McCann v Switzerland Insurance Aust Ltd

[2000] HCATrans 315

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 TUESDAY, 1 AUGUST 2000, AT 10.17 AM

Copyright in the High Court of Australia

MR A.J. MEAGHER, SC:   May it please the Court, in this matter I appear with my learned friend, MR I. McN. JACKMAN, for the appellant.  (instructed by Allen Allen & Hemsley)

MR N.J. YOUNG, QC::   May it please the Court, I appear with my learned friend, MR J.T. GLEESON, for the respondents.  (instructed by Phillips Fox)

GLEESON CJ:   Mr Young.

MR YOUNG:   If the Court pleases, there is one preliminary matter that we would wish to raise.  The appellants have filed written submissions in reply to which we take objection.  We recorded our objection in writing.  Our objection is that paragraphs 1 to 8 that seek to reopen findings of both courts below concerning Mr Powles’ dishonesty ‑ ‑ ‑

GLEESON CJ:   We had noted that objection, Mr Young, and I think the most convenient way to deal with that is in the course of argument.

MR YOUNG:   If your Honour please.

GLEESON CJ:   Mr Meagher, before you begin, for many, many years I had policies of life insurance with the AMP Society and superannuation arrangements which produced the result that on demutualisation a couple of years ago I was allotted some shares in that company.  I have never bought or sold any shares in the company or, I must say, ever taken the trouble to read its financial statements, but I assume, without knowing, that it is the parent company of the second respondent.  I only mention that in case any party wishes to object to my sitting.

CALLINAN J:   I think I have got two shares left in the AMP.

KIRBY J:   I have also asked the Registrar to draw to the notice of the parties certain associations I have had of a personal character with the partners or members of the firm of Allen, Allen & Hemsley over the years.  These were personal associations and not professional.  I gather they have been brought to the notice of the parties and that they raise no objection to the matters raised in my letters.

HAYNE J:   I too am a shareholder in AMP Limited in circumstances identical with those described by the Chief Justice and I too am, I think, the life insured under a life policy for what might properly be described as a very modest sum with AMP Life.  Those matters have, I think, been drawn to the attention of the parties.

GAUDRON J:   I think the parties have received a communication about my past association with Mr Powles.

CALLINAN J:   I have a policy also, again like Justice Hayne’s, rather modest.

KIRBY J:   One of my associates worked for a firm that was associated with this litigation but he will have no part at all in anything in the Court concerning it, and all of that has been drawn to the notice of the parties.

MR MEAGHER:   None of the matters referred to by your Honours are of concern to my client.

GLEESON CJ:   Yes, Mr Meagher.

MR MEAGHER:   Your Honours, the issues which arise on the appeal to this Court concern the operation of the dishonesty exclusion in a solicitor’s policy of professional indemnity insurance.  That exclusion requires attention to the specific act or omission of the insured or of the partner of the insured which is said to have brought about the liability.  It is common ground that the relevant act or omission in this case was the payment away by Mr Powles of an amount of $8.55 million on about 15 January 1992.  Specifically the issues are, first, whether that act of payment away was correctly characterised as dishonest or fraudulent within the meaning of the exclusion and, second, whether, in the absence of any intention on the part of Mr Powles to defraud the Nauruans of the funds, the liability of the firm to the Nauruans can be said to have been brought about by his dishonest act in paying the money away.

In relation to the first issue, it is our submission that the act of payment away was not correctly characterised as dishonest according to ordinary notions.  I will return to deal with that submission in detail shortly.

In relation to the second issue, we submit that the firm’s liability to the Nauruans for the loss of the money was not brought about by Mr Powles’ dishonest act in paying it away because he did not intend that the loss occur, and it was not part of any dishonest purpose that he had that the money should be stolen or that the Nauruans should be deprived of it.

KIRBY J:   It would be very rare that a miscreant intended that a loss would occur, very rare indeed.

MR MEAGHER:   We submit that in this case for a dishonest act to bring about a liability for a loss, the relevant act must be sufficient of itself to cause the loss, or the act must be intended to have that consequence, and that it is not sufficient if it is a likely or possible consequence.

GLEESON CJ:   I gather that the liability itself was not established by some other litigation.

MR MEAGHER:   There were proceedings in the English High Court in which the Nauruans sued the firm for sums of money, including the $8.55 million.  Those proceedings were eventually compromised.  Your Honours will find in volume 1 of the appeal book, in the judgment of the trial judge commencing at page 277, an analysis to the way in which that claim was formulated.  I was not proposing to take your Honours to that in detail now, but as a point of reference.  There is not in the appeal book the pleadings in the Nauruan proceedings, but ‑ ‑ ‑

KIRBY J:   I think the special leave hearing was told that the cause of action was breach of fiduciary duty, is that correct?

MR MEAGHER:   It was put in three ways as appear specifically at page 283 of volume 1:  the breach of mandate, the breach of fiduciary duty, and for breach of a duty of care.

KIRBY J:   What is breach of mandate?  Is that some equitable notion?

MR MEAGHER:   No, your Honour.  We understand it simply to be a breach of the terms upon which the monies were paid to Mr Powles and upon which he was entitled to pay them away.

KIRBY J:   Was it characterised in law as a contractual claim, was it?

MR MEAGHER:   Yes.

KIRBY J:   And was that the contract of retainer?

MR MEAGHER:    I am sorry.  My recollection is that it was ‑ ‑ ‑

KIRBY J:   I can understand, two, that is the equitable fiduciary duty and three is negligence, I suppose.  But four looks like a funny way of pleading a contract or a claim of a contract of retainer.

MR MEAGHER:   It was pleaded that the firm was the agent of the Nauruans to receive and hold the funds, and then to pay them away in accordance with the instructions of the intermediary, Linpar.  So, in that sense, the basis of the claim was contractual.

GLEESON CJ:   That is what I would like to understand a little better than I do at the moment.  On page 412 at line 19 there is a reference to the payment by the Nauruan Trust into the Westpac account in London.  Where do we most conveniently find the terms of the retainer or instructions pursuant to which that payment was made by the Nauruan Trust to the Westpac account?

MR MEAGHER:   There are two letters which principally record the basis of the payment.  Could I ‑ ‑ ‑

GLEESON CJ:   Just the references will do.

MR MEAGHER:   Your Honour, I will give your Honour the reference in the trial judge’s reasons.  The first is referred to at page 162 between lines 10 to 20.  This was a letter from Mr Madden of Linpar to the trust on 18 December in which he sets out the basis upon which Allens were to hold the funds.  That is, Linpar would purchase the instrument on behalf of the trust and would thereafter have authority to proceed to sell it.  That was a communication between Linpar and the Nauruans.  It was not a communication which was received by the firm.

GLEESON CJ:   But had Linpar been introduced to the Nauruans by Mr Powles?

MR MEAGHER:    No.  Linpar was introduced to the Nauruans by a man named Walsh, but Mr Powles did not become aware of the communications between the Nauruans and Linpar on the evidence, I think, until 4 December 1991.  Prior to that time, and from about October 1991, there had been dealings between the Nauruans and Linpar with respect to this proposed instrument series of transactions.  The detail again of those communications is set out in the judgment of the trial judge commencing at page 142. 

Returning to your Honour the Chief Justice’s question, the second document, in particular, is a letter at page 164, which is a letter from Mr Madden of Linpar to Mr Powles of 20 December, informing him that he would shortly receive funds from the trust.

Then the communication from Mr Madden, in effect, reflected the instructions of the Trust.  At this time, that is at the time this letter was sent, the transaction involved payment away to a bank named Merrill Lynch, but it was proposed that Mr Powles would receive the funds into his trust account with Westpac, then set up an account at Merrill Lynch, advance a sufficient sum of moneys to that account to enable the purchase of a standby letter of credit and instruct Merrill Lynch upon the purchase, the standby letter of credit to be purchased in the name of the firm.

Now, the evidence was that that letter, although a communication from Mr Madden to Mr Powles, was received by the Trust and, as his Honour the trial judge found, it indicated to the Trust, first of all, that Mr Powles was going to have to pay the money out of the Westpac account before receiving the instrument and, secondly, it indicated that the price of the instrument may be less than the sum which the Nauruans were paying to Mr Powles.

HAYNE J:   But does this letter, or does this letter with the earlier letter, contain the instruction, “Do not pay away without receiving the instrument”?

MR MEAGHER:   No, there was no such ‑ ‑ ‑

HAYNE J:   Then where lies the alleged breach of mandate? Am I right, first, in thinking that the alleged breach of mandate, that is the alleged breach of explicit instruction was in paying away without having in hand the instrument that was being bought or is there some other breach of mandate alleged?

MR MEAGHER:   The breach, if your Honour goes to page 284 – and this is a summary of the pleading – first, in paragraph 6 your Honours will note that the obligation of the solicitors was alleged to be to:

at all times have control over all the moneys to be invested, over all instruments bought –

so that whilst the solicitors might pay the money away, they were not able to part with control and the alleged breaches in paragraph 11(a), a:

failure to ensure that at all times Allens retained control over the Nauruan Trust’s funds by causing the funds to pass out of Allens’ control without obtaining control over the required bank instruments ‑ ‑ ‑

HAYNE J:   So put shortly and perhaps to an extent inaccurately, but put shortly the breach of mandate is you paid away without having control over the instrument that you were buying.

MR MEAGHER:   You paid away without having retained control over the funds.

HAYNE J:   Yes.

MR MEAGHER:   Yes.

HAYNE J:   Well, where is the instruction, “Do not lose control of the money without first having control of the instrument”?

MR MEAGHER:   Your Honour, my recollection is that there is not in the evidence or in any of the communications an express instruction to that effect.

HAYNE J:   Well, where is the breach of mandate?

MR MEAGHER:   The breach of mandate was alleged and denied in the proceeding.  We do not concede that there was a breach of mandate in any sense other – the firm did not concede a breach of mandate in the proceedings in ‑ ‑ ‑

KIRBY J:   Is the mandate simply another – forgive me if I am missing something, but is the mandate something other than the contract of retainer, because if it is, there would be an implied term, would there not, that a solicitor would not part with funds entrusted to the solicitor except on the authority or for the purposes of the client?

MR MEAGHER:   Your Honour, there was no retainer by the Nauruans of the firm in what might be a generally understood sense.  The role of the firm was put to the Nauruans as being to receive and hold the funds and to pay them away in accordance with Linpar’s instructions.

KIRBY J:   In its trust account.

MR MEAGHER:   In effect as what was described as a fiduciary agent.  So it was more in the nature of an agent to hold the funds and then to pay them away and, to the extent that they were held, the firm was a trustee.

GLEESON CJ:   Allens had no trust account in London, did they?

MR MEAGHER:   In fact, it had no trust account, although the findings are that Mr Powles represented this account to be a trust account of the firm.

GLEESON CJ:   On page 422 in paragraph 60 in two sentences the Court of Appeal summarises the wrongdoing of Mr Powles, as I understand it.

MR MEAGHER:   Yes.

GLEESON CJ:   Now where, in the second sentence, it is said, “His duty was to ensure” et cetera, is that a reference to a duty of care or a fiduciary duty or both?

MR MEAGHER:   The paragraph does not indicate, your Honour, but we understand it as referring to a breach of duty at law as well as a breach of fiduciary duty.

GLEESON CJ:   It is said on page 423, paragraph 61, last sentence, that he failed to seek a condition “that the funds be held until receipt of the security”, but had he ever been instructed to do that or had he been instructed to do something different?

MR MEAGHER:   The finding of the Court of Appeal refers to an unambiguous condition.  In fact, Mr Powles did seek to impose a condition.  The condition which was imposed was ambiguous but he was not specifically instructed by the Nauruans to impose any condition.  The condition that he in fact sought to impose was one he was instructed to impose by Mr Madden in the course of giving effect to his instructions when paying the money away.

HAYNE J:   What is the legal significance of Madden having given him that instruction?

MR MEAGHER:   The legal significance is that under the arrangement between the Nauruans and Mr Powles, Mr Powles was to act on Mr Madden’s instructions in seeking to acquire an instrument.

HAYNE J:   And thus Madden’s instruction which was of to what effect, do you say?

MR MEAGHER:   Madden’s instruction was to the effect that you should pay the money away to this Commonwealth National Bank on the terms that had been worked out between Mr Madden and a Mr Searle, who was the introducer of this transaction to Mr Madden.

GAUDRON J:   Can I take you back to page 422, Mr Meagher, paragraphs 62, 63, “and in breach of trust”.  Does that refer to the secret commissions or to something else?

MR MEAGHER:   I am sorry, I missed your Honour’s line.

GAUDRON J:   Paragraphs 61 to 62.  He paid it away “in serious conflict of interest” - that I can understand – “and in breach of trust.”.  Do those words “and in breach of trust” relate to the secret commission or to something else, or the bribes – I can understand the bribes perhaps to the Nauruan official or his daughter or something of that kind.

MR MEAGHER:   We can only understand it as referring to some breach by the trustee of a duty of care if it can be formulated as a trustee’s breach of a duty of care.

GAUDRON J:   I do not know that I understand that, Mr Meagher.

MR MEAGHER:   Your Honour, I cannot ‑ ‑ ‑

GAUDRON J:   It is not your expression, is it, so I - - -

MR MEAGHER:   No, it is not my expression.  There was, and we have to accept this, a payment away of the balance of this 8.7 million - that is the difference between the 8.55 and the 8.7 which was received – for purposes which were not those of acquiring an instrument.  There were made, as we understand it, findings of breach of trust with respect to those payments, but those payments were subsequent to the relevant payment away.

GAUDRON J:   This seems to relate only to the payment of the 8.55 million.

MR MEAGHER:   Yes, but we would submit that the terms of the Trust permitted Mr Powles to pay it away for the purpose of acquiring an instrument in accordance with Linpar’s instructions, and that that is what he sought to do.

GLEESON CJ:   But it is a central question whether the payment out of the $8.5 million was dishonest or fraudulent or both.

MR MEAGHER:   Yes, characterised as such.  That is the central question on the first issue that I identified for the Court, which your Honours took me from.  If I could just return to say what, as I think I have said to your Honours, the second issue is whether that, assuming there was a dishonest act, whether it brought about the liability in the sense required.  As I have, I think, indicated to your Honours, we submit that – and I will elaborate on this – that the expression “brought about by” requires that the relevant act or omission either be sufficient of itself to cause the liability or the loss, in this case of the $8.55 million, or that it be intended to have that consequences.

KIRBY J:   Is the relevant payment out the one referred to on page 412, line 40?

MR MEAGHER:   Yes.  To elaborate, your Honour, to talk of it as a “payment out” masks what happened.  There were three steps involved in the payment out, or the payment away.  If I could identify those for your Honours.  The first was the opening of an account at the Commonwealth National Bank.  The second was the giving of instructions to Westpac on 15 January to transfer the money to an account at Barclays, Mr Powles’ understanding that that was the means by which the funds were to be credited to his account with the Commonwealth National Bank.

KIRBY J:   That was his personal account, was it?

MR MEAGHER:   No, it was an account at Barclays Bank which was in the name of a Mr Glasby.  But his instructions were that the means by which he would credit the funds to the account with the Commonwealth National Bank was to pay it to this Barclays account; that being the second step.  The third step ‑ ‑ ‑

KIRBY J:   Whilst it was with Westpac it was nice and safe.

MR MEAGHER:   Yes.

KIRBY J:   Once it moved out of that to Mr Glasby’s account, he was on the way to losing control of it.

MR MEAGHER:   Yes.  Once the moneys were paid to ‑ ‑ ‑

KIRBY J:   Was it suggested that the Nauruans Trust had authorised the payment to Mr Glasby’s account?

MR MEAGHER:   It had in the sense that Mr Powles had Mr Madden’s instructions to pay, or to follow that course in order to pay the moneys to the Commonwealth National Bank.  The arrangements, as I have said, which Mr Powles was seeking to give effect to were those worked out between Mr Madden and Mr Searle.  But the third step of the payment away was the giving of instructions to the Commonwealth National Bank to conditionally transfer the funds to another account at that bank, which was styled RITC Paymaster.

HAYNE J:   By whom were those instructions given?

MR MEAGHER:   Those instructions were given by Mr Powles, but again they were given as a result of the meetings which took place on 14 January between Mr Powles and Mr Madden and Mr Searle.

I will not take the Court to the detail of that, but the trial judge’s findings with respect to these matters is set out at pages 177 to 183 of volume 1.  And the instruction to transfer to the account of RITC paymaster is at page 183 and that is the instruction which the Court of Appeal refers to as constituting Mr Powles’ failure to give an unambiguous instruction.  If I could take your Honours just to that.  The instruction was given on 15 January to credit the paymaster account with the 8.55 million, which was said to represent:

funds for the purchase and delivery of a one year zero per cent interest standby letter of credit.

There was an instruction to debit the account and then there was a statement that the:

payment was irrevocable, divisible, assignable and transferable for the release and disbursement without further notice of all funds of this transfer instruction, for the purposes described …”.

HAYNE J:   Just before you go from this, because I am, at the moment, a furlong behind you, Mr Meagher, and I would like to catch up.  This fax you have just taken us to is said, by the trial judge, at 182 in the last two lines to have been received by Powles from Searle.

MR MEAGHER:   Yes.

HAYNE J:   Searle relevantly had what authority to give this instruction on behalf of the Nauruans?

MR MEAGHER:   He was identified by Mr Madden as the intermediary who was introducing or arranging for the purchase of the instrument.  If your Honour goes back to page 176, lines 20 to 25, there is a reference to the meetings in London attended by Searle, Madden and Powles on 14 January.

HAYNE J:   And is it your case that Madden had authority from the Nauruans to give an instruction to Powles that he, Powles, should comply with what Searle told him to do?

MR MEAGHER:   No, I cannot put it that high, your Honour.

HAYNE J:   Is this instruction which Powles gave an instruction which was within or without?

MR MEAGHER:   We say it was within authority, because it was done with the express consent and approval of Mr Madden.  And if your Honour goes back to the letter I took the Court to at page 162 - one of the problems with this case is that there are not the direct communications between the Nauruans and Powles which lay out what would be the obligations one has to find them in the communications between the Nauruans and Madden.

GLEESON CJ:   The related problem, is there not, is that there was a rather dim view taken of Mr Madden by the trial judge?

MR MEAGHER:    Yes, but your Honour ‑ ‑ ‑

GLEESON CJ:   Presumably Mr Powles’ client was the Nauru Phosphate Trust.

MR MEAGHER:   We would suggest that his client was Linpar.

GLEESON CJ:   Let me be more accurate.  To whom was the liability the subject of the policy of insurance owed?

MR MEAGHER:    To the Nauruans in respect of the ‑ ‑ ‑

GLEESON CJ:   When you say “the Nauruans”, there were a few of those of whom a dim view was taken also.  Presumably the liability of Allen Allen and Hemsley, the subject of this insurance policy, was a liability to the Nauru Phosphate Trust.

MR MEAGHER:    Yes.

GLEESON CJ:   Am I right in thinking that was a body whose affairs were controlled by a group of people called “commissioners”?

MR MEAGHER:    Yes.

GLEESON CJ:   Now, by what process of reasoning, or what chain of facts, led to the result that Mr Powles was able to discharge his obligations to the Nauru Phosphate Trust by following the directions given by Mr Madden?

MR MEAGHER:    In effect, your Honour, the evidence indicates – the fact of his authority to work with the funds was initially communicated to him by Linpar.  One of the principal communications is the communication of 20 December which I took the Court to at page 164.

HAYNE J:   That tells me how he got his instruction, it does not tell me that that instruction is sufficient.  Why was it sufficient for him to act on what was told to him in those letters you have taken us to at 162, 164?

MR MEAGHER:    Without satisfying himself that Mr Madden, in fact, had the authority of the Trust.

HAYNE J:   At some point Allens is held liable to Nauru Phosphate Trust.  It is held liable on various bases.  As I understand it, there is a great raft of communications that happen about this transaction.  What I want to understand, and do not yet, is what you say are the legally significant communications that happen in order to determine, one, there was a liability and, two, whether or not the exclusion applies.

GAUDRON J:   While you are at it, can there be any relationship between Linpar and the Nauruan Trust which would explain that, other than agency?

MR MEAGHER:    I think, in answer to your Honour Justice Gaudron’s question, the answer is probably none.  With respect to the ‑ ‑ ‑

GAUDRON J:   How do we find communications which establish Linpar’s agency is what we need, is it not?

MR MEAGHER:    The principal communication establishing Linpar’s agency, which was not communicated to Mr Powles, is the communication of 18 December.

GAUDRON J:   Yes.  Now, this is a letter from Linpar to the Nauruan Trust.

MR MEAGHER:    Yes.

GAUDRON J:   Asking the Nauruan Trust, really, to confirm that Linpar is its agent.

MR MEAGHER:    Yes.

GAUDRON J:   Well, did the Nauruan Trust later do that?

MR MEAGHER:    Not in express terms, but by necessary implication from the communications which followed, your Honour.

GAUDRON J:   May I take it another way?  May I take it that the case has been conducted by the Nauruan Trust on the basis that Linpar was its agent and that has not been contested?

MR MEAGHER:    That is certainly so, your Honour.

GAUDRON J:   And that is so in the United Kingdom and in Australia?

MR MEAGHER:    Yes.  That point is made good when one looks at the allegations which the Trust made in the proceedings in the English High Court if one goes to 284 of volume 1.  It was implicit in the way the Trust put the case that there had been no direct communications between the Trust and Mr Powles as to how or in what circumstances he was to pay the moneys away in return for an instrument, that Mr Powles should act on the instructions of Linpar.

GLEESON CJ:   What are those quotations on page 284, quotations from you see in point ‑ ‑ ‑

MR MEAGHER:   They are from the pleadings, your Honour.

GLEESON CJ:   No, point 4 of the amended points of claim puts quotation marks around a group of words beginning with the word “controlled” and ending with the word “investors”.  What is that a quotation from?

MR MEAGHER:    That is a quotation from the amended points of claim.

GLEESON CJ:   I see.  It is not a quotation from some communication?

MR MEAGHER:    No.  As I have said, the pleadings are not set out in the appeal books, but we can make arrangements to have copies of those pleadings provided to this Court.  So that returning to the question that your Honour Justice Hayne asked me some time back, we do not come here seeking to establish to your Honours’ satisfaction that if the matter in the English High Court had proceeded to judgment there would necessarily have been a liability based on a breach of mandate.  It is sufficient that there was a claim made making those allegations which was the subject of a bona fide compromise and it is that liability in respect of which the firm seeks the indemnity.

The relevance of the way in which the Trust formulated its claim and, indeed, the way in which the Court of Appeal dealt with the matter is that, in our submission, it was not in issue but that Mr Powles had authority to pay the money away for the purpose of acquiring an instrument provided he was doing so in accordance with Linpar’s instructions.  We accept, though, that in addition he had obligations to retain control of the funds if he was to pay them away before receiving the instrument.

The relevance of the distinction is that it was not in contest that Mr Powles was entitled to pay away for that purpose or that he believed that he was entitled to pay away for that purpose.  What is in contest is whether he appreciated when he, in fact, paid them away that he was not retaining control of them such that he was consciously or deliberately disregarding that aspect of his duty and doing so for personal gain in the sense that he was preferring his personal interest.

Now, we accept that if Mr Powles paid the money away preferring his own interest, that is to earn the secret commission, knowing that he was not entitled to pay it away because he was not retaining control when he was paying away, that his action in doing so would be properly characterised as dishonest and we make that concession in part having regard to passages in the judgment of this Court in Peters v The Queen but the ‑ ‑ ‑

HAYNE J:   Does it follow therefore that the solicitor who in the standard house conveyancing transaction chooses to settle without the final cheque search, knowing that he is in breach of ordinary conveyancing practice but does so to save the money that would be paid on the cheque search, is therefore within the fraud exception to the policy?

MR MEAGHER:   No, your Honour.

HAYNE J:   What is it that distinguishes that case from the hypothesised case you have described?

MR MEAGHER:   In the case your Honour puts, he disregards his duty to save money for the client.

HAYNE J:   That is for his own – let it be assumed he disregards it in order that he may close the transaction a day earlier and get the fees in a day earlier for his own benefit.

MR MEAGHER:   There may be no difference from the point of view of characterisation between that example and what we put.

HAYNE J:   Thus the element of personal gain and knowing breach of duty are the two elements upon which you fasten in this limb of the argument or concession you make?

MR MEAGHER:   Yes.  What we submit is that neither the trial judge nor the Court of Appeal sufficiently addressed the question whether, when Mr Powles paid the money away, he knew he was not entitled to because he knew he was not retaining control and he did so preferring his own interest.  We submit that had the Court of Appeal and the trial judge addressed that question, they would not have characterised his act of payment away as dishonest.

GAUDRON J:   How can we know that?

MR MEAGHER:   That they erred in characterising it as dishonest on that basis.  What I would seek to do then in relation to this first issue is to go briefly to the findings and reasoning of the trial judge, because the Court of Appeal first agreed with the characterisation of the trial judge of the relevant act of payment away as dishonest and then it went on to make further findings both with respect to the act of payment away and with respect to other matters, and it is necessary to consider the effect or consequence of those further findings.

It will be necessary for me to take your Honours to five or six passages in the judgment of the trial judge to make good the proposition which I wish to put, which is that in effect what the trial judge found was that the explanation for Mr Powles’ negligence or recklessness in failing to retain control was his self‑interest in the sense that it motivated him, but there was no finding that it was a conscious preference or a deliberate preference.  We say that is critical.

KIRBY J:   Is the effect of it that he was blinded by his self‑interest to concerning himself with the interest that ought to have been paramount, namely, those of the Nauruan Trust?

MR MEAGHER:   The way the Court of Appeal puts it – and I will take the Court to this – is that he was obsessed by this market and blinded to the usual prudential inquiries which a solicitor might make.  In our submission, that is not sufficient to provide a basis for a finding of dishonesty.  The obsession is consistent with ‑ ‑ ‑

HAYNE J:   Stupidity.

MR MEAGHER:   Stupidity or gullibility.

CALLINAN J:   Mr Meagher, the trial judge found that Mr Powles believed in the legitimacy of the stand‑by letter of credit.

MR MEAGHER:   Could I take your Honours through this line of findings of the trial judge, because it is necessary then to consider which of these findings should be regarded as overturned by the Court of Appeal.         First, at page 236 – and this is not the only place where it appears – at lines 25 to 30, the trial judge said:

I have been left in no doubt at all that Powles had no intention to defraud the Nauruans Trust of the subject 8.55 million.  I am as satisfied…..notwithstanding his scepticism of the capacity of those with whom he was dealing to gain access to the pbi market, that he maintained a belief in its existence.

He then refers to the evidence which provided the indication of that, some of which involved communications concerning the subject with reputable third parties, both bankers and others.

The second finding that the trial judge makes, which in our submission is relevant, is back at page 140 between lines 14 and 21.  His Honour found that:

I have no doubt that where the interest of the investor clashed with Powles’ interests, it would be Powles’ interest that would prevail if he thought he could carry it off without imminent exposure of his dishonest.

There is a question here ‑ ‑ ‑

KIRBY J:   Which line is that?

MR MEAGHER:   That is between lines 15 and 20.  There is a question here of identifying precisely what Mr Powles’ interest was.  The Court of Appeal identified it in paragraph 60 of its judgment.

KIRBY J:   What does the trial judge mean by “imminent exposure of his dishonesty”?  What dishonesty was he referring to there?  Is that a finding that there was dishonesty?

MR MEAGHER:   It is a reference to other acts of dishonesty on the part of Mr Powles.  Mr Powles had, for a number of years prior to 1991 and, indeed, prior to his taking up residency in London, been stealing moneys from clients and representing to the clients that the funds had been invested on mortgage, making payments to the clients to continue the pretence that the mortgages existed and the interest payments were being made.  So that there were certainly other dishonesty on the part of Mr Powles which preceded this and which his Honour considered would, if it exposed him to imminent exposure of that dishonesty, prevent him from acting in circumstances where his interests conflicted with those of the client.

GLEESON CJ:   I would have thought that is a reference to something rather more specific.  If you look further up the page, it is a reference to the secret commissions he was getting in connection with these transactions, is it not?

MR MEAGHER:   It is more general, your Honour, because of the sentence commencing at the end of line 13 ‑ ‑ ‑

GLEESON CJ:   It includes those, does it not?

MR MEAGHER:   It certainly includes – the secret commissions:  there have been, in fact, no secret commissions received from this trading before the Nauruan money was received.

GLEESON CJ:   Was he to get a secret commission in respect of this amount of 8.7 million?

MR MEAGHER:   Yes.  He was to receive – the evidence is unclear, but he was to receive either a sum of $100,000 or to receive a percentage of what was described as the net commission to Linpar.  It was to be secret in the sense that it was to be secret from his partners.

GLEESON CJ:   So that was an aspect of specific dishonesty that was related to this particular transaction.

MR MEAGHER:   Yes.

HAYNE J:   What do you mean by the qualification “it was to be secret from his partners”?  Was it to be secret from whoever his client was?

MR MEAGHER:   It was known to Linpar, obviously, and it was not known to the Nauruans.  The evidence did not indicate that the Nauruans knew how Mr Powles was to be remunerated.

GLEESON CJ:   If you use this expression “the Nauruans”, bearing in mind some of the findings about some of the people who are employed by or in the interests of the Trust, it may be necessary to be a little more precise about that.

MR MEAGHER:   I will use the expression “the Trust”, your Honour.  There was no evidence that the Trust was aware that Mr Powles was receiving any payments from Linpar.

KIRBY J:   You are being very careful, and properly so, and very candid, and I express appreciation for that.  But if one is trying to characterise these acts and determine whether they are dishonest or not, is it not relevant to see them in the context of the course of conduct which you have just indicated, not only in respect of this act, which included elements of dishonesty to the Nauruan Trust, but also the dishonesty to previous clients and other clients in different circumstances.  It would be odd to say ‘This one is isolated.  It is otherwise.  Isolated from all the acts.’

MR MEAGHER:   We do not suggest it should be isolated, your Honour.  We accept that it is necessary to examine these other earlier matters and subsequent matters to the extent that they bear upon his state or mind or belief at the time he paid the money away.

GAUDRON J:   And that time, for relevant purposes, is when he authorised the money into RTIC Paymaster.

MR MEAGHER:   On 15 January.

GAUDRON J:   With that letter which said the purpose of this payment is to get this letter of credit?

MR MEAGHER:    Yes, and which, on one view, purported to impose a condition that ‑ ‑ ‑

GAUDRON J:   That it was not to be paid out, except for the letter of credit.

MR MEAGHER:   Yes.

GAUDRON J:   But it, in fact, was.

MR MEAGHER:   Yes.

GAUDRON J:   And really was he dishonest in not imposing tighter conditions?

MR MEAGHER:   The question, as we would formulate it, is whether, when the money was paid away, in fact with Mr Powles losing control, he did so knowing that he was not retaining control.

GAUDRON J:   Knowing that he was risking the money, I suppose?

MR MEAGHER:   Because he was not retaining control.

GAUDRON J:   Yes.

MR MEAGHER:   We would submit, one has to draw a distinction, and it is a distinction which the Court of Appeal, on our submission, does not draw sufficiently between what might be regarded as the risks inherent in the transaction which he was authorised to undertake, namely, to acquire this instrument, and the specific risks inherent in paying the money away without retaining control, which were involved in his act.

GLEESON CJ:   Is part of the point of the finding that you are taking us to at page 140 line 15, that the trial judge took the view that if it had not been for his own personal interest in obtaining this secret commission, he would have been slower to pay the money over?

MR MEAGHER:   Yes.  But the trial judge goes on to find ‑ ‑ ‑

HAYNE J:   Just before you go on to the further finding, on what is this finding based?  Inference from documents, is it not?

MR MEAGHER:   Yes, Mr Powles did not give evidence.

HAYNE J:   Am I right in understanding that this is not a case in which the findings of dishonesty depend upon assessment of witnesses and assessment of motives according to oral evidence given?  It depends upon assessment drawn from consideration of the documents?

MR MEAGHER:   Your Honour is correct, and that fact is expressly noted by the Court of Appeal in paragraph 45 of its judgment.  But could I take your Honours to ‑ ‑ ‑

KIRBY J:   Could I just ask you this.  I am just a little curious of the structure of your argument.  You have launched straight into this sort of factual analysis and this despite what was said on the special leave application that we could just start from the facts as found, but logically it would just seem to me you start with the policy, the words of the policy, what the policy was intended to do, what the exclusion was intended to do, its operation, and then you look at the facts in the particular case measured against the inferences drawn about what the policy is meant to work.

MR MEAGHER:   Your Honour, the second argument which I seek to put to the Court will require that one looks at the policy in the way in which your Honour has described.

KIRBY J:   I am just curious why you – I mean, you will take your own course.

MR MEAGHER:   What I am seeking to do is to address, first, what we describe as the characterisation argument.  We do not seek ‑ ‑ ‑

KIRBY J:   It is only relevant in so far as it enlivens the words of the exclusion.  That is all.  That is the only relevance of it.  Anyway, we are embarked on this ‑ ‑ ‑

MR MEAGHER:   We have embarked on it, your Honour, and I ‑ ‑ ‑

GLEESON CJ:   Well, that is the second of the findings that you have taken us to I think.

MR MEAGHER:   Yes.

GLEESON CJ:   Now, what is the third?

MR MEAGHER:   The next is at page 265 and it starts at line 20 and continues through to line 41.

GLEESON CJ:   The reference to the word “entitled” in line 21; do you see that?

MR MEAGHER:   Yes.

GLEESON CJ:   Would that also be accurate if for the word “entitled” you substituted the word “bound”?

MR MEAGHER:   Yes.  The specific findings that we seek to emphasise are at lines 31 and following, namely that he believed:

that he was following a course which would see the funds go into his client settlement account with Commonwealth and from there to the RTIC paymaster account for the express purpose of payment away of those funds only upon provision of the required letter of credit –

so a finding that he believed that the payment away was subject to a condition and, secondly:

that Commonwealth well understood this purpose and would act only in that way.

GAUDRON J:   Does that amount to a negative finding that he did not know that he was risking the money by the direction to put into the paymaster account?

MR MEAGHER:   Could I answer your Honour’s question this way:  it amounts to a finding that he did not know that when he was paying the moneys away he was, in fact, losing control of them.

GAUDRON J:   Well, yes, I can see why you say that but I am not sure that the negative proposition necessarily flows from those four or five lines.  It is something I might need to think about.  In fact, it goes back to what I asked you before I think a long time ago.  Let us assume that you are right for the moment that in accordance with Peters there would be dishonesty if he risked the funds – I will just say “risked the funds” because that accords with my understanding of Peters, but you can take that to mean in the particular case that he was at risk of losing control of the funds because he wanted – he risked the funds because he was desperate to get this secret – hoping to get this secret commission; that he knew he was risking the funds and he did that because he hoped to get the secret commission.

Let us assume you are right that that would be dishonesty but nothing else would be dishonesty in the context of this case.  Would it not be the case, if the matter turned on the first point, the first of your arguments, that there would have to be a retrial?  You see I just do not think anyone in this case is really addressing the question that has emerged in the course of argument this morning.

MR MEAGHER:    In a sense, the question is addressed by the trial judge to the extent that he makes the relevant findings.  We submit, simply, that he does not properly address the question of characterisation.

GAUDRON J:   Yes, but if it came to characterisation – I know you have a causation argument as well – would that not have to go back for retrial, unless one can turn this around as a negative corollary, as you contend, I suppose – implicitly contend.

MR MEAGHER:   That is what we contend for, but to put it this way, and perhaps to answer your Honour’s question in a different way, we simply rely on the absence of a finding that Powles knew ‑ ‑ ‑

GAUDRON J:   Yes, half thinking of that.  Who bore the onus on this?

MR MEAGHER:    The insurers must bear the onus.  They seek to make out the exclusion and to seek to say that the conduct bears that characterisation as part of that argument.

GAUDRON J:   But I do not know that onus would determine matter, would it, if the wrong question has been addressed or if the right question has not been addressed?

MR MEAGHER:   In respect of the characterisation issue, your Honour, we submit that the only basis on which the trial judge found that the act of payment away involved dishonesty was to the extent that he found that Mr Powles’ conduct was motivated by the self-interest, the secret commission ‑ ‑ ‑

HAYNE J:   Much may then turn on whether you are right to answer the Chief Justice as you did, that the statement at line 21, “entitled to act on the instructions of Linpar”, can properly extend to saying “bound to”.  If bound to act on the instructions of Linpar, does it follow then, instruction given, his motive becomes either irrelevant, less relevant, less operative – I do not quite know what characterisation?

MR MEAGHER:    I think I should have been more precise in my answer to the Chief Justice’s question.  Let me go back a step.  The finding at lines 20 and 21 is that Powles regarded himself as entitled.  We submit that can be read as “bound” to act on the instructions of Linpar.  There is a further finding of the trial judge that, as a matter of analysis, the relationships – Mr Powles had an obligation in giving effect to Linpar’s instructions to take steps to retain control.

HAYNE J:   Can we blow the question out a bit this way?  Take the finding as it stands, regarded himself – so, we are dealing with Powles internal knowledge – as entitled to act.  Linpar give an instruction, do they, pay it away in this fashion, including pay it to the RTIC Paymaster Account according to the instruction, the text of which we give you?

MR MEAGHER:    Yes.

HAYNE J:   If entitled to act on that instruction, a further question might arise in the relationship between Nauru Phosphate Trust and Allens about whether Allens should have given advice at that point, “You have instructed us by your agent to do it this way, but that is not a careful way of doing it.  We advise you, as a prudent solicitor, you should do it that way, not this way”.  But, if entitled to act on the instruction, “We then rolled over into - well, failed to give careful advice because dominated by” – put it as high as that – “dominated by the personal greed of getting the secret commission”.  Now, where then does dishonesty lie on that kind of analysis?  I do not know.

MR MEAGHER:   Your Honour, if one takes the general statement that it may be dishonest to act in a way in which you are not entitled to act, thereby prejudicing the interests of a third party ‑ ‑ ‑

HAYNE J:   But you have assumed it by saying “not entitled to act”.

MR MEAGHER:   But the question then becomes one of examining the state of mind of, in this case, Mr Powles.  If one finds that he believed he was entitled to act on Linpar’s instructions subject to his exercising care towards an objective, namely, to retain control, then the question is whether he believed that he had done sufficient to retain control.

GAUDRON J:   Is not really his entitlement to act in a sense irrelevant on the basis of your concession once you concede that dishonesty is knowingly risking the property of another for personal advantage, which in essence is how I think you made it?

MR MEAGHER:   Your Honour, one has to add the qualification “in circumstances where you know you are not entitled to do so”, because otherwise one ‑ ‑ ‑

GAUDRON J:   I am not too sure about that.

MR MEAGHER:   One could pay money away to someone with instructions that they place a bet in circumstances where there is plainly a risk.

GLEESON CJ:   What Justice Hunter seems to be worried about on the bottom of 265 is that there was an obligation owed by Allens to the Trust that extended beyond merely complying with everything that Linpar said.  Suppose, for example, that a person representing himself as the agent of a well known and respectable organisation says, “I’m going to get you to invest moneys on first mortgage on behalf of my client”, and the moneys are then paid into the solicitor’s trust account.  The agent then says, “Now, the way I want you to go about making that investment is this:  a man called Harry the Horse is going to turn up next Monday morning with a big brown paper bag.  I want you to transfer the money to his brown paper bag and he will effect the mortgage transaction”.  Is the solicitor “entitled” or “bound” to act in accordance with those instructions?

MR MEAGHER:   No.

HAYNE J:   Inevitably that will be so.  We will not be in the realm of discourse of this insurance policy unless the solicitor has been careless or worse.

MR MEAGHER:   That is so.

MR MEAGHER:   So the hypothesis for the debate must be that the solicitor has departed in some way from an obligation.  If the solicitor has not, no insurance cover question arises.

MR MEAGHER:   That is so as a matter of analysis.  The question then is:  did he do so deliberately?

GAUDRON J:   Well, “deliberately” I think is another area of discourse out beyond that which was contemplated in Peters - “knowingly” perhaps, knowingly prejudiced the interests of another, perhaps for his own personal gain.

MR MEAGHER:   It is sufficient for our argument that the disregard of the performance of the duty is conscious.

GLEESON CJ:   What did Justice Hunter find was the essence of the basis of the liability which was the subject of this policy?

MR MEAGHER:   It is probably to be found, among other places, at page 266, at lines 15 to 30, where his Honour says:

it was incumbent upon Allens to ensure that the funds were adequately protected in the course of the proposed transaction –

and that the payment away without any attempt to verify the credentials of the Commonwealth National Bank fell short of the performance of that duty.

GLEESON CJ:   Does that mean he found that this was a liability based in negligence, and although the negligent conduct of Mr Powles was in a context that involved dishonesty by Mr Powles, it was not the dishonesty that brought about the liability?  Is that the essence of his reasoning?

MR MEAGHER:   Yes, because the liability, looking at the matter from the point of view of the Trust’s claim, was for the loss of the money which was due to theft.

GLEESON CJ:   But did he not make a finding that the haste and imprudence with which the money was paid away was attributable to the desire of Mr Powles to earn a secret commission?

MR MEAGHER:   Your Honour, that finding is, again, at page 266 between lines 34 and 41.  He puts it in terms of the undue haste with which the disbursement was effected being the product of the self-interest.

GLEESON CJ:   If the essence of the liability was the imprudent payment away of the money, and if the imprudent payment away of the money was attributable to Mr Powles’ desire to earn a secret commission, why was not the liability brought about by the dishonesty?

MR MEAGHER:   The first premise of your Honour’s question is that what was involved was properly characterised as dishonesty.  The trial judge finds that the self-interest, in effect, provided the motive for the way in which Mr Powles acted.  He makes that finding at pages 270 ‑ ‑ ‑

GAUDRON J:   Is it motive or explanation, really?

MR MEAGHER:   Explanation.

CALLINAN J:   Do you say that it is relevant that the secrecy was secrecy from the partners rather than from the Nauruan trustees?

KIRBY J:   There was secrecy from the trustees on the secret commission.

MR MEAGHER:   There was secrecy from both.  But we submit that the effect of the trial judge’s findings, when one looks at what he says at page 266 and then at page 270, is that the self-interest provided, as your Honour Justice Gaudron puts it, the explanation ‑ ‑ ‑

GAUDRON J:   For the imprudence ‑ ‑ ‑

MR MEAGHER:   One has to put it higher than imprudence, the undue haste.

GAUDRON J:   But again, I am suggesting the right questions, on your concession, are not addressed.  Is that not right?  There has to be at least knowledge of something.

MR MEAGHER:   Yes.

GAUDRON J:   And not merely a turning of a blind eye to the risks because of – when I say “turning of a blind eye” that is a bad expression; one should never use the expression “turning a blind eye”, I think, in this area of discourse, because you could turn a blind eye if you know of them, I suppose.  But failing to think about the risks is one thing because you are anxious to see something through for a personal advantage, but knowing of the risks is a different proposition, is it not?

MR MEAGHER:   Yes, your Honour, and the finding – if I could take your Honours back to page 268.

KIRBY J:   Relevant to her Honour’s question, it is suggested by some of the written submissions that it was within Mr Powles’ knowledge that what he was doing had inherent risks of fraudsters and that, indeed, he knew that that was a risk.  Perhaps when you are answering the question you might ‑ ‑ ‑

MR MEAGHER:   There are certainly findings to that effect, but if one goes to page 268 at line 39 and following, and one has to consider this finding in the light of subsequent findings in the Court of Appeal:

I do not think that he acted in a way from which it should be found that he knew that he was “imperilling or gambling” with the Nauruan Trust’s money.  I think the only risk that Powles would have believed the funds were under was the risk of being transmitted to the Commonwealth only to face an unsuccessful attempt to acquire the letter of credit transactions which would have required the return of the funds to the US dollar account.

And it is in that context that one has to consider what the Court of Appeal found, which was Mr Powles:

was so obsessed with the market that he was blind to normal prudential inquiries ‑ ‑ ‑

GAUDRON J:   Where is this ‑ ‑ ‑

MR MEAGHER:   This is in volume 2 paragraph 63 page 424.  This is after paragraph 62, the Court of Appeal refers to what it describes as “findings favourable to Powles” including the finding that he believed:

that the Commonwealth is required to retain the funds pending delivery ‑ ‑ ‑

GAUDRON J:   Again, there is that word “blind” ‑ ‑ ‑

MR MEAGHER:   And there is then, as your Honour notes ‑ ‑ ‑

GAUDRON J:   ‑ ‑ ‑ which is at the very least ambiguous.

MR MEAGHER:   It is, but the Court of Appeal describes it as something which is the result of an obsession with this market.

HAYNE J:   The task is to distinguish between stupidity, arrant stupidity, and fraud or dishonesty.  It is not self‑evident to me that “blind” describes one rather than the other.

MR MEAGHER:   In terms it begs the question whether it was conscious or wilful and the court ‑ ‑ ‑

KIRBY J:   One is in a realm of discourse here where we are talking of Mr Powles and his actions as if he were just an ordinary investment consultant, but he was a solicitor and presumably the purpose of using a firm of solicitors and a firm of solicitors with the reputation of your client was in order to get some uplift in integrity, honesty, fidelity, all of which was missing, and that is the context in which we have to construe the insurance policy.

MR MEAGHER:   I accept that, your Honour.  The question, with respect, though, to this first argument requires one to look at Mr Powles’ state of mind and belief at the time of this relevant act.  Could I also refer your Honours to the finding of the Court of Appeal in paragraph 64 which accepts that Mr Powles:

may have deluded himself into believing in the existence of the pbi market and that the market could be accessed without loss –

which it is said has to be:

offset against the abundance of evidence which told him that this was no more than wishful thinking, probably wishful thinking engendered by his own desperate situation.

Now, there is not, in our respectful submission, in either of those findings a finding of consciousness with respect to the payment away and the failure to retain control of the funds.

Indeed, the findings are more consistent with the conclusion that when the funds were paid away, Mr Powles did not believe that he had lost control or that by paying away and, in fact, having lost control he was exposing them to quite a different risk from the risk which was inherent in this market, of which he was aware, and which we submit the Court of Appeal refers to in his findings at paragraph 64.

GLEESON CJ:   Mr Meagher, what is the Court of Appeal referring to in the last sentence of paragraph 66?

MR MEAGHER:    Your Honour, I can only put suggestions.

GLEESON CJ:   I see, you challenge that finding?

MR MEAGHER:   We do not ‑ ‑ ‑

GAUDRON J:   Does it go back to the overt act pursuant to a conspiracy?

MR MEAGHER:   Your Honour, we think that it is a reference to payment away of funds other than the 8.55.  It certainly is explicable on that basis.  That is, that subsequently Mr Powles paid away the balance of the funds other than for the purpose of acquiring an instrument.

GLEESON CJ:   Is it a reference to the fact, first of all, that he was going to take a secret commission for himself out of this amount?

MR MEAGHER:   The Court of Appeal finds that he was to receive – one needs to go back to paragraph 58.  In paragraph 58, the Court of Appeal makes findings about what it describes as a modus operandi which involved misrepresenting the price at which the instrument could be acquired and then divvying up the difference between the price in fact and the price at which it could be acquired.  Now ‑ ‑ ‑

GLEESON CJ:   Well, does it come to this, that the $8.7 million was received into the Westpac bank account pursuant to a transaction under which it had been arranged that part of it was going to stick to Mr Powles’ own fingers, and part of it was going to stick to the fingers of Mr Madden, and part of it was going to go to one of the officers, or the daughter of one of the officers, of the Nauru Trust?  So that, before you get into the fine detail about what was going to happen to the $8.5 million and the precise circumstances in which it was going to be paid out, part of it was going to go by way of a secret commission to Mr Powles and others.

MR MEAGHER:   In fact, that is what happened, your Honour.  There was a case put by the insurers that there was a conspiracy between Mr Powles and the others to achieve the consequences which your Honour has identified.  That case, the trial judge found, was not made out and the Court of Appeal did not deal with it, and that is in paragraph 65.

GLEESON CJ:   Well then, the point of departure between the Court of Appeal and Mr Justice Hunter related to whether or not an inference should be drawn that Mr Powles knew that part of the risk involved in paying this money out in accordance with Linpar’s instructions was a risk of loss of the money altogether, or whether, as Mr Justice Hunter found, the only risk in that regard was a risk that the transaction would not go ahead and that the Trust would get the money back without ever having had an opportunity to make a profit on it.

MR MEAGHER:   In general terms, that is the distinction.  In other words, the finding that the Court of Appeal refers to in paragraph 62 of the trial judge that Mr “Powles did not know or imagine that there was a risk of loss of the funds”, must be regarded as overturned by the Court of Appeal by what it says in paragraph 63 and follows.

GLEESON CJ:   It is a disagreement about the nature and extent of Mr Powles’ dishonesty.

MR MEAGHER:   With respect, no, your Honour.  The Court of Appeal’s findings, in our submission, are properly to be regarded as findings as to Mr Powles’ general knowledge with respect to the risks inherent in this instrument trading.  And, in effect, the precautions which Mr Powles, as a matter of law, was required to take to retain control of the funds, for example, by identifying a reputable bank and then by paying to the bank in accordance with a strict condition, were precautions which were to be taken to minimise those risks.

The Court of Appeal, in our submission, should only be taken to have made findings that, at the outset, Mr Powles appreciated that there was a real risk of loss, and a significant risk of loss, in this market.  But it does not make findings that when he paid the moneys away to the Commonwealth National Bank, he did so, conscious of the fact that he had lost control.

GAUDRON J:   But it is not payment to the Commonwealth National Bank as such, it is payment to the Paymaster Account, is it not?

MR MEAGHER:   Yes.

HAYNE J:   Because the relevant sum in issue was the 8.55, not the whole of the 8.7 but it had been paid by Nauru Phosphate Trust to Allens.

MR MEAGHER:   That is so.  Just so it is clear:  the 8.7 was paid into the Westpac account.  In fact, between 1 and 14 August 8.55 was paid away to purchase a banker’s draft and was ultimately paid back into the account and then 8.55 was paid out of the account to Barclays’ Croydon, purportedly as a transfer to the Commonwealth National Bank.  We accept that the issue on the way we put this characterisation argument depends on a view as to the Court of Appeal’s finding with respect to Mr Powles’ knowledge of the risk of loss.  We submit that there is not, in those findings, a finding that, when he paid the monies away he gave the instructions that they be transferred to the Paymaster Account, he was conscious that he was losing control and thereby putting them to an unacceptable risk, as distinct from, in the course of paying away exposing them to the risks which he, on the Court of Appeal’s findings, was aware existed in this market.

GLEESON CJ:   Have you taken us to all the findings of Mr Justice Hunter you wanted to take us to?

MR MEAGHER:   I will just check, your Honour.  I think the answer to your Honour’s question is, “Yes”.

GLEESON CJ:   Thank you.

MR MEAGHER:   Could I just recap as to where I am in the argument.  We submit that so far as the trial judge is concerned, his characterisation of the act of payment away as dishonest was erroneous, because he did not address the question whether the payment away involved a consciousness that he was losing control and, thereby, exposing to a different risk from the risk that was involved in dealing in this market having taken control.

With respect to the Court of Appeal, we submit that the Court of Appeal does not overturn the trial judge’s findings that Mr Powles believed the Commonwealth was required to retain the funds pending delivery or that he believed in the market.  The Court of Appeal’s findings as to his knowledge with respect to the risk are findings as to the risks inherent in this instrument trading which Mr Powles was at the general level authorised to undertake.  There are three findings of the Court of Appeal which we submit are inconsistent with a finding that Mr Powles was conscious that he had not retained effective control.  The first is that in paragraph 63, that he:

was so obsessed with the market that he was blind to normal prudential inquiries –

The second is the finding in paragraph 64 that he:

may have deluded himself into believing in the existence of the pbi market –

and the third is the finding inherent in paragraph 61 that he sought to impose a condition:

that the funds be held until receipt of the security –

but in fact failed to impose an unambiguous condition.

So that the submission we ultimately put is that, in the absence of a finding that Mr Powles was conscious that he should not pay the money away because he had not retained control and had deliberately not sought to do so, neither the trial judge nor the Court of Appeal should properly have characterised the act of payment away as dishonest.

KIRBY J:   Your answer to the Chief Justice earlier indicated that you were not raising any Abalos‑type point that it was not open to the Court of Appeal to intervene here because of the advantages which the primary judge had in assessing the honesty of Mr Powles or dishonesty of Mr Powles.

MR MEAGHER:   No, but I should say, your Honours, we ‑ ‑ ‑

KIRBY J:   Can I just conclude the question, then you can answer.  That being the case and given that the Court of Appeal then had its own responsibilities on the appeal to examine the facts and to draw its own inferences from the facts, at least at this stage in this Court you have to show error on the part of the Court of Appeal in reaching the conclusion which it did.  It is not a matter of the traditional error which is often expressed here that the Court of Appeal’s error is in reversing the decision and assessment of the primary judge.  It is that the Court of Appeal itself made its error in drawing the inferences which it did.  What is that error?

MR MEAGHER:   We do not seek to challenge any of the findings of fact of the Court of Appeal subject to this qualification:  we seek to challenge the characterisation by the Court of Appeal of the relevant act of payment away as dishonest.  We have not, for the purpose of this argument, regarded that characterisation as itself a finding of fact, but the argument otherwise accepts the findings of fact and seeks ‑ ‑ ‑

KIRBY J:   But it is not a finding of law; it is an inference from the facts assigned to the words of the particular policy.  That sounds like a finding of fact.

MR MEAGHER:   In our submission, your Honour, it involves taking findings of fact with respect to the circumstances in which the relevant act occurred and particularly Mr Powles’ state of mind and belief and asking whether, in accordance with ordinary notions, that act of payment away was dishonest.  We submit that in the circumstances of this case, that question should be answered “no” in the absence of a finding of fact that the payment away occurred, conscious that there was involved a breach of duty in failing to retain control.

KIRBY J:   Therefore, it really comes down to you concede that Mr Powles had acted dishonestly in respect of other clients, you concede that here he was acting dishonestly and found to be so because he was seeking to get a secret commission for himself.  You have the finding of fact against you that that last mentioned dishonesty was a reason why he did not take the steps that an ordinary prudent solicitor would take.  The client Trust went to your client because it could be inferred that the solicitors would have a high measure of the total honesty and integrity and fidelity and, notwithstanding that because one gets down into the engine room of the actual mind of Mr Powles at the relevant time it is said that in this particular transaction he was not being dishonest, it is really a surgery of a highly precise kind, worthy of the best of neurosurgery rather than looking at the matter in the broad way that the Court of Appeal has done for the purposes of applying the words of the policy.

MR MEAGHER:   Could I say two things in response to your Honour’s observation.  The first, the policy requires one to identify an act or omission and then to characterise that specific act or omission as dishonest.  It is common ground that the act or omission was the act of payment away, or the giving of instructions to transfer from the Commonwealth National Bank account to the RTIC Paymaster account, so that one is required to characterise that act.  One can have regard to the circumstances, but in our submission, the fact that Mr Powles may have been dishonest on other occasions and was plainly capable of dishonesty, does not necessarily answer that question in the affirmative.  It is still necessary to look at the act.

KIRBY J:   It is not necessary, but I thought you conceded to me earlier that it is relevant to characterising this particular act ‑ ‑ ‑

MR MEAGHER:   To the extent that it bears upon his state of mind with respect to that act.

HAYNE J:   What?  The fact that he has stolen other money means that this transaction is dishonest.  Is that the essence of the argument, because “once a thief, always a thief” is not a proposition that commands universal assent?

MR MEAGHER:   That is certainly not our argument, your Honour.

GAUDRON J:   What one also has to do is operate, I suppose, in a context in which, as a general rule at least, dishonesty and fraud must be strictly proved.  At least that is so in a criminal context, and in the equitable context question whether any different rule should apply when an insurance company is seeking to avail itself of an exclusion in an insurance policy and when it is seeking to avail itself of the exclusion, not in relation to Mr Powles himself, but in relation to the partnership which took out the insurance.

MR MEAGHER:   There are a number of considerations, which I will take your Honours to shortly, when one comes to construing the exclusion which suggests that it ought to be construed strictly.

GAUDRON J:   It is not so much a question of construed strictly, but whether, if you are alleging fraud or dishonesty, you should be required to prove it strictly.

MR MEAGHER:   We submit that in the context of this exclusion, the fraud or dishonesty must be proved strictly and there must be the requisite satisfaction that it has been made out.

CALLINAN J:   Mr Meagher, can you help me a little bit, please?  The obtaining of a secret commission would be a dishonest or fraudulent act.  Is that right?

MR MEAGHER:   Yes.

CALLINAN J:   Why cannot you say that the liability of Allens was brought about by Mr Powles’ desire to obtain a secret commission?  Why can you not say that?  If you can say that, is that not the end of your case?

MR MEAGHER:   The expression – and I will come to this – brought about by it does not simply require a “but for” analysis.  The exclusion requires that the act or omission that is dishonest bring about the liability.  The liability here was not brought about by the receipt, for example, by Mr Powles of the funds.  The funds were paid into his account and until such time as they were paid away, there was no relevant liability.  The act or omission which was relied upon as founding the cause of action, and in that sense bringing about the liability, was the act of payment away.  The fact that he had earlier agreed to take a secret commission was neither here nor there in working out what brought about the liability.

CALLINAN J:   I do not know whether you can exclude a “but for” test in all cases.  Just assume for present purposes that a “but for” test would be available here.  Make that assumption.  If that were so, “but for” his desire to obtain a secret commission, the money would not have been paid away, would it?

MR MEAGHER:   Well, your Honour, the policy indemnifies against liability.  The exclusion takes out of the cover liability brought about by a dishonest act or omission, so that the focus is upon the act or omission which brings about the liability.  The fact that Mr Powles had agreed at some earlier point in time with Linpar, for example, to take a secret commission, that is a commission either secret from his partners or secret from the Trust, was not a relevant fact which brought about any liability to the Trust.

What your Honour is putting to me in a sense is that if the existence of the secret commission provided a motive for what he did, did it not in that sense bring about the liability?  We submit that is plainly not a sufficient relationship between the liability and, in your Honour’s example, the relevant dishonest act, but could I also submit that we certainly do not concede that there is any finding that Mr Powles consciously preferred the personal interest involved in taking the secret commission.

We accept that the trial judge made a finding that it provided the explanation for his haste and for his lack of care, indeed, blindness, but we say that neither court went further than that with respect to the act of payment away.

GLEESON CJ:   Is it an oversimplification to say that Mr Powles’ partners were insured against the consequences of his negligence but they were not insured against the consequences of his dishonesty and the question is one of characterising the liability that arose in the present case in circumstances where it might be liability that involved both negligence and dishonesty?

MR MEAGHER:   To answer your Honour’s question I have to go to the second argument and I was going to move to the second argument unless your Honours have any further questions in relation to the first.

KIRBY J:   On the second argument, just to start it, can I ask are the terms of this policy relevantly brought about by – is that part of some international indemnity insurance of professional negligence?  Is it to be viewed in a context of international market standard form or standard formula that has been interpreted or is it simply something peculiar and is it – I think you make a good point, if I can say so, that it has to be viewed in terms of the compulsory insurance that is required of solicitors and seen in that context is it actually approved by the relevant professional body or is it simply a private matter between solicitors or legal practitioners and their insurers?

MR MEAGHER:   Could I answer your Honour’s questions.  First, the existence of cases such as Crowe v Wheeler, which is Queensland, McMillan v Joseph, which is New Zealand, suggest that the wording is a wording which is certainly used in other States of Australia and in New Zealand.  The other cases do not indicate that precisely the same wording is used in other policies.

KIRBY J:   Was that case which Justice Mahoney delivered the leading judgment, was that on the same wording or a slightly different wording?

MR MEAGHER:    That is, I think your Honour refers to Chittick v Maxwell ‑ ‑ ‑

KIRBY J:   Yes.

MR MEAGHER:     ‑ ‑ ‑is on the same wording.  That, in fact, is the same Law Society scheme wording.  So that, in relation to your Honour’s first question, the answer probably is that these wordings vary, both from State to State, and, certainly, the evidence is not that there is a common wording any wider than that.  In answer to your Honour’s second question, this policy, and if I take your Honours to the policy, the primary policy, which is at page 353 of volume 2, the policy is a policy which is approved under the Legal Profession Act 1987. The relevant section is section 41 which provides that a solicitor has to have an approved policy before he or she may be issued with a practising certificate.

Now, we say that is one factor which suggests that the policy should be read with the public interest in mind, namely, that there be available to clients of negligent or defaulting solicitors, insurance. There is, for example, a specific provision in the policy which is Special Condition 3 at page 354 whereby, “Subject to General Condition [f]”, which is a fraudulent claim condition, the insurers contract out of their rights to “avoid, repudiate or rescind” the insurance, or to “reduce the quantum of” a “claim”. So that, there is a contracting out of the rights that would otherwise arise under section 28 of the Insurance Contracts Act.  The only qualification to that contracting out is General Condition [f] on page 355 which permits the insurers to refuse payment of a claim where the claim made is fraudulent.

KIRBY J:   Does it work this way?  That if indemnity is not provided, or rather, is held not to be available, it is not as if the client has a claim on the fund, it has a claim against the solicitor and only, I suppose, in the event of default of solicitors on the fund.  But, of course, there would be some solicitors not very well off who, in the event that they were denied indemnity in particular circumstances, would have no funds, possibly because of the very events that have given rise to the dishonesty.

MR MEAGHER:   That is so.  The second general matter to note about the policy is that the definition of the insured in clause 1[a] “means the Firm and each Partner in the Firm”, and then if one goes to the end of that subclause, “to the intent that each of the foregoing shall be severally insured”.  Now, the consequence of that is, as a matter of analysis, is that the policy is what is sometimes described as a composite policy containing several promises to each of the insured.  Now, under the common law, it would follow that if there was a fraud, or dishonesty, or intentional bringing about of the insured act by one of the insured, that that could not be relied upon by the insurer against the other insured because the policy is to operate as a several insurance.

GLEESON CJ:   What were the legal services that Allen Allen and Hemsley were rendering to the Trust in connection with this transaction?

MR MEAGHER:   Acting as trustee and the conduct involved in acting as a fiduciary agent, receiving the funds and disbursing the funds in accordance with the client’s instructions, or the agent of the client’s instructions.

The definition in [b] is inclusive, rather than exhaustive, that is [b][i], and there was evidence from an English solicitor that the business of practising as a solicitor, certainly in the United Kingdom, less so here, at the relevant time included engaging in the sorts of activities that Mr Powles was engaged in.  Your Honours will see that the practice is defined in terms as the business of practising as a solicitor undertaken by the assured.  That does not have the consequence that the scope of cover is defined by the assured’s activities, but certainly if the activities fall within the scope of the business of practising as a solicitor, then they are covered.

KIRBY J:   You make another telling point in the written submissions that there are other formulae in the policy for words of connection and words of causation.  Now, my question relating to the approval of the Law Society is directed at this:  would it have been open to the insurer here, or would it have taken it outside of standard approvals for it to have said “Brought about, whether directly or indirectly, by”?  Could they have slipped a phrase like that in to make it clear that that would have been the purpose of the policy, or would that have taken them outside what is the approval of the Law Society necessary for this particular case?

MR MEAGHER:   Your Honour, I cannot answer that question from the evidence.  I can take a guess at the answer to your Honour’s question which is that the proposed policy would be submitted to the Law Society for approval and, once approved, would be the subject of some regulation which described it as an approved policy, thereby permitting insurers to take out insurance with that insurer.

KIRBY J:   This is not a matter of a regulation of a standard form or anything of that kind.

MR MEAGHER:   As I understand the position, it is not a matter of these terms being imposed by legislation.  But could I remind your Honours that the principal contest here is between the excess insurers and my clients.  To the extent that some of those insurers are common to the primary insurance, then they are involved in the primary insurance.  But the excess insurance relevantly simply incorporates the terms of the underlying policies as a matter of contract.  There is no regulation on the excess insurance.  The relevant excess insurance policy here is at page 362.  Again, I am instructed of this, but it is not a matter about which there was evidence.  The relevant policy terms have to be approved by the Attorney‑General before they can then be the subject of insurance to which section 41 applies.

The next point I would wish to make to your Honours is that your Honours will see that in the insuring clause, which is at page 354, that the promise is to:

indemnify…..against all loss to the Assured whensoever occurring arising from any claim or claims first made against the Assured during the Period of Insurance in respect of any description of civil liability whatsoever incurred in connection with the Practice –

and when one goes then to the exclusion, the relevant exclusion being 5[f], it provides that the:

Insurance shall not indemnify the Assured in respect of any liability -

but the relevant exclusion is paragraph [v], but it is to be noted that the earlier and later paragraphs use much broader language in describing the relevant connection between the claim and the event, or between the liability and the subject matter from which it arises.

GAUDRON J:   I suppose there would not be a big claim for radioactive damage arising out of the solicitor’s practice, would there, whereas one is looking at a more normal occurrence - perhaps not a more normal but at least one that is a probable situation too, as distinct from [vi].

MR MEAGHER:   But [vi] nevertheless expressly recognises that there can be very broad connections.

GAUDRON J:   Yes.  What I was putting was not against you.

MR MEAGHER:   Yes.  Your Honours, could I go to [v].

KIRBY J:   The drafter could have used that formula, I suppose, in this provision.  I mean, why would they use these different – probably the reason is they were in different precedence and they were just brought in.  That is the way insurers often act.

MR MEAGHER:   One cannot always accuse insurers of giving too much thought to the way in which exclusions are added to existing policies.

KIRBY J:   But where there is a juxtaposition between different formulae, the normal way one approaches that is that it has a reason or a purpose.

MR MEAGHER:   And that is the submission we put.  If one then goes to [f][v], it relevantly provides:

This Insurance shall not indemnify the Assured in respect of any liability:-…..

[v] brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured.

So that the exclusion can operate to deny an indemnity to an innocent partner in respect of a liability brought about by the dishonest or fraudulent act of another partner.

KIRBY J:   I am a little troubled by that innocent partner idea, given that the formula for indemnity specifically refers to “for a partner” and, therefore, it is contemplated that specifically for the liability that you are talking about, liability for any partner in what may be a firm of partners.

MR MEAGHER:   The point that I was seeking to make earlier, your Honour, was that ‑ ‑ ‑

KIRBY J:   I am sorry, it is in [v] itself.  It talks about “including any Partner or former Partner”.

MR MEAGHER:   It does.  The point I was seeking to make earlier was that in the absence of this clause in a policy such as this, which contains several promises, if the relevant insured event was intentionally brought about by one of the partners, that might be relied upon as a defence to a claim for an indemnity against that partner but not against the others who might be described as innocent.  Similarly with respect to fraud, in the absence of this clause, if there was fraud of one partner, it could not be relied upon to deny liability to other partners.

KIRBY J:   But my point is:  is that not against you, because we do have this clause and we have to construe it and it specifically gives a derogation from the general principle.

MR MEAGHER:   It is but to the extent that it seeks to deny who might be described as the innocent partner of that cover, we submit that it should be construed strictly.

GLEESON CJ:   What is the next step in the argument?  Let it be assumed we construe it strictly.

MR MEAGHER:   The first question which arises is:  what is meant by liability?  In our submission, the answer to that question is given most clearly by the qualification to the exclusion.  That is that the exclusion shall not apply to liability arising out of any claim brought about by the dishonest or fraudulent act.  Used in that sense, the liability with respect to which the exclusion operates is what the insured is liable for, as distinct from the mere cause of action, the consequences for which the solicitor is liable follow by reference to whatever test of causation is applicable.  We draw a distinction then between the abstract notion of liability which might be said to exist upon the establishment of a cause of action and the amount which the insured is liable to pay which is the subject of the claim.  We say that distinction is accepted in the qualification to the exclusion and involves an acceptance that the liability on which the exclusion operates is what the insured is liable for.

Now, the argument we wish to put on the question of construction involves two aspects and that is the first of those aspects.  If the exclusion is read in the way we say it should be read, then the subject of the exclusion, that is the amount for which the insured is liable or the loss for which the insured is liable, is the same as the subject of the indemnity because the indemnity itself is against loss arising from any claim.

KIRBY J:   Would that be the way one would normally construe an exclusion?  Unless it is expressed in some peculiar way, I would have thought so.  They are saying, “You get it under the indemnity but you are not going to get it in certain excluded circumstances.  What are you not going to get?  What you would otherwise get under the indemnity.”

MR MEAGHER:   The way in which the Court of Appeal construed it is, in effect, to treat the word “liability” as referring to the cause of action and to ask whether the cause of action was brought about by a dishonest act or omission and then to say if that question is answered “yes” and the loss which is sued upon follows according to whatever is the relevant test of causation, then one can say of that loss that it was brought about by the dishonest act.  Now, that is seen most clearly in the way the Court of Appeal puts the matter in paragraph 79 where it is said that:

the exclusion refers to liability brought about by Powles’ dishonesty, not loss brought about by Powles’ dishonesty.  If there is a liability according to which Allens is liable for loss, the exclusion operates whether or not the loss was proximately caused by the acts or omissions giving rise to the liability and whether or not the loss was proximately caused by Powles’ dishonesty.

GLEESON CJ:   But there they are addressing a process of reasoning which the trial judge engaged in, are they not?  He said that in between the conduct ‑ and let us not characterise it for the moment – in between the conduct of Mr Powles and the loss of the $8.55 million there was the activity of some of these people who are described as “predators”.

MR MEAGHER:   Who stole the funds.

GLEESON CJ:   Yes.

MR MEAGHER:   And the criticism which was levelled at the trial judge is that he, in effect, drew no distinction between the liability of Allens and the loss of the Trust and addressed the question whether the loss was brought about by the dishonest or fraudulent act and he considered that it was not because the direct cause of the loss was the intervention of the third party.

GLEESON CJ:   But if the liability of Allens arose out of handing the funds over to bad people, the fact that bad people then behaved according to character in relation to those funds does not constitute a kind of novus actus inteveniens between the conduct of Mr Powles and the liability, does it?

MR MEAGHER:   No, and we do not put it that way, your Honour.  What we say is that where the exclusion provides that liability has to be brought about by the dishonest or fraudulent act, it requires first that one address the amount for which the insured is said to be liable.  In this case, the loss of the 8.55 million.  It then requires that it could be said that that loss was brought about by the dishonest or fraudulent act which requires that the relevant dishonesty go to that consequence, it not being sufficient, for example, that there be an act or omission which gives rise to that liability which act or omission can separately be characterised as dishonest.

We submit that, properly understood, for the act to bring about the liability, it has to involve conduct which is either itself sufficient to bring about the liability or the loss, or intended to have that consequence.

GLEESON CJ:   Or adverting to the risk of that consequence.  That may be part of the importance of the additional finding by the Court of Appeal that an aspect of dishonesty in the conduct of Mr Powles was exposing the $8.55 million to risk of loss.

MR MEAGHER:   We cannot accept that the exclusion goes that far, in the light of the finding, in the sense that we say that it can be said – I will put it again:  the notion of bringing something about involves accomplishing something, and in a context where the requirement is that it be brought about by the dishonest act or omission, dishonesty involving purposive conduct, we submit that the clause has to be construed as requiring that the purposive conduct go to the relevant consequence of the act or omission, and that it is not sufficient that you can characterise the act or omission as dishonest.

GLEESON CJ:   Suppose, just for the sake of this particular argument, that it is right to say that an aspect of Mr Powles’ dishonesty, and an aspect of his preferring his own interest to the interests of the Trust, lay in imprudent payment away of the money in circumstances which he appreciated exposed it to risk of loss, then, would not the ultimate liability to the Trust of Allens arising out of that loss be a liability brought about by Mr Powles’ dishonesty?

MR MEAGHER:   We submit not in the sense required by the exclusion, unless either the consequence, the liability, is an inevitable result of the act, or the intended consequence of the act, because absent those requirements, in our submission, the dishonesty does not go to the liability.  Could I give your Honours an example which, perhaps, illustrates the point of distinction.  Assume the facts of this case accept that Mr Powles pays the money away, he does so in circumstances where he does not take adequate care and knowingly, or consciously, does not do so, but he nevertheless acquires an instrument which is delivered to the Nauruans, and then the other party to the instrument defaults in whatever obligation produces the value in the instrument.

The consequence that produces the loss is the default of the party under the instrument and it is a consequence which is inherent in the transaction.  It may be unlikely because one is talking about prime banks but it is nevertheless inherent in the transaction.  The Court of Appeal’s judgment would have it that the liability for the loss due to that insolvency was brought about by the relevant dishonest act or omission, which was the payment away, because it could be said that but for the payment away the liability would not have been incurred.

CALLINAN J:   Mr Meagher, do you say that it has to be exclusively dishonesty or fraudulent or fraud?

MR MEAGHER:   I am sorry, your Honour.

CALLINAN J:   Do you say that in order for the exception to apply the conduct must be exclusively dishonest or fraudulent?  Say there are concurrent or contributing causes to the liability.

MR MEAGHER:   We say that the conduct has to either be sufficient of itself to produce the consequence, that is the liability, in which case you would either infer intention or take intention to exist, that is intention to produce the consequence, or there must be an intention to produce the consequence.

CALLINAN J:   But assume there is an intention but there is also negligence operating which does not involve any fraudulent intention.

MR MEAGHER:   What your Honour is postulating is a situation where there are two causes, one is an insured cause and one is an excepted cause.

CALLINAN J:   Yes, as on one view, might be the case here.

MR MEAGHER:    The answer to your Honour’s question is, we submit, that the act or omission has to be sufficient of itself.

CALLINAN J:   Is that another way of saying exclusively?

GAUDRON J:   I think it must be, must it not?  It must be.

MR MEAGHER:   I think, yes.

CALLINAN J:   That is a “but for” test, really, is it not?

MR MEAGHER:    No, it is the ‑ ‑ ‑

GAUDRON J:   It is the direct and immediate cause, what you are saying.

MR MEAGHER:    Yes, either the direct or immediate cause, or ‑ ‑ ‑

GAUDRON J:   Direct and immediate.

MR MEAGHER:    Direct and immediate, or we accept that there may be other causes which would exist in a situation where the intention is to bring about the consequence.

HAYNE J:   Does the proposition amount to saying that however the client, in fact, framed the claim against the solicitors, the client could have framed the claim as an action in deceit or some other action alleging fraud and unless the client could have framed the claim in that way, the exception does not bite?  Is that the proposition you are putting?

CALLINAN J:   Could have framed it and succeeded on ‑ ‑ ‑

HAYNE J:   Framed and succeeded, yes.

MR MEAGHER:    Frankly, I am not sure if I follow your Honour’s question.  I will have to ask your Honour ‑ ‑ ‑

HAYNE J:   Let me put it in terms of the breach of mandate claimed and let us leave aside whatever factual difficulties underlie it.  The solicitor disobeyed the instruction of the client.  That may be a sufficient statement of claim for the client to succeed in a claim against the solicitor.  But, as I understand your proposition, it is that unless the client could have pleaded it “dishonestly disobeyed instruction”, the exception will not bite.

MR MEAGHER:   Yes.

GAUDRON J:   Could have pleaded it and succeeded.

MR MEAGHER:   And succeeded, yes.

HAYNE J:   That is succeeded in demonstrating dishonesty.

MR MEAGHER:   Yes.

GLEESON CJ:   Now applying that to what must be an extremely common factual situation in which a solicitor covered by a policy like this might find himself, suppose a solicitor is running a system of contributory mortgages, gathering in investment funds from various clients and then investing them in a contributory mortgage, and without the knowledge of the client, or any approval, the funds are being applied for the benefit of the solicitor, but on security.  In other words, the breach of duty consists in the solicitor preferring his own interests to the client and not informing the client that he is actually borrowing the money himself, but he is giving a mortgage by way of security.  The security turns out to be inadequate and the solicitor becomes insolvent and the client loses part of the money.  Is that covered by the insuring clause or by the exception?

MR MEAGHER:   We would accept that that is caught by the exception.

GLEESON CJ:   Why is it caught by the exception?

MR MEAGHER:   Because in the case your Honour puts, the solicitor intends to deprive the client of the funds by ‑ ‑ ‑

GLEESON CJ:   But the solicitor does not intend that the client will lose the money.  The solicitor thinks the client is going to get the money back after the solicitor has made a fortune.

MR MEAGHER:   In the case your Honour puts, the solicitor uses the funds for a purpose, which is not the client’s purpose, and in effect the solicitor’s own purpose, thereby appropriating the funds to his own use.

GLEESON CJ:   The equitable fraud consists in applying the funds without instructions for the purposes of the solicitor.  It does no consist in an intention that the money will never come back.

MR MEAGHER:   But it does involve an intention to deprive the client of the moneys to the extent that they are to be used for the solicitor’s own purposes.

GLEESON CJ:   Yes.

MR MEAGHER:   We accept that that intention would be sufficient to activate the exclusion in circumstances where the claim by the client is for loss of the moneys.

HAYNE J:   And this debate just had may, I suspect, tend to suggest that the distinction you are drawing is illusory.  It is illusory in this way that the distinction I earlier drew was between solicitor did not obey instruction/solicitor did not obey instruction dishonestly is itself an illusory distinction because it is simply transferring the debate to what relevantly is meant by “dishonest”.  Now, is there a difficulty in the distinction you are now seeking to have drawn which is a difficulty masked by the use of the terms like “fraudulent” or “dishonest”?  That is the real area for debate rather than the distinction of the kind you are now drawing.

MR MEAGHER:   I must say I am not sure if I ‑ ‑ ‑

HAYNE J:   That is because the questions are genuine questions not statements in the form of a question of which I am sometimes guilty, Mr Meagher.

MR MEAGHER:   Could I, with respect, take that question on notice, your Honour?

GLEESON CJ:   Most solicitors who misapply moneys belonging to their clients, unless they are unusually malicious do not intend that the client will never get the money back.

MR MEAGHER:   But they may believe that the result of their endeavour will be to restore the funds to the client.

GAUDRON J:   But they knowingly do something with the money that they are not entitled to do.

MR MEAGHER:   And to the extent that they do it for their own purpose as distinct from the client’s purpose, they are to be taken to be intending to deprive.

GLEESON CJ:   If a solicitor takes a client’s money out of a trust account and puts it on a race horse, you do not say that the proximate cause of the loss of the money was the fact that the horse could not fun fast enough.

HAYNE J:   It makes a bad plea anyway, Mr Meagher.

MR MEAGHER:    No, I accept what your Honour puts.  But you do say in that case the dishonest act or omission is the appropriation by the solicitor of the client’s money to himself.  At that point in time, there is an intention to deprive and ‑ ‑ ‑

KIRBY J:   But motivation is often complex and in this case at least one motivation, if not the so-called blinding motivation of Mr Powles, was to make this secret commission.  You would not want to construe this exclusion in such a way that it really did not have much bite at all, because many of these cases are cases where solicitors have gone off and used it for gambling.

MR MEAGHER:   But your Honour, there may be many ‑ ‑ ‑

KIRBY J:   Probably, and certainly intended, to put it back in if they won on number five.

MR MEAGHER:   There may be many cases where a solicitor or other party might be in receipt of a secret commission.  That does not infect all of the subsequent conduct.  It may be that the subsequent conduct, to the extent that it involves acts or omissions, are acts or omissions with no dishonest intent or purpose.

KIRBY J:   What was peculiar here was that generally in the gambling case, the client has absolutely no knowledge of it.  Whereas here it is said that, through these intermediaries, the client was involved and willing to take the benefits but, in fact, the benefits turned out to be illusory.

CALLINAN J:   Well, more than that, because here Mr Powles did not get the money.  In the race horse instance, the solicitor gets the money and uses it as his own money.

MR MEAGHER:    That is so.  In this case, when Mr Powles paid the money away, albeit in haste, and on the assumption this argument puts, preferring his own interest to that of the client, he nevertheless did it for the purpose of the client, for the purpose of achieving an instrument.

CALLINAN J:   And without getting the 8.5 million for himself.

MR MEAGHER:   That is so.  That has to be, in our submission, the distinction between this case and a case where the solicitor appropriates the client’s money to himself.  There are some cases referred to by the respondents to this appeal which exemplify that.  One is the decision of the Full Court of the Supreme Court of Queensland in Crowe v Wheeler where the solicitor intended to use the client’s money for his own purpose. Another is the New Zealand Court of Appeal decision in McMillan v Joseph where the same happened.  In each of those cases, we submit, the result would have been no different if the exclusion is construed as we say it should be construed, because in each of those cases the solicitor appropriated the funds to himself and thereafter used it for his own purpose.

GLEESON CJ:   Is that a convenient time, Mr Meagher?

MR MEAGHER:   Yes, your Honour.

KIRBY J:   Could I just raise one matter before we rise?  Something you said during argument took my eye for the first time to the cover of the appeal book and I notice that the third respondent is GIO Australia Limited.  I have a house policy with GIO Australia Limited.  I have contingent interest in their paying it if anything ever goes wrong but I have no current claim, but I think I should tell you of that.

GLEESON CJ:   Is that a convenient time, Mr Meagher?

MR MEAGHER:   Yes, your Honour.

GLEESON CJ:   We will adjourn until 2.15 pm.

AT 12.45 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.17 PM:

GLEESON CJ:   Yes, Mr Meagher.

MR MEAGHER:    Your Honour Justice Hayne, could I seek to deal with what I perceive to be the thrust of the question you addressed to me before lunch?  I perceive that it went to the difference, if any, between our first and second arguments.  What we concede in the first argument is that it is necessary in order for the exclusion to apply that the Trust be able to plead and make good a case involving allegations of dishonesty with respect to the payment away.  But in relation to the second argument, we do not concede that that would be sufficient because the issue whether the exclusion applies turns on what is meant by “brought about by”, whereas one uses the applicable concept of causation in the relationship between the act and consequence in working out liability.

We submit that the exclusion requires that the necessary relationship between the act and the consequence be one whereby the consequence is a necessary result of the act, in the sense of direct and immediate result, or the consequence is an intended result of the act.  Subject to that, they are our submissions.

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

MR YOUNG:   May it please the Court.  Can we commence by going briefly to the words of the policy found in volume 2 at 354 for the insuring clause and 356 for the exclusion?  The insuring clause, for the purpose of analysis, can be divided into three components.  Firstly, the insurance is “against all loss to the Assured [including claimants costs] whensoever occurring”.  That is the measure of the indemnity and it includes what is commonly called “defence costs”.  That is a different kind of loss than the appellant’s argument refers to when they address the meaning of the word “liability”.

Secondly, the character of the matters that give rise to indemnity is then addressed in two phrases in the insuring clause:

arising from any claim or claims first made against the Assured during the Period of Insurance –

so there must be claims made during the relevant period of insurance.  Thirdly and lastly, the character of the claims must be that they are:

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

and the practice is, of course, that of the assured as defined in clause 1[b].

KIRBY J:   Another way to analyse it would be to look at the words which appear to signal the breadths and a significant breadths of the coverage.

MR YOUNG:   Yes.

KIRBY J:   Words such as “all loss”, “including costs”, “whensoever occurring”, “in respect of”, “whatsoever”, “in connection with”.  Now, all of those are signals of width of coverage.

MR YOUNG:   Yes, your Honour, including, we would add, the words “any description of civil liability”.  So the structure of the policy was that there is wide coverage in respect of any description of civil liability but there is then a carve out.  The carve out relevantly is affected by clause 5[f][v] at 356 and that carves out of any head of civil liability that might otherwise attract coverage civil liability, that is to say any liability:

brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured.

We go briefly to the policy really to make this point, that civil liability is an important component of the insuring clause where that civil liability results in loss to Allens.  The exclusion operates if Allens’ liability – we would say obviously a reference back to civil liability in the insuring clause – was on the facts, not as framed in the claim, but was on the facts brought about by a “dishonest or fraudulent act or omission” of a partner of Allens.

The liability referred to in the exclusion is the same liability as that which would otherwise trigger the insuring clause, but when it is brought about by dishonesty or fraud, it is carved out, or excluded, from coverage.  Liability is not used in the insuring clause in the sense of resulting financial loss, which is the appellant’s construction; it is used in the sense of legal responsibility or legal obligation to which the claim is directed.  That is the construction placed upon it by the Court of Appeal.  They did not construe it as “claim” or as “cause of action”, they construed it as a reference to the legal obligation or responsibility that would arise on the facts.  The question then is the straightforward one:  was that liability on the facts brought about by the dishonest or fraudulent act or omission of a partner of the assured?

HAYNE J:   In that use of the expression “liability”, does that in any way, on your construction, connote cause of action or range of causes of action or legal rights or some such concept?

MR YOUNG:   It connotes the obligation or responsibility which, on the facts, would be found to exist.  It does not connote cause of action, it does not connote the mere claim, it connotes, in effect, the ultimate legal responsibility, or legal obligation, that would arise on a given set of facts.  So, here we would say the fact that NPRT framed a claim in a particular way by reference to particular causes of action is not conclusive and has never been held to be so.  The question ultimately, when one goes to an exception like this, is whether there is, in fact, liability in the sense of legal obligation or responsibility that has been brought about by dishonesty or fraud.

That is the simple way in which not only the Court of Appeal in this case construed the clause but Mr Justice Hunter and the Court of Appeal in New South Wales on several other occasions in the Comino Case and the Chittick Case and in the Ellis Case.  There is no tension between the exclusion as we construe it and the insuring clause.  On the contrary, there is harmony.

GLEESON CJ:   But it is not good enough, is it – and I am not suggesting this is your argument – that there be an aspect of dishonesty about the conduct giving rise to the liability?

MR YOUNG:   No.

GLEESON CJ:   Does that mean then that the liability has to be based upon dishonesty?

MR YOUNG:   In the expression that has been used in some of the cases, you have to ask this question – and it is Justice Mahoney’s question in Comino:  what actually brought about the liability?  Is there a sufficient connection between the alleged acts of dishonesty or fraud and the liability?  In a number of cases it has been held that there will be no sufficient connection if in the transaction in a peripheral or a relevant sense there was a false witnessing of a signature but it had no connection whatsoever with a liability that arose on the facts.  That has been the factual situation in a number of these cases, HG & R and Comino included.

KIRBY J:   Comino did not come to this Court?

MR YOUNG:   No, your Honour.

KIRBY J:   I will be helped if at some stage you go to what Justice Mahoney said.

MR YOUNG:   I will, your Honour, yes.

HAYNE J:   The process you are describing seems to me to be a process of characterisation.  Is that a fair proposition?

MR YOUNG:   No, at this stage the process I am embarked upon is a process of the construction of the policy.

HAYNE J:   That I understand.

MR YOUNG:   I will come to the question of the characterisation of the relevant conduct, but I felt it best really to start with a frame of reference being the policy and what we say about its construction.  Can I direct myself to Justice Kirby’s question in two steps.  Firstly, can I go to what the Court of Appeal said about construction in volume 2 at firstly 427.  In paragraph 75 - and I will not read it - the court notices the argument of construction that has as competing elements “loss” as a meaning of liability and “liability” on the other hand.  At line 11 the court said that:

Allens’ liability hinges on Powles’ breach of duty…..and not on the ultimate cause of the loss.

The cases I referred to are then noted.  I will take your Honours to the cases.  But your Honours will see at line 24, the Court of Appeal notes that Mr Justice Mahoney in Comino said that the phrase liability “brought about”:

looks at what actually brought about the liability and that that was only the failure to clarify instructions.

Mr Justice Sheller agreed but added that:

the dishonest or fraudulent act –

which was a false witnessing:

was not sufficiently connected with the liability of the assured to be regarded as bringing it about.

And the same test has been applied in numerous cases.  Having noted the argument, the court returned, ultimately, to express their conclusion at paragraph 91 at page 431, particularly the second sentence.  And in paragraph 93 the Court of Appeal noted that the argument that liability meant loss was not an argument that was advanced before Mr Justice Hunter and that is, in fact, the case that was first advanced in the Court of Appeal.

KIRBY J:   What is the relevance of that, except forensic?

MR YOUNG:   It explains why there are no findings by Mr Justice Hunter addressed to these contentions that the loss was, in fact, brought about by some kind of novus actus.

Justice Hunter’s whole analysis was in terms of proximate cause and that the appropriate meaning to place upon the words “brought about” was that of proximate cause, as used in the insuring sense where you have an insured peril.  So that was the argument at first instance.

KIRBY J:   Is this a sort of due process objection that you are taking?

MR YOUNG:   No, your Honour.

KIRBY J:   That had this issue been raised clearly ‑ ‑ ‑

MR YOUNG:   No, we are not taking any objection, your Honour.

KIRBY J:   So it is just forensic then.  Do not answer that.

MR YOUNG:   The case of Comino (1993) 7 ANZ Insurance Cases 61‑162, if I can take the Court to that for a moment. It was a case in which the alleged dishonesty related to the attestation and certification of the solicitor but the liability arose because the solicitor had not given effect to the client’s instructions that the guarantee should be a several guarantee where his liability was limited to one-third rather than joint and several. Justice Mahoney addressed the clause, which was in the same terms, at page 77,868. The terms of the exclusion are in the middle of the first column. His Honour construed the reference to liability as a reference to the claim “and the obligation on which it is based”. That is the last sentence in the first column. At the top of the next page:

That obligation derives from essentially the failure…..to clarify…..instructions.

The way in which his Honour approached the question of what was meant by “brought about” appears in the last paragraph, second column at page 869 and the top of the next page at 870.  At 870, his Honour says:

The phrase looks to what actually brought about the liability, in negligence, tort or otherwise, to Mr Manettas.  The ingredients of that liability involved only the failure of Mr Pitsikas to clarify his instructions.  Once that failure occurred and the transaction was carried to completion on the basis of his mistake…..the liability…..arose.  The defaults relied on by Lawcover, viz, the attestation default and the certification default, played no part in the arising of that liability.  In that sense, the liability was not “brought about by” those defaults.

KIRBY J:   Well, those words are attempted to be applied to this case in this way, as I understand it, that if you look at what happened, there was no liability, in fact, for indemnity, when the funds were moved to Croydon, and even when the funds were moved to Commonwealth.  The liability, in fact, arose when the thieves got hold of it in Commonwealth and that, therefore, all of Justice Mahoney’s words can be applied ‑ ‑ ‑

MR YOUNG:   Well, we would say not, your Honour.  We understand that is the argument.  It was rejected by Mr Justice Hunter on the facts, it was rejected by the Court of Appeal and it slides from addressing what brought about the liability to what brought about the financial loss.  What brought about the liability of Allens was breach of trust and breach of fiduciary duty which occurred before the funds were stolen.

KIRBY J:   Would you take us, at some stage, to where you say Justice Hunter rejected ‑ ‑ ‑

MR YOUNG:   Yes, your Honour, I will go through that in detail.

KIRBY J:   In so far as he addressed this issue of proximate cause.

MR YOUNG:   Yes.

CALLINAN J:   Mr Young, that is an important distinction that Justice Mahoney makes on page 77,870, in the first column at about point 8, where his Honour points to:

the difference between that which brings about a result and that which, if it had occurred, would have prevented the result being brought about.

Is that not an important distinction for Mr Meagher’s case?

MR YOUNG:   Yes, but ‑ ‑ ‑

CALLINAN J:   Arguably, that is this case, is it not?

MR YOUNG:   As we understand the appellant’s case, your Honour, it is to accept that Allens were liable for breaches of trust and breach of fiduciary duty in relation to the whole $8.7 million.  But they argue, artificially, we would say, that when you sever the 8.55 from the balance that was stolen and you look to see what happened to the 8.55, it was stolen a little bit later by thieves.

Hence, they say, the interception of that amount by third parties, by theft, somehow denies the proposition that Allens’ liability was brought about by the actions of Mr Powles.  They seem to say that Allens’ liability, which ex hypothesi they accept, was brought about without any conduct by anyone on the part of Allens.  They slide to loss in order to provide a platform for what is, in reality, a novus actus argument.

GLEESON CJ:   That is the sort of situation that would have existed if the money had been paid into the Westpac account in London and then embezzled from the Westpac account without any complicity on the part of Mr Powles by some, for example, employee of the Allens office in London.

MR YOUNG:   Yes, your Honour, but with this qualification:  we would say because the Westpac account was not as represented, it was not a trust account of Allens, and it was being fraudulently conducted in any event by Powles with the complicity of Madden, there might still have been liability in that eventuality anyway here.  But that is really not to go to the point of your Honour’s question.  We agree with your Honour.

HAYNE J:   But the liability you say to which attention must be directed here, is liability for breach of trust and breach of fiduciary duty.  Is that right?

MR YOUNG:   Yes.

HAYNE J:   What are the elements, you say, of the liability for breach of trust and breach of fiduciary duty, and how much is that liability?

MR YOUNG:   Can I answer your Honour shortly.  I am going to come to it in detail.  Shortly, your Honour, the moneys were deposited with Allens on the basis that Allens assumed trust obligations in respect of that money.  That was what was described, perhaps loosely, as the mandate issue.  The mandate issue was the assumption of trust obligations in respect of the deposit of the money and the subsequent disposition of it.      Those obligations were breached.

GAUDRON J:   How?

HAYNE J:   How?

MR YOUNG:   In the first place, there was no Allens trust account as represented.  There was a private account conducted by Powles for his fraudulent business purposes.  Secondly ‑ ‑ ‑

CALLINAN J:   What difference would that have made?  I mean, a trust account can still be operated on by the trustee whether it is a bona fide trust account or whether it is a sham trust account.

MR YOUNG:   Yes, but we would say it is important, as Mr Justice Kirby said, to look at the Nauruan Trust transaction in its overall context, and in the context of Powles’ ongoing fraudulent activities.  You cannot isolate, as the appellants do, this payment away of $8.55 million from what drove it and what its purpose was.  To answer your Honour, the second element in liability is a series of false and fraudulent reports about the status of the moneys and the status of the transaction ‑ ‑ ‑

HAYNE J:   After payment away?

MR YOUNG:   Both before and after.

GAUDRON J:   But did they bring it about?  It seems to me, in both those matters you are overlooking “brought about”.

MR YOUNG:   No, with respect, your Honour, I am not.  We say they were part of what brought about Allens’ liability.  Next, the $8.55 million was paid away so that, as a matter of moving purpose, the differential that was created and left in the Westpac account could be stolen, and it was stolen by Mr Powles.  Thirdly, the $8.55 million was knowingly put at risk of theft by others to the knowledge of Mr Powles for the purpose of his secret and illegal gain.  That is in broad summary what we say the elements of Allens’ liability were.

GAUDRON J:   So you say it was paid away ‑ ‑ ‑

MR YOUNG:   For the purpose of creating a differential that could be stolen.

GAUDRON J:   For the purpose of stealing the difference between the 8.55 and the 8.7?

MR YOUNG:   Yes.

CALLINAN J:   Is “stealing” the right term?  Is taking a secret commission the same as stealing?

MR YOUNG:   Well, we would say “secret commission” here is the euphemism because nobody paid the $US145,000 to Mr Powles for his undertaking this transaction.  He represented to the Nauruan Trust that the purchase price of the instrument was 8.7 million and that $8.7 million had been paid for the instrument.  In fact, the truth was 8.55 was paid away supposedly for an instrument and $US145,000 as a secret differential was left in the Westpac account.  That was then stolen by Powles.

It is not a commission paid to him by anyone.  It is a difference that he deliberately created; it was left in the Westpac account and then Powles as the administrator of that account distributed it to himself, to Madden, Gopal and Walsh.  It is no answer to say that the theft took place a few days after the payment away and the distribution took place early in February.

CALLINAN J:   Assume all of that and assume that that is plainly dishonest and involves stealing.  Did the stealing of the $145,000 bring about the civil liability of Allens for 8.55 million?

MR YOUNG:   Yes, your Honour, because the $8.55 million was put at risk knowingly by Mr Powles ‑ ‑ ‑

CALLINAN J:   Well, putting at risk knowingly might be quite different from bringing something about.

MR YOUNG:   Well, we would say that the reason why the payment away is dishonest and gives rise to liability is that Mr Powles had no lawful right to put his client’s funds at risk in that fashion knowing they would be probably stolen by fraudsters as it happened on every one of the previous 17 occasions where he had sought to purchase an instrument always with the intention of creating a differential that would be stolen.  It cannot make any difference that his intention was to purloin part of the moneys rather than the whole of the moneys if he puts part of the moneys at risk knowingly for the sake of stealing part of it.

Now, all of that, we would say, fits squarely within Peters and it is that which gives rise to civil liability in respect of the 8.55 million and the acts are inherently dishonest and fraudulent.  Now, to make good what I have sort of condensed, I will take the Court in some detail through the facts and I will turn to that in a moment, but we wanted to really set a frame of reference by what we say by reference to the policy in the words “liability brought about”.  I will return to the question of construction to deal with the arguments that have been advanced about intention and about loss, but in simple terms our submission is that the word “loss” cannot be substituted for the word “liability” in the exclusion and that is to distort the meaning of the exclusion.

“Liability” is obviously intended to have the same meaning in the exclusion as in the insuring clause.  The appellants’ construction would do violence to that.  You cannot insert in lieu of the word “liability” in the insuring clause a reference to the amount which Allens is liable to pay to some third party and make sense of it.  The other part of our argument is their contention that the Court of Appeal construed “liability” as meaning cause of action, and plainly they did not.  They construed it as meaning legal obligation or legal responsibility.

HAYNE J:   Is every legal obligation or legal responsibility, if broken, capable of reduction to a cause of action?

MR YOUNG:   It might be possible to analyse it that way but the reason for which the appellants say the Court of Appeal said it was a cause of action, is so that they can set up some tension between the words “claim” and “liability” in the insuring clause.  Because it speaks of – in exact words:

arising from any claim or claims…..in respect of any description of civil liability –

and the simple argument they put is liability cannot mean cause of action because the cause of action is anterior to a claim and if liability met cause of action there would be some tension in the insuring clause.  There is no tension if civil liability means, in plain English, liability, legal responsibility or obligation.  That might be the outcome of a claim or the target of a claim but it is not necessarily to be equated with cause of action.  In another context one might use the words “cause of action” and “liability”, perhaps anonymously, but that is not how they are used in this policy.  Can I turn to an explanation of the facts ‑ ‑ ‑

KIRBY J:   Could you just make clear to me the point you make in your objection to the reply?  Does that go to the entire way in which the appellant has put the first point, or only part of it?  I would like to make it clear.

MR YOUNG:   No, it goes to the entire way they put their characterisation argument.  I is really a point about the notice of appeal, your Honours.  At 437 to 438, there are only two grounds of appeal, and both are really directed at the causation argument, depending on the words “brought about”.  The Court will see in ground 2 at 437, it is accepted in the last phrase, although the relevant liability flowed from that act or omission, that here the liability of Allens flowed from a:

dishonest or fraudulent act or omission of the Assured.

And they were the findings below.

GAUDRON J:   However, is there any prejudice to you in meeting the argument?

MR YOUNG:   No, we are ready to meet the argument.  But it is going to take some time.

GAUDRON J:   Yes.

KIRBY J:   You were trying, generously, to save us all that time.  You will go into it now, just in case?

MR YOUNG:   Yes, we will.  The way in which we put the framework of this argument, and I go to the facts, is this:  the policy exclusion raises, essentially, two questions – and we use the language of Comino to express them.  What conduct of powers actually brought about Allens’ liability is the first question?  And the second question is was that conduct of powers dishonest or fraudulent?

Both questions are to be approached giving full weight to the findings of fact by the Court of Appeal, in our submission.  That is the way in which the Court of Appeal approached it, by posing those two questions.  They analysed all of the documentary evidence and the reasons of the trial judge and, in our submission, they correctly answered the questions.  The starting point is that the liability of Allens, in fact, not as framed in the Trust’s civil claims, but, in fact, arose from breaches of trust and breaches of fiduciary duty, as I have just said.  That is, in effect, what the Court of Appeal said in a number of paragraphs, and I will just briefly take the Court to those.

GAUDRON J:   You did tell us what the breach of trust was earlier.  That was in not keeping a trust account.  The breach of fiduciary duty was in the secret ‑ ‑ ‑

MR YOUNG:   It is false reporting, false confirmations in relation to transaction, false representations that the purchase price was 8.7 million, stealing the differential after first intentionally creating it, false reporting after the transaction and placing the whole of the 8.55 at risk for private gain and doing so knowingly.

GLEESON CJ:   It is only the last one, is it not?  The essence of the liability as alleged by the Trust was letting it out of his control.

MR YOUNG:   No, with respect, not, your Honour.  That is how the appellants like to characterise it, and no doubt that is an important part of it but it is not all of it.

GLEESON CJ:   I had in mind page 284, points 4 and 6.  That is the way the Trust put its case against Allens.

MR YOUNG:   Yes, but that is not confined to the payment away.  This is an allegation against Allens.  Part of the claim was that the funds, contrary to what was represented to the Trust, were never in the control of Allens; they were in the control of the rogue partner.

GLEESON CJ:   Yes, but if you look at the breaches alleged in paragraph 11, the essence of the allegation of wrongdoing on the part of Allens was letting those moneys out of their control in the circumstances.

MR YOUNG:   Well, (b) is not so confined.  Part of the Nauruan Trust funds were not used at all to purchase an instrument.  They were left in the account so that they could be stolen.

HAYNE J:   But you therefore deny, do you, this segmentation of the 8.7?

MR YOUNG:   No.  Can I explain what we say.  Nauruan made a claim against Allens for some US$60 million.  This is at page 285 of Justice Hunter’s judgment, line 35.  Nauruan’s claim was for some 60 million of which US49 million was said to have been repaid, leaving a balance of US11,230,000.  The 11 million comprised not just the 8.55 but part of the Schedule 1 moneys, which the Court will see at the top of page 286, subparagraph 36.4.  Then at line 15 of 286:

The Schedule 1 moneys related to payments totalling $US4,963,314 (reduced to $US2,691,185.82 at the time of settlement) paid out of the US dollar account to interests associated with Powles, Madden, Gopal, Dougall and others…..between 23 December 1991 and 10 November 1992.

The Schedule 1 moneys included $145,000, which I have called the differential, that was left in the Westpac account and stolen by Powles and distributed to himself, to Gopal, to Madden and Walsh.  So Nauru claimed in effect the entirety of the 8.7 million with interest on it.

The Court will see there is a schedule at page 330 of this volume and the theft of the differential and its distribution are items 116 at page 333.  Just looking at 333, the Court will see item 104, 8.55 million is paid to the A M Glasby account at Barclays.  After that is paid, there is some 145,000 left in the Westpac account.  That is then distributed by Powles and it would seem the relevant distribution is 116.  Walsh gets $33,200 of it.  118, Taylor gets 33,200 out of it.  117, 120, 122, 123, Madden also gets 33,200, and 131, Powles’ company, Hilstar, gets 33,200.  So the differential is split by Powles amongst his colleagues.

GLEESON CJ:   The way it seems to have gone is this, is it not:  the Trust said, “We lost our $8.7 million”.  Allens said, “Mr Powles, it appears, was not a man who would hesitate to misappropriate money, and as to the difference between $8.55 million and $8.7 million, he did misappropriate it.  But as to the $8.55 million, he did not misappropriate it and he did not pay it away so that others could misappropriate it.  The worst you can say about what he did was that he did not exercise the care and control over it of which you complain.”

MR YOUNG:   Your Honour, that is the appellants’ argument concerning it.  Your Honour is correct that Allens segment the two and they say that, in relation to the differential, “We accept that Allens, or Powles, misappropriated it”.  What happened was that Allens made a claim in respect of that portion of the Trust claim against them against the fidelity fund, obviously taking the view that the exclusion would operate in respect of the theft of the differential under the professional indemnity policy.  They then advanced claim under the professional indemnity policy for the $8.55 million, in so far as that was the subject of the claims by the Trust, together with interest on it. 

But, in our respectful submission, it is an artificial segmentation.  The $8.55 million was only separated from the $8.7 million so as to create a differential that could be stolen.  The $8.55 million was then paid away in circumstances that I will take the Court to, that we say were, in any event, even if it is looked at separately, dishonest and fraudulent, because those funds were knowingly put at risk when Powles knew he had no right to do so, for private gain.

GLEESON CJ:   That is the point of departure, is it not, between the Court of Appeal and Mr Justice Hunter?  As I understand it, Mr Justice Hunter said, “Yes, it was wrong of Powles to let that $8.55 million out of his control.  Yes, there were aspects of dishonesty about his conduct in letting that $8.55 million out of his control, but the liability to the Trust in respect of the $8.55 million was not brought about by the dishonesty”.  The Court of Appeal then said, “You have underrated the dishonesty”.

MR YOUNG:   We would say not quite.  There was a difference in view between the Court of Appeal and Mr Justice Hunter about the extent of the dishonesty, but it did not go so far as your Honour has said.  Mr Justice Hunter found that the payment away of the $8.55 million was dishonest because it was knowingly done in breach of duties for private gain, that is, to derive the so-called secret commissions.  The difference was only in relation to Powles’ appreciation as to whether, when he let go of the funds, he was really losing control of them or not.  The Court of Appeal said Powles must have appreciated that he was losing control of the funds and putting them at risk.  That was the only difference, and it is really a difference that, in a sense, is beside the point, both for the purposes of characterisation of the payment away was dishonest – which both the trial judge and the Court of Appeal characterised as dishonest – and from the viewpoint of the nexus required by the words “brought about”.

Can I just finish on what the Trust claim was.  The Trust claim embraced the whole of the $8.7 million.  Allens settled that claim for $US12.5 million and they apportioned that $12.5 million into an amount which they would claim under their professional indemnity insurance, an amount that they would claim under fidelity insurance, the difference being the fidelity insurance, or the misappropriation, that there could be no argument but that they were dishonest.  The other amount was the $8.55 million, but the separation, we say is artificial.

So, true it is that they claim under the policy a loss of $8.55 million, or a loss arising from liability in respect of $8.55 million plus interest, but that does not mean that one examines the $8.55 million without any regard to the context in which it was paid away, both within the Nauruan Trust transaction as a whole, and more generally, within Powles’ dishonest business practices.  They are both relevant to the characterisation.

GAUDRON J:   We are, in essence, talking about an omission in this case, are we not?

MR YOUNG:   No, your Honour, not from our perspective.

GAUDRON J:   Not from your perspective.  Well, if you say paying it away without retaining control, if you say that is the act or omission that brought about the liability, if you take that analysis, we are talking about an omission, are we not?

MR YOUNG:   No.

KIRBY J:   The payment is the act.

MR YOUNG:   Payment is the act and we put it more positively ‑ ‑ ‑

GAUDRON J:   You say it is paying it without ‑ ‑ ‑

MR YOUNG:   No, with respect to your Honour, we say paying it for the purpose of generating a differential that could be stolen.

GAUDRON J:   Okay, but that was done – that does not seem to be what brought about the loss of this 8.55.  The payment out to create the differential occurred back at the Barclays point, did it not?

MR YOUNG:   Yes, your Honour.

GAUDRON J:   And then it went to Antigua?

MR YOUNG:   No, it did not.

GAUDRON J:   Well, ultimately ended up in Antigua.

MR YOUNG:   No, it did not, your Honour.  Both courts below found that it never went near to Antigua.  It went straight from Barclays to the Swiss Kantonal Bank.  The rest was a ruse.

KIRBY J:   Commonwealth never got its hand on it?

MR YOUNG:   No, your Honour.

KIRBY J:   Not even a little branch in London?

MR YOUNG:   No, not at all and I will take the Court through it and ‑ ‑ ‑

GAUDRON J:   So then the act or omission was, what, in authorising Barclays to transfer it to Antigua?

MR YOUNG:   What happened, your Honour, was, in brief and I apologise that I will have to take the Court through the detail but it seems to us it is necessary, but Powles abandoned control of the payment out of the Westpac account to Mr Searle, instructed Westpac to act on Searle’s instructions.  Searle instructed Westpac to pay the $8.55 million to a Barclays account held by a Mr Glasby.  At the same time Searle instructed Barclays to immediately transfer the funds from the Glasby account to the Swiss bank called Kantonal and that is where the money went.  Now, Powles knew that was happening.  It was not a question of any conditional swift instructions or anything like that.

GAUDRON J:   He knew what was happening and that ‑ ‑ ‑

MR YOUNG:   He knew that the moneys were being paid over to the complete control of a Mr Glasby.

GAUDRON J:   Yes, but did he know that then it would be transferred to Kantonal?

MR YOUNG:   No.  He just knew that it was in the hands of Mr Glasby or in Mr Glasby’s account and that he would do whatever Mr Searle told him to do with it and we say that Powles did that, abandoned control of the money in those circumstances, because of self‑interest, because he wanted to earn his so‑called secret commission, that is to say steal the balance that was left in the Westpac account and the whole scheme was that this money, if it ever did buy an instrument, the instrument would be sold and the moneys would go around in a circle again.

There would be a new differential.  Some of that could be stolen and it would go around again, et cetera, and, moreover, Nauruan Trust was about to give Powles a further $19.3 million that was to be paid away in similar circumstances leaving a differential that could be stolen.  That was Powles’ scheme.

KIRBY J:   That was not done in any event.

MR YOUNG:   No.  Well, the 19.3 million was paid and it ‑ ‑ ‑

GAUDRON J:   No, that was your case at trial, was it not, this conspiracy to defraud, ongoing conspiracy, but you did not get factual findings in that regard.

MR YOUNG:   Well, we did not get findings about conspiracy but that is not to say that we did not get findings from the Court of Appeal to the effect that Powles had this scheme that I have just described and we did get those findings.  Powles had this scheme and everything he did from his first contact with Nauru was false and dishonest and was a step in this dishonest scheme.

KIRBY J:   Let us test it this way.  Assume there had been vigilance on the part Nauru Trust.  The money has gone out of Westpac to Croydon.  Would there have been an entitlement at that stage to a claim by the Nauru Trust against Allens?

MR YOUNG:   Yes, your Honour.

KIRBY J:   Would there have been indemnity to Allens under the policy, under the indemnity clause, and would there have been exclusion under the dishonesty clause at that stage?

MR YOUNG:   The answer is, there probably would have been because Powles falsely represented that the money should be placed in trust with Allens and he had given a false reference for Linpar from Mr Madden that was the key inducement to Nauru to let their moneys out of their hands in search of a prime bank instrument that Mr Madden was going to deliver.  That has not been referred to but that is the reference letter of 4 December, and I will take the Court to that in a moment.  But from the outset, we would say there was liability of Allens at every step of the way and it was dishonest at every step of the way and the exclusion would have been attracted.

But the loss, it is true to say, that we are relevantly concerned with is in two portions, the differential of 145 out of the 8.7 and the 8.55.  It is true that the claim under the professional indemnity insurances limited the liability in respect of the 8.55 but, for the purpose of determining whether that liability was brought about by dishonesty, we cannot ignore the rest of the transaction or its context.

GLEESON CJ:   I thought I had asked Mr Meagher this morning a question as to whether it was Powles who introduced Linpar to the Trust.  My puzzlement about that arose because he was putting the argument on the basis that Linpar was the agent of the Trust and, as it were, in a position of control over Powles.  But do I understand you to be telling us that the relationship between Powles and Linpar and the Trust was not quite as simple as that?

MR YOUNG:   No, it was not as simple as that, your Honour.  It is true that Linpar, that is Madden and others, excluding Powles, had discussions with the Trust prior to 4 December 1991 which was Powles first direct involvement with the Trust but, thereafter, Powles had direct dealings with the Trust.  Powles assumed Trust obligations for Nauruan Trust in respect of the moneys deposited with Allens, so it was believed.  Powles made direct and false reports to the Trust about the progress of the transaction, et cetera, et cetera.

So they were not in a straight line relationship with the Trust as if the Trust dealt with Linpar who dealt with Powles.  Powles and Linpar were more or less sitting side by side, both having direct dealings with the Trust, but Powles and Linpar having this nefarious activity going on in relation to the false reports and the differential.  Can I tackle the facts this way, if I may?  Can I divide them up into Powles’ general position and the court’s findings as it stood at the inception of his contacts with Nauru Trust, that is to say, at 4 December 1991.

KIRBY J:   Is what you are going to tell us now based upon findings by Justice Hunter and/or the Court of Appeal or something you say we should infer from the facts?

MR YOUNG:   No, everything is in findings.  I will not go to all the findings in this first section ‑ ‑ ‑

KIRBY J:   Is this all set out in your written submissions?

MR YOUNG:   No, that reminds me ‑ ‑ ‑

KIRBY J:   Because otherwise we are going to need some reference to transcript.

MR YOUNG:   Yes.  Can I hand to the members of the Court a document we prepared that dealt with what we thought to be new factual contentions going behind the findings of the courts below that were advanced in reply document?  We have a document that contains an answer to what seemed to be the important factual contentions advanced by the appellants and gives references and answers.  The format of the document is to set out the contention of fact extracted from the appellants’ reply submissions and opposite it the answer we say which appears from findings made, both by the Court of Appeal and Mr Justice Hunter below.

Could I adopt this course, that is to say the first part of what I wanted to put to the Court is not directly dealt with by that document.  Other parts of what we wanted to put orally are.  When we can usefully make reference to the document to shorten the submissions, I will direct the Court to it, if I can take that course.

GLEESON CJ:   Yes, go ahead.

MR YOUNG:   At the commencement of Powles’ involvement with the Nauruan Trust transaction commencing on 4 December 1991, a number of facts existed as found by both the Court of Appeal and Mr Justice Hunter.  First, there had, by 4 December, been 15 failed attempts by Powles to purchase a prime bank instrument, and by the time of the payment away, there were another two.  So, 17 failed transactions - - -

GAUDRON J:   When you say “by the time of the payment away”, can we ‑ ‑ ‑

MR YOUNG:   On 15 January 1992.

GAUDRON J:   Yes, thank you.

KIRBY J:   Why had he failed?

GAUDRON J:   And that is into Barclays?

MR YOUNG:   The position really is that the market, despite the findings about Powles’ belief was entirely bogus.  There were no such instruments.  All these dealers just generated documents with lots of buzz words and expressions in it which were designed either to lead a false trail or confuse people.  But the fact is that, as appears from Justice Hunter’s findings, the whole market – the whole thing was just a total fraud, a total sham.

GAUDRON J:   Now, do you have appeal book references for that?

MR YOUNG:   Yes.  I was going to finish it by saying, the last two transactions that took place of the 17 between 4 December and 15 January 1992 were described as “Ward Investments and Mellows”.  The significance of Ward Investments is that Mr Searle was involved and Powles formed the view, in the course of that transaction, that Searle was untrustworthy and unreliable and probably fraudulent.  The relevant findings:  the Court of Appeal at paragraphs 56 and 57 at page 422.  There are too many pages in Justice Hunter to usefully give, because his Honour goes through all of the anterior transactions over very many pages.

KIRBY J:   There was no challenge to any of his Honour’s findings of fact in the Court of Appeal?

MR YOUNG:   No.  The earlier transactions are summarised in our chronology and the references are given to the findings by Justice Hunter.  It is at the bottom of the first page of our chronology, which was at the back of our written submissions.

Next, the Court of Appeal found that Powles followed a modus operandi, which included these elements:  on a letterhead of Allens giving references in favour of Linpar and other dealers to induce investors to place funds with Allens, indeed, with an Allens trust account when, in fact, Allens had no trust account in the United Kingdom; and, secondly, misrepresenting the purchase price of the instrument to the investors so that a secret differential could be created and then divided by Powles and others.

The Court of Appeal – and I take the Court to that.  There are several paragraphs commencing at 21 at page 412 - this is a reference to the findings by the trial judge – lines 3 and following.  Next, on the same point, paragraph 48, and I will take the Court to the one he gave Linpar in the context of the NPRT transaction; then 58, and this is important.  The Court of Appeal described:

the modus operandi of Powles, Madden, Gopal and others to represent to an investor that an instrument could be purchased for a sum of money representing a discount to face value…..This, so it was represented, could be rapidly on-sold for a substantial profit on the cost price and this profit would be divided between Linpar and the investor.  In fact, the instrument was sought to be acquired at substantially less than the cost price represented to the investor, thus creating a secret differential in the account controlled by Powles, which would then be distributed between Linpar, Powles and others without any knowledge or informed consent of the investor.  To this extent Powles was to receive secret commissions out of the investor’s funds.

KIRBY J:   What was the theory of the value added?  I mean, people do not give away 1.3 million for nothing normally.

MR YOUNG:   No.  The theory presented to investors was that these were off balance sheet transactions that banks needed to engage in and did.  The reality was it is entirely bogus.

GLEESON CJ:   Presumably the Nauru Phosphate Trust was not bound by some regulations about authorised trustee securities or authorised trustee investments.

MR YOUNG:   I cannot answer your Honour, but presumably not, although of course the administrator, Dougall, was receiving bribes from Madden.  So, even if there were some such limitation, it might not have protected the Trust.

HAYNE J:   You said there was a reference in favour of Linpar.

MR YOUNG:   Yes.

HAYNE J:   Given to Nauru?

MR YOUNG:   Given to Nauru by Powles at Madden’s request and in terms dictated by Madden, which the Court of Appeal found to be false and knowingly so.

KIRBY J:   The law that governed these events, occurring as they did in England, was, I assume, English law but was not relevantly different from our own law, is that correct?

MR YOUNG:   Not relevantly different, no, your Honour.

GLEESON CJ:   Was one of the points of giving a reference to Linpar that, although there may have been an association between Dougall and Madden that preceded the association between the Trust and Allens, there were people who were, or were potentially likely to be, looking over Mr Dougall’s shoulder.

MR YOUNG:   Yes, your Honour, and there is evidence of that, that what was critical in Nauru’s decision to go down this path was the Allens’ reference and the belief that the moneys would be held by Allen Allen and Hemsley in a trust account.  I will take the Court to that. 

Can I go back to another background fact which is relevant.  The trial judge found that Powles operated in fraud of his partners the Westpac US dollar account in London.  In addition, the trial judge found, as did the Court of Appeal, that it was falsely represented to be an Allens trust account.  Thirdly, that over a period of time prior to the Nauruan transaction, Powles and Madden had effected fraudulent misappropriations out of the US dollar Westpac account.  From time to time Powles had put his hand in there to steal money to cover up the frauds he had effected on mortgages back in Sydney.

HAYNE J:   And that is the argument of once a thief, always a thief, is it not, Mr Young?

MR YOUNG:   No, it is not, your Honour.

HAYNE J:   He stole from others, therefore he stole from Nauru?

MR YOUNG:   No, not at all.  These are facts that underpin the finding that in January Powles was, at each step of the way, embarked upon a dishonest scheme, not that we had an isolated event of the payment away of $8.55 million pursuant to a supposed instruction.

KIRBY J:   I started this running, but is not the problem for you that the policy talks of “act or omission” and therefore you have to concentrate on the particular act and not on the scheme?

MR YOUNG:   Yes, we do, your Honour, but ultimately, in characterising whether that act or omission was dishonest or fraudulent, it would be wrong to ignore the context in which the transaction was undertaken and the purposes for which the transaction was undertaken.

KIRBY J:   How do you meet Justice Hayne’s point about once a thief, always a thief?  That is not normally the way the law operates.

MR YOUNG:   No, we entirely agree with him.  That is not the way the law operates, but nor does it artificially isolate a transaction from what surrounded it, what gave birth to it and what drove it for the purposes of characterising it.

GLEESON CJ:   What the case is about is whether or not the fact that Mr Powles set out to steal $145,000 meant that Allens cannot claim 8.55 million.

MR YOUNG:   No, in part that is right, your Honour, but it is whether Allens’ liability, which is acknowledged to Nauru in respect of the loss of the $8.55 million, was brought about by dishonesty or fraud in circumstances where that payment away of the $8.55 million was brought about by the dishonest purpose of generating a differential out of the larger sum of $8.7 million placed with Allens.

HAYNE J:   The argument about generating a differential suggests that thieves will take only what is left.  That is a startling argument.  If he is going to steal it, he is going to steal it.  Does it matter whether the 8.55 has gone first or second?

MR YOUNG:   Well, your Honour, what he was stealing was an amount that Nauru never knew existed.  There was a further $19.3 million coming.  If an instrument had been purchased it was going to be resold and so forth.  But this part of the theft, in relation to the differential, was the part of the theft that Powles thought he would get away with because it was stealing an amount of money that Nauru never knew existed according to the representations made to them.

Can I go back and answer the Chief Justice’s question more fully:  the second part of the characterisation does not depend on the differential.  It really is that knowing he had no right to do so, he placed the $8.55 million at serious risk of theft, just like every one of the previous 17 occasions.  He knew there were fraudsters in the market, he knew they had made off with funds previously, so he placed the $8.55 million at risk.  In circumstances where he knew of the risk, he did not reveal it to his clients to whom he owed trust obligations.  Far from revealing it, he concealed it, he gave false references and false reports.  So, quite apart from the differential, we would say, in terms of this Court’s judgment in Peters, there is dishonesty and fraud in the circumstances in which the $8.55 million is paid away.

CALLINAN J:   Where is the finding that he knew there had been fraud on other occasions?

MR YOUNG:   At paragraph 57 in the Court of Appeal, which is a summary paragraph at page 422, that summarises part of what is briefly set out in the previous paragraph, paragraph 56.

CALLINAN J:   How do you reconcile that with what Mr Justice Hunter said at page 15 that he did not doubt that Powles “was taken in by the apparent legitimacy, albeit unconventional nature, of the pbi market”?

MR YOUNG:   All we can say is that that was a generous finding.

CALLINAN J:   The two findings are in conflict, are they not?  Or are they?

MR YOUNG:   No.  Mr Justice Hunter’s finding in terms of the risk of loss of the funds was overturned by the Court of Appeal.

CALLINAN J:   Do we have in the books the evidence that Powles had been told by others that dealers in the market were fraudsters or untrustworthy?

MR YOUNG:   To some extent, yes.  It is not complete but there is material to that effect.  There are, indeed, complaints by Powles in correspondence that various dealers in the market were thieves and fraudsters.

CALLINAN J:   But not all dealers in the market.

MR YOUNG:   Well, amongst those that he complains about ‑ ‑ ‑

CALLINAN J:   We know that they were perhaps, but was there any evidence that he knew that they all were?

MR YOUNG:   Well, there is evidence that he had his reservations about Mr Searle, who was one of the critical players in the Nauruan Trust transaction.

CALLINAN J:   It is a bit different from knowing though, is it not, that he had reservations?

MR YOUNG:   Well, that was my expression, your Honour, but I will try and gather together those references overnight if I can.  One of the difficulties is that there is a lot of material and a lot of findings by Mr Justice Hunter but through the first 100 or more pages of Mr Justice Hunter’s judgment he goes through each of the transactions and in a large number of them moneys are lost and allegations are made by Powles, amongst others, that they were lost through the fraud of particular individuals involved in the transactions.

That is the basis of the finding that he knew that there were fraudsters in the market and that is common ground.  I mean, both parties’ written submissions in this Court accept the finding that Powles knew there were fraudsters in the market.  Can I deal with – I am not sure I gave the references to the Westpac account.  In the Court of Appeal paragraphs 17 and 54 at pages 410 and 421 respectively, and in the judgment of Mr Justice Hunter at pages 91 to 92, 139 line 24 and 140 lines 5 to 13.

The other matter in place at the start of the Nauru transaction was that Powles had an established arrangement with Madden that he would receive secret commissions on each prime bank instrument transaction.  The Court of Appeal made findings to that effect at paragraphs 46 and 47, page 419, and at paragraphs 54 line 13 page 421 and 58 at page 422.  Mr Justice Hunter’s findings were referred to by the Court of Appeal at paragraphs 12 and 15 at 408 and 409.

The judgments refer to what is called the personal contribution letter, that is the offer of secret commissions from Madden to Powles of 17 August 1991.  Justice Hunter refers to it at pages 86 to 88 and the actual letter is in volume 7 page 1511 of the appeal books.  There are numerous examples of the secret commissions in the previous transactions that Justice Hunter reviewed at these pages:  1521 of volume 7; 1522, 23, 25 and 30, that is 1530 of volume 7; and in Justice Hunter’s judgment at 125 to 126 and at 144 to 145.  At 141 – I ask the Court to go to 141 for a moment in Justice Hunter’s judgment.  At line 10 his Honour found:

that Powles saw, in the anticipated receipt of vast sums from Nauruan Trust sources, the opportunity to siphon off fringe amounts.

That qualifies his Honour’s finding that Powles did not intend to defraud the Nauruan Trust of its core investment moneys at the outset of the transaction, which was on the previous page at 140 line 38.

KIRBY J:   I am just getting a little anxious because this is a mammoth job for this Court to, as it were, revisit all the facts in seven or 10 volumes of appeal books and, I mean, we may have to do it, but I read the special leave transcript and Justice Gaudron seemed to think the case would take much less than a day, which was the estimate of the parties, and if we are to do justice to, as it were, making our own findings of fact, it is a huge enterprise.  I thought it was advanced at the special leave on the basis that we take the findings of fact and apply the law and the contract of insurance to it.

MR YOUNG:   Well, your Honour, all we can say is so did we and, hence, our objection.

KIRBY J:   I mean, I just have a fear about doing a hybrid job, taking some findings of fact as made by Justice Hunter, a few by the Court of Appeal, and then a few by ourselves.  It is a perilous thing because to do justice to the whole exercise – the Court of Appeal, I think, took three days on this case - Justice Hunter, a huge amount of time.

MR YOUNG:   Can I say this, your Honour, that what we are endeavouring to do is to assist the Court by identifying relevant findings.  At the end of the day, it is our submission that there is no relevant difference between the findings made by the trial judge in the Court of Appeal and those findings foreclose the appellants’ first argument.  Indeed, when all the factual findings are understood, the contention advanced by the first argument is revealed as manifestly untenable.  But to understand that, and the reason why the 8.55 cannot be surgically isolated, one needs to go to these various findings of fact, but it will be our submission that - and we appreciate we are taking time about it, but at the end of the day the exercise will be a useful one and, we think, one of assistance to the Court.

GLEESON CJ:   Mr Young, nothing may turn on this but I cannot help being struck by the difference in the order of amounts of money involved between the transactions referred to on page 421, paragraph 56, and the 8.55 million with which we are presently concerned, or the 8.7, it does not matter.

MR YOUNG:   That is so, your Honour ‑ ‑ ‑

GLEESON CJ:   These are relatively modest amounts of money, more comparable with the 145,000 that Mr Powles was attempting to get hold of than with the 8.7 million.

MR YOUNG:   That is so, your Honour, and there was a letter from Powles, in respect of the earlier transaction, to his colleagues, I think it is to Madden, where he says, “Little fish are sweet”.  This was plainly an enormous amount compared to previous transactions but, as the court found, by December 1991 Powles self-interest and great need for funds to cover up previous frauds were such that this transaction was revealed as a great opportunity to get his hands on significant amounts of money and it is found that, subsequently, he was voracious in stealing money from the Nauruan Trust out of the 19.3.

HAYNE J:   This opportunity was one that came as a result of negotiations between Madden on behalf of Linpar and the Trust.

MR YOUNG:   Not entirely, your Honour.  It came because Madden needed the credibility of Allens to give him a reference ‑ ‑ ‑

HAYNE J:   Yes, that reference appearing at 156, is it?  Is that the reference to which you are referring?  Coming after the proposal at 145, modified as it appears at 151 to 152.

MR YOUNG:   Your Honour is right.  The reference comes at 156 ‑ ‑ ‑

HAYNE J:   The only reference to trust account there is at line 30.

MR YOUNG:   Yes.

HAYNE J:   That comes on top of 145, lines 20 or thereabouts, where the original proposal by Madden of Linpar is that money would go into Allens Sydney trust account and then remitted on to the London office.

MR YOUNG:   Yes.

HAYNE J:   Modified at 151 to 152, in the last few lines of 151, top of 152, to refer for the first time to the trust account of Allens in London. These events occurring before Powles becomes involved with Nauru, directly or indirectly or what?

MR YOUNG:   His first involvement is 4 December, so the previous discussions involving Linpar are, so far as one knows, before Powles direct involvement.

HAYNE J:   And the Trust has decided, has it?

MR YOUNG:    No.  The Trust only decides after getting the Allens’ reference, and I will take the Court to that.  For instance, your Honour will see at 157, line 35:

Subsequently, I have further information from Allen Allen & Hemsley in relation to Linpar and their dealings with the Linpar. This should help them decide –

HAYNE J:   Yes.  I was looking at 155, line 37:

we are advised, the President of Nauru, has approved the commencement –

MR YOUNG:   Well, that is Mr Madden, your Honour.

HAYNE J:   I see.

MR YOUNG:   And no credence can be given to that, because the Nauruan documents show that they relied upon the Allens’ reference and Justice Hunter so found, at the top of 158.

HAYNE J:   Yes.

MR YOUNG:  

It is almost impossible to escape the conclusion that the fact that it was Allens who was to be the custodian of the Nauruan Trust funds and vouched for Linpar and Madden, inevitably, would have been an important factor in the Nauruan Trust deciding to invest its funds with Linpar.

And then there is an internal Nauruan Trust memo referred to:

“While I have had no part in your discussions I have been made aware that it is proposed to make use of the Trust account of Allen Allen & Hemsley in London.  In my opinion that firm is of the highest integrity and can be trusted to follow your instructions.”

And that was a state of mind induced by the Allens or Powles’ reference for Linpar.

The other broad finding about the background, or the state of affairs at the inception of the transaction was a finding about Powles’ conflicting self‑interest, namely, a great need for funds to cover up past frauds.  The Court of Appeal deals with it at three places:  paragraph 16 at page 410, referring to the trial judge’s findings; and then at paragraphs 47 and 60, which are at 419 and 422 to 423.

KIRBY J:   I am sorry, what was that second reference?

MR YOUNG:   Paragraph 60 is at 422 to 423.  Justice Hunter made findings to like effect at these pages:  21 to 22, 26, 27, 138 and 140.  And at 261 the trial judge found that Powles was not a respecter of client funds; and at 263, he found that he was:

constantly under threat of exposure for long standing frauds:  a factor which I have no doubt would have been a constant driving factor in his pursuit of moneys…..to the point that I have little doubt that, where Powles’ self interest conflicted with interests of third parties, it would be his self interest that would prevail.

If we move then to what we say are the ingredients that gave rise to Allens’ liability in the particular Nauruan Trust transaction, I start with a reference letter of 4 December ‑ ‑ ‑

GAUDRON J:   Before you do that, you say there were several acts or omissions, do you, that brought about the liability?

MR YOUNG:   No, we say there are several acts or omissions, yes, that gave rise to liability in respect of the 8.55 million.

GAUDRON J:   But that has its difficulties, does it not, in terms of “brought about”?  One is obviously going to have to see – I mean, if you were alleging a scheme, and which you did at first instance and in the Court of Appeal, a scheme to get the trustees to part with their money so that Mr Powles could play with it on this round robin siphoning off sums each time it went around, then it may well be that the act or omission would be a false representation which led them to part with their money that was the cause of the loss.  But that scheme was not found in your favour, was it?

MR YOUNG:   It was, with respect.  It was found both by Justice Hunter and by the Court of Appeal – that is to say, Powles’ scheme.  His modus operandi ‑ ‑ ‑

GAUDRON J:   But did they find that was the act or omission that in the end brought about the liability?

MR YOUNG:   We would say this, that a fair reading of the Court of Appeal is that there were a series of interrelated acts and omissions undertaken by Powles during the course of January.  They all bear upon the proper characterisation of the liability of Allens in respect of the loss or in respect of $8.55 million.  The question is whether the liability of Allens in respect of the $8.55 million and interest thereon was brought about by the dishonest or fraudulent act or omission.  In our respectful submission, liability in respect of that sum was brought about by an interrelated series of acts or omissions.  Of course, one could say an essential part of that was the actual payment away of the 8.55, but we still stress it is not to be viewed in isolation from the purpose that drove it and the acts that permitted it.  There would have been no 8.55 received and kept and maintained during January but for false statements made by Powles.

HAYNE J:   Can I go to that question of falsity of statements, particularly the reference.  In paragraph 21, page 412, the Court of Appeal describes it as Powles giving a false reference.  Does that sit with what the trial judge found at page 156, line 40?

MR YOUNG:   That it sailed close to the wind?

HAYNE J:   I am reading the sentence:

Still, in most respects, it is either factual or the evidence does not permit me to say it was not factually correct.

MR YOUNG:   Page 157 is what I was referring to, lines 10 and 17.

HAYNE J:   At line 10 he declines to find misrepresentation.  Wherein lies the falsity to which the Court of Appeal refers?

MR YOUNG:   The falsity is explained by the court - paragraphs 48 and 50 to 55 of the Court of Appeal go further than the trial judge, whose view was that it was uncomfortably close to the line of fraud.

GAUDRON J:   I am sorry, what paragraphs?

MR YOUNG:   Paragraph 48, I said firstly, in the Court of Appeal at page 419.  That is perhaps introductory but it includes 4 December and the false references.  Then at paragraphs 50 to 55, the Court of Appeal go to the question of whether the reference given to the Nauruan Trust was false and they conclude on several grounds that it was, at 51 firstly:

‘we are holding in trust substantial moneys, in US dollars, for various transactions involving Linpar’…..Allens was not holding any such moneys in trust -

52…..‘I can confirm that Linpar is capable…..This was not an opinion which Powles could properly hold because he knew that on all occasions when he had received moneys and paid them away on Linpar’s instructions, no instrument had been obtained and, on occasions, the money had been lost.

53 An honest disclosure to the Nauruan Trust would have included divulging that he had been attempting to access the pbi market for nearly 2 years without success –

54…..Powles knew that the Bank of England denied the existence of the market…..not disclosed –

Other matters not disclosed in that reference letter are then dealt with at the top of page 421, including, in particular, not disclose that it was his private business account rather than an Allens’ trust account, which was used to make secret commissions.  Finally, he:

did not tell the Nauruan Trust that it was part of the arrangement with Madden that the instrument would be purchased for less than the Nauruan Trust’s funds and the difference shared between him and Madden.

They are findings that really go to the fact that the Court of Appeal was finding that Powles was embarked upon a fraudulent scheme.

GAUDRON J:   I seem to recollect that somewhere in their judgment they refrained from finding that.  They refrained from finding a conspiracy.

MR YOUNG:   They do, but a conspiracy is different than Powles’ scheme.  All they stay short of is finding an agreement with others that went as far as my clients urged.  That appears at paragraph 65, pages 424 to 425.

GAUDRON J:   Yes, I can see that paragraph, but I keep coming back:

knew –

that in doing what –

he was placing the trust moneys at considerable risk.

Paragraph 65.  It seems to me that if one is focusing on the dishonesty, one has to know what it was that he was doing that placed the money at risk.

MR YOUNG:   What he was doing with the $8.55 million was putting it into the Glasby account, which he had absolutely no control over.  He surrendered control of the money a little earlier to Mr Searle, who gave the instructions to transfer it to the Glasby account, but ‑ ‑ ‑

HAYNE J:   That is the finding at paragraph 67, is it not, the last couple of sentences:

known that parting with the funds, without having acquired the instrument, would seriously endanger - - -

MR YOUNG:   Yes, and it is not just not having obtained an instrument in exchange before release – perhaps that was part of it – but it was placing them at the disposal of Searle who had lost funds in the Ward transaction and Powles had accused him of fraud in the transaction.  So he knowingly put them into the hands of a person who had lost funds previously.

GAUDRON J:   Yes, but you have to go a little bit further than that, have you not?  For the purpose of some gain to himself, something to which he was not entitled, or for the purpose of letting Glasby get away with it?  Certainly, one has to ‑ ‑ ‑

MR YOUNG:   But the objective, the purpose, that was moving Powles was to derive so-called secret commissions.  It is not to the point that the secret commissions were not coming out of the $8.55 million; the fact that they were coming out of the differential left behind when the $8.55 million was paid away, does not alter the appropriate characterisation.  He represented through January that an instrument had been purchased already for $8.7 million.

GAUDRON J:   Yes, but at which stage the money had been lost, so that ‑ ‑ ‑

MR YOUNG:   No, at that stage, the money had not been lost.  He was representing as early as 6 January that the transaction has happened and an instrument has been purchased.

GLEESON CJ:   If this money disappeared down a black hole, it would have defeated his campaign to obtain repeated commissions, would it not?

MR YOUNG:   Yes, your Honour, it would.  Moreover, it would have ensured that the next tranche, the $19.3 million, never arrived in his account.

GLEESON CJ:   Is that not involved in the ‑ I think there is at least one point of departure between the Court of Appeal and Justice Hunter.  Justice Hunter said the risk that Powles saw was not the risk of the loss of the money; it was the risk that this deal would not be consummated and he would have to start all over again ‑ ‑ ‑

MR YOUNG:   That is so and if it was not ‑ ‑ ‑

GLEESON CJ:   ‑ ‑ ‑ perhaps with an accompanying loss of credibility.

MR YOUNG:   And, of course, if it was not consummated and he could not say an instrument had been purchased effectively, the divvying up the differential of 145,000 would have to have been perhaps undone or reversed because the Nauruan Trust would want their $8.7 million accounted for.

GLEESON CJ:   Did the Nauruan Trust have an auditor?

MR YOUNG:   I trust so, your Honour, but ultimately it was the Nauruan Trust’s demands, I think through their auditors who came to London for a proper accounting, that led to the balloon going up in about October/November 1992.

GLEESON CJ:   But the existence of an auditor might be relevant to certain appearances that needed to be created.

MR YOUNG:   Yes, your Honour, definitely.  Just finishing on the reference.  The other reference to the Court of Appeal is paragraph 60 at the top of page 423, second line.  So there are fairly comprehensive findings of the Court of Appeal that the first reference letter, Powles first involvement in the transaction that was essential to induce the Trust to put moneys into the account, was dishonest in numerous respects.

KIRBY J:   Is it your case that you can succeed in attracting the application of the exclusion upon concurrent findings of fact before the primary judge and the Court of Appeal?

MR YOUNG:   Yes, your Honour.

KIRBY J:   Well, it would be helpful to me to have those on a piece of paper in so far as they go beyond what you have already put in your written submissions.

MR YOUNG:   Yes.  I think what we have handed up is – I will see if we need to supplement it overnight.

GAUDRON J:   Well, essentially do you say – stop short of the dishonest scheme argument, if you do, because I still have not really found a finding that supports a dishonest scheme, but if you stop short of the dishonest scheme, does your finding depend on the placing of this money in the Glasby account knowing that it was thereby put at risk for the purpose of availing himself of a share in the $145,000 left in the Westpac account?

MR YOUNG:   Not completely, but largely so, your Honour.  I say not completely because the element of putting it there, knowing that it was at risk of being taken by fraudsters ‑ for private gain, is the way in which we have put it ‑ the private gain was in part the first differential on the first transaction but to some extent the actuating purpose was further commissions derived in the same dishonest way, either out of further circulation of the 8.55 or out of further funds coming from the Nauruan Trust.  That was the purpose.

So there was a purpose of secret and private gain actuating the payment away and the payment away was one that knowingly put the funds at risk of theft by fraudsters in circumstances where he had concealed over weeks, both before and after that step of payment away, the true facts and the true risks from the Nauruan Trust.  They would not have let him have the money if they had been properly informed by their fiduciary of the true risks.

GLEESON CJ:   It might depend on who you mean by “they”.

MR YOUNG:   I am sorry?

GLEESON CJ:   That might depend on who you mean by “they”.

MR YOUNG:   I do not mean Mr Dougall.  I mean the responsible decisions makers.  Finally, on the reference there, which is the first step in the transaction, can I give the Court a reference to Justice Hunter’s findings at 155 to 156, 157 to 158.  Justice Hayne has referred to them.  It is noteworthy though that the request of Powles for the reference from Madden at 155 to 156 is quoted.  It starts off, the facts, “This should…..make your day”.  A few paragraphs further on:

What we do require is one final letter from you, on behalf of LIN/PAR and the suggested text is set forth below.

Et cetera.  Powles had been induced to give numerous references previously, all false, all to induce investors to place funds in this manner and in many instances the funds were lost through the involvement of Madden.  So, one final letter is requested and then a false reference letter is given that kicks off the transaction.

Now, the next step is important because of the issue that was discussed this morning about mandate and what that meant.  It is our submission that, as used by Mr Justice Hunter in the Court of Appeal, the reference to mandate and Trust is a reference to the Trust terms or conditions upon which Allens assumed responsibility for the $8.7 million deposited with Allens for use in purchasing a bank instrument.  Both judgments, the trial judge and the Court of Appeal, found that, in connection with the receipt of the $8.7 million, Powles assumed Trust duties to receive the $8.7 million for the sole purpose, and we underline “sole purpose”, of acquiring a letter of credit and to use the $8.7 million, and the entirety of it, only for that purpose.

The Court of Appeal’s findings commence at paragraphs 59 and 60 at 422, then at 66 at page 425 at line 17, at 67 on the same page and again at 69.  My learned friend was asked this morning about the mandate and he referred the Court to two letters from Linpar to NPRT of 18 December and 20 December 1991.  That is neither of the documents that the trial judge or the Court of Appeal relied upon to make those findings concerning trust and mandate.  In fact, the relevant letter is an earlier Nauruan Trust memorandum to Madden of 13 December 1991.  The actual document is in volume 3 at page 581, and could I ask the Court to go to that for a moment.  This copy was Mr Powles’ copy of the letter from his files.  The Court will see it goes from Dougall of the Trust to Madden.  The first paragraph confirms the decision of the Trust to embark upon the rollover programs.  The second paragraph:

We would advise that funds in the amount of USD $8.7 Million will be advanced to the Trust account of Allen, Allen & Hemsley, London for the purpose of purchasing a USD $10 million face-value Standby Letter of Credit.  Such funds are for the sole purpose of facilitating LIN/PAR’s purchase through Allen’s in the name of the Trust of the instrument.  Our understanding is that LIN/PAR LIMITED will, after delivery of the subject Instrument to Allen, Allen & Hemsley, and after the required “hold” period, onward sell the same.  The funds generated by the transaction will then be delivered, in full, to the Trust account of Allen’s to facilitate a second transaction.

That was, in large measure, the basis of the trial judge’s findings that Allens assumed obligations to receive the $8.7 million into the Allens’ trust account solely for the purpose of acquiring a letter of credit, and that all of the funds would be directed to that purpose and that purpose only.  Powles, in the same volume, whilst the Court has it, at page 633, in a handwritten letter to a colleague, acknowledge the duties he had assumed to the Trust.  It is at about point 6 on the page:

In any event, we will not be able to move the money out of Westpac without the Nauru Trust’s concurrence and this will have to be specifically discussed with them at the appropriate time.

The trial judge relied upon that as part of his finding that Trust duties were assumed by Powles in respect of the receipt of the $8.7 million. 

Can I take the Court then to Justice Hunter’s findings about the Trust obligations?  They commence at 199 in volume 1, line 15.  A more detailed discussion then occurs commencing at page 237.  I am sorry, I should start a little bit earlier.  Allens’ position is referred to at the top of 237:

that Powles’ mandate was that of an escrow agent acting under the instructions of Linpar –

and the dispersal was in accordance with the direction of Linpar.  The trial judge rejected that argument which is now the argument advanced as the first argument by the appellants.  At line 28, on the same page, 237, Justice Hunter says this:

it is beyond dispute, in my view, that Allens (Powles) owed the Nauruan Trust the duty to act in such a way as to ensure that proper safeguards were in place to protect the Nauruan Trust funds pending receipt of the required financial instrument.  That was a duty, in my view, that was not removed by any authority of Linpar to direct the disbursement of the Nauruan Trust funds for the purchase of financial instruments.

His Honour goes to the letter of 27 December which has Powles’ acknowledgment.  Then at the next page, 238, line 19:

Allens (Powles) had an overriding duty to the Nauruan Trust in accepting custody of the funds to ensure that proper safeguards were in place –

et cetera.

Now, I just interpose that Allens’ reply submissions refer to page 237 but they do not refer to the judges’ findings and, in fact, extract Allens’ argument which was rejected by Justice Hunter.  At page 262 and then at 265 his Honour returns to the point.  Page 262 sets out findings by the trial judge.  Paragraph 5 is relevant to the present point and whilst we are at the page the Court will note the finding that:

Powles, undoubtedly, had a vested in the subject transaction…..I regard this secret commission of Powles as crucial in the consideration of the honesty of his conduct.

Next, if the Court goes to 265 to 266 there is a passage that my learned friend referred to in part this morning.  This is his Honour’s finding of dishonesty.  At line 20 his Honour starts with a heading, “As to ground 1”.  Ground 1 refers back to page 263 last paragraph.  It starts off with something the appellants relied upon:

that Powles regarded himself and Allens as being entitled to act on the instructions of Linpar (Madden).  Similarly, I think the evidence is clear that it was not part of his mandate expressly to retain the Nauruan Trust funds in Allens’ trust account in exchange for the required financial instrument.

But that is qualified by what follows and consistently with what his Honour had earlier found.  At line 38:

Powles was not entitled to disburse the funds of the Nauruan Trust from the US dollar account to Commonwealth in the circumstances in which he paid away those funds between 15 and 17 January 1992:  regardless of that disbursement being carried out precisely in accordance with Linpar’s instructions.  I think this conclusion is called for on the basis of the assumption of responsibility by Allens to the Nauruan Trust in respect of its funds placed with Allens for the purpose of acquiring the letter of credit:  not under any mandate of the Nauruan Trust.  This was a responsibility which I think was imposed upon Allens by reason of the circumstances in which the funds were so deposited and, moreover, it was a responsibility which Powles expressly assumed and had a clear understanding of.  The transaction itself smacks of undue haste –

et cetera.  Then in the next paragraph 266 line 16:

it was incumbent upon Allens to ensure that the funds were adequately protected in the course of the proposed transaction.

Line 22:

It is simply no answer for Allens to rely upon the authority which, no doubt, Powles had from Linpar in payment away of those funds.

Then at line 34:

I regard that breach of duty as dishonest, not fraudulent, as I have little doubt that the undue haste with which the disbursement was effected and the terms of the disbursement were the product of Powles’ overriding self interest in seeing the transaction proceed.

GLEESON CJ:   Mr Young, is that a convenient time?

MR YOUNG:   Yes, it is, your Honour.

GLEESON CJ:   How long do you expect to require to complete your submission?  I only ask that question for the benefit of the next case in the list.

MR YOUNG:   Yes, your Honour.  I expect I will be at least two hours, your Honour.

GLEESON CJ:   We will resume at 9.30 in the morning and we will say that the next case will be taken not before 11.15.

We will adjourn until 9.30.

AT 4.14 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 2 AUGUST 2000