National Mutual Holdings Pty Ltd v Sentry Corporation

[1989] FCA 274

Re: NATIONAL MUTUAL HOLDINGS PTY. LIMITED; ACC HOLDINGS LIMITED;
ACC FINANCIAL MANAGEMENT LIMITED; ACC LIFE LIMITED; ACC GENERAL
INSURANCE LIMITED and AUSTRALIAN CASUALTY COMPANY LIMITED
And: THE SENTRY CORPORATION and PEAT MARWICK MITCHELL & CO. and OTHER
CROSS-PROCEEDINGS
No. VG 173 of 1987
FED No. 274
Equity - Legal Profession - Evidence - Practice and Procedure
22 FCR 209

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Gummow J.(1)

CATCHWORDS

Equity - injunctions - jurisdiction to enjoin the conduct of proceedings in a foreign court where those proceedings have a tendency to interfere with the conduct of proceedings before this Court - principles applicable to grant of interlocutory relief of this character - jurisdiction distinguished from that to stay proceedings commenced in this Court.

Legal Profession - solicitors - principles governing conflict of interest - former solicitor for a respondent now acting for applicants in litigation concerning agreement in relation to the drafting of which the solicitor had acted for that respondent.

Evidence - principles governing admission of evidence as to foreign law.

Practice and Procedure - when prior leave of the Court necessary to filing of cross-claims - principles on which pleading struck out - whether real question for determination.

Judiciary Act 1903

Trade Practices Act 1974

Insurance Contracts Act 1984

Lotteries, Gaming and Betting Act 1966 (Vic.)

Instruments Act 1958 (Vic.)

United States Surgical Corporation v Hospital Products International Pty. Ltd. (Supreme Court of New South Wales, McLelland J., 19 April 1982, unrep.)

Rakusen v Ellis Munday & Clarke (1912) 1 Ch 831

D. & J. Constructions Pty. Ltd. v Head (1987) 9 NSWLR 118

Mills v Day Dawn Block Gold Mining Company Ltd. (1882) 1 QLJ 62

Phipps v Boardman (1967) 2 AC 46

Chan v Zacharia (1984) 154 CLR 178

Baker v Campbell (1983) 153 CLR 52

Baltimore & Ohio Railroad Co. v Kepner 314 US 44 (1941)

Societe Nationale Industrielle Aerospatiale v Lui Kui Jak (1987) AC 871

Oceanic Sun Line Special Shipping Co. Inc. v Fay (1988) 79 ALR 9

Laurie v Carroll (1958) 98 CLR 310

Maritime Insurance Co. Ltd. v Geelong Harbor Trust Commissioners (1908) 6 CLR 194

Voth v Manildra Flour Mills Pty. Ltd. (New South Wales Court of Appeal, 13 February 1989, unrep.)

Kolback Securities Ltd. v Epoch Mining NL (1987) 8 NSWLR 533

Lord Portarlington v Soulby (1834) 3 My & K. 104; 40 ER 40

Kennedy v Lord Cassillis (1818) 2 Swans 313; 36 ER 635

Beckford v Kemble (1822) 1 Sim and St 7; 57 ER 3

Cole v Cunningham 133 US 107 (1889)

Muschinski v Dodds (1985) 160 CLR 583

South Carolina Insurance Co. v Assurantie Maatschappij "De Zeren Provincien" NV (1987) AC 24

Pioneer Concrete (Vic.) Pty. Ltd. v Trade Practices Commission (1982) 152 CLR 460

Darling Downs Investments Pty. Ltd. v Ellwood (1988) 18 FCR 510

Castlemaine Tooheys Ltd. v South Australia (1986) 161 CLR 148

Yorke v Lucas (1985) 158 CLR 661

The Saints Gallery Pty. Ltd. v Plummer (1988) 80 ALR 525

Co-Ownership Land Development Pty. Ltd. v Queensland Estates Pty. Ltd. (1973) 47 ALJR 519

Dey v Victorian Railways Commissioners (1949) 78 CLR 62

General Steel Industries Inc. v Commissioner for Railways (NSW) 112 CLR 125

Merman Pty. Ltd. v Cockburn Cement Ltd. (1988) 84 ALR 521

Trade Practices Commission v Allied Mills Industries Pty. Ltd. (1980) 32 ALR 570

Yango Pastoral Company Pty. Ltd. v First Chicago Australia Ltd. (1978) 139 CLR 410

Brownbill v Kenworth Truck Sales (NSW) Pty. Ltd. (1982) 59 FLR 56

Carlill v Carbolic Smoke Ball Co. (1892) 2 QB 484

Morley v Richardson (1942) 65 CLR 512

Petranker v Brown (1984) 2 NSWLR 177

Kay's Leasing Corporation Pty. Ltd. v Fletcher (1964) 116 CLR 124

Holmes v Bangladesh Biman Corp. (1989) 1 All ER 852

HEARING

SYDNEY

#DATE 6:6:1989

Counsel and Solicitors for
National Mutual Holdings Pty. Limited,
National Mutual Life Association of Australasia Limited,
National Mutual Corporation Pty. Limited,
ACC Holdings Limited,
ACC Financial Management Limited,
ACC Life Limited,
ACC General Insurance Limited,
Australian Casualty Co. Limited,
Mr. Hoskins,
Mr. Kent: P.R. Hayes Q.C. and C.M. Scerri Esq.

instructed by Messrs. Mallesons Stephen Jaques.

Counsel and Solicitors for
The Sentry Corporation: D.E. Horton Q.C., J.H. Karkar Esq.

and D.E.J. Ryan Esq. instructed by Messrs. Phillips Fox.

Counsel and Solicitors for
Messrs. Mallesons Stephen Jaques: S.E.K. Hulme Q.C. and S. Wilson Esq.

instructed by Messrs. Ebsworth & Ebsworth.

Counsel and Solicitors for
Messrs. Peat Marwick Mitchell & Co.: S.D. Rares Esq. instructed by

Messrs. Allen Allen & Hemsley.

JUDGE1

The Motions Before the Court

On 22, 23 and 24 May 1989, in Melbourne, I heard seven motions in these proceedings. Also listed before me were eight motions to set aside subpoenas which had been issued in late April and early May, but I was told that the subpoenas would not be called. It thus is unnecessary to deal with the applications to set them aside, other than to order that they be dismissed. But the costs of each application must be paid by the respondent to the motion.

1. In order to appreciate what is involved with the seven motions that remain in issue, it is necessary to have some understanding of the principal proceedings. They were commenced by an Application and Statement of Claim both filed 3 July 1987. Numerous interlocutory steps were taken. On 30 March 1989, Northrop J. granted leave to file an Amended Application and Amended Statement of Claim. By orders made 30 March 1989, but apparently entered 6 April 1989, his Honour gave further directions leading up to the filing and service of experts' reports in reply on 10 October 1989. When these directions were given, it was indicated to the Court that the proceedings should be ready for trial early in 1990. The seven motions with which I am concerned were all filed after the giving of these directions by Northrop J.

2. The first applicant ("National Mutual") is incorporated in the State of Victoria. The first respondent ("Sentry") is a corporation organised under the laws of the State of Texas but has its principal place of business in the State of Wisconsin, in the United States of America. National Mutual entered into a contract dated 22 July 1986 with Sentry ("the Sale Agreement") whereby National Mutual agreed to purchase 9 million $1 shares in the capital of the second applicant ("the Shares"); the second applicant was then named Sentry Holdings Limited ("Sentry Holdings"). Sentry Holdings is a company incorporated in the Australian Capital Territory. The agreement was executed in Wisconsin. Clause 23 of the Sale Agreement provides that the governing law shall be the law of Victoria. Clause 10 is in the following terms:
   

"10. Each of (Sentry) and (National Mutual) hereby submits for itself and its successors and assigns to the jurisdiction of the Courts of the Commonwealth of Australia with respect to all disputes concerning this agreement or their rights and obligations under this agreement."

1. The third applicant ("Sentry Finance") was then named Sentry Financial Management Limited. The fourth applicant ("Sentry Life") was then named Sentry Life Assurance Limited. The fifth applicant ("Sentry Insurance") was then named Sentry Insurance (Australasia) Limited. The name of the sixth applicant ("Australian Casualty") has not changed. All of the capital in Sentry was held by a company incorporated in Wisconsin named Sentry Insurance A Mutual Company ("SIAMCO").

2. Until 27 June 1986, SIAMCO was beneficially entitled by virtue of its ownership of the shares in Sentry to the capital of another company, Sentry Assurance International Limited ("SAIL"). Before 27 June 1986, SAIL was the registered holder of the shares in Sentry Holdings. SAIL was also the holding company for SIAMCO's Hong Kong business operations. By an agreement executed 27 June 1986, National Mutual Hong Kong Limited, a company related to National Mutual, purchased all the capital in SAIL ("the Hong Kong Agreement"). It was a condition of the Hong Kong Agreement that SAIL dispose of its interests in the shares in Sentry Holdings on or before 27 June 1986. To satisfy this condition in the Hong Kong Agreement, on 27 June 1986 SAIL distributed the shares in Sentry Holdings in specie to Sentry, which became the registered holder of the shares. This cleared the way for the Sale Agreement of 22 July 1986 between Sentry and National Mutual for the sale by Sentry of those shares in Sentry Holdings. The negotiations for the purchase by National Mutual of the shares in Sentry Holdings took place between April 1986 and 22 July 1986. During this period, Sentry Holdings held all the shares in Sentry Finance, Sentry Life, Sentry Insurance and Australian Casualty.

3. The particulars accompanying the Amended Statement of Claim point to the commencement of the negotiations for purchase of the shares in Sentry Holdings as a conversation on 20 April 1986, between Mr. O'Kane (Managing Director of Sentry Holdings and its subsidiaries), Mr. Hoskins (an Executive Director of National Mutual Life Association of Australasia Limited) ("NMLA"), in which Mr. O'Kane indicated Sentry Holdings was for sale. NMLA was the beneficial owner of the capital of National Mutual Corporation Pty. Limited ("NMC"). From 9 July 1986, NMC owned the shares in National Mutual.

4. It is alleged in the Amended Statement of Claim that Sentry engaged in misleading conduct within the meaning of s. 52 of the Trade Practices Act 1974 ("the TP Act") in that in the course of negotiations for the purchase of the Shares, National Mutual and NMC were supplied with and relied upon audited accounts of Sentry Holdings and its subsidiaries which were represented as having been prepared in accordance with certain accounting standards and principles, and that Sentry made or "adopted" the representations. The representations so "adopted" are said to have been made in a memorandum dated 23 May 1986 from Mr. H.R. Hoth who was then a director of both SAIL and Sentry. It is also alleged that (a) the audited accounts were inaccurate and significantly overstated the true profits of the Sentry companies, (b) Sentry owed a duty to take care in making the representations to National Mutual, (c) in breach of that duty Sentry negligently failed to take any or any reasonable steps to ascertain whether the representations were accurate, and (d) National Mutual entered into the sale agreement in the faith of and in reliance upon the representations. It is also alleged that Sentry was in breach of certain warranties contained in the Sale Agreement.

5. The relevant portions of clause 4 of the Sale Agreement are as follows:
   

"4. (a) In this Agreement the following expressions have the following meanings:

(i) 'the SHL Group' means each of SHL (Sentry Holdings), SLAL (Sentry Life), SIAL (Sentry Insurance), ACCL (Australian Casualty), SMPL (Sentry Marketing Pty. Limited), SFML (Sentry Finance) and SFUND (Sentry Fund Management Limited);

(ii) 'the latest accounts of (a specified company or group of companies)' means the audited Balance Sheet of such company or group of companies as at 31st December, 1985 and the audited Profit and Loss Account of such company or group of companies for the financial year ended 31st December, 1985.

(iii) 'the date of the latest accounts' means the 31st December, 1985.

(b) Sentry warrants to and agrees with NMH (National Mutual) that save as has been disclosed to NMH in writing before the date of this Agreement or as permitted or contemplated by this Agreement:

. . .

(iii) the latest accounts of each of SHL, SLAL, SIAL, ACCL, SMPL and SFML has been prepared on a going concern basis in accordance with Australian Accounting Standards and applicable approved Accounting Standards or with provisions of the Life Insurance Act, 1945, as appropriate, consistently applied to each company and that the figures and other information contained in each of them gives a true and fair view of that basis of the assets and liabilities of each of them and of the profits and losses of each of them and of the profits and losses of each of them for the period to which such accounts relate."

The opening words of clause 4 (b) are of significance in construing the content of the warranty given in para. (iii) thereof.

1. Clause 8 includes the following provisions:
   

"8. (a) In this clause

(i) 'loss' means any liability loss cost damage expense or payment including but not limited to related attorneys' fees and expenses and any interest penalty tax and fines;

(ii) 'indemnitee' means a person claiming the right to be indemnified under this clause;

(iii) 'indemnitor' means a person against whom indemnification is claimed under this clause.

(b) Sentry agrees to indemnify and keep indemnified NMH against any income tax and any interest penalty tax and fines which may be assessed against or levied upon any member of the SHL Group with respect to any income earned or derived or deemed to have been earned or derived at any time prior to 31st December, 1985 but only to the extent that such income tax interest penalty tax and fines cause the actual aggregate income tax interest penalty tax and fines payable by the SHL Group with respect to income earned or derived or deemed to have been earned or derived at any time prior to 31st December 1985 to exceed by more than $(A)150,000 the aggregate amounts provided therefor in the accounts of the members of the SHL Group for the year 1985."

Sub-clauses (d) and (e) lay down procedures for dealing with claims for indemnification including the provision of prompt written notice of claims by the indemnitee to the indemnitor.

1. The second respondents ("the Auditors") were the auditors at all material times of Sentry Holdings, and of Sentry Finance, Sentry Life, Sentry Insurance and Australian Casualty. Allegations in contract and in negligence are made in the Amended Statement of Claim against the Auditors. Mr. O'Kane has been joined by the Auditors as a cross-respondent.

2. Messrs. Mallesons Stephen Jaques are the solicitors for the applicants. With effect from 1 July 1987, the members of the Melbourne firm Messrs. Mallesons joined the firm of Messrs. Stephen Jaques Stone James. However, both firms had earlier agreed to practice under the name "Mallesons Stephen Jaques" from 1 January 1987. At all material times, before and after the merger, Stephen Jaques Stone James and then Mallesons Stephen Jaques had an office in New York. On 20 November 1986, Messrs. Mallesons became the solicitors for the applicants in relation to the claim which gave rise to present proceedings and, as I have said, they have been succeeded by Messrs. Mallesons Stephen Jaques. In what follows, it should be noted that no point has been taken (if any point could be taken) as to any relevant distinction in legal identity between these firms, and they may for present purposes be treated as one.

3. Earlier this year, what have been described as interim terms of settlement were reached between National Mutual, Sentry and SIAMCO (but not the Auditors) as to the future conduct of the present proceedings and the resolution of various interlocutory disputes. It was consequent upon this settlement that Northrop J. made certain orders, some of which I have earlier referred to. In particular, National Mutual agreed to withdraw an application to join SIAMCO as a respondent to the proceedings. Sentry agreed it would give to National Mutual five business days' notice prior to disposing of any of its assets otherwise in the ordinary course of business, or otherwise than to third parties "on an arm's length basis". National Mutual and Sentry agreed "to use their respective and best endeavours expeditiously to conclude all outstanding interlocutory steps" in the present proceedings. Paragraphs 6 and 7 were in the following terms:
   

"6. National Mutual shall promptly determine whether or not it will amend its statement of claim as against Sentry in the form proposed in the notice of motion dated 6 February 1989 (other than joining SIAMCO) and Sentry hereby consents to such amendment.

7. If National Mutual determines so to amend its statement of claim, Sentry shall promptly amend its defence, and National Mutual hereby consents to Sentry's amending its defence."

1. The applicants also sought to amend their statement of claim as against the auditors. That amendment was opposed but on 30 March 1989, Northrop J. gave reasons for judgment allowing that amendment.

2. The result was, as I have indicated, a grant of leave on 30 March 1989 for the filing and service of an Amended Application and Amended Statement of Claim, these being the current state of those pleadings. Sentry was directed to file its Amended Defence to the Amended Statement of Claim on or before 21 April 1989.

3. Sentry then took several steps which have given rise to the seven motions presently before me. On 12 April 1989, proceedings were commenced by Sentry in the United States District Court of the Southern District of New York by a Complaint filed against parties identified as "Mallesons Stephen Jaques" and "Stephen Jaques Stone James". Paragraphs 8 - 23 of the Complaint were in the following terms:
   

"8. In or about June 1986, Sentry negotiated a sale to National Mutual Hong Kong Limited ('National Mutual Hong Kong') of certain business operations in Hong Kong (the 'Hong Kong Operation'). National Mutual Hong Kong is affiliated with National Mutual Holdings Pty. Ltd. ('National Mutual').

9. In connection with Sentry's sale of the Hong Kong Operations to National Mutual Hong Kong, Sentry consulted the New York office of defendant Stephen Jaques, which agreed to represent Sentry.

10. In or about June 1986, defendant Stephen Jaques represented Sentry in connection with the sale by Sentry of the Hong Kong Operations to National Mutual Hong Kong.

11. Thereafter, in late June 1986, Sentry and National Mutual negotiated a transaction whereby National Mutual purchased from Sentry the shares of Sentry Holdings Limited ('Sentry Holdings').

12. Defendant Stephen Jaques also represented Sentry in connection with the sale to National Mutual of Sentry Holdings.

13. On behalf of Sentry, defendant Stephen Jaques, inter alia, reviewed the agreements between Sentry and National Mutual for compliance with Australian law, interviewed employees of Sentry and/or its subsidiaries, performed due diligence work, consulted extensively with Sentry's corporate counsel, provided tax advice, and issued opinion letters with respect to the transaction.

14. The New York Code of Professional Responsibility applies to the attorney-client relationship formed between Sentry and Stephen Jaques in connection with the sale of the Hong Kong Operations and the Sentry subsidiaries.

15. In or about January 1987, Sentry was put on notice that National Mutual would be making a claim that Sentry had breached alleged warranties and made misrepresentations with respect to the audited accounts of Sentry Holdings.

16. Having been put on notice of National Mutual's forthcoming claim, on or about January 27, 1987, Sentry's corporate counsel consulted with John King, a member of defendant Stephen Jaques, advising Mr. King of the forthcoming National Mutual claim, discussing the issues underlying the claim, and requesting Mr. King's further legal advice on the issues.

17. On or about January 28, 1987, King informed Sentry's corporate counsel that Stephen Jaques had merged with Mallesons and that Mallesons generally represented National Mutual. Mr. King informed Sentry's corporate counsel that he believed that the merged firm, defendant Mallesons Stephen Jaques, could represent Sentry, but could not represent National Mutual in connection with the dispute between them.

18. Thereafter, Sentry and National Mutual engaged in negotiations with respect to their dispute.

19. In or about July 1987, National Mutual commenced an action in Australia, alleging claims against Sentry with respect to the sale of Sentry Holdings. Defendants represent National Mutual against Sentry in the action.

20. In or about February 1988, Sentry filed its defense to National Mutual's statement of claim.

21. In or about July 1988, National Mutual filed further and better particulars of its statement of claim, thereby raising additional claims with respect to the sale of Sentry Holdings.

22. In or about December 1988, Sentry demanded that defendants withdraw from representation of National Mutual due to conflicts of interest.

23. Defendants have failed and refused to withdraw from representation of National Mutual against Sentry."

1. The relief claimed in the New York proceedings includes an injunction restraining the defendants named therein from representing National Mutual "with respect to matters on which defendants have rendered legal advice and counsel to (Sentry)", together with damages and costs. The claims to relief are based first on breach of the New York Code of Professional Responsibility, then on breach of contract, tort (negligent and wilful breach of a duty not to represent National Mutual or any interest other than Sentry in connection with the legal advice and counsel allegedly provided to Sentry), and breach of fiduciary duties ("not to expose Sentry's confidences and secrets to the risk of disclosure or use contrary to the interests of Sentry"). No such relief has been sought by Sentry from this Court, although in its Amended Defence and one of its Cross-Claims, Sentry relies upon alleged deficiencies in the advice given Sentry by Stephen Jaques Stone James in 1986.

2. On 9 May 1989, Sentry undertook to this Court to take no further step in the New York proceedings, and this undertaking continues until delivery of these reasons and the making of consequential orders.

3. In the proceedings in this Court, Sentry filed three pleadings on 21 April 1989:
   

1. A Defence by Sentry to the applicants' Amended Statement of Claim delivered pursuant to the orders made on 31 March 1989; in response to the allegation that it failed to take reasonable steps to ascertain whether representations to the same effect as the warranties in the Sale Agreement were true, Sentry pleads reliance upon the advice to it by Stephen Jaques Stone James concerning what became clause 4 (b) (iii) of the Sale Agreement.

2. A Cross-Claim against Stephen Jaques Stone James claiming damages for breach of contractual duty and duty of care arising from the pleaded prior relationship between them; Sentry claims to recover against Stephen Jaques Stone James all amounts which might be awarded against it in the action brought by the applicants against Sentry together with Sentry's costs of the litigation on a solicitor/client basis.

3. A Cross-Claim by Sentry against NMLA, NMC, Mr. Hoskins and Mr. Kent, Mr. Hoskins and Mr. Kent having been directors of National Mutual. Sentry claims contribution or indemnity against each of the cross-respondents and further as against NMLA it claims damages, by subrogation to what is alleged to be National Mutual's rights against NMLA.

1. By motion filed 27 April 1989, the applicants seek to strike out, dismiss or stay each of Sentry's new cross-claims; they also seek to strike out Sentry's Defence to the Amended Statement of Claim ("Motion 1"). By motion filed 1 May 1989, NMLA and NMC apply to strike out, dismiss or stay Sentry's cross-claims against them ("Motion 2"). Messrs. Hoskins and Kent apply by motion filed 28 April 1989 ("Motion 3") to strike out, dismiss or stay Sentry's cross-claim against them. They were represented by the same counsel as the applicants in the principal proceedings, NMLA and NMC.

2. By motion filed 20 April 1989 ("Motion 4"), the applicants seek an order that until the determination of the proceedings or further order, Sentry be restrained from taking any further step in a New York proceedings. By a motion filed 2 May 1989 ("Motion 5"), Stephen Jaques Stone James (which firm was separately represented by solicitors and counsel before me) seek an order to like effect in respect of the New York proceedings.

3. By motion also filed 2 May 1989 ("Motion 6"), Stephen Jaques Stone James seek an order that the cross-claim against them be set aside or struck out on the grounds that the cross-claim was irregularly issued and served in that Sentry failed to obtain the leave of the Court to issue it.

4. By motion filed 5 May 1989 ("Motion 7"), Sentry seeks orders:
   

"1. That insofar as it is necessary (Sentry) have leave to file and serve an amended defence in the form of the pleading filed on 21 April, 1989.

2. That insofar as it is necessary Sentry have leave to file and serve the cross-claims against the firm of Stephen Jaques Stone James and (NMLA), (NMC), Mr. J.M. Hoskins and Mr. John Kent in the form of the pleadings filed on 21 April, 1989.

3. Sentry have leave to further amend the defence referred to in order 1 above in the form set out in Annexure A hereto."

The Necessity for Leave

1. The first question that arises is whether the cross-claims were irregularly filed in that prior leave was required. In my view, leave was required. The preparation of these proceedings for trial has continued over some time through the system of directions hearings, as is the general practice in this Court. The clear tenor of the most recent directions given by Northrop J. was that the steps there laid down would get the matter ready for trial. The parties were given leave to apply (para. 18). That liberty should have been availed of before such a major step was taken as the filing of these fresh cross-claims.

2. The direction by Northrop J. that Sentry file on or before 21 April 1989 its Amended Defence to the Amended Statement of Claim did not open for Sentry a window of opportunity for the filing of cross-claims as of right. Where a proceeding is commenced by application supported by statement of claim, a respondent may file a pleading by way of cross-claim within the time fixed for filing his defence or any extension thereof (Order 5 Rules 4, 5). On 28 August 1987, an order was made that defences be delivered by 19 October 1987; this was later extended to 15 February 1988 and Sentry's Defence was filed on 22 February 1988. Thus, any entitlement of Sentry to cross-claim as of right was long spent by April 1989. It was suggested that the filing of the Amended Defence commenced a fresh cycle, but I accept the submissions for Stephen Jaques Stone James that what remains on the Court file is the Defence, the document in question being physically amended or replaced by a freshly filed document as provided in Order 13 Rules 2, 8, 9.

3. It was for Sentry to seek an extension of the time within which a cross-claim might be filed under Order 5 Rule 5. That would conveniently have been dealt with when the matter was before the Court on 30 March or, if that would have been premature, pursuant to the liberty to apply then granted. Order 10 Rule 1 (2) (a) (x) specifically provides for the making of orders at directions hearings with respect to cross-claims. Plainly, that procedure should have been utilised here.

4. Order 1 Rule 8 empowers the Court to dispose with compliance with any of the requirements of the Rules even after the occasion for compliance arises. I would not, in the circumstances I have described, exercise this discretion favourably to Sentry. As sought in Motions 1, 2, 3 and 6, the cross-claims filed on 21 April 1989 should be struck out. It is then a question of whether Sentry should now have the leave sought by it in para. 2 of Motion 7.

5. I will return to this aspect of the case, after dealing further with the New York proceedings, the subject of Motions 4 and 5.
   The Events Giving Rise to the Allegations
   Made in the New York Proceedings

6. Between March and December 1986, Mr. J.C. King was resident partner in New York of the firm of Messrs. Stephen Jaques Stone James. On 1 January 1987, it was announced that the partners of the firm of Mallesons in Melbourne would be joining that firm, which would be known as Mallesons Stephen Jaques. The "full financial integration" (as one of the partners, Mr. Wells, described it in evidence) did not take place until 1 July 1987. From 1 January 1987 to 22 January 1988, Mr. King was resident partner in New York of Mallesons Stephen Jaques. He was the only resident partner in New York over the whole of the period I have described. On the letterhead used in 1986 in the New York office of Stephen Jaques Stone James, particulars were given of the offices of the firm in Sydney, Perth, Canberra and London, together with the names of all partners. The letterhead also contained the words "AUSTRALIAN LAWYERS NOT ADMITTED TO NEW YORK BAR" appearing under the list of partners. Mr. King was not licensed by the State of New York as a legal consultant at any material time. The significance of this will appear when I deal with Mr. Knake's evidence.

7. During the course of Mr. King's duties in New York in 1986, Stephen Jaques Stone James was retained by Messrs. Sutherland Asbill & Brennan, United States attorneys, to assist Sentry in relation to certain aspects of what became the Hong Kong Agreement. Later, the firm was engaged in relation to what became the Sale Agreement. Mr. King was assisted by four solicitors in the Sydney office of the firm, Mr. Burges, Mr. Wiley, Mr. Mansfield and Mr. Lennox; the first three of these gentlemen were partners and the fourth an associate. Two accounts were issued from the New York office of Stephen Jaques Stone James, addressed to the Sentry Corporation, for the attention of its assistant general counsel, Mr. James C. Noonan. The accounts were rendered for amounts expressed in United States dollars.

8. The first memorandum of costs is dated 30 June 1986 and is headed "Sentry Holdings Limited; Transfer of Shares from Sentry Assurance International Limited to the Sentry Corporation". It refers to the receipt of instructions from Messrs. Sutherland Asbill & Brennan and to advice in relation to Australian stamp duty, the foreign takeovers legislation and income tax implications, and to meetings and discussions of officers of Sentry Holdings Limited in Sydney. The second memorandum is dated 22 July 1986 and is headed "Sentry Holdings Limited: Sale of Shares by the Sentry Corporation to National Mutual Holdings Pty. Limited". It itemises various matters, including the following:
   

"A partner in our Sydney office attending a meeting with officers of Sentry Holdings Limited in Sydney; Examining draft agreement for sale of shares and advising you thereon from an Australian legal point of view, including suggesting certain changes to the wording of various provisions thereof; Providing detailed written advice on stamp duty aspects of the sale agreement and any security documents, including a guarantee, a promissory note and a lien; . . .

Providing opinion letter on closing; . . ."

1. Instructions in relation to the matters giving rise to the second account were received initially from Mr. Noonan in a telephone call of 7 July 1986 to Mr. King. Mr. Noonan said that he would need assistance in various aspects of the sale of the Australian business of Sentry to National Mutual. There was another telephone conversation on 9 July in which Mr. King was told that a draft document (of what became the Sale Agreement) was coming from Mr. Barry Strong, the in-house lawyer of National Mutual. This was forwarded to Mr. King by letter from Mr. Noonan on 11 July 1986, and Mr. Noonan wrote that he was "looking to you for input with respect to the peculiarities of Australian law". Particular reference was made to certain provisions concerning warranties in clause 5 of the draft, which eventually became clause 4 of the Sale Agreement. Mr. Mansfield had a meeting in Sydney with Mr. O'Kane, and on 16 July 1986 sent a telex to Mr. King reporting on what had happened. This led to Mr. King sending to Mr. Noonan on 16 July 1986, a fax message containing a suggested revision of para. (iii) of clause 5 (b) of the proposed agreement (but not to the opening words of clause 5 (b)) so that it read:
   

"5. (b) (iii) The latest accounts of each member of the SHL Group have been prepared on a going concern basis in accordance with Australian Accounting Standards and applicable Approved Accounting Standards and in accordance with Australian generally accepted accounting principles consistently applied to each company."

The changed words were those underlined. One of Sentry's complaints in respect of this advice is that inquiries were not made as to what had been disclosed to National Mutual in writing before the date of the Sale Agreement and that the opening words of clause 5 (b) were deprived of effect as a protection to Sentry from liability. (I later set out para. 16 (b) of the relevant cross-claim by Sentry.)

1. This was followed on 17 July 1986 by a four page letter from the Sydney office of Messrs. Stephen Jaques Stone James reporting on the stamp duty implications of the transaction.

2. In his fax to Mr. King dated 16 July 1986, Mr. Mansfield included the following as paragraph 3:
   

"A couple of threads came together when Bill O'Kane told me that he personally has an option to purchase the shares in Sentry Australia if Sentry Corporation ever wished to sell the shares in Sentry Australia. The option is not in writing and arose when Bill O'Kane first became involved in the Sentry Group. I understand that Sentry Corporation honoured the option by offering the shares in Sentry Australia to Bill O'Kane. Bill O'Kane then approached National Mutual who together with Bill O'Kane made a joint offer to the Sentry Corporation. Because of technical hitches (questions of minority shareholding) the purchase of Sentry Australia will done (sic) by National Mutual alone. In this regard National Mutual have agreed to purchase Bill O'Kane's option. Bill O'Kane gave me this information freely and I am not sure whether it is confidential, but I thought it appropriate to pass it on to you for your information. I don't think it is appropriate to relay this information to the officers of Sentry Corporation you are dealing with in this matter. If you think you need to perhaps you could give me a call first. Bill O'Kane asked whether anyone in our office could assist him if he needs legal advice in respect of his arrangements with National Mutual. I suggest he call Tony Bancroft (another partner of the firm). I asked him whether he thought there was any conflict in seeking advice from a partner at Stephen Jaques. He thought there wasn't. As (sic) the present moment I don't think there is any conflict but if you do please let me know."

In the letter of 11 July 1986, Mr. Noonan had instructed Mr. King that he would like one of Mr. King's partners or associates in Sydney to meet as early in the next week as possible with Mr. O'Kane or his designee to review with him the various warranties and representations contained in para. 5 (b) of the draft agreement. On 22 July 1986, Mr. King wrote to Mr. Noonan that the Sale Agreement would "constitute a valid and binding obligation of Sentry enforceable against Sentry in Australia in accordance with its terms". The opinion was said to be limited to the laws of the Commonwealth of Australia and New South Wales (not Victoria, the governing law by clause 23 of the Sale Agreement). Before he gave advice to Mr. Noonan, Mr. King made no inquiries as to the basis upon which the accounts of Sentry and the subsidiary companies, the subject matter of the sale, had been prepared. Complaint as to this is made by Sentry in para. 16 of the Cross-Claim against Mr. King's firm. (I set out the text of para. 16 later in these reasons.)

1. As I have mentioned, the Sale Agreement was executed in Wisconsin on 22 July 1986 and Messrs. Mallesons (as they then were) were retained by the present applicants on 20 November 1986.

2. Instructions on behalf of the applicants were given by Mr. Strong. Within a few days of the receipt of initial instructions, he told Mr. Wells, the partner of Mallesons with the conduct of the matter, that the New York office of Stephen Jaques Stone James had given some minor tax advice to Sentry and asked whether Mr. Wells thought there was a conflict of interest. Mr. Wells considered that given the nature of the dispute between the applicants and Sentry on the one hand, and the minor nature of what he understood to have been the advice given by Stephen Jaques Stone James on the other, there was no conflict of interest. He advised Mr. Strong accordingly. Of course, at that time Mr. Wells did not know of the extent of the involvement of Stephen Jaques Stone James. In particular, he did not know of the involvement of that firm in the redrafting of the warranties. Mr. Wells did not make inquiries of his partners as to the precise nature of the previous involvement of Stephen Jaques Stone James, because he wanted to make quite sure that he would not obtain any information, let alone any confidential information, which might cause him to have an unfair advantage in any litigation with Sentry.

3. On 27 January 1987, Mr. King, in New York, received a telephone call from Mr. Noonan, to which a Mr. Gunderson was also a party. The Auditors had been indicating that there were some significant errors in the accounts of the Sentry Group. The purpose of Mr. Noonan's call, as understood by Mr. King, was to ask whether Sentry could seek Mallesons Stephen Jaques' advice on the matter. In his cross-examination, Mr. King gave the following account of what he said to Mr. Noonan in this conversation (an account which, having regard to the different version set out in para. 17 of the Complaint in the New York proceedings, I should say I accept).
   

"I indicated to him at the outset that there may be a problem in us acting for Sentry against Peat Marwick in any event and that the reason for that is that we had recently done a major job for the firm of Peat Marwick and I thought that it may not be possible for us to act from a commercial standpoint to accept further instructions, if you like, to act against Peat Marwick. I also indicated to him that I was aware, or that since we had last spoken, which I think was at the end of July, we had had discussions with Mallesons which ultimately led to a merger and that the National Mutual Group was a major client of the firm of Mallesons in Melbourne and that the merger had taken effect from January when we adopted the common name and that I would have to refer the matter back to my Australian office for further instructions."

Mr. King promptly referred the matter back to Stephen Jaques Stone James in Sydney. On the day he received the telephone call from Mr. Noonan, he sent a very detailed fax to the Sydney office of Mallesons Stephen Jaques explaining everything he had done in as much detail as he could, and raising the question of potential conflicts of interest. He received a telephone call the next morning from Mr. Wiley, his partner in Sydney, the substance of which was that he was to communicate to Sentry that under no circumstances could Mallesons Stephen Jaques accept instructions from Sentry to give any further advice in relation to the matter. Mr. Wiley told Mr. King that in about November 1986, Mallesons had been approached by National Mutual to act in relation to the matter of a claim against Sentry. Mr. King promptly told Mr. Noonan that Mallesons Stephen Jaques were unable to act for Sentry. On 17 February 1987, Mr. King received a fax from Mr. Wallace of the Sydney office of his firm confirming the instructions he had been given by telephone on 28 January 1987. Nothing was said in it about the conflict of interest problem which Mr. King had raised.

1. On 16 April 1987, Mr. Hoskins, as NMLA's General Manager Insurance Operations, wrote to Mr. Hoth, the Vice President of Sentry, informing him, inter alia, that National Mutual was using Mallesons Stephen Jaques as solicitors.

2. Mr. Peters is a solicitor employed by Mallesons Stephen Jaques. In December 1986 or January 1987, after his firm had been engaged to advise in relation to the matter, he had become aware, in the course of investigating files made available by Mr. Strong, that Stephen Jaques Stone James had some prior involvement and that they had given an opinion letter to Mr. Noonan, the in-house attorney of Sentry. In the absence of Mr. Wells, Mr. Peters raised the matter with the senior partner in the Melbourne office and with the chairman of the firm. Mr. Peters was given a reply which indicated that Mallesons Stephen Jaques should continue to act. He did not raise the matter with Mr. King, understandably enough given the seniority of the members of the firm whom he had approached.

3. Between 25 May and 12 June 1987, Mr. Peters represented National Mutual during "without prejudice" discussions with Sentry. Sentry was represented, among others, by Mr. Ducey. Mr. Ducey was in Court during the hearing before me but he had not sworn an affidavit on the motions, and leave was not sought for him to give oral evidence. In the course of the discussions I have described, Mr. Ducey said to Mr. Peters that Mallesons Stephen Jaques had a conflict of interest in acting for National Mutual in this matter. Mr. Peters replied to the effect that Mallesons Stephen Jaques did not consider that it had a conflict. Mr. Ducey then said words to the effect that in the United States it probably would be considered that Mallesons Stephen Jaques had a conflict.

4. As I have said, the present proceedings were instituted by application and statement of claim filed by Messrs. Mallesons Stephen Jaques on 3 July 1987. They were served on Sentry on 6 July 1987.

5. On 9 July 1987, further "without prejudice" discussions were held between representatives of Sentry and the applicants. Mr. Peters and Mr. Ducey again were among those present. At no time during these discussions did the Sentry representatives object to Mallesons Stephen Jaques acting for the applicants.

6. On 13 December 1988, Messrs. Phillips Fox, the solicitors for Sentry, wrote a letter to Messrs. Mallesons Stephen Jaques, the material portions of which read as follows:
   

"We are instructed that during June and July 1986, The Sentry Corporation (Sentry) retained Stephen Jaques Stone James (SJ) to advise it on various aspects of the sale agreement with National Mutual which was then in contemplation. Pursuant to the retainer, SJ examined drafts of the agreement, advised Sentry in relation thereto, suggested amendments to the wording of the drafts and generally acted as Sentry's Australian counsel in connection with the proposed agreement. Now that the issues in the present litigation have become clearer, it appears that the litigation will involve resolution of a number of fundamental questions concerning the meaning and effect of the sale agreement, including -

(a) the meaning and effect of clause 8 of the agreement concerning indemnity and the steps to be taken before the right to an indemnity crystallises;

(b) whether there should be implied in the agreement a term that National Mutual would not act in a way which would prejudice Sentry;

(c) the meaning and effect of the warranty clause and its inter-relationship with the indemnity clause;

(d) the meaning of clause 22 of the agreement and the effect that clause has on National Mutual's claims for misleading conduct and negligence;

(e) whether the sale required the preparation of a scheme in accordance with Pt III, Div. 9 of the Life Insurance Act 1945; and

(f) the meaning and effect of clause 12 of the agreement dealing with restraint of trade.

As the meaning and effect of the agreement will be the subject of controversy between our respective clients, the circumstances preceding and surrounding the execution of the agreement, including the role played by SJ, is likely to become relevant and be called into question at and before the trial of the proceeding. Furthermore, our client is concerned that by reason of the role played by SJ in pursuance of the retainer it (and consequently you) has acquired confidential information concerning the affairs of Sentry which makes it inimical to the legitimate interests of Sentry for you to continue to act for National Mutual. In these circumstances, there is a real risk that you will be placed in a conflict of interest situation and that our client is likely to be prejudiced thereby."

Messrs. Mallesons Stephen Jaques replied on 10 January 1989 by a letter, the material portions of which read as follows:

"We refer to your letter of 13 December 1988 in which you suggest we should cease to act for the Applicants in this litigation. We do not regard ourselves as being in a position of conflict of interest and propose to continue to act for the Applicants. We deal with the matters raised in your letter below.

1. Role of Stephen Jaques Stone James

('SJSJ').

We understand from inspecting documents discovered by your client and the Applicants that SJSJ gave some advice to your client.

The advice was given by the New York office of SJSJ where, we assume, the relevant SJSJ file remains. We note your client has not discovered SJSJ's file regarding any advice given to it. Any advice given by SJSJ was given before the merger of SJSJ with Mallesons to form Mallesons Stephen Jaques ('MSJ'). As far as the persons handling this litigation for the Applicants are aware, no-one from the Australian offices of MSJ other than Mr. King, (now returned to Sydney from New York), the partner who advised your client, knows anything about the instructions given by and advice given to your client. . . .

3. Confidential Information obtained by SJSJ For the sake of clarity, we repeat that the persons handling this litigation and, as far as they are aware, the Australian offices of MSJ have no idea what instructions were given to the New York office of SJSJ.

Furthermore, we do not accept your mere allegation that the New York office of SJSJ obtained confidential information concerning the affairs of your client - you have not suggested the type of confidential information that it is alleged the New York office of SJSJ received nor the relationship of that confidential information to the issues raised by the pleadings in this litigation. In these circumstances no view of the possible prejudice to your client could be formed by the persons handling this litigation for the Applicants.

4. Issues in the Litigation. Your suggestion that the issues in the present litigation 'now ... have become clearer' is, with respect, misleading. Your client

(a) commenced settlement negotiations with the Applicants in April 1987.

(b) was served with the Applicants' Statement of Claim and Application in early July 1987.

(c) has had detailed particulars of the Applicants' Statement of Claim since early December 1987. The issues in this litigation have been perfectly clear to your client and its legal advisers for nearly eighteen months.

5. Extraordinary delay Your client and the solicitors acting for it have known that the Melbourne office of MSJ was acting for the Applicants since April 1987. It is obvious that our clients will suffer a very real disadvantage if we were now to withdraw. It is also obvious that that disadvantage would be far greater now than it would have been at the commencement of this action.

Your client has taken 21 months before it raised for the first time the suggestion that it would be prejudiced if we continued to act for the Applicants. Even then the alleged prejudice is referred to in the vaguest of terms. The only inferences that can be drawn from this delay is that your client has been and will be in no way prejudiced by the Melbourne office of MSJ continuing to act for the Applicants and that your client has instructed you to write the letter of 13 December 1988, not because it has any genuine concerning about MSJ acting for the Applicants, but because it hopes to harm the preparation of our clients' case."

1. Messrs Phillips Fox replied on 18 January 1989 as follows:
   

"We refer to your letter of 10 January which was in reply to our earlier letter of 13 December 1988, regarding what we consider to be your firm's conflict of interest in this litigation.

We enclose an authority from our client requesting that you forward to us the files of both your New York and Sydney offices pertaining to this matter. On receipt of those files we will answer each of the allegations raised in your reply. We note at this stage, however, that your assertion that 'no-one from the Australian offices of MSJ other than Mr. King (now returned to Sydney from New York), the partner who advised your client, knows anything about the instructions given by and advice given to your client' is incorrect: both Mr. J. Mansfield (who we note is now a partner of your Sydney office) and Mr. T. Lennox provided advice to our client."

1. Messrs. Mallesons Stephen Jaques replied by letter dated 25 January 1989, the material portions of which are as follows:
   

"We refer to your letter of 18th January 1989 concerning your allegation that we have a conflict of interest in this litigation. Your client's request to have provided to it documents from files held in our New York and Sydney offices relating to the sale of the ACC Holdings Group has been forwarded to Mr. J. King and Mr. J. Mansfield in the Sydney office, with a request that they then communicate with you direct. Please direct all further correspondence concerning production of documents from the files directly to them.

Finally, in our letter of 10th January we stressed (point three on page two) that you had provided no clarification of the confidential information that you and your client alleged the New York office of SJSJ received and thereby placed the Melbourne office of this firm in a position of conflict. The fact that you and your client now need to recover documents from the files of this firm's New York office to determine what, if any, relevant confidential information was given to that office only reinforces our view that the New York office of SJSJ was provided with no relevant confidential information and that your client had instructed you to write the letter of 13 December 1988, not because it has any genuine concern about this office acting for the Applicants, but because it hopes to harm the preparation of our clients' case."

1. On or about 1 March 1989, Messrs. Mallesons Stephen Jaques produced to Messrs. Phillips Fox in Melbourne a file being that maintained by Mr. King in relation to Stephen Jaques Stone James' retainer for Sentry in 1986.

2. It is apparent from that file and from the oral evidence given by Mr. King, that the statements made by Messrs. Mallesons Stephen Jaques in their letter of 10 January 1989 to some extent had proceeded upon a false basis. For example, the statement "As far as the person handling this litigation for the Applicants are aware, no-one from the Australian offices of MSJ other than Mr. King, (now returned to Sydney from New York), the partner who advised your client, knows anything about the instructions given by and advice given to your client", no doubt literally was accurate as to the knowledge of Mr. Waters and his litigation team. But the fact was that there was at all material times a number of partners based in Sydney with an involvement in the Sentry matter. It was also not quite to the point to say, as Messrs. Mallesons Stephen Jaques did in their letter of 25 January 1989, that the matter is one where there was an allegation that the "New York office of SJSJ" had received confidential information and "thereby placed the Melbourne office of this firm in a position of conflict". The "offices" were not discrete legal entities. In March 1989, Messrs. Mallesons Stephen Jaques was a firm with 155 partners and approximately 1,141 employees of whom 273 were employed solicitors.

3. In an effort to expedite the final hearing of these hearings, the interim terms of settlement I have described were entered into between National Mutual, Sentry and SIAMCO, and these terms were implemented by orders made by Northrop J on 30 March 1989. The applicants now complain that when these arrangements were made, nothing was said of any action as about to be taken in respect of the involvement of Mallesons Stephen Jaques. Inquiries were made between counsel, the result of which was to produce some apparent conflict which it is not necessary now to resolve. It is sufficient to say that plainly the issue of the New York proceedings on 12 April 1989 and the filing of the cross-claims on 21 April 1989 was not foreshadowed in any way to the Court several weeks earlier when Northrop J. made the orders implementing the interim terms of settlement.
   Evidence As To the Law in Force in The State of New York

1. The existence, the nature and the scope of any rules and principles of the law of a foreign jurisdiction is to be treated as an issue of fact upon which evidence is receivable; on the other hand, the effect of the application of those rules and principles, as so ascertained, to the particular facts and circumstances of the instant case is a question of law for the court of the forum, upon which evidence is not receivable: United States Surgical Corporation v Hospital Products International Pty. Ltd. (Supreme Court of New South Wales, McLelland J., 19 April 1982, unrep.). Where the relevant rules and principles of foreign law are so framed as to confer discretions upon the courts which administer them, then, in my view, evidence is receivable as to the manner in which those discretions are exercised, with reference to any pattern or course of decision.

2. The applicants relied on the affidavits of Mr. P.B.K. Knake, an experienced practitioner and a member of the firm of White & Case, which has its principal office in the State of New York. Mr. Knake was not called by Sentry for cross-examination and his evidence relevantly is uncontradicted. He proceeded on the footing that Mr. King denied the conversation attributed to him in para. 17 of the Complaint. He also proceeded on the footing that to the extent that there may be an implication from the Complaint that any confidences and secrets of Sentry had been used by the attorneys representing the applicants in the Australian proceedings, such allegations are denied.

3. Mr. Knake swore two affidavits; in the first (and major) affidavit he evidently proceeded on the false assumption that Mr. King was licensed by the State of New York as a legal consultant. What follows is the substance of Mr. Knake's evidence.

4. In 1974, the Judiciary Law of the State of New York was amended, so as to permit attorneys licensed in foreign countries to be licensed in New York as legal consultants in the law of that foreign country. The scope of practice of licensed legal consultants is limited by Rules promulgated by the New York Court of Appeals. These prohibit drafting of pleadings or appearances in New York courts; a legal consultant must observe the New York Code of Professional Responsibility to the extent applicable to the legal services he is authorised to perform. The statutory and regulatory scheme provides for disciplinary proceedings against legal consultants in the same manner as is prescribed for attorneys. The New York courts have power to suspend from practice or revoke licences issued to foreign legal consultants. The ethical provisions governing attorneys and legal consultants licensed in New York are found in the New York Code of Professional Responsibility, which is codified in the appendix to the Judiciary Law. An attorney is enjoined from accepting or continuing employment if the interests of another client may impair his independent professional judgment; this restraint is concerned with the propriety of simultaneous representation of two clients. Mr. Knake's opinion is that the present case would not fall in that category, because Stephen Jaques Stone James ceased its representation of Sentry before the commencement of the Australian proceedings.

5. If an attorney or legal consultant licensed in New York were to reveal knowingly or use a confidence or secret of Sentry to the disadvantage of Sentry, there would be a violation of the disciplinary rules of the Code of Professional Responsibility by such person. In such a circumstance, the New York disciplinary proceedings could be invoked. The transgressor's licence to practice might be suspended or revoked by the New York court, or some less stringent action might be taken. However, if there had been no misuse of Sentry's confidence and secrets, there would have been no violation of the proscriptions of the Code of Professional Responsibility.

6. The disciplinary rules directly govern the conduct of New York lawyers through the statutory and regulatory mechanisms described above. In addition, the Code of Professional Responsibility has been relied upon as a basis for court decisions in New York and other jurisdictions upon motions seeking disqualification of counsel.

7. Whilst the disciplinary rules prohibit misuse by an attorney of confidences or secrets of a former client, the courts have applied a gloss upon the rules, proceeding from a rationale which has been essentially prophylactic in character. In a number of cases where a former client has sought to disqualify an attorney from representing an opponent in a pending action, the courts have applied a presumption that confidential information was revealed by the former client to his attorney during the earlier representation. If the previous representation was in a substantially related matter, a further presumption arises that the information will be used by that attorney contrary to the interests of his former client. Some courts have held the presumptions irrebuttable under the circumstances. Again, it has been held that when a single attorney must be disqualified because of the acts or presumed holding of confidences and secrets of a former client, knowledge of the facts that lead to the disqualification must be imputed to other members of the law firm with which he or she is associated. Thus, the entire firm must be disqualified. The rationale behind this approach is concerned with a danger of inadvertent disclosure of confidences inherent in the everyday interchange of ideas and discussion of problems amongst law partners. Some courts have found that the avoidance of even the appearance of impropriety is important, and support disqualification upon that ground.

8. More recent decisions of the Federal Courts, including those of the Southern District of New York, and the Court of Appeals for the Second Circuit, have held that the mere appearance of impropriety is an insufficient ground for granting a disqualification motion. Moreover, the concept of imputation of information to all associated with a law firm has been questioned and criticised by some courts and commentators.

9. The provisions of the Code need not be rigidly applied. They provide guidance but are not binding authority upon the courts in determining whether the law firm of a party should be disqualified at his adversary's instance during litigation. The fairness and effect of disqualification in the particular factual setting must be considered. A substantial delay in raising the issue of disqualification might well incline a United States court not to disqualify existing counsel, particularly if there were evidence that there was no disclosure or adverse use of confidences and secrets.

10. The Code of Professional Responsibility of the State of New York has no extra-territorial effect or application to the conduct of the litigation in the Federal Court of Australia. Whilst the courts of the State of New York do hold the power to discipline attorneys licensed by it, even for conduct outside the boundaries of the State of New York, such courts would not presume to govern the conduct of attorneys not licensed by New York in their representation before the court of a foreign country. The New York courts would not purport to reach or govern the proceedings in the foreign country. That the firm of Stephen Jaques Stone James undertook in Australia an engagement adverse to Sentry would not create any wrong by the licensed legal consultants in New York. Plainly, this evidence is of considerable importance in the present case.

11. In his second affidavit, sworn 18 May 1989, Mr. Knake says that he has since been informed, contrary to his earlier assumption, that Mr. King was not licensed by the State of New York as a legal consultant at the time the services were rendered to the Sentry Corporation. Mr. Knake continues:
    

"Nevertheless, it is my opinion that the same principles set forth in my affidavit of 17 May, 1989, remain applicable. In particular, I reaffirm my opinion as to the application of these principles by courts in the United States in the context of adversary proceedings."

The Australian Law as to "Conflict of Interest"

1. What then is the position in Australia? This is of some relevance to the present proceedings. The applicants and Mallesons Stephen Jaques pointed to the failure of Sentry to indicate with any precision what confidential information was imparted by Sentry to Stephen Jaques Stone James pursuant to the retainer in 1986. For its part, Sentry asserted, and Mallesons Stephen Jaques denied, that there was a legitimate juridical advantage to Sentry in litigating in the New York proceedings issues as to the alleged conflict of interest, because more rigorous standards were said to be required of attorneys by New York law. In particular, Sentry referred to what was said by Mr. Knake as to the essentially prophylactic rationale of the law in this area, and to what he said as to presumptions, and, indeed, to irrebuttable presumptions. Sentry submitted that to enjoin it from pursuing the New York proceedings would be to deprive it of that legitimate advantage.

2. Reliance has been placed in Australia upon the decision of the English Court of Appeal in Rakusen v Ellis Munday & Clarke (1912) 1 Ch 831, for the proposition that a solicitor is precluded and will be restrained from acting for an opponent of a former client where the solicitor, as the result of having previously acted for the client, obtained confidential information and it reasonably can be anticipated that in the course of acting for the opponent of the former client, the solicitor may consciously or inadvertently make use of that information in breach of his duty to the former client: Vatousios, "Solicitors Acting Against Former Clients", (1983) Victoria Law Institute Journal 976.

3. D. & J. Constructions Pty. Ltd. v Head (1987) 9 NSWLR 118 was decided on the footing that there was never any relationship of solicitor and client between the parties. However, Bryson J. referred to the decision of the English Court of Appeal as indicating that the existence of a proved risk of misuse of confidential information was very important if the first client was to succeed in restraining his former solicitors from acting for their second client in litigation between the first and second clients. His Honour continued (at 123):
   

"Cautious conduct by the court is appropriate because the spectacle or the appearance that a lawyer can readily change sides is very subversive of the appearance that justice is being done. The appearance which matters is the appearance presented to a reasonable observer who knows and is prepared to understand the facts. The court should weigh the facts and assess the risks in the eye of reality, theoretical risks should be disregarded and when as here there is no confidential information available and there never was a relationship of solicitor and client with any partner the appearance of the matter is not a basis for the court to assume control over the retainer."

1. A stricter approach was taken earlier by the Queensland Full Court in Mills v Day Dawn Block Gold Mining Company Ltd. (1882) 1 QLJ 62. It was there said that if the first client swore that he had made confidential communications to the solicitor, the court would restrain the solicitor from acting for the other party in any suit relative to the same circumstances and that the court would not weigh conflicting testimony as to the existence of the confidence.

2. Reference also may be made to what was said by Lord Cohen in Phipps v Boardman (1967) 2 AC 46 at 103-104 as to the significance of the existence of a possibility of conflict between the personal interest of Mr. Boardman (as Lord Boardman then was) and his duty as solicitor to the trustees involved in that litigation. This is consistent with the reference by Deane J. in Chan v Zacharia (1984) 154 CLR 178 at 199 to conflict or "significant possibility of conflict" between duty and personal interest. I recognise that whilst his Honour was speaking here of fiduciaries generally, this was a case between partners, not solicitor and former client. But even among fiduciaries solicitors stand in a special position. There is an underlying principle that a person should be entitled to seek and obtain legal advice in the conduct of his affairs without the apprehension of his being thereby prejudiced; the concern is with the general preservation of confidentiality and encouragement of full and frank disclosure between client and solicitor: Baker v Campbell (1983) 153 CLR 52 at 114-115, per Deane J.

3. Further, the applicability today in Australia of the reasoning in the decision of the English Court of Appeal in the Rakusen Case has attracted adverse comment. I was referred to Professor Finn's paper, "Conflicts of Interest and Professionals" (published by the New Zealand Legal Research Foundation in the volume "Professional Responsibility"). Professor Finn describes the English decision as untenable today and as having four defects. The learned author says:
   

"First it was formulated when our law of breach of confidence was in an embryonic state. In particular, it paid no heed to the now well accepted phenomenon of 'unconscious plagiarism' or unconscious use of information. United States courts early acknowledged this to be a real possibility to be guarded against in lawyer-client cases at least where the later representation was of an interest adverse to the former client, as did Lilley CJ in a perceptive judgment of the Full Court of Queensland in 1882 (in the Mills Case supra). Secondly, with the onus now being on the former client to prove not merely that his former lawyer acquired information in confidence but also that there is a real likelihood that some or all of that information will be misused, the Rakusen ruling does in effect 'tear aside the protective cloak drawn about the lawyer-client relationship' and undermines the policy informing both client secrecy and the related doctrine of legal professional privilege. . . . Thirdly, Sir Robert Megarry has suggested in Spector v Ageda (1973) Ch 30 at 48 that

A solicitor must put at his client's disposal not only his skill but also his knowledge, so far as is relevant; and if he is unwilling to reveal his knowledge to his client, he should not act for him. What he cannot do is to act for the client and at the same time withhold from him any relevant knowledge that he has.

If as is well accepted, a solicitor cannot pray in aid a duty of confidence to justify his non-disclosure to his client of relevant information he possesses, then the assumption underlying the Rakusen rule conflicts with the duty of a lawyer to his second client. . . . Assume that S in a previous retainer acquires information that his then client X is destined for insolvency. X is later retained by Y for advice on a terms contract he is entering into with S, X having continuing payment obligations to Y. S, consistently with Rakusen could advise without disclosing his knowledge of X's circumstances. But can that information properly be withheld from Y if S, having accepted Y's retainer, is to discharge his duty to Y? Fourthly, and consistently with the policy informing legal professional privilege, the rule adopted must eliminate, as the Rakusen rule does not, the apprehension a member of the community might have that disclosures he may make to a lawyer might somehow become available to third persons. To allow that apprehension is to prejudice the possible utilisation of legal services."

1. The learned author then considers whether it is preferable for the law (a) to raise a rebuttable presumption that a prior retainer has resulted in the acquisition by the lawyer of confidential information so that he cannot act in the same or in a substantially related matter for an interest adverse to his former client unless the former client consents or unless the Court is satisfied that no confidential communication of possible relevance to that matter were in fact made, the onus of proving this being on the lawyer, or (b) to raise an irrebuttable presumption and thus an automatic disqualification in the circumstances discussed in (a). Professor Finn refers to certain United States authorities as taking this latter approach.

2. To decide whether Sentry should be enjoined from pursuing the New York proceedings, it is unnecessary to decide whether the law in New York gives Sentry a substantial juridical benefit or advantage because of a more rigorous treatment of "conflict of interest" raised by a party against its former solicitors, since retained by the other party to litigation. It is sufficient to say that there is a real possibility that the law in this country is no less stringent than that which Sentry submitted to be the law to be applied in the New York proceedings. Even if I be wrong in this evaluation, and the New York law does clearly confer on Sentry an advantage which could not be found here, nevertheless other matters to which I later refer point sufficiently strongly to the enjoining of Sentry from further pursuit of the New York proceedings.
   The Jurisdiction to Enjoin Sentry From
   Further Pursuing the New York Proceedings

3. What is sought on the motions of the first respondent and Stephen Jaques Stone James (Motions 4 and 5) is the exercise of the power of the Court, as a court of equity, to enjoin resort to vexatious and oppressive foreign suits. This is not a case where the Court has jurisdiction to entertain proceedings instituted before the Court, but the Court nevertheless declines to act because the suit is one which in justice should be tried elsewhere. The distinction was drawn by Frankfurter J. in Baltimore & Ohio Railroad Co. v Kepner 314 US 44 at 55-56 (1941). His Honour's remarks were made in the course of a judgment dissenting at to the result, but this does not detract from their cogency. The distinction has now been recognised by the Judicial Committee, after some uncertainty in the British decisions: Societe Nationale Industrielle Aerospatiale v Lui Kui Jak (1987) AC 871. It also was noted by Deane J. in Oceanic Sun Line Special Shipping Co. Inc. v Fay (1988) 79 ALR 9 at 49.

4. With cases in the second category, where the question is whether the Court should decline its facilities to a suit that in justice should be tried elsewhere, there may be a further distinction to be made. It may be one thing to decline to exercise jurisdiction where service is effected outside the forum pursuant to the "long arm" or "exorbitant" powers given the Court by, for example, Order 8 of the Federal Court Rules; it may be another to decline to exercise jurisdiction where service is effected within the forum in accordance with the root principle of the common law as to jurisdiction, explained in Laurie v Carroll (1958) 98 CLR 310 at 322-324. Oceanic Sun Line Special Shipping Co. Inc. v Fay (supra) is a case where a stay was sought to proceedings instituted in reliance on the "long arm" or "exorbitant" jurisdiction of the Supreme Court of New South Wales; Maritime Insurance Co. Ltd. v Geelong Harbor Trust Commissioners (1908) 6 CLR 194 is a case where a stay was sought in respect of proceedings against a defendant present in Victoria and liable to be sued there. The distinction which I have mentioned was noted by Deane J. in Oceanic Sun Line Special Shipping Co. Inc. v Fay (supra at 52); see also Voth v Manildra Flour Mills Pty. Ltd. (New South Wales Court of Appeal, 13 February 1989, unrep., per Gleeson C.J. at 30-32 of the print).

17. Further, in breach of the contractual duty and the duty of care pleaded in paragraph 15 above SJSJ failed and neglected to advise Sentry that the rights and remedies accorded to National Mutual in clauses 4 (b) (iii) and 8 of the sale agreement were cumulative and failed and neglected to advise Sentry that the procedures set out in clause 8 of the sale agreement in relation to indemnification for income tax liability of any one or more of the applicants in the manner set out therein was not an exclusive repository of the rights of National Mutual to claim compensation from Sentry in relation to such amounts but was only a provision which National Mutual could elect to pursue if it so chose and that National Mutual could, if it so elected, pursue the rights and remedies provided in clause 4 of the sale agreement in relation to the said payment of income taxation."

1. Some of the evidence before me touched upon these questions. I have indicated the nature of that evidence earlier in these reasons. I have also had the advantage of argument by senior counsel. I have reached the conclusion the case sought to be made on the cross-claim is not so clearly untenable that it cannot possibly succeed and that, on the contrary, it is apparent that real questions will arise for determination, within the meaning of the well known authorities: Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91; General Steel Industries Inc. v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 130; Merman Pty. Ltd. v Cockburn Cement Ltd. (1988) 84 ALR 521 at 534. If leave is to be refused to file this cross-claim, it cannot be on the basis that once filed the cross-claim would be liable to be struck out in accordance with the principles mentioned in those authorities.

2. The submissions in support of a refusal of leave emphasised the delay by Sentry in bringing this cross-claim into the present proceedings, given the history which I have narrated earlier in these reasons. Furthermore, it was said that the delay was one which has been prejudicial to National Mutual. The evidence was that the greater the lapse of time, the more deeply National Mutual has become involved with and dependent upon its present solicitors for the preparation of this complex matter for trial. It was submitted that if the proceedings went ahead to trial with the inclusion of this cross-claim, Messrs. Mallesons Stephen Jaques would be placed in an impossible position. On the one hand, as solicitors for the applicants, they would be assisting their clients to recover the maximum damages from Sentry; on the other hand, as cross-respondents in their own right to the cross-claim by Sentry, it would be in their interests to minimise the amount for which Sentry was to be held liable and which Sentry would seek to pass on to Messrs. Mallesons Stephen Jaques. If the applicants in the principal proceedings were to lose their present solicitors, the result, it was submitted, with considerable cogency, would be the infliction of prejudice upon the applicants; given the detailed preparation of the case this far, the introduction of fresh solicitors would involve much more than the transmission of papers, there being a fund of experience in the case which would not be readily transmissible, or not transmissible at all, by one firm of solicitors to another.

3. It was then submitted that the introduction into the Australian proceedings of the cross-claim against Messrs. Mallesons Stephen Jaques and the commencement by Sentry of the New York proceedings, were calculated, in the strong sense of that word, to harass the applicants in the Australian proceedings and Messrs. Mallesons Stephen Jaques, and thereby to gain an improper advantage for Sentry in the Australian proceedings. The evidence before me falls short of providing grounds upon which I properly could conclude there was any such calculation by Sentry. However, it was submitted even if I reached that conclusion, the other matters which I have mentioned still indicated that to let in the cross-claim would cause injustice to the applicants out of proportion to the injustice occasioned to Sentry by a refusal of leave; see Trade Practices Commission v Allied Mills Industries Pty. Ltd. (1980) 32 ALR 570.

4. In response to the allegations of delay, senior counsel for Sentry submitted that it had not been unreasonable for Sentry to rely upon what was said by Mr. Peters to Mr. Ducey in mid-1987 during the "without prejudice" discussions, as a considered statement by Sentry's former Australian solicitors that, under the law in this country, there was no conflict of interest in that firm acting for the applicants in the present litigation. Sentry submitted that in that setting there was no unreasonable delay in Sentry obtaining the further advice which led to the letter from Messrs. Phillips Fox dated 13 December 1988 in which it was said that now the issues in the litigation had become clearer, it appeared that the litigation would involve the resolution of a number of fundamental questions concerning the meaning and effect of the Sale Agreement, thereby highlighting the alleged conflict of interest.

5. There is force in these submissions, although of themselves they fall short of tipping the balance in the favour of Sentry. As to the delay after the letter of 31 December 1988, and the ensuing correspondence which I have set out earlier in these reasons, there is, in my view, much force in the submission that it was only with the production by Messrs. Mallesons Stephen Jaques on or about 1 March 1989 to Messrs. Phillips Fox in Melbourne of the file maintained by Mr. King in New York that Sentry was equipped with adequate materials to frame a cross-claim in proper terms.

6. Senior counsel for Sentry submits that if, as I have concluded, real questions arise for determination on the cross-claim, and if, as I have found, the case has not been made out that the cross-claim is designed as a calculated harassment of the applicants in the principal proceedings and of the cross-respondents, Sentry is entitled to have its claim tried in an Australian court. Sentry then submits that this Court should be slow to expand the scope of any discretion to refuse to exercise competent jurisdiction; cf. Oceanic Sun Line Special Shipping Co. Inc. v Fay (1988) 79 ALR 9 at 50, per Deane J. Sentry also contended that it had a legitimate interest in Messrs. Mallesons Stephen Jaques being bound by findings in the principal proceedings.

7. Further, it was submitted for Sentry that any difficulties for the applicants in retaining their present solicitors in this litigation, in the light of the case sought to be made on the cross-claim, would not be removed even if leave was refused to file the cross-claim. In particular, Sentry pointed to para. 38 of its Defence. Sentry there responds to the allegation that Sentry had failed to take reasonable steps to ascertain whether the representations relied upon by National Mutual were true. Sentry pleads reliance upon advice to it by Stephen Jaques Stone James concerning what became clause 4 (b) (iii) of the Sale Agreement. If the result of granting leave to file the Cross-Claim is hardship to the applicants in the principal proceedings, Sentry counters by asking why it should be shut out from bringing a legitimate cross-claim by a chain of events which commenced with the information given by Mr. Strong (the in-house lawyer of National Mutual) to Mr. Wells when Messrs. Mallesons (as they then were) were retained on 20 November 1986. That chain of events includes, no doubt with the best of motives, the failure of Mr. Wells, promptly and at an early stage, to make fuller inquiries of his partners as to the precise nature of the previous involvement of Stephen Jaques Stone James.

8. In all the circumstances, as they appear from these reasons, including those which I have dealt with specifically above, in my view the interests of justice call for the grant to Sentry of leave to file the cross-claim against Messrs. Mallesons Stephen Jaques.
   Application to Strike Out Portions of Defence
   to Amended Statement of Claim

9. By Motion 1, the applicants seek, inter alia, to strike out Sentry's Defence to the Amended Statement of Claim. It became apparent upon the commencement of the hearing of the motion that the applicants were in fact less ambitious. What is sought is an order directed against particular paragraphs of the Defence.
   Paragraph 13

10. By this paragraph, Sentry says, in answer to so much of the Amended Statement of Claim as alleges breaches s. 52 of the TP Act, that "no actual or positive statement or action by Sentry is alleged as being misleading or deceptive nor is anything alleged against Sentry which is conduct within the meaning of section 52 of the (TP Act)". The applicants point to para. 13 of the Amended Statement of Claim which contains an allegation that Sentry made certain representations and "adopted" certain representations which had been made by another party.

11. I read para. 13 of the Defence as raising the point (which I have discussed earlier in these reasons) that it is not misleading conduct for a recipient of information merely to pass it on without knowledge of its truth and without accepting responsibility for it. In ordinary parlance, something is "adopted" if it is taken up from another and used as one's own, and to pass on information without knowledge of its truth and without accepting responsibility for it would not, in my understanding, be to adopt it. I would not strike out para. 13 as embarrassing.
    Paragraph 19

12. Paragraph 17 of the Amended Statement of Claim pleads the warranties contained in clause 4 (b) (iii) and of the promise to indemnify contained in clause 8 (b) of the Sale Agreement. Clause 18 then pleads breaches. In the Defence, Sentry denies the breaches (para. 16) and goes on, in para. 19 of the Defence, to allege that National Mutual is not entitled to maintain the claims made in para. 18 because there had been sufficient disclosure to National Mutual in writing before the date of the Sale Agreement within the meaning of exception from the warranties, which is contained in the opening words of clause 4 (b).

13. Once this is understood, and in my view it is quite clear, there is no ground for any attack on para. 19.
    Paragraph 20

14. The same conclusion follows as to the attack upon para. 20 of the Amended Defence.
    Paragraph 21

15. Paragraph 7 of the Sale Agreement provides:
    

"7. Any undertaking agreement warranty or acknowledgment contained herein other than in Clause 8 shall remain in full force and effect following the completion date notwithstanding completion and the transfer of the (Sentry Holdings) shares to (National Mutual) until the 'cut-off date' specified below with respect to such matter; . . .

(c) with respect to all other undertakings, agreements, warranties and acknowledgments the cut-off date shall be the second anniversary of the completion date."

The completion date was 22 July 1986.

1. Paragraph 21 of the Defence pleads that the warranty contained in clause 4 (b) (iii) of the Sale Agreement (breach of which is alleged by National Mutual) "is no longer in full force and effect and National Mutual cannot sue for breach thereof" because of the expiry of the period referred to in clause 7 (c). This, then, is a construction point. The substance of the plea is that National Mutual has lost the right to sue for breach of the warranty because the proceedings have taken more than one year to reach judgment. The point is not one that will add in any appreciable degree to the expense of the trial. Whilst it is very near the line beyond which it would be struck out, I would allow para. 21 to remain.
   Paragraph 22

2. This paragraph is designed to put in issue non-compliance by National Mutual with what Sentry says are conditions precedent to the operation of the indemnity provisions of clause 8 of the Sale Agreement. I do not believe that the paragraph contains material so vague and uncertain as to be embarrassing, and the paragraph should not be struck out.
   Paragraph 23

3. Senior counsel for Sentry pointed to the definition of "the SHL Group" in clause 4 (a) (i) of the Sale Agreement as including neither Sentry nor National Mutual. He then pointed to the agreement by Sentry in clause 8 (b) of the Sale Agreement to indemnify and keep indemnified National Mutual against any income tax and any interest penalty tax and fines which, in the circumstances there described, may be assessed against or levied upon any member of the SHL Group, and points out that National Mutual is not one of these taxpayers. The result is that the taxpayers who suffer the loss do not obtain the immediate benefit of the indemnity. The benefit is for National Mutual.

4. It is alleged, in para. 23 of the Defence, that clause 8 (b) is a contract of insurance within the meaning of the Insurance Contracts Act 1984 ("the Insurance Act"), and that National Mutual, in failing to act with the utmost good faith (in the circumstances detailed in the pleading) was acting illegally. Reference is made to ss. 13 and 14 of the 1984 statute. Section 13 implies in contracts of insurance a provision requiring each party to act towards the other with the utmost good faith, in respect of any matter arising under or in relation to the contract; s. 14 does not limit the operation of s. 13, and provides that if reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision. For its part, National Mutual submits that, giving ss. 13 and 14 their full effect, does not mean that in seeking to rely upon clause 8 (b) of the Sale Agreement, National Mutual is "acting illegally by virtue of the statute" as pleaded in para. 23 of the Defence.

5. The issue thus raised involves the application of the principles considered in such cases as Yango Pastoral Company Pty. Ltd. v First Chicago Australia Ltd. (1978) 139 CLR 410, and Brownbill v Kenworth Truck Sales (N.S.W) Pty. Ltd. (1982) 59 FLR 56; see also Lindgren, Carter and Harland, "Contract Law in Australia", para. 1613. The application of these principles to the particular statute involved thus presents, in a sense, a novel but substantial legal issue; it is also apparent from the terms of para. 23 of the Defence that it raises factual disputes. In the circumstances, the issues raised by para. 23 should go to trial.
   Paragraph 24

6. This should be treated in the same way as para. 23.
   Paragraph 25

7. This presents a construction point as to the interrelation between the warranty contained in clause 4 (b) (iii) of the Sale Agreement, and the indemnity contained in clause 8 (b), the contention being that the indemnity is the exclusive repository of all rights and remedies that National Mutual has under the Sale Agreement in relation to any income tax and any interest, penalty tax and fines which may be assessed against or levied upon any member of the SHL Group. Paragraph 25 was said to be embarrassing, but I do not consider it so.
   Paragraph 26

8. This is put in the alternative to para. 25, the contention being that insofar as they cover the same subject matter, the warranty in clause 4 (b) (iii) of the Sale Agreement and the indemnity contained in clause 8 (b) thereof present National Mutual with an election and that it cannot plead reliance on one without abandoning reliance on the other. It is then alleged that because National Mutual has elected to pursue its rights under the indemnity clause, it cannot seek to recover damages for breach of the warranty in respect of the taxes, interests and fines upon which the indemnity clause operates.

9. National Mutual submits that the paragraph is embarrassing. In my view, whilst the use in para. 26 of the term "estopped" is an unfortunate one, nevertheless the purport of the paragraph is clear and it should not be struck out.
   Paragraph 27

10. Senior counsel for Sentry points again to the operation of clause 8 (b) of the Sale Agreement as indemnifying National Mutual against income tax, interest, penalty tax and fines assessed against or levied upon third parties, being members of the SHL Group. The allegation is that if the applicants are entitled to recover from Sentry under the claim for breach of the warranty in clause 4 (b) (iii), damages in respect of the taxes, interest and fines of the members of the SHL Group, then clause 8 (b) operates as a penalty. This will largely be a question of construction. In my view, the point cannot be said to be so clearly untenable that it cannot possibly succeed. Paragraph 27 should stand.
    Paragraph 28

11. The Sale Agreement was, as I have said, entered into in Wisconsin. However, there is an express choice (in para. 23) of the law of Victoria as the governing law of the agreement, and this may supply a sufficient nexus. In para. 28, Sentry points to the Lotteries, Gaming and Betting Act 1966 (Vic.), s. 15, and says that the meaning of the indemnity in clause 8 (b) of the Sale Agreement is that Sentry and National Mutual are wagering upon the income tax liabilities of the members of the SHL Group. In s. 3 of that statute, "gaming" is defined as including playing games or any wager or stake of money or any valuable thing and also betting on the sides or hands of those who play at games.

12. Section 15 of the Victorian statute is in the following terms:
    

"15. All contracts or agreements whether by parole or in writing by way of gaming or wagering shall be null and void; and no suit shall be brought or maintained in any court of law or equity for recovering any sum of money or valuable thing alleged to be won upon any wager or which has been deposited in the hands of any person to abide the event on which any wager has been made."

1. The term the "SHL Group" was defined in clause 4 of the Sale Agreement as meaning each of Sentry Holdings (now the second applicant), Sentry Life (the fourth applicant), Sentry Insurance (the fifth applicant), Australian Casualty (the sixth applicant), Sentry Finance (the third applicant) and Sentry Marketing Pty. Limited and Sentry Fund Management Pty. Limited. Sentry Holdings was the beneficial owner of the shares in the other five members of the SHL Group. The subject matter of the Sale Agreement was the sale by Sentry of the shares in Sentry Holdings to National Mutual.

2. Clause 8 (b) of the Sale Agreement is to be understood in this setting. In my view, plainly insofar as it included clause 8 (b), the Sale Agreement was not thereby rendered a contract or agreement by way of gaming or wagering, within the meaning of s. 15 of the Victorian statute. The Sale Agreement represented a commercial bargain for the sale of property. National Mutual, as successor to Sentry in ownership of the shareholding in Sentry Holdings, had a real concern in the income tax and any interest penalty tax and fines which might be assessed against or levied upon Sentry Holdings and any other member of the SHL Group. This was not a case where "neither of the contracting parties (had) any other interest in that contract than the sum or stake (it) will so win or lose, there being no other real consideration for the making of such contract by either of the parties": Carlill v Carbolic Smoke Ball Co. (1892) 2 QB 484 at 490-491. See also Morley v Richardson (1942) 65 CLR 512 at 518, 519, 520, 522, 526-7; Petranker v Brown (1984) 2 NSWLR 177.

1. In my view, the defence pleaded in para. 28 is so clearly untenable that it cannot possibly succeed. Paragraph 28 should be struck out.
   Paragraph 29

2. This defence is only made out if s. 15 of the Lotteries, Gaming and Betting Act 1966 (Vic.) applies to the indemnity provision of clause 8 (b) of the Sale Agreement. Paragraph 29 should be struck out.
   Paragraph 30

3. Section 21 of the Instruments Act 1958 (Vic.) provides:
   

"21. No insurance shall be made by any person or persons bodies politic or corporate on the life or lives of any person or persons or on any other event or events whatsoever wherein the person or persons for whose use benefit or on whose account the policy or policies are made shall have no interest or by gaming or wagering; and every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever."

The Sale Agreement was made in Wisconsin, not Victoria, although the governing law is that of Victoria. On its face, s. 21 is directed to activities in Victoria; cf. Kay's Leasing Corporation Pty. Ltd. v Fletcher (1964) 116 CLR 124; Holmes v Bangladesh Biman Corp. (1989) 1 All ER 852.

1. Paragraph 30 of the Defence pleads that the indemnity provided for in clause 8 (b) of the Sale Agreement is "illegal and unenforceable" by virtue of s. 21. In response, senior counsel for the applicants pointed to s. 16 of the Insurance Act. This provides:
   

"16. (1) A contract of general insurance is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject-matter of the contract.

(2) Sub-section (1) does not apply to a contract that provides for the payment of money on the death of a person by accident or sickness but not otherwise".

It follows from sub-section 11 (1) of the Insurance Act, that a contract is one of general insurance for the purposes of s. 16 if it is a contract of insurance that is not a contract of life insurance.

1. Section 7 of the Insurance Act states:
   

"7. It is the intention of the Parliament that this Act is not, except in so far as this Act, either expressly or by necessary intendment, otherwise provides, to affect the operation of any other law of the Commonwealth, the operation of a law of a State or Territory or the operation of any principle or rule of the common law (including the law merchant) or of equity."

1. The applicants submit that even if, which they do not admit, clause 8 (b) of the Sale Agreement is properly to be characterised as a provision by which insurance is made, within the meaning of s. 21 of the State Act, and even if, which is not admitted, National Mutual as the insured lacked an insurable interest, in the technical sense of the law of insurance, the necessity for such interest is removed by the operation of the Insurance Act. Sentry responds that all s. 16 of the Insurance Act does is to provide that the contract is not void "by reason only" of the lack of an insurable interest at the time when the contract was entered into; s. 21 of the Victorian Act, it is said, strikes at the making of the contract of insurance (semble even outside Victoria) thereby giving rise to an illegality for the purposes of the law of contract; this is not removed by s. 16 of the Insurance Act, particularly having regard to s. 7 thereof.

2. The matter is very near the line but, on balance, I would not classify the point which Sentry seeks to propound by para. 30 as so clearly untenable that it cannot possibly succeed.
   Paragraph 31

3. The references in para. 31 to paras. 28 and 29 should be struck out. The issue that remains is whether, on the assumption that the defence in para. 30 is made out, the whole of the Sale Agreement (including the warranties in clause 4) falls, because clause 8 (b) cannot be severed. This is a construction issue which should be allowed to go to trial; but para. 31 will require amendment to delete the references to paras. 28 and 29.
   Paragraph 32

4. This is another construction point. Clause 8 (b) is expressed as an agreement by Sentry to indemnify National Mutual against income tax and any interest, penalty tax and fines which may be assessed against or levied upon any member of the SHL Group, that is to say upon third parties. Sentry maintains that the sub-clause is self-contradictory because the legal character of an indemnity is a contract whereby one party agrees to save harmless the other party from loss suffered by that other party. National Mutual counters that the promise to indemnify National Mutual has to be understood in its particular context and that plainly it was used in a special sense in clause 8 (b).

5. Again, this paragraph comes very near the line but, on balance, I do not think Sentry's point is so clearly untenable that it cannot possibly succeed.
   Paragraph 33

6. This is a construction point related to that Sentry makes in para. 32. It also should be allowed to go to trial.
   Paragraph 38

7. The applicants allege in para. 23 of the Amended Statement of Claim that in breach of its duty of care, Sentry was negligent in the making of what is defined as the Representations because it failed to take any reasonable steps to ascertain whether the Representations were true. In para. 38 of the Defence, Sentry pleads that it exercised all reasonable and due care because it accepted and relied upon the advice sought by it from Stephen Jaques Stone James as to what became clause 4 (b) (iii) of the Sale Agreement containing a warranty said by Sentry to be not in substance different from the allegedly negligent misstatement. The applicants submit that para. 38 is embarrassing. In my view, this is not so. The paragraph raises a real question for determination. It is one to which I have referred earlier in these reasons.
   Paragraphs 51 - 68

8. The purpose of these paragraphs is to plead an estoppel against National Mutual, whereby it is precluded from asserting that there has been a breach by Sentry of the warranty in clause 4 (b) (iii) of the Sale Agreement. It is alleged that Sentry acted to its detriment by entering into the Sale Agreement in reliance upon certain representations. The representations were allegedly made as to some by National Mutual, and as to others by NMC, by NMC and National Mutual, and by Mr. O'Kane. It is alleged NMC and National Mutual adopted the representations made by Mr. O'Kane (para. 62). It is not clear that the representations alleged in para. 55 to have been made by NMC were adopted by National Mutual. It may be that the representations in para. 55 are not representations upon which Sentry relies to found the alleged estoppel.

9. The embarrassment caused by the pleading in its present form is indicated by the text of para. 67. This is in the following terms:
   

"67. In reliance upon the representations referred to in paragraphs 51 and 61 (iv) hereof and the matters referred to in paragraphs 51 to 65 hereof, Sentry entered into the sale agreement containing the alleged warranty and thereby altered its position to its detriment."

1. The words which I have underlined are embarrassing and should be struck out. Sentry should have leave to amend para. 67 if it wishes to plead reliance upon any other representations set forth in earlier paragraphs.
   Paragraphs 69 - 77

2. These are expressed as being pleaded in the alternative to paras. 51 - 68. However, as is apparent from para. 77, these paragraphs assume that the defence of estoppel pleaded in the earlier paragraphs would otherwise be a good defence, but fails by reason of the falsity of a particular representation pleaded in para. 69. The applicants say that because the estoppel argument in the earlier paragraphs is untenable, the same is to be said of paras. 69 - 77. As I have indicated, as presently framed a vital integer in the estoppel argument is pleaded in an embarrassing form. But, in my view, the estoppel argument is not untenable. That conclusion cuts the ground from the complaint made concerning paras. 69 - 77.
   Sentry's Motion

3. Motion 7 is a motion by Sentry. In my view, Sentry did not require leave to file and serve the Defence filed on 21 April 1989. Sentry thus had no need of the relief sought in para. 1 of Motion 7. Sentry should have an order for leave to file and serve the cross-claims, as sought in order 2, but, as regards the cross-claim against NMLA, NMC, Mr. Hoskins and Mr. Kent, only with the inclusion of amendments to give effect to the reasons expressed earlier herein.

4. Sentry also seeks leave further to amend the Defence in specified particulars which are annexed to Motion 7. There is no opposition to these amendments, save that which is sought to para. 74 of the Defence. In its present form, para. 74 makes allegations of fraud against NMC. The amendment sought would make allegations of fraud against National Mutual. In the circumstances of this case, I would not allow such an amendment unless the application for amendment was accompanied by proper particulars; see Order 12 Rule 2. None have been furnished. The application to amend para. 74 should be refused.
   Conclusions

5. The result is as follows. As to Motion 1, the applicants succeed in having the cross-claims struck out; the application to strike out the whole of the Defence was not pressed, and the applicants succeed in part in their application in respect of particular paragraphs of the Defence or parts thereof (paras. 28, 29, 31 and 67) but, in the case of paras. 31 and 67, on terms that Sentry be given leave to re-plead.

6. The applicants in Motions 2, 3 and 6 succeed in their applications to strike out the relevant cross-claims.

7. As to Motion 7, Sentry succeeds in obtaining leave to file and serve the cross-claims in the form of the pleadings filed on 21 April 1989, subject to a qualification as to the amendment of the cross-claim against NMLA, NMC and Messrs. Hoskins and Kent to give effect to the reasons herein. Sentry also should have the leave it seeks to amend the Defence, other than the amendment sought to para. 74.

8. There remains Motions 4 and 5, dealing with the stay of the New York proceedings. There was some discussion with counsel at the hearing of the motions as to the proper form of any injunctive relief. The applicants for this relief propound an injunction in the following form:
   

"Upon the Applicants and Messrs. Mallesons Stephen Jaques (including any predecessor firms) by their Counsel undertaking to the Court:

(1) to pay to any party adversely affected by this order such compensation (if any) as the Court thinks just in such manner as the Court directs, and

(2) to take no steps in the action entitled 'The Sentry Corporation v Stephen Jaques Stone James and Mallesons Stephen Jaques, Index No. 89, Civ. 2443', commenced in the United States District Court for the Southern District of New York ('the US action'), other than -

(a) for any of the Applicants to intervene in the US action;

(b) for any of the Applicants or Messrs. Mallesons Stephen Jaques -

(i) to answer the Complaint;

(ii) to move to dismiss the Complaint or any of the claims therein;

(iii) to move for judgment on the pleadings;

(iv) to move for summary judgment; and taking any necessary steps in relation thereto, THE COURT ORDERS that until the determination of this proceeding or further order, the first respondent, The Sentry Corporation, be restrained by itself its officers servants employees agents attorneys or otherwise howsoever from taking any step in the US action otherwise than to give effect to this Order or to take any necessary step in opposition to any motion or other step taken by any of the Applicants or Messrs. Mallesons Stephen Jaques."

1. On a date to be fixed, I will hear the parties as to any suggested variations to this proposed order; I will also then hear the parties as to costs of the seven motions with which I have dealt in these reasons. Also on that day, the applicants in the principal proceedings should bring in Short Minutes of Orders to give effect to these reasons, including what I have said as to costs of the motions to set aside the subpoenas.