whole truth about Linpar and the market.

MR YOUNG:   Yes.

HAYNE J:   I am trying to cut out the emotive descriptives. 

MR YOUNG:   Well, I am not trying to emotionalise the argument, your Honour, but the other element of it is that the misapplication is one that your Honour described as being for the purchase of a bank instrument.  Well, when the moneys were transferred to the A.M. Glasby account, there were no conditions attached.  They were transferred to the account of someone else who Powles barely knew, and that man then had complete control over the disposition of the funds.  So, to say it is paid out for the purchase of a bank instrument really exaggerates the proposition concerning the misapplication of the funds.  He transferred the funds at the suggestion of Searle, whom he knew to be probably dishonest, to the account of an A.M. Glasby.

CALLINAN J:   But it is naïve and stupid, but, nonetheless, as Justice Hunter found, upon the basis that he believed that this was a legitimate market.  Naivety and stupidity are different from dishonesty.  He still believed that this was a genuine market.  I mean it might be a remarkable proposition, but that is what has been found.

MR YOUNG:   But, your Honour, accepting that, it was a genuine market that had always failed to produce any instrument that had, on any view of things known to Powles, grave risks about it, with lots of sharks in the market ‑ ‑ ‑

CALLINAN J:   We understand all of that.

MR YOUNG:   Yes, your Honour, but ‑ ‑ ‑

CALLINAN J:   You have told us that and I understand all of that, but it does not convert – how do you get around the finding that he still believed that this was a legitimate market?  Is there any finding in the Court of Appeal to a different effect as to his belief in the legitimacy of the market?

MR YOUNG:   No, there is not, your Honour, but the reason why we say it is not of central importance is this:  that, accepting that he believed it was a legitimate market, Powles was using that market as the vehicle to derive, dishonestly, secret and private gains on the instant transaction and on the transactions that would only follow if this first transaction went through or could be represented to have gone through.

GLEESON CJ:   Is not one of the benefits, in the analysis that Justice Hayne put to you, that it avoids the necessity of attempting to psychoanalyse Mr Powles whose state of mind in mid January 1992 is not perhaps a very reliable subject for adjudication?

HAYNE J:   Reason may not have informed it.

MR YOUNG:   No.  We are attempting not to psychoanalyse Powles.  We are trying to address the purpose of the misapplication, that is the objective in the sense of the actuating or moving purpose.  Now, it was not confined to buying an instrument as instructed.  That is artificial.  His purpose was to engage in a transaction through the vehicle of this market in order to make a secret gain.

KIRBY J:   If we are concentrating ultimately on the formula “brought about by”, why is his motivation relevant?

MR YOUNG:   Well, we do not use it in the sense of motivation.  We use it in the sense of he had an extraneous and improper purpose in applying the funds.

KIRBY J:   But does not “brought about by” conjure up objective considerations rather than what he intended or what his purpose was.

MR YOUNG:   Yes, your Honour, but the actuating purpose of a trustee in making an application of funds is of central importance to ‑ ‑ ‑

KIRBY J:   I mean, if the policy had said “brought about, whether directly or indirectly, by”, then you would have been home and hosed.  The question is whether or not because it said just “brought about by” that allows a differentiation between that which historically happened and the actual causes of the loss or the liability.

MR YOUNG:   Well, your Honour, we would say the words of additional width that your Honour mentions would not really make a difference to the analysis that we advance.  The analysis we advance is to ask what really brought about Allens’ liability in relation to the misapplication of the $8.55 million and part of what brought it about was that the actuating purpose of that transaction was, perhaps amongst other things, but it certainly was, as a moving cause, the derivation of secret gains.

CALLINAN J:   Could you say that the loss of the 8.55 million and the liability for it were occasioned by the making of an unauthorised investment but not a dishonest one?

MR YOUNG:   No, your Honour, because, firstly, the investment could not be regarded as the subject of any authority, the authority having been procured by fraud.

CALLINAN J:   Well, that is what I say.  An unauthorised investment may not be a dishonest one.  I am not suggesting it was authorised.

MR YOUNG:   Well, it is when part of the transaction is to generate a secret gain or secret commission and, secondly, it is also dishonest according to Peters, when, knowing he has no right to do so and knowing he has made no full disclosure of the risks in the market, albeit he believes it is a genuine market, he puts his client’s funds at risk in that market.

KIRBY J:   And according to the findings knowingly or he must have known there was a risk.

MR YOUNG:   Yes.  The way the appellants deal with the commissions, as we understood it, was to say, “You need not worry about those because they were subsequent to the payment away.  None were received before the moneys were paid away.”  Well, the arrangement to receive them both courts found was in place before the payment away.  The objective of generating the differential so that it could be taken was there beforehand and the very fact that the divvying up of the differential took place afterwards does not allow one to say, “They are subsequent to the payment.  Ignore them in characterising the transaction as dishonest or fraudulent.”  As our learned friend conceded, these payments were secret from Nauru.  They were not disclosed and they were hidden all the way through. 

I have dealt with the next point fully already, which is that it was represented that the moneys would be in Allens’ trust account and I will not elaborate that.  As to the false reports as to the transaction ‑ ‑ ‑

KIRBY J:   I think you have taken us to some of those too.

MR YOUNG:   Yes.  I have taken the Court to some of those.  There is one more, if I could take the Court to this one.  There were two Powles’ letters of 6 January.  I have been to one.  Would the Court go to volume 3.  I have been to the one at 664.  There is another one at 666 which responds to a request from the Nauruan Trust of 31 December 1991 which is at 641, so ‑ ‑ ‑

KIRBY J:   These are not mentioned in this list here.

MR YOUNG:   Yes, the pages are given but not really a description of what it is.  At 641 there is a Nauruan Trust fax to Powles at Allens, a handwritten fax from Dougall:

Would you please fax to me as a matter of urgency copy of prime bank coupon.

It is of 31 December and Dougall is doing that because Madden has represented to him that it has already been purchased.

KIRBY J:   How did Mr Powles get around that one?

MR YOUNG:   Your Honour will see at 666 he dodges it.  He responds:

Attached is copy of the Confirmation issued by Westpac Banking Corporation on 24 December, 1991 in respect of the United States dollar call account.  The amount covered by this Confirmation includes the remittance of –

funds –

you sent us last month.

I understand that our client has kept you informed in respect of progress ‑ ‑ ‑

GLEESON CJ:   Mr Young, did Allens ever charge the Trust a fee for professional services in relation to this transaction and, if so, do we have the memorandum of fees in evidence?

MR YOUNG:   I do not believe they did.  I believe it charged Linpar fees in connection with the transaction, but I will check that, your Honour.

GLEESON CJ:   Thank you.

KIRBY J:   I suppose fees had not been rendered until - before this all broke, is that correct?

MR YOUNG:   I cannot answer that question at the moment.  I am told fees were rendered but I think moneys were simply misappropriated from various accounts to pay the fees.

GLEESON CJ:   When was it in 1992 that the Trust first complained to Mr Lehane?

MR YOUNG:   They complained to Lehane, I think it is round about October of 1992.  I am not ‑ ‑ ‑

GLEESON CJ:   That is what I wanted to know, thank you.

MR YOUNG:   The Court of Appeal found that the letter of 6 January at 666 was false.  The reason was that by 6 January, the 8.25 million was already out of the Westpac account in the bank draft that Madden was carrying around.  In addition to the two false statements of 6 January, there were a series of false reports as to the status of transaction.

I have taken the Court to the one of 16 January by which Powles informed the Nauruan Trust that the purchase had been completed.  That was at 819 and 821.  The Court of Appeal found that was false at paragraph 27.  There was another false confirmation to the Nauruan Trust at volume 4 page 974 of 3 February.  This was the first of the letters suggesting a profit had been made on the first transaction of $125,000.  There was also a status report which Madden sent to the Trust on 12 January of which Powles got a copy and Justice Hunter found that Powles knew it to be false.  Justice Hunter’s finding is at page 172 line 27.  Madden’s report is in volume 3 at page 716.

Then can I turn to the actual misapplication of the funds and give the Court the references really to the several stages.  It went in and out of the Westpac account on several occasions.  In relation to the bank draft, the references are these:  Court of Appeal, paragraph 22 of page 412.

KIRBY J:   This is the bank draft of what date?

MR YOUNG:   A bank draft purchased on 31 December in favour of the Union Bank of Switzerland which Powles handed to Madden and which was returned to the Westpac account on 13 January 1992.

KIRBY J:   I am sorry, you were giving us the Court of Appeal reference.

MR YOUNG:   Paragraph 22, page 412.  Can I just take a moment to explain the Glasby transfers?  There was a first attempt to transfer the funds on 14 and 15 January 1992 from Westpac to the A.M. Glasby account.  The transaction failed.  It failed because the coordinates that Searle had given to Powles, and Powles had given to Westpac, suggested that the Commonwealth National Bank of Antigua was the account holder with Barclays ‑ ‑ ‑

KIRBY J:   You told us this earlier.

MR YOUNG:   I am sorry?

KIRBY J:   You told us all this earlier when you went through the chronology.

MR YOUNG:   Yes, well, the references are in what I have given to the Court so I will not repeat that.  When the first transaction failed, Anton, of Westpac, spoke to Powles.  Powles told her to act on Searle’s instructions.  We have given the references to Anton’s evidence and findings concerning that in the document we have handed up.  What does not appear in that document are the references to Mr Searle and his probable dishonesty.  Can I take the Court to the Court of Appeal’s reasons commencing at page 409, paragraph 15?  At 409, the relevant passage is at about line 30:

probable dishonesty of some of the players…..for example Mr Searle –

Next, paragraphs 56 and 57 commencing at 421, line 40 of page 421:

In the Ward Investments transaction Powles paid away $50,000 on the instructions of Madden and Searle.

At 57, line 11:

fraudsters…..included at least eight people, including…..Searle –

At paragraph 60 at 422, it appears at the top – I am sorry, at 423 – I should have said paragraph 61, the third line of paragraph 61:

Searle, the latter being known to Powles as probably dishonest and certainly unreliable –

Then at 424, paragraph 63, line 15, Justice Hunter made findings that did not quite go as far.  They spoke of Searle being untrustworthy and unreliable.  That is at 104 to 108 in the context of the Ward transaction and later at 183, 185, 191 and 202.

In terms of where the funds went from the Glasby account, both the Court of Appeal and Justice Hunter found that they went straight to the Kantonal Bank.  The Court of Appeal’s findings at paragraph 33 on page 415 and Justice Hunter’s finding is at 185 to 186, and again at 271 by Justice Hunter, line 25.

KIRBY J:   There is no real dispute about these facts ‑ ‑ ‑

MR YOUNG:   No, there is no dispute about any of these, your Honour, but ‑ ‑ ‑

KIRBY J:   It is a question of working out what the legal consequences of them are.  We ultimately have to get back to those words “brought about by”.

MR YOUNG:   Yes, we do, your Honour.  One final matter, it would really seem to us that if we sort out the facts, the answer to the questions is easier.  Simultaneously with what was happening with Barclays Bank, there were a series of instruction requested of Powles relating to Antigua and given by Powles in relation to Antigua.  The effect of those instructions that were dictated to Powles by Searle, was that Powles should transfer the funds to something called the RTIC Paymaster Account, which was an account with a Mr Rice.  What Mr Rice was to do was to use the funds to purchase an instrument.  But the instruction to transfer the funds was in writing.  It said the transfer to Mr Rice’s account was irrecoverable, signable, transferable, et cetera, for the release and disbursement of the funds without further notice.  So the paper trail suggested much the same thing as previous transaction, that is, Powles was to transfer the funds into the account of a third party, irrecoverably, who could transfer the funds out without further notice.

Having, I hope, not laboured the facts for too long, can I then turn to what we say the key elements are in the application of the exclusion.

KIRBY J:   The starting point is that the appellant procured this policy, intended it to be a true coverage.  The insurance clause is very wide and the onus is on you to establish that you come within the exclusion, and the coverage contemplated that the policy would cover not only the firm, but the partners individually.  So there are a lot of things, and the differential between the clauses of exclusions seem to, at least on the face of things, be deliberate, and the words “brought about by” - “brought” is a positive action word.  I think this is something Justice Mahoney pointed out in that case.

MR YOUNG:   As we submitted yesterday, your Honour, the exclusion is a complete carve out, and it is a carve out that deliberately alters what would otherwise be the composite nature of the policy.  So that if liability of Allens is brought about by the dishonest or fraudulent act of any partner, the exclusion operates against all partners.

CALLINAN J:   Mr Young, what do you say about the proposition which, I think, ultimately Mr Meagher adopted – I think he did – that in order to attract the operation of the exclusion, the conduct had to be exclusively dishonest or fraudulent?

MR YOUNG:   Well, we would say that is plainly not correct, your Honour.  Any form of civil liability would fit within the insuring clause, but what is carved out of it is any liability brought about by dishonest or fraudulent acts or omissions.

CALLINAN J:   What about if it is brought about by both dishonest and stupid but not dishonest conduct?

MR YOUNG:   I thought your Honour was asking me, what if it is brought about by conduct that could be categorised as negligent, or, alternatively, as a dishonest breach of trust.  The fact that it bears a second aspect and could be the subject of liability under a different head would not prevent the exclusion operating.  It will operate whenever the liability is, in fact, brought about by the dishonest or fraudulent act or omission, regardless of the fact that it could be brought about by something else.

CALLINAN J:   If it is brought about by both, I do not think, with respect, you have really answered my question.  If “but for” both elements, the loss or the liability would not have occurred, do you say that the exclusion then operates?  I am not talking about conduct that can be characterised both as dishonest and a breach of trust or perhaps negligent conduct, but a liability which arises because of contributing factors, one of which is, say, negligence, one of which may be a breach of trust which is either dishonest or honest, and conduct which is, in fact, dishonest.

MR YOUNG:   Yes, well, your Honour really postulates the sort of scenario in the Comino Case.  That is where the task really is to ask the question what really brought about the liability, so that if you have dishonest acts of false witnessing false certification, but they are entirely collateral to and not really connected with a head of liability which was ‑ ‑ ‑

CALLINAN J:   No, that really does not really answer my question.  What do you say?  Do you say that the conduct has to be exclusively dishonest or not which brings about the liability?

MR YOUNG:   No, we say plainly, on the words of the policy, the conduct does not have to be exclusively dishonest or fraudulent, but that is not to say that anything other than that liability must be really brought about by the dishonest or fraudulent conduct.  The fact that there is something else that would contribute to liability, the lack of reasonable care or something like that, is not going to prevent the operation of the exclusion.

KIRBY J:   Well, that word, the adverb, really indicates that the task is, as Justice Gaudron mentioned earlier, really one of characterisation, but you have to look at all the facts and say, “Can we characterise this as ‘brought about by’?”

MR YOUNG:   Yes.

KIRBY J:   Here there are competing theories.  One is, of course, it was brought about by his dishonesty.  It would not have happened without it.  He set upon a task; he wanted to make a private profit; he deceived his clients; he acted in a way that was totally unacceptable, and so on.  But the other theory is he really believed that there was this market, and he was not going to steal all of this money.  He went ahead, true it is, to make this private benefit creaming off an amount for himself.  If one has two different theories, why would one not give operation to the policy and say, well, if you had wanted it to exclude the second theory, you could have done so.

MR YOUNG:   Yes, and I answer your Honour in two parts.  Firstly, we say the task is to construe those words “brought about” and we accept that more is necessary than a “but for” causal nexus.  Hence, the cases have said that if you have the dishonest or fraudulent act which is entirely incidental or peripheral, not the real basis in the facts that brings about liability, as in the Comino Case, those words will not be satisfied.

But the dishonest and fraudulent acts of Powles cannot be dismissed as merely incidental or collateral to the holding of the moneys or the application of the moneys and the way in which they were applied.  They were of central importance.  They were the driving purpose and hence they coloured and tainted the entire application of the funds.  To overlay that proposition by saying that as well, Powles was stupid and believed really in the existence of the market, does not make, we would say, a relevant difference to the appropriate characterisation.  You can add those facts but those facts do not alter the inherent dishonesty in what he was doing in the way in which he was holding the funds, misrepresenting the status of the funds, failing to disclose matters and then deliberately putting the funds at risk for the purposes of secret gain.  You can accept his stupidity in believing in the market but that does not mean that it transforms his conduct from the character it would otherwise bear.

So that is the way in which we would answer the question:  yes, you are looking for what actually brought about the liability in more than a “but for” sense.  But the fact that you can add some matters that indicate that there was an element of fool in Powles does not save his conduct from the characterisation as inherently dishonest.  If his conduct, his various actions, are interlinked in the way in which we say they are, and the question is what brought about the liability of Allens, we would say you cannot get away from the characterisation of his conduct in the manner in which both ‑ ‑ ‑

GAUDRON J:   But the exclusion does not talk about conduct.  It talks about an act or omission, which almost looks as though you are being forced to look at a distinct misappropriation or something of that kind.

MR YOUNG:   With respect, your Honour, that is not the way in which it has been applied.  Chittick is a good example.  A solicitor allowed his parents‑in‑law to build on his property.  He did not disclose to them the property was mortgaged or that he ‑ ‑ ‑

GAUDRON J:   That is an omission.

MR YOUNG:   Yes, but there was a course of conduct that was interrelated and he started off with the pious hope that there would not be any difficulty, he would not get into trouble in his business difficulties.  He had no intention to defraud them of anything, but of course he became insolvent and the parents-in-law were faced with loss.

GAUDRON J:   There is no difficulty in identifying an omission and in those circumstances identifying it as a dishonest omission in failing to disclose something that there was a duty to disclose, because failure to disclose it would give a false impression.  If need be, you also have failing to disclose it for the purpose of securing a benefit to yourself.

MR YOUNG:   Yes, but there is a failure to disclose.  I mean, the fact that we rely upon numerous acts or omissions does not take us outside the clause, but let me just fasten on one.  He did not disclose at the point of payment away to the Glasby account to the Nauruan Trust that he was about to pay the money away not in exchange for an instrument but into the hands of Mr Glasby over whom he had no control and who could dispose of the moneys with Searle in such manner as they think fit in circumstances where he knew at the very least that Searle was probably dishonest.

He did not disclose that.  That was an omission by a solicitor holding moneys in trust and that was dishonest because it was omitted for a purpose.  Had he disclosed that, the Nauruan Trust would have come down very hard and insisted that no transfer of funds be made and therefore, if no transfer of funds were made, there would be no secret gain.  So there was a critical omission at that point.

Now, the two steps we take about liability are really these.  First, we take the step that the Full Court took, that is we are concerned with liability for breaches of trust and breach of fiduciary duty.  By reference to the decision of this Court in Maguire v Makaronis and the decision of the House of Lords in Target, the Court of Appeal said liability attached immediately whatever the quantum of loss that ultimately flowed from the breaches of trust.  That, we say, is the proper analysis.  There is a difference between the liability that attaches and when matters play their way out through the Swiss bank system and recovery action how much is ultimately the quantum of the loss?

Now, when you are dealing with breaches of trust, breach of fiduciary duty, the liability attaches.  Here, we would say, there is liability right throughout because of the fraudulent actions we have described, but liability certainly attached at the point of misapplication by payment out.

KIRBY J:   But the policy is an indemnity policy.

MR YOUNG:   Yes.

KIRBY J:   So it is in respect of the ‑ and to the extent of the loss.

MR YOUNG:   Yes.

KIRBY J:   So how does that fit in with that theory that you have just been propounding?  There would be liability at a certain time ‑ ‑ ‑

MR YOUNG:   Yes.

KIRBY J:   ‑ ‑ ‑ but the true liability which is in issue here is not just declaratory orders or a small amount of interest or fixing up the breach and referring Mr Powles to the professional body.  It is the money.

MR YOUNG:   Yes, your Honour, but the policy runs this way.  The measure of the indemnity is loss including defence costs.  The qualification for indemnity is that it arise out of a claim with respect to any head of civil liability in connection with practice.  There is then excluded from civil liability that qualifies for indemnity any liability brought about by dishonesty or fraud, so that true it is we are only concerned with the loss that is ultimately claimed, which is the product of three things:  what is paid away, what cannot be recovered and what Allens chooses to claim under the professional indemnity policy rather than their fidelity policy; and true it is there actually has to be a loss in respect of which indemnity is claimed, but the quantum of the loss does not control the exception.  The exception arises where the liability connected with the loss is brought about by dishonesty or fraud.

KIRBY J:   In respect of the fidelity insurance, there is no question of double insurance here, is there?

MR YOUNG:   No, because they claimed indemnity for the different amounts, we would say connected amounts, and they have divided them up but ‑ ‑ ‑

KIRBY J:   But is there not insurance under both policies for the same subject matter?

CALLINAN J:   They are different risks, are they not?  Is not the risk under the fidelity policy the risk of dishonesty ‑ ‑ ‑

MR YOUNG:   Yes.

CALLINAN J:   ‑ ‑ ‑ and the risk here is liability other than dishonesty.

MR YOUNG:   That is so.  So what is excluded from the pi policy is the subject of coverage under the fidelity policy.

KIRBY J:   So presumably, if the appellant were to lose this proceeding it might have, subject to any limitation problem, some rights against the fidelity policy.

MR YOUNG:   Yes.

KIRBY J:   Anyway, we are not concerned with that.

MR YOUNG:   No, we are not.

KIRBY J:   Except in so far as it is raised by you to say, well, it is no answer to suggest that this is a wide policy.  True it is a wide policy, but there are specific policies for dishonesty.

MR YOUNG:   That is so, and no assistance is gathered from the statute because these excess policies stand outside that regime.  They are a matter of private negotiation between the firms and their insurers as to what language goes in there.

The appellants seem to attach effectively two glosses to the words “brought about”, which we should address.  The first is that those words are not satisfied unless there is an intention to cause loss, and that intention is accomplished.  In other words, that there was an intended misappropriation of the $8.55 million which was achieved.  That was rejected by the Court of Appeal as a gloss on the words of the section.  The first vice of it is it slides away from the words of the exclusion and substitutes “loss” for “liability”, and I have addressed that.

The second is that, as the Court indicated in questioning of my learned friend, in most solicitor’s frauds or misappropriations, there is not normally an intention to lose the client’s money.  There is an intention to misuse it, to put it at risk and to replenish it because the fraudulent scheme is going to work out for the better and we will have some money and we will restore it.  So by and large, in most instances of dishonest misappropriation, there is often an intention not to cause a loss of the funds, simply to misuse them and put them at risk, and then recover them and replace the stolen funds before anything is discovered.  In our respectful submission, it would really make a mockery of the concept of “brought about by dishonesty or fraud” to have a superadded requirement that the fraudster must actually intend to lose the core investment moneys of the client, rather than siphon off fringe amounts.

In terms of the findings, Mr Justice Hunter made a finding, that the appellants rely upon, about the fact that Powles had no intention to defraud the Nauruan Trust of the substance of its deposits at the time those moneys came under his control.  That is at page 140 of volume 1.  But that was qualified because at page 141, Justice Hunter went on to say that Powles intended to siphon off the fringe amounts.  He also found that:

Powles’ dealings with other people’s moneys, apart from straight out misappropriation, involved placing their money at risk for his benefit in circumstances where one could be confident if the risk had to be borne by him, the transaction would not have been attempted.

So the intention here as found by Justice Hunter in the Court of Appeal was to place all of the moneys at risk and to siphon off fringe amounts.  They translate that into an intention not to lose the core investment moneys.  But in our respectful submission, it does not save the conduct from being characterised as dishonest and it does not introduce some added requirement into “brought about” of accomplished intention.

The other gloss they add, and I think it is the one Justice Callinan was addressing, that is to say the “dishonest acts must be sufficient in themselves to produce a loss”, is the way they put it.  The two vices are, again, it slides away from the words of the exclusion and substitutes “loss” for “liability”.  The question is not what was sufficient in itself to produce the quantum of loss that is ultimately claimed, it is what brought about the liability.

It is really a way of saying that there can be no other intervening person or cause between the dishonest act of misapplication and the ultimate loss.  Here, to use the Chief Justice’s example, Mr Searle is really Harry the horse.  Instead of having a big paper bag, he has a bank account over which Powles has absolutely no control.  Searle’s suggestion to Powles is to transfer it to the A.M. Glasby account.  Searle might say it is for the purpose of acquiring a bank instrument but the last time he had contact with Searle, $70,000 was lost in the Ward transaction when it was paid away at the suggestion of Mr Searle.

So, it is, in our respectful submission, knowingly putting the client’s money at risk without extant authority, because the authority is vitiated by the fraud that procured it and perpetuated it in circumstances where there was a secret gain to be made along the way. 

I have not gone to it, but can I remind the Court that in both Maquire v Makaronis and in Target in the House of Lords, both courts said that in dealing with liability for breaches of trust and breaches of fiduciary duty, there is no room for the introduction of a novus actus doctrine or idea and, of course, that stands to reason because the function of the fiduciary duties is to guard against the very sorts of risks that might be presented by a Mr Searle, or a Mr Madden, or someone else.

GLEESON CJ:   Most solicitors and most fiduciaries who misapply or misappropriate trust moneys presumably cope and in some cases expect that there will be no loss of the moneys and, therefore, the misappropriation will never be discovered.

MR YOUNG:   Yes, your Honour, that is exactly so.

HAYNE J:   If then, there is no scope for novus actus ideas in considering consequences of breach of fiduciary duty, how do you marry that with what I understood to be your earlier submission about “brought about by”?  As I understood it, you acknowledge, do you, that “brought about by” speaks of a causal link, and a causal link which is not necessarily satisfied by a “but for” test?  Have I misstated your position?

MR YOUNG:   Your Honour is accurate in what we said about “but for” tests, but your Honour’s question, with respect, really confuses two things.  My submissions are directed to what brought about Allens’ liability.  The idea of novus actus, introduced by the appellants, is really to say thieves intercepted the money, either in Switzerland or on its way to Switzerland and, therefore, the loss that arose was caused by the novus actus interveniens.  Now, our submission really is, where the question under the exclusion clause is what brought about Allens’ liability, Allens’ liability was brought about by the matters we have indicated being breaches of trust, et cetera.

That liability was instantaneous upon either the fraudulent procurement or misuse of the authority and, certainly, instantaneous with the instruction to Anton to act on the instructions of Mr Searle to pay the moneys to the Glasby account.  Allens were then and there liable for whatever consequences unfolded in relation to the loss of the money.  The fact that the loss was a bigger loss because thieves intervened in Switzerland, rather than a smaller loss, is not relevant.  That is to introduce a foreign notion of novus actus into the realm of liability for Trust obligations.  That, despite their denials, is what they are really doing in putting an argument that says the loss really flowed from the intervention of thieves.

HAYNE J:   But you say, do you, that the liability was brought about by a breach of trust or fiduciary duty, that being the only operative cause, thus relieving us of any need to have regard to “but for” tests or epithets qualifying “cause”, the only operative cause because the liability arose when the money went out of the control of Powles in breach of trust?

MR YOUNG:   We do not go so far as to say that “brought about” requires you to eliminate any other contributing factors so that you have a sole cause.  We do not say that, your Honour.

HAYNE J:   But in this case you say there is only one operative cause, do you?

MR YOUNG:   No.  In this case we say that the cause of Allens’ liability to the Nauruan Trust rests in a series of breaches of trust and breaches of fiduciary obligation culminating in the misapplication for relevant purposes of the 8.55 million, in conjunction with the theft of the remainder.  But we do not need to go so far and the clause does not go so far as to say that you must find something that you can say is the sole cause, the only cause, of the liability.  There may be other contributing factors.  There may have been some negligence in here, there may be some stupidity as well, but that does not alter the answer to the question of what actually brought about Allens’ liability.  It is not a search for the sole cause, nor is it a search, we would say, for the direct or immediate cause of the liability, although that gets closer to the way in which we put it.  It is what really brought about, what actually brought about, the liability in Allens.  Were the acts and omissions that actually brought about liability dishonest or fraudulent?

The other way that one might look at it is the way that finally the Court of Appeal turned to it and said the trial judge adopted a proximate cause argument which looks for the most efficient cause.  Your Honour’s question to me has some sort of overtone of “most efficient cause”.  The Court of Appeal, we say rightly, rejected the idea that “brought about” requires you to look for the most efficient cause.  The appellants do not press that argument here but in the end the Court of Appeal said, “If you are asking the question ‘What was the most efficient cause of the liability of Allens?’, you cannot really separate the dishonest conduct of Powles from his stupidity or negligence or theft by others.  There may be more than one proximate cause but we are satisfied that one proximate cause is the dishonest conduct of Powles”.

That approach of not being driven in the end to distinguish between two proximate causes, each of which are of similar significance, is sanctioned in the authorities.  If it turns out that one of the proximate causes is within the exclusion and the other not, the exclusion operates.  The Court of Appeal so held in Wayne Tank & Pump and the New South Wales Court of Appeal held that not only in this case but in a number of authorities in New South Wales, including the one we cite in our outline at paragraph 25, HIH Casualty & General Insurance.  So, if you are looking for the most efficient cause, there is a complete answer in the analysis put forward by the Court of Appeal.

KIRBY J:   I am still curious about the differential use of the words of connection, “arising from”, “arising from”, “in relation to”, “incurred by”, “directly or indirectly caused by or contributed to”, “in connection with”.  I mean, almost each exclusion seems to have a different formula for connection.  On the face of things, if one approaches this matter in an orthodox way, you would say that is deliberate and therefore it is intended that it should be tighter than, say, [vi] “directly or indirectly caused by or contributed to by”.  That would be the orthodox way to approach the construction of “brought about by”.

MR YOUNG:   Yes.

KIRBY J:   Given that this is a form policy, that you are propounding the policy, that you are propounding an exclusion, that the policy in insurance clauses are broad, why would one not read it in a way against you to say if they had intended – I realise your factual arguments, but if they had intended a looser form of expression, they would have used the formula in [vi].

MR YOUNG:   Well, your Honour, we would say this.  We first submit that limited assistance is gained by the different verbal formulae in the different exclusions, but having said that, your Honour, we do not dispute that the words “brought about by” can legitimately be regarded in that context as narrower than in some of the other formulae.  It is no part of our submission to contend that “brought about by” is as wide as [vi] “directly or indirectly caused by or contributed to”.

We have accepted the orthodox approach followed by a number of courts, including the Court of Appeal in New South Wales, to say that “brought about by” means more than a “but for” connection.  It means more than an ability to point to some peripheral part of the transaction that does not really give rise to liability and say, “There was dishonesty in the attestation clause,” or something like that.  That is obviously not enough.  You must look at what actually brought about the liability.  Now, in that respect I doubt that there is any difference between us and the appellants, your Honour.

KIRBY J:   Well, there may not be but, I mean, I am just trying to construe the policy and there are these different formulae.

MR YOUNG:   Yes.

KIRBY J:   You were going to tell us how this policy came about.  It has got the heading Law Society of New South Wales Certificate of Insurance.

MR YOUNG:   Yes.  Well, this policy, Law Society of New South Wales, is the subject of a process under section 41 of the Legal Professional Practice Act which requires approval of the policy by the Law Society.  Now, that is the primary policy.

KIRBY J:   Is that the document at 354?

MR YOUNG:   Yes, it is, your Honour, but the relevant policies of insurance we are concerned about respectively commence at 360 and following.  If your Honour goes to 360 ‑ ‑ ‑

KIRBY J:   Yes, but you just pick up the primary policy, do you not?

MR YOUNG:   It is on the same language.  I will show your Honour why.  At 360 there is a Master Policy of Excess Insurance or the schedule to it and your Honour will see the assured is the Australian Legal Group, which is a federation of firms including Allens, and it continues:

on terms and conditions as more fully specified in the individual Certificates of Excess Insurance issued to the respective firms.

At 362 there is effectively the excess insurance policy.  Paragraph 1 provides that:

Except as otherwise provided herein, this Policy is subject to the same terms, exclusions, conditions and definitions.....as the Underlying Policies.

Then at 368 there is the certificate issued under that excess policy in favour of Allens.  At 368 under the heading Interpretation it again picks up the conditions in the underlying policy.  So what you have running from 360 to 368, 369 – I am sorry, it runs through to 370 – is the documents comprising the first excess policy and then, without going through it, from 371 through to 381 you have the documents comprising the second excess policy, which again picks up the wording “in the underlying policy”.

So the excess policies are not the subject of any approval process or a matter for negotiation both in terms of the quantum of the cover and the terms of the policies but in this instance they have simply adopted the underlying language of the primary policy.

KIRBY J:   I realise that, but when you looked at the underlying policies, you would have looked at 356, paragraph [f], and all those exclusions and differential words that are used.

MR YOUNG:   Yes.

KIRBY J:   I mean, I am only thinking of some reasoning of my own in Johnson v American Insurance as to how one approaches these problems.  I want to be consistent.  When one is looking at exclusions, if there is ambiguity, conventionally, that has been construed against the insurer.

MR YOUNG:   We would say there is no ambiguity, your Honour, but a factor to be borne in mind is that Allens had the ability to obtain cover, no doubt at different prices, but cover for civil liability excluding dishonesty and, separately, cover for misappropriations and other dishonesty, and that is what, in fact, they did, that is what they bargained for and obtained.  So there is no public policy reason, we would say, that really operates to alter the normal processes of construction that would apply to the excess policies.

But the key difference in construction between us is, really, that they construe liability brought about as meaning the ultimate financial loss, the amount that Allens was liable to pay to NPRT, as if that expression or concept is to be substituted for the reference in the exclusion to liability.  That, at the end of the day, is the key difference in matters of construction because, beyond that, what our learned friends do is not to construe the words “brought about”, but to introduce extraneous notions of, firstly, there must be an intention which is accomplished by the dishonest party, and secondly, no other person’s actions are allowed to intervene so as to effect the loss, both of which we say are impermissible glosses.

The last matter I want to take a moment over, without going to the cases, is to refer the Court to what we regard as helpful decisions.  One is

the NZ Court of Appeal in McMillan (1987) 4 ANZ Ins Cas 60-822, and the other is a decision of the High Court in Byrnes and Hopwood 183 CLR 501 in this Court. Both cases reject the idea that an intention ultimately to restore the funds that have been misapplied has any relevance to the question of whether liability is brought about by dishonesty. In McMillan at 75,055, the relevant passage is in the first column, the first and second complete paragraphs.

GLEESON CJ:   Restoring the funds is usually the best way of ensuring that your dishonesty will not be discovered.

MR YOUNG:   Exactly, your Honour, and it is no more than that.  They also deal with dishonesty inhering in a lack of full and frank disclosure of the relevant facts which, had they been disclosed, would have ensured that the funds were not left with the defaulting solicitor.  I will just give the Court the references in Byrnes to the pages – it is a slightly different context of dealing with improper use of position as a director, but there are two relevant passages, one at 516 to 517 in the joint judgment of Justices Brennan, Deane, Toohey and Gaudron:  An authority is not to be used for the moving purpose of obtaining a private benefit, and that was regarded as an improper use of fiduciary position.  In Justice McHugh, there are two passages: one is a 522 at about point 4 on the page, continuing to the end of that paragraph; the other dealing with intention not really being relevant - that is the intention to replenish the fund not being relevant is at 523, last paragraph.

Unless I can assist the Court further, those are our submissions.

GLEESON CJ:   Thank you, Mr Young.  Yes, Mr Meagher?

MR MEAGHER:   Your Honour, the only thing we would ask for is leave to respond to the document which deals with the concurrent findings of fact in the event that there is a need for us to do so.

GLEESON CJ:   Yes, you have that leave.

MR MEAGHER:   If we could respond within seven days.

GLEESON CJ:   Yes, certainly.

MR MEAGHER:   There is nothing else we wish to say, your Honour.

GLEESON CJ:   Thank you, Mr Meagher.  Then we will reserve our decision in this matter, and we will adjourn for a short time to reconstitute.

AT 11.52 AM THE MATTER WAS ADJOURNED