Solicitors' Liability Committee v Gray

(997 - -.\L27

JUDGMENT No.

..,....,.

I ,,

FEDERAL COURT OF AUSTRALIA

LEGAL PRACTITIONERS - professional duty - solicitor's professional indemnity insurance - the concept of a solicitor's professional legal practice contrasted with entrepreneurial and promotional activities undertaken by a solicitor - ordinary hnctions of a solicitor - activities of a solicitor having a professional character - the solicitor/client relationship - instructions from a client - dual activities of other professionals - the giving of "purely commercial" advice - ethical responsibilities of a lawyer in relation to law-related services - professionalism and the modern solicitor - whether retainer in relation to the acquisition of a kiwi fruit orchard was a retainer within the scope of practice as solicitors -

the solicitors' practice - whether marketing or promotion of investments in the area of '

whether liability incurred in the settlement of an action for damages arose in connection with

property syndication, in conjunction with accountants seeking investment and taxation advantages for clients, part of the practice of a solicitor - neg.3tiations of agreements for the sale and purchase of land, plant and equipment - purchase at auction - arrangement of finance for the purchase - receipt by solicitor of an acquisition fee expressed as a percentage of the purchase price - recruitment of partners in a syndicate.

INSURANCE - construction of insurance policies - scope of i,idemnity - whether weight to be given to the statutory context, origins and rationale of a policy.

PROFESSIONAL INDEMNITY INSURANCE - indemnity for costs reasonably and necessarily incurred in proceedings arising out of a claim against the insured following settlement of the claim against the insured - application to set aside settlement - meaning of "necessarily".

Mann v Hulme (I 9 6 I) 106 CLR 136, distinguished

Hawkins v Clayton (1988) 164 CLR 539, distinguished

Hill v Van Erp (199 7) 142 ALR 687, distitig~/ished

Drayton v Martin (1 996) 67 FCR I , distinguished

Leary v Federal Commis,sioner of Taxation (1980) 32 ALR 221, applied

Hendersori v A madio Pty Ltd (no I) (I Y 95) 62 FCR I , applied

Citicorp Australia L d v 0 'Brien (1 996) 40 NSWLR 398, considered

Haseldine v Hosken [I9331 1 KB 822, considered

liestatement of the Law Governing Lawyers, Tentative Drafi No 8, March 21, 1997, Section

79, p

124

State of Florida v Sperry (I 962) Flu I40 So (2d) 58 7, considered

She ttln~pf

1) Stone 92 7 F 2d 1259, considered

Law Society of NSW v Hawey /I9 76/ 2 NSWLII 154, considered

Federal Commissiotler of Taxation v Snowden & WillLson

Propriefary Limited (1 958) 99 CLR

43 1,

applied

THE SOLICITORS' LIABILITY COMMITTEE v GARRICK LEWIS GRAY and

MICHAEL FREDERlCK WINTER

No. VG 546 of 1996

Judges:	Lockhart, Beaumont, Burchett JJ.
Place:	Sydney (heard in Melbourne)
Dated:	21 July 1997

IN THE FEDERAL COURT OF AUSTRALIA

)

VICTORIA DlSTRlCT REGISTRY

)	No, VG 546 of 1996

)

GENERAL DIVISION

)

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

THE

SOLICITORS'

LIABILITY

COMMITTEE

Appellant

(Cross-respondent)

AND

GARRlCK

LEWIS

GRAY

and

MlCHAEL FREDERlCK WINTER

Respondents

(Cross-appellants)

JUDGES:	LOCKHART, BEAUMONT & BURCHETT JJ.
PLACE:	SYDNEY (HEARD IN MELBOURNE)
DATED:	21 JULY 1997

MINUTES OF ORDERS

THE COURT ORDERS:

1. That the appeal be allowed, with costs.

2. That the cross-appeal be dismissed, with costs.

3 . That the judgment and orders made at first instance be set aside.

4. That, in lieu thereof, it be ordered that the application be dismissed, with costs.

Note:

Settlement and entry of orders is dealt with in Order 36 of the Federal Court

Rules.

IN THE FEDERAL COURT OF AUSTRALIA	)
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION

ON APPEAL FROM A JUDGE OF THE

FEDERAL COURT OF AUSTRALIA

BETWEEN:

THE SOLICITORS' LIABILITY

COMMITTEE

Appellant

Cross Respondent

AND

GARRICK LEWIS GRAY and

MICHAEL FREDERICK WIhTER

(trading as GRAY & WINTER)

Respondents

Cross Appellants

C O W : LOCKHART, BEAUMONT and BURCHETT JJ.

PLACE: SYDNEY (HEARD IN MELBOURNE)

DATED: 21 JULY 1997

REASONS FOR JUDGMENT

LOCKHART J.

This is an appeal from the judgment of a judge of the Court (Olney J) . The issue before his Honour (and on this appeal) arises from the terms of a contract of professional indemnity insurance between the appellant ('the insurer') and the respondents ('the insured'). The issue is whether a

liability incurred by the respondents, a firm of solicitors,

in settling a c!.aim for dar:oges, was incurred in connection

with their practice as solicitors.

The appellant appealed primarily from Olney J's finding that the liability was incurred in connection with the respondents' practice as solicitors. The respondents cross- appealed from Olrey J's finding that they were not entitled to be indemnified for their costs and expenses reasonably and necessarily incurred in certain matters and the appeals therefrom (Nos VG293, VG314 and VG315 of 1993) to which reference will be made later.

The proceeding was commenced in the Supreme Court of Victoria; but was later transferred to this Court p~rsuant

the

J u r i s d i c c i o n o f Courts

(Cross-Vesting) Act

1987

(Vic)

Most of the relevant facts are not in dispute. In the main I shall take the statement of facts from the judgment of the learned prlmary Judge.

The respondents were at all material times solicitors

admitted to practice in Victoria, holding current practising

certificates and carrying on practice in partnership under

the firm name of Gray 4 Winte r .

The appellant is a body corporate established under S

b 8 B of the Lega.1 Prcfessiondl Practice Act 1958 (Vic) ( 'the

Act'

i .

Section 88H(1) of the Act requires the appellant to carry on the business of providing for solicitors and firms of solicitors professional indemnity insurance, and to u~dertake liability under cc:-"_acts of professional indemni~y insurance eniered into in accordance with the Act

with solicitors and firms of solicitors. I shall return to the Act later because ~ t s provisions are important to the

The parties entered into a contract of professional

indemnity insurance for the calender year 1993 ('the

insurance contract') whereby the appellant agreed to

indemnify the respondents against civil liability in

connection with the private practice as solicitors carried c,:~ solely oil their own behalf, in respect of claims first

made agalnst rhem dcring 1993. The insuring clause

provides

' T h e

i n s u r e r

will

i n d e m n i f y

t h e

i n s u r e d

a g a i n s t

a n y

c i v i l

l i a b i l i t y

i n

c o n n e c t i o n

w i t h

t h e

P r a c t i c e

i n r e s p e c t

o f

~L~nicil a

c l a i m

f i r s t

made

a g a i n s t

t h e

f i r m

d u r i n g

t h e

P e r i o d

o f

1 7 s u r d n . -2.

The appellant also agreed to indemnify the respondents

against costs and expenses reasonably and necessarily

incurred in defending a claim, after notification of the

claim to the ~ ~ p e l l a n t and before the appellant elected to take over the defence of the proceedings. The total liability of the appellant for each claim including such

costs and expenses is limited to $1 million.

The respondent, Garrick Lewis Gray, has been in practice as a barrister and solicitor of the Supreme Court of Victoria since 1958. He practices in the areas or property, taxation and commercial law. Michael Frederick Winter became Mr Gray's partner in 1988. Initially the firm name was Garrick Gray & CO, but this was later changed to Gray & Winter.

In the period 1976 to 1981 Mr Gray specialized in the area of personal tax minimization, an area in which t5ere was a considerable demand from self-employed professional, business and farming people. Early in 1982 Mr Gray wrote to

311 clients wi:o had participated in tax minimization

arrangements and expressed the opinion that the age of artificial Eax :jcl!e;~;es !?ad f inlshed, and he advised clients to contemplate tax relief by entering into investments with tax incentives such as deductions for depreciation, investment allowances, negative gearing and non-taxable

capital gains.

In 1987 taxation deductions, which had previously

applied for certain primary production activities, :lad

become less available; so following the stock :narket crash

in October 1987 Mr Gray examined the feasibility of forming

partnerships or syndicates for clients to invest in commercial properties. He started to practice in the area of property syndication in conjunction with accountants who saw investment and taxation advantages for their clients in such investments.

The usual practice was for a company controlled by

Messrs Gray & Winter to take an option over a property which

was thought to be a suitable investment for investors seeking to minimize their liability for income tax. Having acquired the optioi? they would organize a syndicate to acquire the property and would arrange the necessary finance. They were recompensed by the payment of an

acquisition fee, usually 7.5 per cent of the cost of the

property. As part of their function they would attend to

any necessary legal work. When interstate properties were acquired it was usual for local solicitors to be engaged to attend to the conveyancing.

In about late 1988 or early 1989, first Mr Winter, then

later Mr Gray, met a Mr Neil Allan, a partner in the

accountancy firm of Metzke & Allan at Shepparton, Victoria. Mr Allan was adept at producing computerized cashflow forecasts and cash returns from investment in property, and

was engaged by Messr- Gray and Winter to do cashflows for

projects in which they were interested.

Prior to 1989 various combinations of Victorian

barristers had become involved in syndicates which purchased

properties over which Messrs Gray and Winter had acquired

options. In April 1988 four barristers entered into a contract for the purchase of a property at Marrickville, New South Wales, for a purchase price of $4 million, organized through Messrs Gray and Winter. In July 1988 four Melbourne barristers (including three of the four barristers who agreed to purchase the Marrickville property) entered into a contract for the purchase of a property at Wembley, Western Australia, for a total price of $1.39 mill.ion, also organized through Yessrs Gray and Winter. The barristers

contributed $75,	C33 betweer; then,	t k . ~ balance	being
financed.

In about February 1989 three of the barristers acquired a one-third interest each in a property in Karratha, Western Australia which cost a total of $2.1 million (check) . The barristers contributed $120,000 and the balance was financed.

In each case written instructions were given to Messrs

Gray & Winter by the respective purchas2rs authorizing the

firm to act in the matter.

In addition to these transactions, two of the

barristers had been involved in a number of other tax

minimization partnerships arranged by Mr Gray.

The praccice of Messrs Gray & Winter was organized in such a way that a company controlled by the partners, Australian Investment Management Pty Limited ('AIM1),

administered the financial affairs of the partnership. AIM was set up as an administration company in the same way that other professional people, such as accountants and doctors, establish ad~inistration companies to receive fces, make payments and otherwise administer their practices.

In late October 1989 Yr Gray was contacted by Mr Allan who told him that a Kiwi fruit property in the Murray Valley was to be auctioned on 15 November 1989. Mr Allan said that the property had cost over $6 million to purchase and develop, but it was likely to sell at auction for under $1.5

' 8

million. He said it would be a good investment for the barristers. Mr Gray said that he would mention the matter

to the barristers. Shortly afterwards, Messrs Gray & Piinter met Mr Allan at his office in Shepparton and discussed the matcer in detail. Mr Gray also discussed the proposal with a Mr Corboy, an experienced manager and fruit grower, and they later inspected the property.

A day or so after returning to Melbourne (having been at Shepparton and inspected the Murray Valley Kiwi fruit property) Mr Gray spoke to Mr Hedigan (one of the interested barristers) on the telephone and mentioned the project to him. He told Mr Hedigan that Mr Alian had recommended it as

being suitable for 'your barristers' with 'good tax

deductions'. Mr Hedigan h on lied that only Mr Guest (another of the barristers) and himself were around at the time and invited Mr Gray to 'bring it in to us'. On that or the

following d a ~ . both Messrs Gray and Winter met with Messrs

Hedigan and Guest at Mr Hedigan's chambers where they

cutlined the propsal.

I n the course of the meeting Mr Gray

sal6 t h a t i ~ e a~-!;i ?lr >J:r!Eer would be ~nLercsted i:i becornlng part of the syndicate. Mr Hedigan said that he was interested in having a further look i t anL Mr Guest said

that he too was interested. Mr Hedigan said that Mr OfCallaghan and Mr Chernov (both barristers involved in the property transactions previously mentioned) would probably be interested. Mr Gray also mentioned a Mr Manford (who is not a barrister and who lives in Perth) as someone who could be interested. In the course of the meeting Mr Gray said:

' I f we

purchase

t h e p r o p e r t y

a t

a u c t i o n

would

b e

i n t e r e s t e d

i n p c ~ t t i n g up

t n e

d e p c s l t ,

a r r a n g i n g

f i n a n c e

t o

purchase

t h e

p r o p e r t y ,

and

pay

any

a c q u i s i t i o n

c o s t s

such

a s

a g e n t ' s

commis s ion ,

w e ' l l

fund	wha tever	i s	n e c e s s a r y	t o	a c q u i r e
i t . '

and also:

'If we

p u t

a l l

t h e money

t o a c q u i r e

t h e p r o p e r t y

a t

a u c t i o n ,

we'd

want

a c q u i s i t i o n

f e e

o f

p e r c e n t

o f

t h e

purchase

p r i c e . '

The primary Judge assumed, and the contrary is not suggested, that by referring to 'we' Mr Gray meant hi:r ,self and ?4r Winter.

Within a couple of days zfter the initial meeting at Mr Hedigan's chanlhers , Mr Hedigan told Mr Gray on the telephone that he had spoken to Mr 0' Callaghan and Mr Chernov who had both expressed incerest in becoming involved. Mr Gray and

On 10 November 1989 a celebration was held to mark Mr

Mr Hedigan also discussed options for financing the project. races in early November 1989 to discuss the project fxrther.

Grayf s 60th birthday. The guests included Mr Hedigan, Mr Guest, Mr O'Callaghan and Mr Winter. Mr Winter was seated at the same table as Mr O'Callaghan and Mr Guest and he discussed with both of them the Kiwi fruit proposal. Mr

Guest said he had already spoken to Mr Corboy who was

interested. Mr O f Callaghan also expressed interest subject

to a suitable funding package being worked out.

Between 10 and 15 November 1989 Mr Gray had several

discussions with Mr Hedigan to ascertain the commitment of

the barristers to the venture. He was concerned that Messrs Gray & Winter and companies associated with their firm had

not previously entered into a contract to acquire a commercial property in their own name. Mr Gray did not want to be placed In the position of either having to complete the contract or lose a deposit in excess of $100,000.

In respGrise tc? Mr Sray's enqulry about the statement that he would be interested In havlng a share in the syndicate, Mr Hedlqan told Mr Gray that the barristers only wanted barristers to be involved.

In the period between the signing of the contract on 15 November 1989 and the final settlement of the purchase, Mr Hedigan acting Gn hls own initiative, without the involvement of elther Mr Gray or Mr Winter, met with both Mr

Corboy and Mr Allan to discuss mz'ters associated with the

Kiwi fruit property.

At the auction on 15 November 1989 an agent acting on Mr ray's instruction: .:as t h ~ highest bidder at $l.lm but the property was passed in. After negotiation, an offer of $1.265m was accepted, being $1,110,000 for the land and

irrigation equipment and $155,000 for machinery and other equipment. Separate contracts were executed for che property and for the equipment. The purchaser in each case was 'Covent P t y Limited or nominee' . Covent was a shelf company then controlled by Mr Allan which he made available for Mr Winter on the day of the auction. Mr Winter signed

the contracts on behalf of Covent and he also executed a

personal guarantee.

. - -

Tk,e cor,trs;::

pr. :x~ii i i . - j ."c:

cf ,

b e

paid as to $50,000 on the signing of the contract and as to $61,000 by 20 November 1983, with the balance of purchase

price to be paid on 15 December 1989. Mr Winter paid the initial deposit of $50,000 with a cheque drawn on the account of Mount Dunnead Pastoral Company Pty Limited, the trustee of his family trust. There is no evidence as to the payment of the balance of the deposit, but it is common ground that it was paid. On the day of the auction Mr Gray

told Mr Hedigan of the purchase by tel~phone. He said that the contract had been signed in the name of the shelf company which Mr Allan had provided. He asked Mr Hedigan to let the other syndicate members know.

Contracts signed by Mr Winter on behalf of Covent on 15 November nominated Messrs Riordan & Partners as the purchaser's solicitors. Messrs Riordan & Partners is a firm of solicitors practising at Shepparton. Mr Riordan is the partner in the firm who had the conduct of the transaction on behalf of Covent.

Ir, November I989 Mr Riordan was introduced to Messrs Gray and Winter by Mr Allan.

They had lunch together. Mr

Allan was a client for whom Mr Riordan's firm had acted.

lunch Mr Gray indicated that he was interested in purchasing

three kiwi fruit properties in the Shepparton area with a view to cornering the kiwi fruic market. Not long after the day of this meeting Mr Allan told Mr Riordan that Mr Gray had purchased one of the properties for $1.1 million and that Messrs Riordan G Partners would be instructed to ac'; for the purchaser. He was told that the contract was in the nane of

a nominee company and that it was probable that the property

would ultimately be purchased by some Melbourne bar~isters.

It was a matter of immediate concern to Mr Riordan that there was a prospect of the ultimate purchasers being nominees of the purchaser. The basis of his concern was that proposals were then being mooted which, if implemented, would have had the effec~ of rendering stamp ddty payable on both the initial contract and on the further corlveyance effected by the nomination. He was concerned to know the identity of the purchasers so that the nomination could be made in case the

law changed. He raised with both Messrs Winter and Allan on

a number of occasions the need to get the details of the purchasers clear. He explained the reason for his concern to

Mr Winter both verbally and by letter; and as the date for settlement approached the need to know who the purchasers were became more urgent.

The contract with Covent contained a covenant on the

part of the vendor that it would, pending settlement, farm and

manage the orchard in a proper and husbandlike manner according to the normal methods accepted throughout the district (special condition 6) . During December 1989 Mr Winter asserted that the vendor was in breach of special

' L

condition 6 and sought to use that breach as a lever to obtain

an extension cf time f?r settlement.

On 11 December 1989

Messrs Gray & Winter wrote to the vendor's solicitors seeking

an extension and, by letter dated 18 December 1989, the vendor's solicitors ,;rote to Messrs Riordan & Partners refusing the extension and requiring immediate settlement. On 20 December 1989 Messrs Riordan & Partners advised Messrs Gray & Winter that they did not consider there was any

realistic prospect of Covent being able to rescind the contract of sale for breach of special condition 6, and urged that they take every step necessary to be in a position to settle at the earliest possible date.

By letter daced 20 3ecember 1989 the vendor's solicltors

served notice of default under the contract on Covent and on

Mr Winter.

On 4 January 1990 Messrs Riordan & Partners informed

Messrs Gray & Winter that the vendor's solicitors had

indicated that the vendor might extend settlement if Messrs

Gray & Winter cculd procxre the execution of substitute

contracts of sale by prominent barristers as purchasers in substitution for Covent. There then followed an exchange of correspondence in which various proposals were put forward by Messrs Riordan & Partners on behalf of Messrs Gray & Winter

and Covent. First, it was suggested that Covent would nominate Messrs Hedigan, Guest and Chernov as additional purchasers in return for an extension of time; then there was an offer to procure by 25 January 1990 substituted contracts naming Messrs Hedigan, Guest and Chernov as purchasers.

By letter dated 24 January 1990 Messrs Riordan & Partners informed Messrs Gray & Winter that the vendor's solicitors had advised that the vendor had refused to extend the time specified in the notice of default beyond 4.00pm on

26 January 1990. However, on 31 January 1990 the vendor's

solicitors wrote to Messrs Riordan & Partners stating that the vendor had agreed to extend the time for completion to 1 March 1990 on condition that by 4.00pm on 5 February 1990 substitute

contracts were slgned by the barristers and exchanged. On 1 February 1990 Messrs Rlordan & Partners wrote to Messrs Gray & Winter saying that, if they wished to seek a further extens~on

for exchange of the substitute contracts, they should deal

directly with the vendor.

Following an exchange of correspondence between Messrs

Gray & Winter and a representative of the vendor, the rendo or's

solicitors informed Messrs Riordan & Partners by letLdr dated 7 February 1990 that the vendor had agreed to extend time to 1 March 1990 on condition that by 4.00pm on 12 February 1990 substitute contracts of sale were executed by the barristers. On 9 February 1990 Mr Winter instructed Messrs Riordan & Partners to Frepare substitute contracts naming the barristers as purchasers in place of Covent; and on 12 February 1990 he instructed Messrs Riordan & Partners to seek one final

extension for obtaining the execution of the substitute contracts until 16 February 1990 on condition that a photocopy of the face page signed by Messrs Hedigan, Guest and ~'~allaghan, with advice that they ~:ould exchange the contract when it had been signed by Messrs Chernov and Myers (who were then in Perth), would be provided by facsimile to the vendor's solicitors that day.

On 12 February 1990 Messrs Riordan & Partners sought the extension in accordance with their instructions and it was refused. The vendor's solicitors stated that the deposit had been forfeited and that the land, the orchard and the plant

and equipment would again be placed on the market. This

information was conveyed to Messrs Gray & Winter by letter

dated 12 February 1990.

On 16 Ftbruary 1990 Mr Winter and a r?pre,entative of

the vendor negotiated a fresh agreement for the sale and purchase of the land, the orchard and the plant and equipment to the barristers in substitution for the contracts with '

Covent

Substitute contracts were prepared by the vendor's solicitors naming the five barristers as purchasers. The documents were signed by four of the barristers in late

February 1990. As Mr Chernov was not available to sign, his name was struck out and the words 'and/or nominee' added after the other names. This was done on Mr Riordan's advice.

Subsequently, the four signatories nomir-ated themselves and Mr Chernov as the purchasers. Settlement took place on 2 March

1990.

The Kiwi Fruit Action

On 14 July 1993 the partnership known as Murray Valley Fruits (which included the five barristers) instituted proceedings in the Supreme Court of Victoria (No 7480 of 1993) claiming damages from Messrs Gray & Winter and others ('the Kiwi Fruit actionf) and on 23 July 1993 Messrs Gray & Winter

gave notice of s!lch cslal.:?. :::I, c?e respon?er,t. The kiwi fruit action was Lrai:.?fer:-cc? TO :!::S Court on 1 1 November 1993 (No VG 479/93). On 17 ;.Jovenber 1993 the respondent inforxed Messrs Gray & Wirlter that it refused to indemnify them and

refused to take over or continue their defence of the Kiwi Fruit action which they thereafter conducted at their own cost. Subsequently, the five individual members of the Murray Valley Fruits partn~rship were substituted as applicants in the Kiwi Fruit action. They are Messrs Hedigan, Guest, O'Callaghan, Chernov and Myers, then all barristers practicing at the Victorian Bar.

The clalms pleaded against Messrs Gray & Winter were in respect of three causes of action.

The facts pleaded in

respect of each claim are summarized below.

Claim pursuant to the F a i r T r a d i n g Act 1 9 8 5

(Vic)

a)	Messrs Gray & Winter were beneficially interested in and

controlled Covent which was usea as the corporate vehicle by which they entered into two contracts each dated 15 November 1989 whereby Covent agreed to gurchase

from Murray Valley Kiwi Frult ?ty Ltd (the veridcr) certain land at Nathalia (the land) together with the W fruit orchard business conducted on the land (the

. ,-

_ _ ..--,.

1 aan .

orchard) and certain plant and equipment relating lo the

conduct of ::i:e

a rchar t i .

b	1 Prior to completion of the contracts of sale, the

barristers and Messrs Gray & Winter agreed that the

barristers would assume the obligations of Covent under

the contracts of sale and would purchase the land, the

orchard and the plant and equipment and would pay Messrs

Gray & Winter a fee of $126,500.

In order to induce the barristers 20 enter into the agreement Messrs Gray & Winter made certain representations about the a&.:icipated yield of the orcnard, the cash flow to be produced by the orchard, and the value of the land and orchard.

The representations were constituted by:

i	cash flow b ~ t , ~ - ~ s prepared by a firm of accountants dated 21 December 1989, 22 Pecember 1989, 4 January

1990, 14 February 1990 and 16 February 1990;

ii) a valuation of the land and the orchard dated 24

January 1990;

iii) statements made to Messrs Hedigan, Guest and Chernov in early January 1990; and

iv) statements made to Messrs Hedigan, Guest, O'Callaghan and Myers on 18 February 1990;

d )	Acting in reiiance on the representations the barristers entered into the agreement, purchased the land, the orchard and the plant and equipment and paid the fee to Messrs Gray & Winter.
e)	Each of the representations was made in trade and commerce.
f)	Each of the representations was false, misleadl~g and deceptive, or likely to mislead or dsceive.
g)	Insofar as the representations were made with respect to future matters, theze were no reasonable grounds for

making them.

h)	By reason of the foregoing matters, Messrs Gray & Winter

engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in contravention of s 11

of the Fair Trading Act 1985 (Vic)

2. Claim in Nealiaence

a)	At the time of making the representations Messrs Gray & Winter intended, knew or ought reasonably to

have known or foreseen that the barristers would

rely on them in deciding .idhether or not to enter

into the agreement;

Messrs Gray & Winter owed a duty to the barristers

to take reasonable care in making the

represe~tations;

C)	In breach of such duty, Messrs Gray & Winter failed

v p ;i c

1;a

- , ; .?ble

C:? r e

~rlaking

the

representations.

3. Claim for breach of fiduciary duty

a)	In and between November 1989 and February 1990

Messrs Gray & Winter promoted to the barristers an	'
undertaking, scheme or enterprise whereby they would acquire the land, the orchard and the plant and equipment and would thereafter conduct the business of the orchard in partnership or joint

venture

(the scheme) ;

b)	Messrs Gray & Winter owed the barristers a

fiduciary duty to make a full and fair disclosure

of all matters within their knowledge which were material to the making of a decision by the barristers as to whether or not to participate in

the scheme;

C	In breach of the fiduciary duty Messrs Gray &
Winter did not disclose various matters (to which reference will be made later) each of which matters was materlal to be known by each of the barristers prior to deciding whether or not to participate in
the scheme;

If the undisclosed matters had been disclosed to

them I-lore

of the barristers would have entered into

the agreement.

Messrs Gray & Winter denied liability, and as will be seen from what follows, the issues pleaded against them were never litigated. Accordingly, no findings have ever been made in respect thera5f and none is called for in this proceeding.

The trial of the Kiwi Fruit action was due to commence on 29 August 1994, but did not proceed.

On 30 August 1994

the action was settled by the parties entering into an agreement (the settlement agreement) under which Messrs Gray & Winter agreed to pay the barristers $500,000, and the parties to the action agreed to pay their own costs.

On 1 September 1994 the barristers applied to the Court

by motion on notice for an order enforcing the settlement

agreement (the enforcement motion).

On 5 September 1994

Messrs Gray & Winter filed-an

application seeking, inter alia,

a declaration that the settlement agreement was void and of no effect and an order that the settlement agreement be rescinded (the rescission proceeding).

The enforcement motion and the rescission proceeding came for hearlng before Olney J on 6, 7 and 8 September 1994. On 19 September 1994. His Honour -

(a) dismissed the rescission proceeding with costs; and

(b)	ordered Messrs Gray & Winter to pay the barristers

$500,000 in accordance with the settlement agreenent

together with the costs of the enforcement motion.

Messrs Gray & Winter appealed against the decisions in respect of both the enforcement motion and the rescission proceeding. On 6 October 1994 a Full Court of this Court

dismissed both appeals with costs.

The claim made in the present proceeding relates to the

liability incurred by Messrs Gray & Winter in settlement of

the Kiwi Fruit action and the costs of that action.

Messrs Gray & Winter asserted in the trial (and the

appellant denied) that -

i	) Insofar as they were involved in any arrangement or agreement with the barristers and/or the making of any representations in connection therewith ana/or any failure to disclose material matters they were so

engaged in connection with their practice as solicitors

carried on solely on their own behalf;

ii) The claim of the barristers was one in respect of which

they are entitled to indemnity under the insurance

contract;

iii) The enforcement motion and the rescission proce,dinq and the appeals arising therefrom were proceedings brought as part of their defence of the barristers' claim against them.

iv) The appellant is in breach of the insurance contract.

Messrs Gray & Winter claim an indemnity in respect of thc sum of $500,030 for which they settled the Kiwi Fruit action and for their costs of that proceeding, the enforcement motion, the rescission proceeding and the appeals, including costs awarded against them. As the total of the costs is said to 'exceed $500,000 they seek judgment for $1 million being the total liability of the respondent under the

insurance contract.

The substantive issue determined by Olney J was that the

liability incurred by Pessrs Gray and Winter pursuant to their

settlement of the claim agai-qt them by the five barristers in the Kiwi Fruit action was incurred by them in connection with their practice as solicitors. It is this finding which is central to the appeal.

His Honour also found that the liability incurred by Messrs Gray and Winter 'in connection with the practice' of

solicitors did not include the costs a~?d expenses reasonably

and necessar-.ly incurred in the enfarcem2nt xotion, the

rescission proceeding and the appeals therefrom including the

costs awarded against them in those proceedings. In his

Honour's opinion those proceedings did not fit within the	t
description of proceedings arising out of a claim in respect
of which the appellant is liable under the insurance contract. His Honour said that those proceedings, all occurred after the Kiwi Fruit action, had been settled and that the settlement put an end to the proceeding. Thereafter, there was no proceeding to defend. The post-settlement proceedings may,
his Honour said, conveniently be classified as proceedings
arising'out of the setElement but not out of the claim. Hence in his Honour's opinion those costs were not recoverable from
the appellant.
Messrs Gray and Winter cross-appealed from these findings of his Honour with reference to costs.
I set out earlier the text of the insuring clause from which the liability of the appellant depends. Certain other clauses of the policy of insurance must be recited. In

addition to the clause mentiorled earlier, the insurance policy

provldes that the insurer (i.e. the appellant) will also:-

( i ) i n d e m n ~ f y

t h e

In sured

a g a i n s t

c o s t s

and

expenses

r e a s o n a b l y

and

n e c e s s a r i l y

i n c u r r e d

i n

d e f e n d i n g

any

proceedings

a r i s i n g

ou t

o f

c l a i m

I n

r e s p e c t

o f

which

t h e

I n s u r e r

i s

l i a b l e

t o

i n d e m n i f y

t h e

I n s u r e d ,

where

such

c o s t s

and

expenses

a r e

i n c u r r e d

a f t e r

n o t i f i c a t i o n

t h e

c l a i m

t o

t h e

I n s u r e r

and

b e f o r e

t h e

I n s u r e r

e l e c t s

t o

t a k e

o v e r

t h e

d e f e n c e

o f

t h e p roceed ings ;

and

( i l ) pay

t h e

c o s t s

and

expenses

o f

t h e

s o l i c i t o r s

appo in t ed

b y

t h e

I n s u r e r

t o

t a k e

o v e r

and

conduct

a n y

proceedings

a r i s i n g

ou t

o f

o r

r e l a t i n g

t o

c l a i m

a g a i n s t

t h e

I n s u r e d .

The policy defines 'the Practice' as follows:

' ( h )

"The

Prac t ice"

means

t h e

p r i v a t e

p r a c t i c e

o f

s o l i c i t o r

c a r r i e d

b y t h e F i r m s o l e l y on

I t s own

b e h a l f

and

i n c l udes

any

personal

appointment

o f

Pr inc ipa l

o r

Employee

t o

a c t

a s

d i r e c t o r ,

s e c r e t a r y

o r

o f f i c e r

o f

body

c o r p o r a t e

o r

a s

t r u s L 2 e ,

e x e c u t o r ,

a t torney-under-power

o r

t a x

a g e n t ,

b u t

o n l y

where

any

f e e

o r

o t h e r

reinunera t i o n from

such

appointment

i s payable

t o

t h e

F i r m

o r ,

where

t h e r e

i s

f e e

o r

o t h e r

remunera t ion ,

t h e

F i r m

e x p r e s s l y

approved

t h e

appo in tmen t ,

b u t

does

no t

i n c l u d e :

i i )

a c t l n g

i n

t h e

c o u r s e

o f

?:?p1 cj?:le:?t _hj/ an

elnpl o y e r

who

i S

n o t

s s l i c i tor

In p r i v a t e

p r a c t i c e ;

o r

( i i) a c c e p t i n g

moneys

f o r

i n v e s t m e n t ,

o r

making

i n v e s t m e n t s ,

o t h e r

than

a s

t r u s t e e

and

i n

s t r i c t

accordance

w i t h

t h e

r equ i remen t s

o f

t h e Law

I n s t i t u t e

o f

V i c t o r i a

and

t h e

A u s t r a l i a n

Secur i t i e s Commission. '

The exclusions from liability of the appellant include

the following:

' ( i i )

a r i s i n g

o u t

o f

any

t r a d i n g

o r

personal

d e b t

i n c u r r e d

b y any

In sured ;

V )

under

o r f o r

breach

o f

any

warranty ,

g u a ~

ai l tee

o r

indernni t y g i v e n

any

In sured

o t h e r

t han

a s

agent

f o r

and

w i t h

t h e e x p r e s s

a u t h o r i t y o f

c l i e n t ;

(V)

a r i s i n g ,

i n whole

o r

i n p a r t ,

d i r e c t l y

o r

i n d i r e c t l y ,

from

o r

brought

about

b y

t h e

d i s h o n e s t y

o r

f r a u d u l e n t

a c t

o r

ornission

o f

any

I n s u r e d ,

o t h e r

t han

l i a b i l i t y f o r

any pecun iary

l o s s from

any

d e f a l c a t i o n

committed

b y 2.7

Employee

t o

t h e

e x t e n t

t h a t

t h e

S o l i c i t o r s '

Guarantee

Fund

i s no t

l i a b l e

t o pay

compensat ion

f o r

t h a t

l o s s ;

(X)

a r i s i n g

ou t

o f

any

i n v e s t m e n t

made

a f t e r

December

1 9 9 2 ,

o r

a n y

a d v i c e ,

r e p r e s e n t a t i o n ,

recommendation,

endorselnen t

o r

op in ion

g i ven

o r

made

a f t e r

December

1 9 9 2

f avour ing

I nvt?s

t : ~ l i 3 7

a n y

fund,

schern?,

bus-iness, ,jrrsng?inent or en t i t y i n which at ar i y z-eievant t.iine there was a Related

I,; ce:-?s c I :?cl u d i ng investment by [%lay of 3

loan iio dny such fund, scheine, business,

ar: 3ngerne. t

or ent: t y ; '

The expression 'Related Interest' is defined as meaning

any interest beneficially held, whether directly or

indirectly, through any firm, company, trust or other entity,

by or on behalf of any one or more of the firm, any principal

or any relative of any principal.

The word 'principal' is defined to mean, where the practice is carried on by a firm a partner of the firm and, where the practice is carried on by a sole practitioner that practitioner and, where the practice is carried on by an incorporated practitioner a director or employee of that

incorporated practitioner with the right to participate in

distributions of profit of that incorporated practitioner.

There are many decided cases on the question of what constitutes the practice of a solicitor. We were referred to a large number of them in the course of argument and in the written submissions of counsel for both parties. What is inportanL, however, is to remember that we are considering the

scope of ;ne practice of a solicitor in the i990s, in

particular in Australia. The scope of a solicitor's practice

has widened considerably in recent time, reflecting the

increasing involvement of the Commonwealth Parliament, the

Parliaments of the States and Territories and their respective Executive Governments in human affairs. Virtually nothing

today is free from the influence of leyislation c r crcc:.s:cns

of the Executive Governments and administration. Necessarily, therefore, solicitors are involved in advising their clients in these burgeoning areas of government activity, appearing

for them in court cases and instructing counsel.

It is well known and has been so for many years that

some solicitors accept appointments to the boards of companies

including blue chip public companies. Indeed, this is

expre-ssly recognized by the insurance policy in this case in paragraph (h) of the definition of 'practice' mentioned earlier. Work of solicitors in aavisory matters ranges from advice in relation to complex international financial transactions to the country solicitor who advises his or her client on matters that are perhaps not strictly within the scope of the solicitor in the usual sense but include, for example, certain advice with respect to investments. The country solicitor is usually a respected figure whose advice is valued by his clients and whose wisdom is respected.

I say all this because it is important not to take a narrow view cf the r2le of a solicitor in modern times or the scope of a solicitor's practice. This role of a solicitor must also be reflected in the interpretation of insurance policies between the solicitor and the insurer.

There must, however, be some point reached where the solicitor ceaseq to engage in his practice as a solicitor and enter other areas of activity, particularly business activity. This case is an excellent example of the grey dividing line between the two.	,
The point of central importance is that the insurer of the respondents is the Solicitors' Liability Committee, the body established for the very purpose of providing
professional indemnity insurance to solicitors, thus reflecting ~ h e Victorian Parliament's view that it is in the interests of the community as a whole, clients and solicitors
themselves, that indemnity insurance of this kind must be provided in the age in which we live. Although this does not call for any narrow view of the scope of the insurance policy with which this case is concerned it does focus attention upon the fact that it is truly the practice of a solicitor that is central to the resolution of the question befare this Court, a

practice which as I have said calls for a broad and liberal

definition.

It is, however, important to view the activities of the respondents as a whole, although with particular relevance to the transactions with which this case is concerned.

'l'ne primary Judge concluded that the retainer accep-d

by Messrs Gray and Winter in relation to the acquisition of

the Kiwi Fruit orchard was within the scope of their practice as solicitors. Hls Honour said t h ~ t he reached this conclusion on the basis of eleven findings to which I shall now turn. Many of these findlngs were challenged on one basls or another by counsel for the appellant.

(i) Mr Gray and later Messrs Gray and Winter had a long established practice in the field of providing legal advice to clients in relation to tax minimization.

This statement is not challenged, but c~unsel for the app~llant submitted that it said nothing about the question whether the activities of Messrs Gray and Winter with which this case is concerned were within the scope of a solicitor's practice.

(ii) That their practice was a legitimate activity for a firm of solicitors to engaqe in.

This statement was not challenged.

(iii)In the course of their practice they had on a number of

' 4

occasions before November 1989 performed services in relation to tax minimization schemes on instructions from Mr Hedigan and other barristers with whom Mr

Hedigan was associated.

This statement was not challenged.

(iv) When the taxation laws changed so as to render unsuitable the type of schemes previously used to minimize tax, Messrs Gray and Winter directed their attention to other lawful methods of achieving tax savings.

This statement was not seriously challenged.

(V) In their past dealings with Mr Hedigan and the other

barristers with whom they had an association, Messrs

Gray a1?3 Winter held themselves out as solicitors and conducted cheir dealings in that capacity.

This statement was not challenged except that it was submitted that the real question was whether the activities with which tl~is case is concerned coula be said to have been the conduct of solicitors in that capacity.

(vi) Although the Kiwi Fruit scheme differed from previous

schemes involving the acquisition of commerc ;.a1

properties in that previously Messrs Gray and Winter had

acquired only an option, the substance of the Kiwi Fruit

scheme was essentially the same as the earlier schemes

in that it involved the purchase of property and the

financing of it from an outside source.

This statement kas not challenged by counsel for the appellant except as to its relevance.

(vii)At no stage did Messrs Gray and Winter claim to have

acquired any personal interest in the properties the subject of the Kiwi Fruit scheme. 'They referred ;o Mr Hedigan tk.2 offer to on-sell at a substantial profit.

Again, this statement was not challenged, but its relevance was questioned.

(viii) Messrs Gray and Winter played no part in organizing the syndicat:e which purchased the property. 'I'his was <!one by ;4r Hediyan. When >lr Gray expri?.ssed an

~nteres;

in being involved he was rebuffed.

Counsel for the appellant submitted that this finding was in error because Messrs Gray and Winter did everything to put the syndicate together. There was no aspect of it in which they were not involved. It was said that Mr Hedigan did speak to the other barristers about it, but it was Mr Winter who organized the finance.

In my opinion this submission of counsel for the appellant is correct. The facts establish that Messrs Gray and Winter were the primemovers in organizing the syndicate including the purchase of the property which formed the basis

of the Kiwi Fruit scheme.

(ix) Financial contributions made by the barristers in relation to the Kiwi Fruit scheme were directed to Messrs Gray and Winter who paid them into thL trust account which they were required to maintain as practising solicitors.

Counsel for the appellant said there was only mdrginal evidence to support this; but in any event it did not matter because it threw little, if any, light on the true analysis of

the activities of Messrs Gray and Winter with which this case

is concerned.

(X) Although Messrs Gray and Winter left themselves in a

vulnerable position by the manner in which the rrcperty

was acquired, the transaction was carried through to

completion in the manner initially planned, and they	! I
l
made no profit other than the ayreed fee.	l

Counsel for the appellant used this finding to support

his argument that the payment of the agreed fee to them was

more consistent with the~i activities being outside the scope

of the practice of a solicitor than within it.

(xi) The sole purpose of the transaction was to enable Mr Hedigan and the other barristers enlisted by him to obtain a financial advantage by taking part in a tax

incentive

scheme.

1 1

Counsel for the appellant said that this was an

irrelevant finding because the question is whether all that

was done by Messrs Gray and Winter was within their practice

as solicitors.

It was submitted on behalf of the appellant that his Honour really asked the wrong question in making these eleven findings of fact.

In my opinion, when the whole of the evidence relevant to the characterization of the activities of Messrs Gray and Winter is examined, the following facts are established:

fa) They promoted and sold commercial properties to

prospective purchasers.

(b) They entered into contracts of sale for the purchase of

properties without having instructions from clients to do so and for the purpose of nominating another purchaser; indeed, for the purpose of promoting partnerships and to recruit

partners in syndicates tc purchase the properties.

and a risk fee which ranged from 7.5% to 101 of the purchase

price of the property acquired and syndicated.

(d) The s~ndication

work was carried out, not by Messrs Gray

and Ninte~:

<:ke!ns~;.~~e:;, LE'; :;y comps,!!;es cwneu or cont roiled by

them:

the

two

p r l ~ ~ c i p a i

companies ased were Acstralian

Investment Management (Holdings) Pty Ltd and Graywinter

Properties Pty Limited.

(e) From time to time they expressed opinions concerning the

value of properties to be purchased.

(f) They gave forecasts and made predictions of values of

properties which they were examining for the purposes of

syndication.

(g) They gave forecasts and made predictions of changes in

values of properties in the future.

(h) They speculated in the property market by searching for

and locating properties being sold, for the purpose of

approaching prospective purchasers to acquire the properties.

These are the relevant findings by way of background which it is necessary to have in mind when considering the activities of Messrs Gray and Winter with which this case is concerned.

As mentioned earlier, the claims pleaded against Messrs

Gray and Wlnter b y the barristers in the action in this Court

which led to the settlement fell into three categories: first a claim pursuant to the F a i r T r a d i n g Act 1 9 8 5 (Vic); secondly, a claim in negligence; and thirdly, a claim for breach of fiduciary duty.

It is e~s~iltial

to examine the nature of these claims

because it was the making of them which led to the settlement

on 30 August 1994 of the claim whereby Messrs Gray and Winter paid the barristers $500,000. There is no other way of determining what the settlement monies were paid for.

The allegations in respect of the claim pursuant to the Victorian F a i r T r a d i n g Act were that Messrs Gray and Winter were beneficially interested in and controlled Covent which was the corporate vehicle used by Messrs Gray and Winter to purchase the relevant land for the Kiwi Fruit schene together

with the orchard business and plant and equipment relating to the conduct of the orchard. The barristers and Messrs Gray and Winter agreed that the barristers would assume Covent's obligations under the contract for sale. In order to induce the barristers to enter into the agreement Messrs Gray and Winter made representations concerning the anticipated yield

of the orchard, the cashflow to be produced by it and the

value of the land and orchard.

r t was alleged that the barristers relied on the representations much of which was false, misleading and deceptive or likely to mislead or deceive and as a result they

suffered damage.

I paase at chis point to observe that none of these representations could be said to have been made by Messrs Gray and Winter in the course of their przetice as solicitors. Plainly they were made as syndicate promoters.

The claim in negligence was based on the same facts that support 'the claim under the Fair Trading Act.

The claim for breach of fiduciary duty was also based on substantially the same facts as the other claims, but were said to give rise to a fiduciary duty to make full and fair disclosure of all matters within the knowledge of Messrs Gray

an? "'inter which were material to the making of a decision by the barristers whether or not to participate in the Kiwi Fruit scheme.

The circumstances in !which an appellate court can

+ .

reverse the :L!-:din7s zf fa8zc of a trial Judge are well established. The critical issues of fact do not turn on the credibility of any witness in this case. Object~ve facts and the inferences to be drawn from them are the nucleus of the factual matrix on which this case turns: see Warren v

Coombes

(1979) 142 C L R 531.

When the background facts mentioned earlier are

considered in the light of the allegations in the claim by the

barristers against Messrs Gray and Winter which led to the

settlement, in my opinion the conclusion is inevitable that the activities of Messrs Gray and Winter were not part of a practice of a solicitor.

The 'practice' as defined in the policy means the

private practice of a solicitor carried on by the firm of Gray

& Winter. I do not think the activities with which they were

concerned that led to the claim against them by the barristers and then the ultimate settlement answer this description. They were engaged in the ' .siness of syndicatinq property transactions. Any work which they did in relation to that as solicitors was peripheral to the claims made against tnem. The centre oL activity was property syndication.

In my opinion the proper conclusion to be drawn from the evidence on wlhich the case t~rns, in order to characterize the true nature of the relevant activities of Messrs Gray and Winter with which this case is concerned, is that the liability incurred by Messrs Gray and Winter in settling the claim for damages brought against them by the

five barristers was not incurred in connection with cheir

practice as solicitors.

That leaves the cross-appeal; but in the light of my

findings concerning the appeal the issues raised by the

cross-appeal do not arise.

I propose the following orders:

1. That the appeal be allowed.

2. That the cross-appeal be dismissed.

3. That the orders of the learned primary Judge be set aside.

4. That the application which commenced the proceeding at first instance be dismissed.

5. That Messrs Gray and Winter pay the costs of the appellant of ihe proceeding at first instance, including any reserved costs, and the appellant's costs

of the appeal and cross-appeal.

I hereby certify that this and

the preceding forty-one (41) pages are 5 true copy of the reasons tor judgment herein of

the

H o ~ o ~ r a b i e

Justice Lockhart

I N THE FEDERAL COURT OF AUSTRALIA

)

VICTORIA DISTRICT REGISTRY

)	No. VG 546 of 1996

)

GENERAL DIVISION

)

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

THE

SOLICITORS'

LIABILITY

COMMITTEE

Appellant

(Cross-responden t)

AND

GARRlCK

LEWIS

GRAY

and

MICHAEL FREDERICK WINTER

Respondents

(Cross-appellan ts)

JUDGES;	LOCKHART, BEAUMONT & BURCHETT JJ.
PLACE:	SYDNEY (HEARD IN MELBOURNE)
DATED:	21 JULY 1997

INDEX TO REASONS FOR JUDGMENT

BEAUMONT and BURCHETT JJ

1NTRODUCTION..

........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......

THE STATUTORY CONTEXT OF THE INSURANCE COVER ........ ........ ........ ........ ...

THE TERMS OF THE INDEMNITY

........ ........ ........ ........ ........ ........ ........ ........ ........ ........

THE CASES PLEADED BY MESSRS GRAY AND WINTER

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE ORDERS MADE AT FIRST INSTANCE IN THE PRESENT PROCEEDINGS..

......

. 9

THE APPEAL AND THE CROSS-APPEAL

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE REASONING AND FINDINGS MADE AT PIRST INSTAVCE

RELEVANT TO THE QUESTIONS ARISING IN THE APPEAL

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

His Honour's description of the character of the claims made by the

Partners against Messrs Gary and Winter..

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I .

The Partners' claim pursuant to the Fair 7radinlg Act 1985 (Vic)

. . . . . . . . . . . . . . . . .

The

Partners'

claim

negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l l

3 .

The Partners' claim of breach of fiduciary duty

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 I

His Honour's findings of fact

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 .	As to the practice of Messrs Gray and Winter	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
2.	As to the acquisition of the kiwi fmit orchard	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13

3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

d .

As to the role of Riordan & Partners

4.	As to the execution of the contracts by the Partners	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
5.	As to the retainer.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

His Honour's reasoning and conclusions on the legal questions

........ ........ ........ ....

1 .

The

expert

evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 .

The test

what

amounts

the

"practice"

law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 .

His

Honour's

application

this

test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 .

The ultimate question: whether the liability incurred in the settlenient of ttle Kiwi Fruit Action arises "in connection

with"

the

solicitors'

practice . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE

COMMITTEE'S

GROUNDS

APPEAL

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE CONTENTIONS OF MESSRS GRAY AND WTNTER ON THE

APPEAL ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .

' 1

CONCLUSIONS ON THE APPEAL

........ ....

........ ........ ........ ........ ........ ........ ..

The general concept of a solicitor's professional legal practice contrasted with the conduct of entrepreneurial activities and other

businesses .......

........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......

Decisions of the High Court of Australia

........ ........ ... ........ ..

........ ........ ........ ........ ...

Decisions of this Court ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. 25

Decisions of the New South Wales Court of Appeal ........ ........ ........ ........ ........ ........ 26

Decision of the Supreme Court of Victoria ........ ........ ........ ........ ........ ........ ........ ......

Decision of the Supreme Court of Queensland ........ ........ ........ ........ ........ ........ ........ . 28

The position in England ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... 28

Decisions of United States Courts

........ ........

....

........ ........ ........ ........ ........ ........ .

A Canadian decision

........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....

Decisions dealing with unlicensed persons acting in legal matters ........ ........ ........ .....	31
The rules of professional conduct and the changing profile of
lawyers

........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....

........ ........ ........ ........ ........ ........ ........ ........ ........

Dual activities of other professionals

........ ........ ........ ........ ........ ........ .......

The meaning of the present insuring provisions

Should the relevant activities of Messrs Gray and Winter be

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

characterised as "professional" or "entrepreneurial"?

The ultimate question: whether the liability incurred in the settlement of the Kiwi Fruit Action arises "in connection with" the

........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...

solicitors' practice

CONCLUSIONS

THE

CROSS-APPEAL

. . . . . . . . . . . . . . . . . . . ..

........ ..,,.,....

........ ........ .......

ORDERS PROPOSED . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

. . . . . .....

. . , . . . . . .

. . . . . . . ., ....

........ . .

IN THE FEDERAL COURT OF AUSTRALIA

)

VICTORIA DISTRICT REGISTRY	No. VG 546 of 1996
GENERAL DIVISION

l	ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

THE

SOLICITORS'

LIABILITY

COMMITTEE

Appellant

(Cross-respondent)

AND

GARRICK

LEWIS

GRAY

and

MICHAEL FREDERICK WINTER

Respondents

(Cross-apbellants)

JUDGES:	LOCKHART, BEAUMONT & BURCHETT JJ.
PLACE:	SYDNEY (HEARD IN MELBOURNE)
DATE:	21 JULY 1997

REASONS FOR JUDGMENT

BEAUMONT and BURCHETT JJ.

INTRODUCTION

The respondents and cross-appellants, Garrick Lewis Gray and Michael Frederick Winter, sued the appellant and cross-respondent, the Victorian Solicitors' Liability Committee ("the Committee") on several claims made under a contract of professional indemnity insurance ("the Indemnity"). The Committee denied liability on the ground that each of the claims fell outside the terms of the insurance cover. A Judge of the Court held that Messrs Gray and Winter were entitled to succeed on part of their claim and made orders accordingly, including an order that Messrs Gray and Winte~ recover judgment against the Committee in the sum of

$500,000. It was also declared that the Indemnity extended to costs incurred by Messrs Gray

and Winter in other proceedings. The Committee has appealed from these orders. However, Messrs Gray and Winter failed in respect of their claim to be indemnified for certain other costs, to be identified below, and they have cross-appealed in respec: of these other costs.

The central questions in the litigation, both at the trial and before us, concerned the true construction of the cover provided by the Indemnity. There was little, if any, room for dispute about the background facts, notwithstanding their apparent complexity. But the parties were at issue as to the meaning of the insuring clauses and as to their applicability ir, the present circumstances. Specifically, the primary question which arose W?? whether the Indemnity covered the liability of Messrs Gray and Winter to a group of investors who claimed that they

had been induced to acquire a business by the alleged misleading conduct or negligence of Messrs Gray and Winter; and that Messrs Gray and Winter had, in that connection, acted in breach of fiduciary duties owed to the investors. A secondary question, which grounds the cross-appeal, arose as to whether the cover extended to the costs of certain collateral proceedings.

THE STATUTORY CONTEXT OF THE INSURANCE COVER

The indemnity was issued pursuant to the provisions of the Legal Profession Practice Act

1958 (Vic.). Reference should be made to this statutory context. As Samuels JA. (with

whom Mofitt P. and Glass JA. agreed) said in Miltenburg v AMP Fire General Insurance CO,

U (1981) 1 ANZ Ins Cas 60-442 (at 77, 327):

"What is in contention here is the construction of the policy and, although it is a statutory policy which the employer was required to have and the defenhnt compelled to issue in the terms laid down by the Act, it is to be construed according to its terms; although it is legitimate to take into account the provisions of the Act and its legislative intention. "

See also Brakespeare v The Northern Assurance CO Ltd (1 959) 10 1 CLR 66 1 at 668	and
Insurance Ltd v Bankstown Football Club Ltd (1997) 141 ALR 618 at 634-5.

In moving the Second Reading of the Leaal Profession Practice (Amendment) Bill (Vic.) in the Legislative Assembly the Minister said (Hansard, 3 1 October 1985 at 1573):

"Finally, and perhaps the most important aspect of this Bill, are the provisions relating to the Law Institute of Victoria's provision for insurance to its practisina members against professional negligerrce claims.

Professior~al indcmnih) insurance is present@ provided bv means o f a master policv arranged through insurance brokers in Australia, principallv Lloyds o f

London. The claims experienced in a number of recent vears has resulted in a

sharp escalation in premiums. Earlier this year, the Law Institute became

aware that the premiums for 1986 would be increased by 125 percent if current arrangements were to continue. These premiums would be so high as

.'.- raise serious questions about the abilih) o f many suburban and country

practitioners, in ~~articular. to ajjcord them. They would also pose considerable barriers against entry into the profession, thereby reducing competition. Conse uentlv. the Law Institute q f Victoria decided to

ir~vestiaate

the ~ossibilitv

o f a self-insurance scheme as a means qf reducing

the extent o f ~remium

increase in 1986 and subseauent years." (Emphasis

added)

The Minister added (at 1573):

"The scheme proposed would make use of an exemption under the Commoiuealth Insurance Act. As from 1 Januaiy 1986, the Law Institute would be reauired bv the law q f Victoria to carn, on the business of insuring

solicitors and former solicitors. A committee would be established to be responsible for the investment of the premiums, the handling of claims, and the arranging of stop loss insurance. (Emphasis added).

The amorrnt of the contributions - which will be paid at the time of solicitors applying for annual practising certr$cates - and the level of cover will be prescribed by the Governor in Council on the recommendation of the Law Institute and the committee established to manage the scheme. "

Division 5A (ss.88A - 88D) of Part V of the Legal Profession Practice Act deals with

"Professional Indemnity Insurance" relevantly as follows:

' ,

The Committee is required (a) to carry on the business of providing professional indemnity insurance for solicitors, former solicitors and firms of solicitors; and (b) to undertake liability under contracts of professional indemnity insurance entered into in accordance with that Division with solicitors, former solicitors and firms of solicitors (~.88H(1)).

"Professional indemnity insurance" is relevantly defined (by s.88A) to mean -

"[I]nsurance against loss arising from claims in respect of civil

liability incurred by -

(a)

a solicitor. former solicitor, or -firm of solicitors in connexion

with -

ctice or former ~ractice

o f the solicitor or-firm;

(ii) anv trust o f which the solicitor is or was an executor or trustee; or (Emphasis added)

The Committee, with the approval of the Council of the Law Institute, may determine:

"(a)	the amount of contribution payable by classes oj' solicitors, former solicitors or Jirms of solicitors for each class of contract of professional indemnity insurance; and
(b)	the period for which professional indemnity insurance is provided for each class of contract; and
(c)	the date on which coiitribzrtions are payable; and
(4	due date; and
the rate of interest payable on contributions not paid by the

(e)

the date on which the number of employees of a solicitor or firm of solicitors should be assessed for the purpose of determining the contribution payable by /hat solicitor or j rm cfsolicitors; and

any other terms and conditions of any c l ~ s s

of contract of

professional indemnity insurance. "

(Section 88H(2A)).

A practising certificate must not be issued to a solicitor unless the solicitor-

"(a)

has entered into a contract of professional indemnity insurance for thdt year with the Committee and paid to the Committee the contribution to the Fund payable in respect of that contract; or

(aa)

is a solicitor for whom a contribution is required to be pafd by

another person and the contribution has been paid;

(6)

is exempt from compliance with this section. "

(Section 88K - emphasis added).

A contract of professional indemnity insurance entered into between the Committee

and a solicitor or firm of solicitors in respect of a period entitles the solicitor or firm, subject to the terms and conditions of the contract, tc indemnity fiom the Fund in respect of claims against the solicitor or firm first made during that period (s.88L).

The statutory definitions of "solicitor", "practice as a solicitor" and "the practice of a solicitor", for the purposes of Division 5A of Part V, should also be noticed (see s.51(1)). Relevantly for our purposes, a "solicitor" means: (i) a "practitioner" (defined as a "person who has been admitted and enrolled as a barrister and solicitor of the Supreme Court and who continues to be on the roll") practising as a solicitor within the meaning of Part V11 either solely on his, her or its own account or in partnership with any other practitioner; (ii) a "practitioner" who is employed by and in connexion with the practice of a "solicitor" or a firm of such "solicitors": and (iii) any other "practitioner" not engaged in practice exclusively as a barrister who is declared by the Council of the Institute published in the Government Gazette to be a solicitor, or who comes within any class of practitioners so declared by the Council to be solicitors for the purposes, inter alia, of Division 5A. For present purposes, the expressions "practise as a solicitor" and "the practice of a solicitor" have corresponding interpretations.

THE TERMS OF THE INDEMNITY

The terms of the relevant insuring clauses of the present cover, which is described as a

"Contract of Professional Indemnity Insurance", are as follows:

The Insurer will indemn~fy

the Insured against any civil liability in

"(a)

connection with the Practice in respect of which a claim is first made

agair~st

/he firm d14rit1g

/he Period of lnstrrance. (Emphasis added)

(b)

7'he Insurer will also:

(i)

itidemnr& the Insured against costs and expenses reasonab[y

and necessarilv it~curred in defendina anv proceedings arising

out q f a claim in respect of which the Insurer is liable to

indemnrfy the Insured, where such costs and expenses are

incurred after not~fication of the claim to the Inmrer and

before the Insurer elects to take over the defence of the

proceedings; (Emphasis added) and

(ii) pay the costs and expenses of the solicitors appointed by the Insurer to take over and conduct any proceedings arising out of or relating to a claim against the Insured "

The "Insured" is relevantly defined to mean:

"(0

the Firm;

(ii)

each Principal;

(iii)

(iv)

each service, administration, trustee or nominee company the sole business of which is conducted in connection with the Practice; and ..

(v)

. . S .

The "Firm" is relevantly defined to mean:

(ii) where the Practice is carried on by a firm - the firm as constituted from time to time; and

(iii) ...."

The policy defines "the Practice" thus:

"(h)

'The Practice' means the private wractice q f a solicitor carried on b y the Firm sole(v on its own behalf and includes anv personal amointment o f a Principal or Employee to act as a director, secretary or officer o f .- body corporate or as a trustee. executor, attornev- tmder-power or tax agent. but only where any fee or other remw~eration -from such ointment is crya able to the Firm or, where

there is no-fee or other remuneration. the Firm expressiv approved the

up-pointment, but does not include:

(i) acting in the course gf emplo-vment b.v an employer who is not

a solicitor in private practice:

(ii) accepting mone-vs for investment, or making investments. other than as a trustee and in strict accordance with the requirements o f the Law Institute o f Vrctoria and the Australian ,5'eczaities Commission. " (Emphasis added)

The exclusions from liability in the Indemnity include the following -

' i i )	[claims] arising out of any trading or personal debt incurr~d	by any
Insured;

(iv) [claims] under or for breach of an1) warranty, guarantee or indemnity given by any Insured other than as agent for and with the express authority of a clierit;

(v) [claims] arising, in whole or in part, directly or indirectly, j?om or brought about by the dishonesty or fraudulent act or omission of any Insured, other than liability for any pecuniary loss from any defalcution commifteci' UY an Employee to the extent that the Solicitors'

Guarantee Fund is not liable to pay compensafion

for that loss;

(X) [claims] arising out of any investment made after 31 December 1992, or any advice, representation, recommendation, endorsement or opinion given or made after 31 December 1992 favouring investment, in any flmnd, scheme, business, arrangement c;. entity in which at any relevant time there was a Related Interest, including investment by way of a loan to any such firnd, scheme, business, arrangement or entity;" (Emphasis added).

(The events now in question occurred in 1989 and 1990).

"Related Interest" is defined as follows:

" 'Related Interest ' means any Interest beneficially held (whether directly or

indirectly throlrgh any firm, company, trztst or other entity) by or on behalf of

any one or more of:

6) the Firm;

(ii) any Principal;

"Principal" is relevantly defined to mean:

"(i)	...
(ii)	where the Practice is carried on by a firm - a partner of that firm; and
(iii)	.... "

As has already been observed, reference should be made to the statutory context in which the Indeinnity was prollided but any question of interpretation of the terms of the Indemnity is, in the end, to be resolved by reference to the language of the Indemnity (see Brakespeare v The Northern Assurance Co. Ltd above at 668). Yet it is of assistance here to consider the statutory context, origins and rationale of the Indemnity, noting that, in any event, there appears to be no material contradiction at all between the provisions of the statute and those of the Indemnity (see CIC Insurance Ltd v Bankstown Football Club Ltd above at 634-5).

TIIE CASE PLEADED BY MESSRS GRAY AND WINTER

It is necessary to identifL the nature of the claims that were made upon Messrs Gray and Winter by the investors in respect of which Messrs Gray and Winter claimed to be

indemnified.

' .-

By their statement of claim in this matter, Messrs Gray and Winter pleaded the foregoing

terms of the cover provided by the insuring clauses in the Indemnity, and then referred to civil proceedings brought against them in this Court (No.VG479 of 1993) by five senior barristers, John Joseph Hedigan, Paul Marshall Guest, Peter John O'Callaghan, Allan Jones Myers, and Alex Chernov ( "the Partners") as follows:

"1 0.

By [the Partners '] Statement of Claim, [the Partners] claimed against Gray & Winter in the saidproceedings that Gray & Winter was liable

to [the Partners] for

damages in circumstances where:

(a)	[the Partners] and Gray & Winter entered into an agreement in respect of which [the Partners] assumed the obligations of a company Covent Pty Ltd under a Contract of Sale being [certain]. .. land [at Nathalia].. . artd in respect of which a fee of $1 26,500.00 woztld be paid to Gray & Winter;
*(b)*	in order to induce [the Partners] to enter into the agreement, Gray & Wiriter misrepresented to [the Partners] matters concerning the yield of a kiwi fruit orchard business conducted on the said land, the profits that would E ; derived from the operation of such business and the market value of the land and/or orchard thereon;

(c)	Gray & Winter pay to [the Partners] the sum of $500,000.00 in accordance with the settlement agreement;
(d)	[the Partners I / costs of and incidental to the said Motion be paid by Gray & Winter.

19. On 20 September 1994, Gray & Winter issued Notices of Appeal agaiti.rt the saidfir~dir~gs and Orders oj. . Olney [L] in Appeals No. VG 314 of 1994 and VG 315 of 1994 respectively.

20.

On 6 October 1994, the F1111 Court

... dismissed the said Appeals with

costs.

21. In the prernwes, the said Motion and further proceeding No. VG 293 of 1994 and t,$e Appeals thereon numbered VG 314 and VG 315 of I994 respectively were proceedings brought as purt of Gray & Winter's defence of [the Partners '] claim against Gray & Winter. "

?articulars of alleged loss and damagt: were then given by Messrs Gray and Winter against the

Committee as follows:

The sum of $500,000.00 paid andlor payable by Gray & Winter to the Partners pursuant to the settlement agreement.

Gray and Winter's costs of and incidental to their defence of the Partners' claim in proceeding No. VG 479 of 1993.

The costs Gray and Winter were ordered to pay the Partners in respect of proceeding

No. VG 293 of 1994.

The costs Gray and Winter were ordered to pay the Partners in respect of the Appeals

No. VG 3 14 and VG 3 1 5 of 1994 respectively.

THE ORDERS MADE AT FIRST INSTANCE IN THE PRESENT PROCEEDINGS

As has been noted, the learned primarv Judge ordered that Messrs Gray and Winter recover judgment against the Committee in the sum of $500,000. His Honour hrther declared that Messrs Gray and Winter were entitled to be indemnified by the Committee for costs and expenses reasonably and necessarily incurred after 23 July 1993 (being the date of notification of the insurance claim) in defending proceeding No. VG 479 of 1993 in this Court. But no declaratory or other order was made on the submission by Messrs Gray and winter that they were entitled to be indemnified in respect of the other proceedings mentioned in their statement of claim.

In Entente Mineral Co. v Parker 956 F 2d 524 (5' Cir. 1992), a law firm was held not liable when a lawyer bought a royalty interest from a client, thus interfering with the client's contract with the plaintiff.

In Sheinkopf v Stone 927 F 2d 1259 (l" Cir. 1991)' a law firm was held not liable for the acts of a lawyer who solicited a "non-client's" investment in an outside business venture. Selya J said (at 1265):

"Hunian beings routinely wear a multitude of hats. 7he-fact that a person is a law-ver, or a phvsician, or a dumber, or a lion-tamer, does not mean that even, relations hi^ he undertakes is. or can reasonab(v be perceived as being&

in his professional capacig. Lawyers/physicians/plumbers/lion-tamers

sometimes ac; ,rs l~~*sbatids,

or wives, or fathers, or daughters, or sports fans,

or investors, or businessmen. The list is nearly infinite. To imply an attorney- client relationship, therefore, the law requires more than an individual's subjective, zlnspoken belief that the person with whom he is dealing, who happens to be a lawyer, has become his lawyer. If any such belief is to form a foundation for the imp1icr;ltion of a relationship of trust and confidence, it must be objectively reasonable under the totaliv of the circz~rnstances."

(Emphasis added).

See also First Bank & Trust Co. v Zanoria 302 SE 2d 674 (Ga. 1983); Shelton v Fairley 356

SE 2d 917 (NC App 1987); Heath v Craighill. Rendleman. Inele & Blythe PA 388 SE 2d 178

(NC App 1990); Husted and Husted and Husted v McCloud 450 NE 2d 491 (Ind. 1983); Reiner v Kelley 457 NE 2d 946 (Ohio App 1983); Roach v Mead 722 P 2d 1229 (Or. 1986); Eisenberg v Gagnon 766 F 2d 770 (1985).

A Canadian Decision

Hazlewood v Travelers Indemnity Company of Canada [l9791 2 WWR 271, was an appeal from a judgment at first instance that a solicitor acting in the capacity of a commission agent was not entitled to claim under a policy of insurance covering his omissions in his capacity as a lawyer. The appellant had invested moneys on instructions from a client. They were misused and lost. The client successfblly sued the solicitor on the basis of a contractual obligation as a guarantor of the investment. The British Columbia Court of Appeal dismissed the appeal on the basis that the appellant had not met the burden of showing that the loss was a loss arising out of the performance of professional services.

Decisions dealing with unlicensed persons acting in legal matters

As has been seen, the learned primary Judge in the present matter relied on United States cases dealing with contempt of court for the unauthorised practice of law (see State of Florida v

Sperry, above; The Florida Bar v Town Fla (1965) 174 So 2d 395). We were also referred to

similar decisions in other jurisdictions, e.g. Barristers' Board (WAJ v Palm Management Pty Ltd (1984) WAR 101; Barristers' Board (WA) v Central Tax Services Pty Ltd (1984) 16 ATR 115; Attorney-General (WA) v Ouill Wills Ltd (1990) 3 WAR 500; Auckland District

Law Society v Dempster [l9951 1 NZLR 2 10; and Regina v Nicholson (1979) 96 DLR (3d)

693.

In our opinion, these cases do not address the present question, that is whether, as Brennan J. held in Leary, a distinction should be drawn between a lawyer's professional functions undertaken on behalf of the client on the one hand and, on the other, personal entrepreneurial activities engaged in on the lawyer's own account.

The Rules of Professional Conduct and the Changing Profile of Lawyers

It has been observed that "many clients, particularly commercial clients, require their lawyers to be competent business advisers. These clients expect their lawyer to be commercially aware, to have a good sense of judgment and to be capable of providing prompt practical advice" (The College of Law Sydney, Professional Program: Studv Guide, at para.3-8); see also, to similar effect Disney, Basten, Redmond & Ross, Lawyers at 62-3). It should be, and is, accepted by practitioners that sound legal advice should be practical, and thus should take into account its context, be it commercial, personal or other; this has always been the position at common law and in practice in all common law jurisdictions.

But this is not to say that, ordinarily at least, a solicitor is professionally responsible for giving purely "commercial advice" or suggestions. Indeed, in some situations, the solicitor should not deal with the client at all. In Law Society of NSW v Harvey C19761 2 NSWLR 154, Street

CJ. said (at 171):

"A c~rflict of interest which is avoidable, and ought to be avoided, is that which arises from a deliberate proposal of the solicitor that his client deal with him. [L "for example, a client seeks aid or advice -from a solicitor coricernirlg leridiiig or borrowing. or the acqaisition or disposal or dealing with assets. the solicitor will disregard his prima? duv as a solicitor referred to so trertcharttlv b-v Lord Westbuy, i_f he uses the occasion to become the pary who deals with his client. It can make no d!fference (f he is not a party directly. but the transaction is with a company in which he has an interest. Even the tender of advice to his client to have independent legal advice, although of inzportarice, does not really overcome the objection to the solicitor having proposed, invited or erzcouraged the client to deal with him or his company in the proposed transaction. We need not pause to analyse the differingproblems which arise where the client rejects the advice to seek such irideperident advice, and the solicitor continues to act, or the client acts for himself or where he has independent advice either just for the transaction or has a permarzent new solicitor. In varying degrees the trust of and reliance zrpon the solicitor to act fairly and irideperidently arising from the initial preparedness of the solicitor and client to trade may remain as the reason why the client trltimately deals with the solicitor and not somebody else. It is dflflctrlt to be sure it does not. In the absence qf vety special circumstances, a solicitor who promotes .Ilin!;e!f as the dealer wiih his client ntisuses his position. A solicitor who constant(y promotes dealings with various clients ciearly misuses his position. a:zd puts it beyond his capaciv to observe his primarv dutv to his clients. The price of being a member of an honourable

profe.rsion, whose dirty to his client ought trot to be prejudiced in any degree,

is that a solicitor is denied he freedom to take the benejt of any opport~rnity

to deal w~th persorls whom he has accepted as clients. Therefore, he ought

rreither to promote, suggest nor encourage a client to deal with him, but rather

.sho~rld take all reasonable steps positively to avoid dealing direc~ly, or

indirectly, with his client. There are of course exceptional cases where the

trarrsactiori may be in the special interest of a particzrlar client, but such cases

will be isolated and need to be dealt with [with] cor~scientiozts regard for the

procedures already referred to. " (Emphasis added).

However, the content and application of the rules of professional misconduct cannot be decisive of the present question. (See Mayuire v Makaronis, High Court of Australia, 25 June 1997, unreported, per Brennan CJ, Gaudron, McHugh and Gummow JJ at 13). In most common law jurisdictions, special ethical rules have been framed to deal with a legal practitioner's ethical responsibilities for "law-related services" (see, e.g. The American Bar Association, Model Rules of Professional Conduct (1 994), Rule 5.7 at 85-7; Halsbury, op. cit. para.75). Indeed, the Council of the Law Institute of Victoria specifically permits qualified solicitors to practise as estate agents from the same premises on their undertaking to: (a) maintain two separate trust accounts; (b) place all deposits from the sale of land ir, the solicitor's trust account; (c) appoint the same persons as auditor of both trust accounts; (d) allow Law Institute personnel full access to the estate agent trust account and other records associated with the agency (subject to provisions and restrictions of the Estate Agents Act 1958 (Vic)); (e) maintain in their dealings as estate agents the same ethical standards expected in their capacity as solicitors; and (0 obtain separate insurance cover for real estate agent functions-to a level not less than that of the compulsory professional indemnity insurance required to be carried by solicitors in Victoria.

But, as has been said, whilst ethical considerations can throw some light on the present problem, they cannot be decisive of the question whether, for our purposes, a line should be drawr., as was done in Leary, distinguishing professional fbnctions from entrepreneurial activities. In the present context, that distinction remains valid.

Dual activities of other professionals

A similar distinction (i.e. professicnal versus personal or entrepreneurial) has been drawn in professional insurance contexts beyond the context of legal professional insurance.

-In FA1 General Insurance Co. Ltd v Gold Coast City Council (1993) 7 ANZ Ins Cas 61-153, the Council insured under a professional indemnity policy against any claim "for breach of professional duty in the conduct of the practice [of 'Municipal Authority']". Tht: Council was successfUlly sued for negligence consisting of a misstatement by one of its employees as to the location of a water main. It was held that the claim fell outside the scope of the policy.

McPherson, Davies and Moynihan JJ. said (at 77, 8 12):

"The dejnitior~

of risk and the rneasztre of the obligation to indemnrh in a

professiorlal i~idemriity

policy in terms of breach of professional duty in the

conduct of the practice of M~rnicipal

Airthority requires that effect be given to

the word

'professional', It is rlot everv breach o f d t r ~

in the course o f the

conduct o f the

)v-actice' or

'b~rsine.~.~'

o f 'Municipal Authoritv' which will be

a breach o f professional dtrty.

7he meaning qf 'professional' will, of course

varv with context.

'Prqfessional', however, connotes 'pertaining or

ropriate to a profession ',

'engcwed in one q

f the learned prqfessions '.

The point is ill~rstrated by the decision of the British Columbia Court of Appeal in Chemetics International Ltd v Commercial Union Assurance CO of

Canada l I DLR (.lth) 754. In that case the policy excluded liability in respect

of the rendering of 'professional services '.	The relevant failure was to give
proper operating instructions in a manual.	The manual was prepared by a

qtralzjed engineer.

That was, however, held to be irrelevant to determining

whether the particular irtstr~rction in issue was characterised as a professional service. It was held not to be. The provision of operating instructions was not the provision of professional services; the service was not one which could usually be expected to be provided only by a professional engmeer. It was simply part of a service provided by a vendor to a purchase;. of the particular plant.

This may be contrasted with Baltzam v Fidelity Insurance Company of Canada (1932) 3 WWR 140. There the indemnity was in terms of 'in the practice of his profession '. An injury to a patient because an X-ray table was improperly locked by the doctor was, not surprisingly, held to be within the terms of the indemnity.

In the present case the Respondent 'S servant did no more than conve-v-factual information which was incorrect and upon which it mm, be accepted that a professional~udment was exercised bv those respo.vsible-for the desim o f the Plaintiff's buildina. That. however. did not impart anv 'professional' component to the Respondent's du@ to provide correct information in the circumstances. " (Emphasis added).

In Drayton v Martin (1996) 67 FCR l , an accountant, who was primarily engaged in business as an investment adviser, gave investment advice to a client. The client later made a claim against the accountant, alleging breach of duty. The accountant settled the claim and the question alose whether it fell within the scope of the accountant's professional indemnity policy, and in particular, whether the liability incurred by the accountant was incurred "in connection with" his practice as an accountant.

Sackville J. said (at 34):

"The simple fact of the matter is that, so far as the Draytons were concerned, Mr Martin's advice fo them to invest in the cash -flow plan was, to use his words 'inextricah(v interwoven' with his role as their accountant and his brtsitiess or profession as an accottntant. In practice, the strinpent demarcation identtJied by Mr Williams was blurred, at least in Mr Martin's dealirlgs with the Draytons. His work as the accountant for the tractor business provided the impetus for his recommendation that the Draytons

participate in the tax-driven cash flow plan. His role as an accountant was lrtldertakerl at the same time as his role as an investment adviser. His firnction as at1 adviser, however imperjecrly performed, depended on information obtained as the accozintatlt for the Draytons. Zri these circumstances, it seems to me inevitable that the liability Mr Martin incurred to the Draytons was incurred 'in cotinection with' his practice as an accountant." (Em,,hasis

added).

An appeal to the Full Court by parties involved in cross-claims to the principal proceedings in

Drayton v Martin, above, was dismissed by Davies, Wilcox and Branson JJ. in HIH Casualty

and General Insurance Ltd v FAI General Insurance CO Ltd, 10 February 1997, unreported.	' ,
The Full Court was of the view that the question was one of fact only, that no question of principle was raised, and that there was no good reason for interfering with the trial Judge's findings on the facts.
Wilcox J. said (at 5-6):

"As his Honour said, it was Mr Martin's work as accountant for the Draytons in connection with the tractor business that provided the impetus for his recommendatiorl that they participate in what his Honour called the 'tax

driver? cash flow plan '. . . . Mr Martin says he told Mr Drayton that the plan

'might help to reduce your tax liability. You still have a large amount of money on deposit and you could have tax problems this year and in the

firtzrre l.

He then enlarged on the virtues of the plan.

I think a simple way of testing whether the liabiiity arose out of Mr Martin's

practice as an accountant would be to ask what would have been his position

rf; after referring the Draytons in general terms to the plan, and

recommending it as something for their consideration, he had sent them off to an entirely independent investment adviser who completed the negotiations and signed them up on the plan. Would Mr Martin have been liable? In my view he undoubtedly would have been. I say this because it is quite plain that the plan was only a useful acquisition for the Draytons if the otherwise assessable income of the tractor business was sufficient to support the interest payments that would be required, and indeed to make the incurring of those payments worthwhile. It is clear it was not. At the relevant time the tractor business was operating at a loss G , , , lhere was nothing to indicate :hat, in future, it would receive projits of the dimensions necessary to require consideratiorr of a plan such as this.

In other words, the scheme was jiindamentally flawed from the outset. &l" Martin, as the Drqvtons' accountant, should have known this." (Emphasis

added).

Again, there is nothing in this case that detracts from the drawing of the professionaVentrepreneurial distinction explained in Leary. As we followed the reasoning of Sackville J. and of the Full Court, their Honours have held that the relevant activity was, in truth, professional, either because it was advice given by an accountant wearing an accountant's hat, or because any "commercial" suggestion offered was "inextricably

intertwined" with the technical, i.e. professional, advice. However, in the present case, as will appear below, we are of the view that no technical, i.e. legal or professional, advice was given by Messrs Gray and Winter at all.

The meaning of the p, esent insuring provisions

It will be remembered that the principal provision expressed the cover as an indemnity "against any civil liability in connection with the Practice..."; and that "the Practice" relevantly means "the private practice of a solicitor carried on by the Firm solely on its own behalf...".

There are further provisions to which we will return, but pausing at this point, the provisions mentioned above should, we think, be construed so as to cover liability having some nexus with (i.e. "in connection w i th j the professional hnctions of a solicitoi. (i.e. "the Practice"). In other words, the cover does not extend to liability for an entrepreneurial activity which has no real nexus with the Practice.

This conclusion is supported by the statutory context which, as we have seen, em~hasises the need to provide professional indemnity insurance. Moreover, as has been noted, the professional character of the cover is indicated by its entitlement as a "Contract of Professional Indemnity Insurance".

It is also supported by the unlikelihood that the Indemnity was intended to cover liability for

activity associated with the conduct of a solicitor's practice, when the practice is viewed

as a going business concern. Take the illustration of a solicitor who conducts a practice fiom

prernises- owned by the solicitor, who enters into a contract to sell the premises, but not the

practice, and is alleged to have defaulted in the performance of that contract. In our opinion,

such a claim was not intended to fall, and does not fall, within the scope of the policy, because

such a claim does not arise out of any professional relationsllip.

Do the succeeding provisions of the cover affect this conclusion?

It will be recalled that the definition of "The Practice" went on to include "any personal appointment of a Principal or Employee to act as a director, secretary or officer of a body corporate or as a trustee, executor, attorney-under-power or tax agent, but only where any fee or other remuneration from such appointment is payable to the Firm or, where there is no fee or other remuneraticn, the Firm expressly approved the appointment.. .". This provision is consistent with an interpretation that the scope of the cover is restricted to professional activities, the Firm's involvement in which will be indicated either by receipt of fees, or by the express grant of its approval.

The definition of "The Practice" goes on to exclude "acting in the course of employment by an employer who is not a solicitor in private practice". This is a fbrther indication of an intention to confine the cover to professional activities.

The definition also excludes "accepting moneys for investm-nt, or making investments, other than as a trustee and in strict accordance with the requirements of the Law Institute of Victoria and the Australian Securities Commission". Again, this exclusion is consistent with

the inclusion in the cover of activities having a professional quality, as distinct from

unrestricted entrepreneurial activities.

Reference should also be made to the several specific exclusions from the policy.

In our opinidn, to zxclude ~laims for trading or personal debts and for breach of warranty, guarantee or indemnity (other than as agent for, and with the express or implied authority of, a client) again emphasises the professional character of the cover.

The exclusion, to some extent at least, of claims arising from dishonesty, or from certain investments in schemes involving a "Related Interest" is, perhaps, an equivocal consideration on the present point of interpretation.

When the Indemnity is considered as a whole and in its statutory context, it appeal5 that claims arising from professional fbnctions fall within the scope of the cover, but that claims arising from entrepreneurial activities are not covered.

The learned primary Judge appear!: to have accepted this distinction but only as a matter of principle, since his Honour held that there were no entrepreneurial activities here. He cited (at 36-7) the judgment of Eames J, in Henderson, above, including its reference to "entrepreneurial activities" consisting of the promotion and syndication of investment schemes involving real estate. However, the trial Judge went on to say (at 37) that such activities "have no relevant similarity to the facts of this case". This is suggestive of the view that the activities here should be characterised as professional rather than entrepreneurial. In other words, his Honour so characterised what Messrs Gray and Winter did by an inference drawn from the circumstances of the case. So viewed, it must follow that this is an area in which p n appellate court may review the matter and reach its own conclusions as to the inferences to be drawn from the primary facts found by the learned trial Judge (see Warren v Coombes (1979) 142 CLR 531 at 553). Having given fbll weight to the conclusion reached by the primary Judge, we cannot, with all respect, agree with it for the reasons which now follow.

Should the relevant activities of Messrs Gray and Winter be characterised as

"professional" or "entrepreneurial"?

In our opinion, when the conduct of Messrs. Gray and Winter is considered as a whole, the inference should be drawn that the things they did were d u e as the actions of Lsinessmen, rather than as solicitors. In other words, they acted as entrepreneurs rather than as legal professionals.

There are many indicia to support this inference. Messrs Gray and Winter first heard of the proposal, through Mr Allan. They were prepared to enter into the contract to buy through their corporate vehicle. They were also prepared to terminate that contract. In introducing the proposal to the barristers, they nominated an "acquisition fee" of about 10 per cent of the purchase price. They did not perform any of the legal work - the conveyancing was done by Mi- Riordan; it was Mr A l l c ~ who gave some (limited) tax advice on the depreciation available. Messrs Gray and Winter gave no tax or any other technical or legal advice.

Significantly, Messrs Gray and Winter were not sued by the barristers in respect of any legal or tax advice tendered by them On the contrary, the complaints made by the barristers went to misrepresentations by Messrs Gray and Winter as to commercial aspects of the venture, or to their failure, as promoters, to disclose some facts. They were not sued as professionals. Nor could they have been. They never undertook any relevant professional responsibilities. Their sole interest was in obtaining the 10 per cent "acquisition fee" (i.e. profit) from the barristers acting at arms' length from them. In all of this, they were not wearing the hat of a solicitor.

The ultimate question: whether the liability incurred in the settlement of the Kiwi Fruit

Action arises "in connection with" the solicitors' practice	L
It must follow that the claims made by the barristers were outside the scope of the policy, and that the appeal should be allowed.
CONCLUSIONS ON THE CROSS-APPEAL
Having regard to the dismissal of the application purrT.:ant to the appeal, the cross-appeal must fail. However, the point it raises is important, and we should say something about it. The question is whether the hrther proceedings, following the settlement of the claim made against Messrs Gray and Winter, were so integrally related to the claim that the costs thereby incurred should be seen as part of the costs of "defending any proceedings arising out of [the] claim", and also as "reasonably and necessarily [so] incurred, within the meaning of clause (b)(i) of the insuring clauses.
The costs were incurred, in part, in resisting a motion brought against the cross-appellants for the entry of judgment in the action against them for $500,000 pursuant to the settlement, in part in connection with a separate application they made to set the settlement aside, and in part in connection with their unsuccessfbl appeal against the allowance of the motion and the dismissal of their application. So far as the motion and the appeal against the order made upon it were concerned, they were in the very proceeding which had been brought to enforce the claim the subject of the insurance. Quite literally, those costs were incurred in defending a proceeding which arose out of the claim - in order to avoid a judgment being entered in that proceeding for the amount of the settlement. A similarly worded clause was held to cover the costs of an appeal in Karenlee Nominees Pty Ltd v ACN 004 3 12 234 Ltd (1995) 8 AN2 Ins. Cas. 75,655 at 75,661. See also Edwards v Insurance Office of Australia Ltd (1933) 34 SRmSW) 88 at 95, 98. The separate application to set aside the settlement might conceivably be seen in a different light. But it was brought only in support of the defence of the motion for judgment. There is authority that, where a new trial is sought upon the ground "that the verdict was obtained by fraud or by surprise", the preferable course is to bring a separate proceeding, rather than move in the original proceeding: McDonald v McDonald (1965) 113 CLR 529 at 533, per Banvick CJ, with whom Kitto J agreed; Monroe Schneider Associates
(Inc) v No 1 Raberem Ptv Ltd (No 2) (1992) 37 FCR 234 at 239. Accordingly, the course
taken was procedurally appropriate, since Messrs Gray and Winter were alleging the sett!emer,t was obtained by misrepresentation and surprise, so that judgment should not be entered pursuant to it, but instead a new trial should be had.

Upon this analysis, all the costs should be seen as incurred in defending the principal proceedings. The language of the insuring clause is wide enough to cover both solicitor and client costs payable by the cross-appellants in respect of their own representation and party and party costs incurred by orders made against them in the proceedings. Were the costs, however, "reasonably and necessarily" so incurred? The contentions urged by Messrs Gray and Winter failed, but that cannot be deterninative. The unreported decision on the appeal in

v Hedigan (Burchett, Foster and O'Loughlin JJ, 7 October 1994) does not suggest the matter was unarguable. The problems that beset the parties during the negotiations were real, and real issues were decided by the Full Court. In these circumstances, the costs were certainly incurred "reasonably", so that the only remaining question is whether they were also incurred "necessarily".	4	,
"Necessarily" is a strong word. Its use in the context of the insuring clauses requires consideration to be gi.,,:n to whether it was intended to have the full strength of its meaning. In an absolute sense, the necessity of almost any expenditure - at least in relation to professional costs and fees - in litigation could nearly always be disputed. The clause could hardly mean that. There are authoritative precedents for construing "necessary" and "necessarily" as referring to the appropriateness of whatever is in question to the achievement
of some contemplated goal. So, Piggins J in The Commonwealth and the Postmaster-General
v The Progress Advertising and Press Agencv Com~anv Proprietary Limited (1 9 10) 10 CLR 457 at 468 - 469 thought a power to make regulations for "matters and things which may be necessary for carrying out [an] Act" did not mean "absolutely or essentially necessary", but "appropriate, plainly adapted to the needs of the Department". And Dixon CJ, in Federal Commissioner of Taxation v Snowden & Willson Proprietary Limited (1958) 99 CLR 43 1 at 436-437 explained that S 51 of the Income Tax and Social Services Contribution Assessment
1936 used the expression "necessarily incurred in carrying on a business" in order "to place a qualification upon the degree of connexion between . .. expenditure and the carrying on of [a] business". In that context, his Honour said:

"Logical necessity is not a thing to be predicated of business expendittrue. What is meant by the qual$cation is that the expenditwe mzrst be dictated by the business ends to which it is directed, those ends formingpart of or being truly incidental to

the

business. "

Similarly, logical necessity is not to be predicated of expenditure in litigation, and what is meant by "necessarily" in clause (b)(i) is that the expenditure must be dictated by appropriate litigious ends, that are truly incidental to the litigation. So understood, the requirement included in the clause was satisfied in the circumstances of this case.

Accordingly, had we held that the respondents were entitled to indemnity, we would have allowed the cross-appeal. But as they are not, the cross-appeal must be dismissed with costs.

ORDERS PROPOSED

We would order that the appeal be allowed, with costs; that the cross-appeal be dismissed, with costs; that the judgment and orders made at first instance be set aside; and that, in lieu thereof, it be ordered that the application be dismissed, with costs.

1 certify that this and the preceding thirty-nine (39)

pages are a true copy of the Reasons for Judgment herein of their Honours Justices Beaumont and

Dated:

2 1 July 1997

Counsel for the Appellant (Cross-respondent):	R A Finkelstein QC with M Clarke
Solicitor for the Appellant (Cross-respondent):	Deacons Graham & James
Counsel for the Respondents (Cross-appellants):	P K Searle
Solicitor for the Respondents
(Cross-appellants):	Garrick Gray & CO
Dates of Hearing:	1 1 March 1997
Date of Judgment:	2 1 July 1997

[1997] FCA 1627

21 Jul 1997