McCann & Ors v Switzerland Insce Aust Ltd & Ors

[1999] HCATrans 405

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S145 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 application for special leave to appeal

Applicant

and

SWITZERLAND INSURANCE AUSTRALIA LIMITED

First Respondent

AMP GENERAL INSURANCE

Second Respondent

GIO AUSTRALIA LIMITED

Third Respondent

Application for special leave to appeal

GAUDRON J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 19 NOVEMBER 1999, AT 11.32 AM

Copyright in the High Court of Australia

_________________

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friends, MR A.J. MEAGHER, SC, and MR L. McN. JACKMAN, for the applicants.  (instructed by Allen Allen & Hemsley)

MR J.T. GLEESON:   May it please the Court, I appear with, DR A.S. BELL, for the respondents.  (instructed by Phillips Fox)

MR JACKSON:   Your Honours, the issues sought to be raised in this application concerns the operation to be given to the dishonesty fraud exclusion clause in the form of solicitors professional indemnity policies used in a number of jurisdictions in this country.  Could I say that whilst there have been some changes in relation to policies since the events giving rise to this action, the same form of policy is current in Queensland and Tasmania, and, whilst there have been some changes in its form in New South Wales, the question of the nature of the causation required remains.  Could I give the Court a document which a summarises ‑ ‑ ‑

GAUDRON J:   Is it really a question of causation?

MR JACKSON:   Your Honour, I am sorry, I was putting it very shortly, but, meaning that what is meant in a sense by “the brought about by” in the terms of the exclusion clause.

GAUDRON J:   In this case, though, it is not so much a question of causation as a characterisation of the particular act in question, is it not?

MR JACKSON:   Yes, your Honour, that is so.  May I come to that, now.  I was going to give your Honours a copy of the document which simply sets out, currently, various provisions which exist in the jurisdictions.  The policy provisions in question are set out in volume 2 at pages 361 and 362 to 363.  May I go immediately to page 361.  I am referring to the “Insuring Clauses” at about line 39.  What your Honours will see is that the insuring clause contains an indemnity, at about line 40:

against all loss to the Assured –

and the loss has to arise, as your Honours will see, from:

claims first made against the Assured during the Period of Insurance –

and, it is to be:

in respect of any description of civil liability whatsoever incurred in connection with the Practice –

There is then the exclusion at page 362, at the bottom of the page, to the effect that the insurance is not to:

indemnify the Assured in respect of any liability –

falling within one of the succeeding paragraphs, here, relevantly, paragraph (v) which your Honours will see at line 10 on page 363.  What is required for the exclusion to apply is that it be:

brought about by the dishonest or fraudulent act or omission of the Assured –

The issues to which the present application gives rise, and your Honours will see these adverted to at pages 399 and 400, in “Special Leave Questions”, concern the operation of the expression “brought about by” on the one hand ‑ ‑ ‑

GAUDRON J:   But why is that so?  There is no doubt in this case what particular act “brought about” and it does not matter whether you talk about it as loss or liability .  There is no doubt what act did it.

MR JACKSON:   Yes, your Honour.

GAUDRON J:   And, is not the only question, despite the way in which it seems to have been approached below, how you characterise that act?

MR JACKSON:   Your Honour, that is so, but as to – - -

GAUDRON J:   I mean, the question is, it does not seem to give rise to any great question of principle relating either to causation or even to the question of construction that seems to have been advanced.

HAYNE J:   But rather a simplier approach to what happened in this case.

MR JACKSON:   Well, that is essentially what we would seek to say about it is that no matter how much one dresses up the circumstances and examines them in detail, the case was one where what one had was a solicitor whose conduct, whether one calls it grossly negligent, dishonest or whatever ‑ ‑ ‑

HAYNE J:   Made an authorised but imprudent investment for a client.

MR JACKSON:   Yes, your Honour.  I have to say there was some argument about the extent of authorisation, about whether the particular thing was authorised or whether the manner in which he went about it was something that took it outside authorisation but having said that, one had a situation where he engaged in that conduct, the conduct the Court of Appeal thought was one that involved the risk of loss and the risk matured, and, the risk matured because some altogether third parties took the money – stole the money.

HAYNE J:   What significance, if any, is to be attached to the fact that, or the allegation that there were to be secret commissions, or the like, paid to the solicitor concerned?

MR JACKSON:   Well, could I say, a number of propositions were put forward in relation to what that might mean.  Certainly, the solicitor was, on the material found by the court, to be engaged in an activity where, by engaging in these transactions, he was, himself, obtaining some commission that he should not have obtained, but, so far as the transaction itself was concerned, what he was doing was not, himself – and the money that was the subject of the proceedings was not involved in that.  The situation which obtained was simply that the conduct in which he engaged was conduct which put the money in a situation where other people took it.  I do not know that I can advance it beyond that.

The secret commission was something that he should not have engaged in, but having said that, one is not really looking at that so much as the rather different question, was the position one where the terms of the exclusion applied and applied in relation to – whether one calls it liability or loss – the liability resulting inevitably in a loss that had occurred.  When I say “inevitably” I am speaking of the construction of the policy in that regard. 

Could I seek to say that the approach taken by the Court of Appeal – if I could just take your Honours to page 386.  Your Honours will see in paragraph 87 what appears to be the summation of the Court of Appeal’s approach.  His:

dishonest conduct exposed Allens to a liability to the Nauruan Trust for any loss that is suffered in consequence of that conduct.  It matters not that a further act by another party or parties may have been necessary –

et cetera.  Your Honours, will then see the discussion through the remainder of that paragraph.

GAUDRON J:   As far as it goes, that is correct, is it not?  You cannot disagree with that?

MR JACKSON:   No, your Honour, I would not disagree with it in the sense of saying if those events had not happened the further things would not have happened.  That is what usually happens with causes that, if one uses that expression, are causa sine qua non.  But, that approach does place its focus on the fact that Allens was in breach of its duty to the trust when the money was paid away but what it does not do, in our submission, is approach the questions that are posed by policy because the policy, as the insuring clause makes clear, is giving an indemnity in respect of loss when this ‑ ‑ ‑

GAUDRON J:   You cannot put it any higher though, can you, than saying it was paid away for an authorised purpose, for the client’s purpose and for no purpose of the solicitor or the plaintiffs?

MR JACKSON:   Yes.  I cannot put it higher than that.  I have to say, though, in saying that that for the solicitor to pay it away, for the solicitor to deal with the money in that way, to put it more broadly, in the sense of trying to buy one of these prime bank instruments that are said to exist, or thought to exist, there was some personal advantage in it for him because he was thought to be, to a degree, motivated, generally speaking, by the prospect of there being some commission for him arising out of these transactions of that kind.  So, your Honours, I would have to add that qualification to what I have said.

HAYNE J:   And may also have taken place against a background of other unauthorised attempts to enter that market for other clients.

MR JACKSON:   Yes, your Honour.

HAYNE J:   But, is that background of any significance in the operation of the clause?

MR JACKSON:   Could I just say two things, your Honour?  Sometimes authorised, perhaps unauthorised but, in our submission, no, not really.  One simply has a situation where one is looking at the particular transaction, in the end.  I mean, no doubt, the background is for various – it may be for some purposes of some relevance but one does not go beyond the situation where he took a risk, a serious risk, a risk he should not have taken, and he took it.  And, that having happened one then had a situation where, as I said before, the risk matured, but if one looks then to see how that ties into the policy, what we would seek to say is that when one looks to the question that is posed by the exclusion, was the liability, as our learned friends would put it, “brought about by the dishonest or fraudulent act or omission of the Assured”, the common sense answer is that it is the person who took the money.

HAYNE J:   Did Nauru ever sue Allens?

MR JACKSON:   Yes.  The answer is yes, your Honour.

HAYNE J:   And recovered judgment?

MR JACKSON:   Compromised, yes. 

HAYNE J:   And was that action framed in deceit or ‑ ‑ ‑

MR JACKSON:   May I just check that. There was material.  Your Honour, I am told it was put as breach of fiduciary duty, not framed in fraud or deceit.

HAYNE J:   And in respect of the particular transaction that we are here concerned with, the eight point whatever million?

MR JACKSON:   Yes.  Now, could I just say one further thing about the question of loss and liability because that did play a significant part in the Court of Appeal’s approach.  The Court of Appeal took the view that because the opening words of the exclusion clause used the expression “liability” to describe the several liabilities that are the subject of the various exclusion clauses and because the payment away was a breach of fiduciary duty and because, also following from that, there would be a potential liability of Allens to the person for whom they were fiduciary and because a fiduciary was liable for, in effect, any loss following from that, that therefore the situation was one where they would be liable, automatically, upon paying away the money if it were lost.

That, in our submission, does not give the policy its true meaning.  As the insuring clause indicates, it is an indemnity in respect of loss.  When the exclusion clause is excluding liability it is speaking of the concept being the subject of the insurance, that is loss in respect of any liability.  If I could just take your Honours back to the terms of the policy at pages 361 and 362 - the exclusion clause, I should have said, your Honour, is at page 363.  It speaks of, at the bottom of 362:

This insurance shall not indemnify the Assured in respect of any liability –

of the specified kind, and one sees the words:

in respect of any description of civil liability –

in the insuring clause itself.  The point I am seeking to make about it is that the question to be asked is whether the particular loss is “brought about by the dishonest or fraudulent act” of a “partner”.  To determine that it is appropriate to look at what is the cause of that loss and that certainly seems to be, if one looks at the second part of the particular exclusion at page 363, the second sentence, as it were, it seems to me the meaning of “liability” as used in the second part of the same clause. 

Could I take your Honours for just one moment to what was said by Justice Mahoney in the Court of Appeal in an earlier case dealing with the same policy.  It is Comino v Manettas.  It is No 2 in the applicant’s bundle of authorities.  At the page numbered at the top 77,869, his Honour said in the last paragraph:

In my respectful opinion –

It is the last paragraph on page 77,869.  I will not read it out, your Honours.  His Honour adverted to the fact that it was an over simplification to say that:

“brought about” intends a “causa causans” causal relationship and that the one which, as his Honour pointed out, existed between these defaults and the liability was, at best, the relationship of “causa sine qua non”.  But that distinction assists, I believe, in understanding the nature of the relationship intended by “brought about by”.  The phrase looks to what actually brought about the liability, in negligence, tort or otherwise –

There is, of course, in the same case, if I can just say, on the left column at page 77,869 - your Honours will see the third paragraph raises another question about whether the dishonesty involved purpose and intention and it was not necessary for the court in that case to decide that issue, as your Honours will see from the third last paragraph in the same column, the last few lines.  I mention that only because it may be, if the Court were to grant special leave in the case, that that is an issue which itself underlies some of these considerations.

Could I say two further things, your Honours.  One is that the causative link required by the exclusion itself, in our submission, should be related to what is insured against, namely, the loss as distinct from the creation of liability.  The second thing is that the Court of Appeal at page 388, in volume 2, in paragraph 95, referred briefly “to an alternative approach” saying that Powles’ conduct was, in any event, “one of a number of proximate causes”.  That is an easy enough proposition where one is speaking about a passenger or pedestrian being injured by two negligent drivers but where one is looking at the terms of an insurance policy, if the loss is the loss of a fund by theft, what we would submit is that one would, in the ordinary course of events, simply say, “How did that loss occur?” One would say, “It was brought about by the theft”.

Finally, this case did involve other issues not dealt with by the Court of Appeal.  You will see that at page 388, paragraph 96.  As we say in our summary at page 405, paragraph 22 at the bottom of the page, if special leave were granted and the appeal were to succeed, the matter would need to be remitted to the Court of Appeal, and the appropriate Court of Appeal then to deal with those other issues.  Your Honours, those are our submissions.

GAUDRON J:   Yes, thank you, Mr Jackson.  Yes, Mr Gleeson.

MR GLEESON:   Your Honours, the act which brought about Allens’ liability was the payment away of the money.

GAUDRON J:   That has never been in dispute, has it?

MR GLEESON:   No, and that is what ‑ ‑ ‑

GAUDRON J:   And that is the payment away – I think it is 28 January when it eventually happened, is it not?

MR GLEESON:   Yes, Mr Powles let go of the money between 15 and 17 January and subsequently the money was lost.

GAUDRON J:   And that was the payment out of the Westpac account.

MR GLEESON:   Westpac account.

GAUDRON J:   To Barclays and then ‑ ‑ ‑

MR GLEESON:   Yes.

GAUDRON J:   Yes.  So the act you concentrate on, though, is paying it out of the Westpac account.

MR GLEESON:   Yes.  That is the act which Nauru seized upon in their third party against Allens as being a breach of mandate, a breach of fiduciary duty and the like.  That is apparent in volume 1 at pages 273 to 275.  It is correct that Nauru did not allege that that act was dishonest or fraudulent, as often occurs in third party actions where insurance policies are in the background.  The question of characterisation then was, was that act of payment away dishonest or fraudulent?  What occurred before the trial judge was that we obtained a finding that that was a relevantly dishonest act and that finding was closely tied to the secret commission and that finding has been upheld by the Court of Appeal.         In the Court of Appeal ‑ ‑ ‑

HAYNE J:   By that do you mean that Powles was dishonest in the sense that he agreed to take a secret commission?

MR GLEESON:   More than that, your Honour.  Dishonest in the sense that he had a secret commission in respect to the very transaction which involved payment away and, further, the nature of that secret commission was not just a theoretical conflict of interest but one that actually caused him to pay away money in circumstances where he would not have done so had he not been favouring his own interest.  So, it was a finding not just of acting in a situation of conflict which would be sufficient to attract an equitable liability ‑ ‑ ‑

HAYNE J:   But pursuing his own interest in preference to that of his client.

MR GLEESON:   And that leading to payment away in the very circumstances in which it occurred.

HAYNE J:   In the effecting of an investment on behalf of the client that was authorised by the client, or no?

MR GLEESON:   We would say unauthorised.  It was an investment in the sense of in a broad sense it was seeking to access this thing called “the prime bank instrument market” but unauthorised in the key sense that Nauru were led to believe that their moneys were at all times under the safety, the control of this Australian law firm working in London and the key aspect of the payment away was a deliberate surrender of control and a deliberate exposing of the money to a degree of risk.  Now, it is at that point where we obtained the additional findings from the Court of Appeal because the trial judge, although he accepted that the commission activated the actual payment, stopped short and said, “I do not think that Powles realised he was imperilling the money, placing it at a risk which Nauru did not consent to”.

The Court of Appeal on its review of the document said, “This man must have known that it was more than likely that the money would be lost”.  So, could I take your Honours to two findings.  Firstly, in volume 1 at page 255, lines 35 to 42 is the finding by the trial judge that the breach of duty was dishonest and we rely particularly on the last sentence, 40 to 42, Powles would not have acted as he did:

unless he had his self interest at stake.

Then, could I go to the Court of Appeal, volume 2, page 387, paragraph 94 and over to 95.  Paragraph 94:

Powles conduct was such that he knew that he was exposing the money to an unacceptably high level of risk of loss.  His breach of duty unquestionably paced the moneys in a situation where –

and we rely upon this:

the act of a third party (in a market known for fraudsters) was more than likely –

that seems to be a finding -

more than likely –

not just a possibility or a strong possibility, a probability this money was going to be lost at the hands of fraudsters in this market.  At the end of that paragraph Powles knew:

he was imperilling, indeed gambling with, the funds.

That led the court to what was said in the next paragraph that whatever view one might take of causation Powles brought about the loss. 

Now, in that respect, we rely really upon two matters for the characterisation.  The secret commission provides dishonesty, having regard to the equitable duties imposed upon Powles as trustee and fiduciary. This action of ‑ ‑ ‑

HAYNE J:   But there breach of duty in equity constitutes dishonesty, is that the proposition?

MR GLEESON:   Not every breach of duty in equity constitutes dishonesty but one where the fiduciary or trustee not only acts in a situation of conflict which is enough to create liability but deliberately prefers the private interest to the interest of the client or the principal.  That would be characterised, in equity, as a dishonest breach of fiduciary duty or a dishonest breach of trust.

HAYNE J:   Does it come to this:  the solicitor tells the client, “This investment is safe”.  The client tells the solicitor, “You tell us it is safe.  Do it.”  It is not.  The risk to which this investment is subject comes about because the solicitor lets the money go and lets the money go through self‑interest.  Is that the essence of what happened in this case?

MR GLEESON:   That, plus one element, your Honour.

HAYNE J:   Yes?

MR GLEESON:   And step 3, the solicitor knew of the risk in this market, the risk that the money would be lost through fraud.

HAYNE J:   Yes, knew that there were some dangerous people out there and you say that conduct, taken as a whole, amounts to dishonesty by the solicitor?

MR GLEESON:   Dishonesty and fraud and we submit that ‑ ‑ ‑

HAYNE J:   That is the nub of the point, is it not?

MR GLEESON:   That is the nub of the point but we submit ‑ ‑ ‑

HAYNE J:   And, we have 300 pages or so of trial judgment focused on that issue.

MR GLEESON:   Your Honour, the reason for the 300 pages ‑ ‑ ‑

HAYNE J:   Do not rise to the bait, Mr Gleeson.

MR GLEESON:   It is a documentary case.  Mr Powles is not there.

HAYNE J:   Yes.

MR GLEESON:   The dispute between us was this:  we, as insurers, said that action was dishonest and fraudulent.  Allens said, “We accept Mr Powles was dishonest and fraudulent in many, many respects but he had a window of negligence on 15 January.  On that afternoon he was merely negligent, not dishonest, not fraudulent”.  The case we sought to put, and it may have been overkill, was to say, if you go through his 24 prior transactions in this market ‑ ‑ ‑

HAYNE J:   You wanted to show lots of dishonesty and you had much fund doing so, did you not?

MR GLEESON:   We wanted to show, your Honours – and could I also say this Court’s decision in Peters was handed down, coincidentally, with the conduct of this trial and our case we sought to make consistently with Peters – Your Honour’s judgment and Justice Toohey’s judgment and then Justice McHugh’s judgment, which emphasised that in a fraud the essence of the fraud is often not that the fraudsters want the money to be lost.  Often they hope the money will not be lost because that is how they will make their sting, but, the essence is putting someone else’s money at a risk which you know you are not entitled to do.  We went through the 24 prior transactions to show that this man must have known that he was putting this money at a risk which he had no right to put it to.         That is why we went to that.

We now have that finding from the Court of Appeal, paragraphs 94 and 95, and we therefore say whether one is looking at the liability in equity or in a pure common law fraud sense, this is action properly characterised as dishonest and fraudulent. 

Your Honours, that is the central issue, whether the Court of Appeal’s characterisation of the action as fraudulent is proper.  We would simply say that the application, as put to you, has not put forward any substantial reasons why if this Court is to attempt to revisit the documents there is any likelihood ‑ ‑ ‑

GAUDRON J:   There would be no need to revisit the documents.  It is a question of whether the facts as found, including those in the Court of Appeal, warrant the characterisation that was given.

MR GLEESON:   That the Court of Appeal placed on it.  What we submit to you is that in the application as put forward you have not been given cogent reasons why the characterisation of dishonest and fraudulent is one that was not proper to place on this conduct and if that be right the application would not warrant the grant of special leave. 

Could I mention in conclusion that there are at least two cases of some similarity to the present, Maxwell v Chittick referred to in a Court of Appeal’s judgment and Crowe v Wheeler in the Full Court in Queensland, similar in this sense, that the solicitor did not intend the ultimate loss of the money but the solicitor engaged in conduct ‑ ‑ ‑

GAUDRON J:   But was using it for his own purposes.

MR GLEESON:   But was using it in one case for his own purposes, Maxwell v Chitty, and in the other case was using it in a way different to the way that had been instructed by the client.  The solicitor, of course, was hoping that everything would come good at the end of the day and in both cases the Court found the action was properly characterised as dishonest or fraudulent.

GAUDRON J:   We would have no difficulty where the money is paid away for your own purposes.

MR GLEESON:   Yes, and that is what we say is ‑ ‑ ‑

GAUDRON J:   That is the critical question really, here, is it not?

MR GLEESON:   I took your Honour to the finding of the trial judge and that is a finding which was never challenged, namely, that the desire to make the secret commission influenced the conduct in such a way that he would not have ‑ ‑ ‑

GAUDRON J:   On one view that might simply be saying he would have exercised caution if he were not motivated by this and being motivated he failed to exercise caution.

MR GLEESON:   Yes.  As we put the findings to you, it is a finding that it has been a deliberate referring of the self-interest and that has caused a payment which otherwise would not have occurred and if the payment had not occurred, no liability of the firm.  Those are our submissions, your Honour.

GAUDRON J:   Yes, thank you, Mr Gleeson.  Yes, we need not trouble you, Mr Jackson, there will be a grant of special leave to appeal in this matter.

We do not expect that this would take a long time to argue, Mr Jackson.  We do not see that this is a case that needs to go through the evidence again but would proceed on the factual findings in both judgments.

MR JACKSON:   Yes, your Honour.  In terms of time, I suspect it is a one‑day case; maybe a little over, but it is a one-day case.

GAUDRON J:   I should have thought it was much less.  Well, Mr Gleeson, you understand, the matter should proceed on the findings as already made.  There should be no need for the Court itself to embark upon the evidence or, indeed, for it to be reproduced.

The Court will now adjourn to reconstitute.

AT 12.06 PM THE MATTER WAS CONCLUDED