Solicitors' Liability Committee v Gray
[1997] FCA 652
•21 July 1997
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 functions 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 - whether liability incurred in the settlement of an action for damages arose in connection with the solicitors’ practice - whether marketing or promotion of investments in the area of property syndication, in conjunction with accountants seeking investment and taxation advantages for clients, part of the practice of a solicitor - negotiations 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 indemnity - 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 (1961) 106 CLR 136, distinguished
Hawkins v Clayton (1988) 164 CLR 539, distinguished
Hill v Van Erp (1997) 142 ALR 687, distinguished
Drayton v Martin (1996) 67 FCR 1, distinguished
Leary v Federal Commissioner of Taxation (1980) 32 ALR 221, applied
Henderson v Amadio Pty Ltd (No 1) (1995) 62 FCR 1, applied
Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398, considered
Haseldine v Hosken [1933] 1 KB 822, considered
Restatement of the Law Governing Lawyers, Tentative Draft No 8, March 21, 1997, Section 79, p 124
State of Florida v Sperry (1962) Fla 140 So (2d) 587, considered
Sheinkopf v Stone 927 F 2d 1259, considered
Law Society of NSW v Harvey [1976] 2 NSWLR 154, considered
Federal Commissioner of Taxation v Snowden & Willson Proprietary Limited (1958) 99 CLR 431, applied
THE SOLICITORS’ LIABILITY COMMITTEE v GARRICK LEWIS GRAY and MICHAEL FREDERICK 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 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-respondent)
ANDGARRICK LEWIS GRAY and MICHAEL FREDERICK WINTER
Respondents
(Cross-appellants)
JUDGES:LOCKHART, BEAUMONT & BURCHETT JJ.
PLACE:SYDNEY (HEARD IN MELBOURNE)
DATED:21 JULY 1997
MINUTES OF ORDERS
THE COURT ORDERS:
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.
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 ) 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: GARRICK LEWIS GRAY and
MICHAEL FREDERICK WINTER
(trading as GRAY & WINTER)
Respondents
Cross Appellants
CORAM: 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 claim for damages, 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 Olney 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 pursuant to the Jurisdiction of 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 primary 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 & Winter.
The appellant is a body corporate established under s 88B of the Legal Professional Practice Act 1958 (Vic) (‘the Act’).
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 undertake liability under contracts of professional indemnity insurance entered into in accordance with the Act with solicitors and firms of solicitors. I shall return to the Act later because its provisions are important to the disposition of this matter.
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 on solely on their own behalf, in respect of claims first made against them during 1993. The insuring clause provides:
‘The insurer will indemnify the insured against any civil liability in connection with the Practice in respect of which a claim is first made against the firm during the Period of Insurance.’
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 appellant 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 of 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 there was a considerable demand from self-employed professional, business and farming people. Early in 1982 Mr Gray wrote to all clients who had participated in tax minimization arrangements and expressed the opinion that the age of artificial tax schemes had finished, 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, had become less available; so following the stock market 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 option 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 Messrs 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 $1.99 million, also organized through Messrs Gray and Winter. The barristers contributed $75,000 between them, the 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 purchasers 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 practice of Messrs Gray & Winter was organized in such a way that a company controlled by the partners, Australian Investment Management Pty Limited (‘AIM’), 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 administration companies to receive fees, make payments and otherwise administer their practices.
In late October 1989 Mr 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 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 & Winter met Mr Allan at his office in Shepparton and discussed the matter 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 Allan had recommended it as being suitable for ‘your barristers’ with ‘good tax deductions’. Mr Hedigan replied 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 day both Messrs Gray and Winter met with Messrs Hedigan and Guest at Mr Hedigan’s chambers where they outlined the proposal. In the course of the meeting Mr Gray said that he and Mr Winter would be interested in becoming part of the syndicate. Mr Hedigan said that he was interested in having a further look it and Mr Guest said that he too was interested. Mr Hedigan said that Mr O’Callaghan 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:
‘If we purchase the property at auction we would be interested in putting up the deposit, arranging finance to purchase the property, and pay any acquisition costs such as agent’s commission, we’ll fund whatever is necessary to acquire it.’
and also:
‘If we put up all the money to acquire the property at auction, we’d want an acquisition fee of 10 percent of the purchase price.’
The primary Judge assumed, and the contrary is not suggested, that by referring to ‘we’ Mr Gray meant himself and Mr Winter.
Within a couple of days after the initial meeting at Mr Hedigan’s chambers, Mr Hedigan told Mr Gray on the telephone that he had spoken to Mr O’Callaghan and Mr Chernov who had both expressed interest in becoming involved. Mr Gray and Mr Hedigan also discussed options for financing the project. Mr Gray and Mr Hedigan met at the Melbourne Cup Carnival races in early November 1989 to discuss the project further.
On 10 November 1989 a celebration was held to mark Mr Gray’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’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 response to Mr Gray’s enquiry about the statement that he would be interested in having a share in the syndicate, Mr Hedigan 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 on his own initiative, without the involvement of either Mr Gray or Mr Winter, met with both Mr Corboy and Mr Allan to discuss matters associated with the Kiwi fruit property.
At the auction on 15 November 1989 an agent acting on Mr Gray’s instructions was the highest bidder at $1.1m 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 the property and for the equipment. The purchaser in each case was ‘Covent Pty 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.
The contract provided for a deposit of $111,000 to be paid as to $50,000 on the signing of the contract and as to $61,000 by 20 November 1989, 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 telephone. 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.
In November 1989 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. At 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 fruit 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 & Partners would be instructed to act for the purchaser. He was told that the contract was in the name of a nominee company and that it was probable that the property would ultimately be purchased by some Melbourne barristers.
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 effect of rendering stamp duty payable on both the initial contract and on the further conveyance 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 condition 6 and sought to use that breach as a lever to obtain an extension of time for 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 wrote 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 dated 20 December 1989 the vendor's solicitors 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 could procure 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 signed by the barristers and exchanged. On 1 February 1990 Messrs Riordan & Partners wrote to Messrs Gray & Winter saying that, if they wished to seek a further extension 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 vendor's solicitors informed Messrs Riordan & Partners by letter 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 prepare 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 O'Callaghan, with advice that they would 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 February 1990 Mr Winter and a representative 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 nominated 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 action’) and on 23 July 1993 Messrs Gray & Winter gave notice of such claim to the respondent. The kiwi fruit action was transferred to this Court on 11 November 1993 (No VG 479/93). On 17 November 1993 the respondent informed Messrs Gray & Winter 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 partnership 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 claims 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 Fair Trading Act 1985 (Vic)
a)Messrs Gray & Winter were beneficially interested in and controlled Covent which was used as the corporate vehicle by which they entered into two contracts each dated 15 November 1989 whereby Covent agreed to purchase from Murray Valley Kiwi Fruit Pty Ltd (the vendor) certain land at Nathalia (the land) together with the kiwi fruit orchard business conducted on the land (the orchard) and certain plant and equipment relating to the conduct of the orchard.
b)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.
c)In order to induce the barristers to enter into the agreement Messrs Gray & Winter made certain representations about the anticipated yield of the orchard, the cash flow to be produced by the orchard, and the value of the land and orchard.
The representations were constituted by:
cash flow budgets prepared by a firm of accountants dated 21 December 1989, 22 December 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 reliance 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, misleading and deceptive, or likely to mislead or deceive.
g)Insofar as the representations were made with respect to future matters, there 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).
Claim in Negligence
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 whether or not to enter into the agreement;
b)Messrs Gray & Winter owed a duty to the barristers to take reasonable care in making the representations;
c)In breach of such duty, Messrs Gray & Winter failed to take reasonable care in making the representations.
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 material to be known by each of the barristers prior to deciding whether or not to participate in the scheme;
d)If the undisclosed matters had been disclosed to them none 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 thereof 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 hearing 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 agreement 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 -
Insofar as they were involved in any arrangement or agreement with the barristers and/or the making of any representations in connection therewith and/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 proceeding 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 the sum of $500,000 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 Messrs Gray and Winter pursuant to their settlement of the claim against 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 and expenses reasonably and necessarily incurred in the enforcement motion, 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 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 settlement 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 mentioned earlier, the insurance policy provides that the insurer (i.e. the appellant) will also:-
'(i) indemnify the Insured against costs and expenses reasonably and necessarily incurred in defending any proceedings arising out of a claim in respect of which the Insurer is liable to indemnify the Insured, where such costs and expenses are incurred after notification of the claim to the Insurer and before the Insurer elects to take over the defence of the proceedings; 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 policy defines ‘the Practice’ as follows:
'(h) “The Practice” means the private practice of a solicitor carried on by the Firm solely on its own behalf and includes 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 remuneration, the Firm expressly approved the appointment, but does not include:
(i)acting in the course of employment by an employer who is not a solicitor in private practice; or
(ii)accepting moneys for investment, 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.'
The exclusions from liability of the appellant include the following:
'(ii) arising out of any trading or personal debt incurred by any Insured;
...
(iv) under or for a breach of any warranty, guarantee or indemnity given by any Insured other than as agent for and with the express authority of a client;
(v) arising, in whole or in part, directly or indirectly, from or brought about by the dishonesty or fraudulent act or omission of any Insured, other than liability for any pecuniary loss from any defalcation committed by an Employee to the extent that the Solicitors’ Guarantee Fund is not liable to pay compensation for that loss;
...
(x) 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 fund, scheme, business, arrangement or entity in which at any relevant time there was a Related Interest including investment by way of a loan to any such fund, scheme, business, arrangement or entity;'
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 important, however, is to remember that we are considering the scope of the practice of a solicitor in the 1990s, 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 legislation or decisions 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 expressly recognized by the insurance policy in this case in paragraph (h) of the definition of ‘practice’ mentioned earlier. Work of solicitors in advisory 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 of the role 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 ceases 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 the 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 before 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.
The primary Judge concluded that the retainer accepted by Messrs Gray and Winter in relation to the acquisition of the Kiwi Fruit orchard was within the scope of their practice as solicitors. His Honour said that he reached this conclusion on the basis of eleven findings to which I shall now turn. Many of these findings were challenged on one basis 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 counsel for the appellant 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 engage in.
This statement was not challenged.
In the course of their practice they had on a number of 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 and Winter held themselves out as solicitors and conducted their dealings in that capacity.
This statement was not challenged except that it was submitted that the real question was whether the activities with which this case is concerned could 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 commercial 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 was not challenged by counsel for the appellant except as to its relevance.
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 to Mr Hedigan the offer to on-sell at a substantial profit.
Again, this statement was not challenged, but its relevance was questioned.
Messrs Gray and Winter played no part in organizing the syndicate which purchased the property. This was done by Mr Hedigan. When Mr Gray expressed an interest 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 the trust account which they were required to maintain as practising solicitors.
Counsel for the appellant said there was only marginal 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 property was acquired, the transaction was carried through to completion in the manner initially planned, and they made no profit other than the agreed fee.
Counsel for the appellant used this finding to support his argument that the payment of the agreed fee to them was more consistent with their 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.
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:
(a) 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 to purchase the properties.
(c) They were paid an acquisition fee or an acquisition fee and a risk fee which ranged from 7.5% to 10% of the purchase price of the property acquired and syndicated.
(d) The syndication work was carried out, not by Messrs Gray and Winter themselves, but by companies owned or controlled by them: the two principal companies used were Australian 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 Winter by the barristers in the action in this Court which led to the settlement fell into three categories: first a claim pursuant to the Fair Trading Act 1985 (Vic); secondly, a claim in negligence; and thirdly, a claim for breach of fiduciary duty.
It is essential 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 Fair Trading 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 scheme 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.
It 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 pause at this 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 practice 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 and Winter 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 findings of fact of a trial Judge are well established. The critical issues of fact do not turn on the credibility of any witness in this case. Objective 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 CLR 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 business of syndicating property transactions. Any work which they did in relation to that as solicitors was peripheral to the claims made against them. The centre of activity was property syndication.
In my opinion the proper conclusion to be drawn from the evidence on which the case turns, 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 their 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:
That the appeal be allowed.
That the cross-appeal be dismissed.
That the orders of the learned primary Judge be set aside.
That the application which commenced the proceeding at first instance be dismissed.
That Messrs Gray and Winter pay the costs of the appellant of the 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 a true copy of the
reasons for judgment herein of
the Honourable Justice Lockhart.Associate
Dated: 21 July 1997
IN 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-respondent)
ANDGARRICK LEWIS GRAY and MICHAEL FREDERICK WINTER
Respondents
(Cross-appellants)
JUDGES:LOCKHART, BEAUMONT & BURCHETT JJ.
PLACE:SYDNEY (HEARD IN MELBOURNE)
DATED:21 JULY 1997
INDEX TO REASONS FOR JUDGMENT
BEAUMONT and BURCHETT JJ
INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 1
THE STATUTORY CONTEXT OF THE INSURANCE COVER........ ........ ........ ........ ........ 2
THE TERMS OF THE INDEMNITY........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 4
THE CASES PLEADED BY MESSRS GRAY AND WINTER........ ........ ........ ........ ........ ... 7
THE ORDERS MADE AT FIRST INSTANCE IN THE PRESENT PROCEEDINGS....... 9
THE APPEAL AND THE CROSS-APPEAL........ ........ ........ ........ ........ ........ ........ ........ ....... 10
THE REASONING AND FINDINGS MADE AT FIRST INSTANCE RELEVANT TO THE QUESTIONS ARISING IN THE APPEAL........ ........ ........ ........ ........ ........ ........ ........ ........ .. 10
His Honour’s description of the character of the claims made by the Partners against Messrs Gary and Winter........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 10
1......... The Partners’ claim pursuant to the Fair Trading Act 1985 (Vic)........ ........ ... 10
2......... The Partners’ claim in negligence........ ........ ........ ........ ........ ........ ........ ........ .... 11
3......... The Partners’ claim of breach of fiduciary duty........ ........ ........ ........ ........ ...... 11
His Honour’s findings of fact........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 12
1.As to the practice of Messrs Gray and Winter........ ........ ........ ........ ........ ....... 12
2.As to the acquisition of the kiwi fruit orchard........ ........ ........ ........ ........ ....... 13
3.As to the role of Riordan & Partners........ ........ ........ ........ ........ ........ ........ ...... 14
4.As to the execution of the contracts by the Partners........ ........ ........ ........ ...... 16
5.As to the retainer......... ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... 16
His Honour’s reasoning and conclusions on the legal questions........ ........ ........ ........ . 18
1. The expert evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 18
2. The test of what amounts to the “practice” of law........ ........ ........ ........ ........ .. 19
3. His Honour’s application of this test........ ........ ........ ........ ........ ........ ........ ....... 20
4.The ultimate question: whether the liability incurred in the settlement of the Kiwi Fruit Action arises “in connection with” the solicitors’ practice........ ........ ..... 21
THE COMMITTEE’S GROUNDS OF APPEAL........ ........ ........ ........ ........ ........ ........ ........ . 21
THE CONTENTIONS OF MESSRS GRAY AND WINTER ON THE APPEAL........ ..... 22
CONCLUSIONS ON THE APPEAL........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 22
The general concept of a solicitor’s professional legal practice contrasted with the conduct of entrepreneurial activities and other businesses........ ........ ........ ........ ........ ........ ........ 22
Decisions of the High Court of Australia........ ........ ........ ........ ........ ........ ........ ........ .... 23
Decisions of this Court........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 25
Decisions of the New South Wales Court of Appeal........ ........ ........ ........ ........ ........ .. 26
Decision of the Supreme Court of Victoria........ ........ ........ ........ ........ ........ ........ ........ . 27
Decision of the Supreme Court of Queensland........ ........ ........ ........ ........ ........ ........ ... 28
The position in England........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... 28
Decisions of United States Courts........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 30
A Canadian decision........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 31
Decisions dealing with unlicensed persons acting in legal matters........ ........ ........ ...... 31
The rules of professional conduct and the changing profile of lawyers........ ........ ...... 32
Dual activities of other professionals........ ........ ........ ........ ........ ........ ........ ........ ........ ... 33
The meaning of the present insuring provisions......... ........ ........ ........ ........ ........ ........ .. 36
Should the relevant activities of Messrs Gray and Winter be characterised as “professional” or “entrepreneurial”?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 37
The ultimate question: whether the liability incurred in the settlement of the Kiwi Fruit Action arises “in connection with” the solicitors’ practice........ ........ ........ ........ ........ .. 38
CONCLUSIONS ON THE CROSS-APPEAL........ ........ ........ ........ ........ ........ ........ ........ ...... 38
ORDERS PROPOSED........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... 40
IN 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-respondent)
ANDGARRICK LEWIS GRAY and MICHAEL FREDERICK WINTER
Respondents
(Cross-appellants)
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 Winter 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 respect 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 in the present circumstances. Specifically, the primary question which arose was 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 Moffitt P. and Glass JA. agreed) said in Miltenburg v AMP Fire General Insurance Co. Ltd (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 defendant 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 (1959) 101 CLR 661 at 668 and CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 141 ALR 618 at 634-5.
In moving the Second Reading of the Legal Profession Practice (Amendment) Bill (Vic.) in the Legislative Assembly the Minister said (Hansard, 31 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 practising members against professional negligence claims.
Professional indemnity insurance is presently provided by means of a master policy arranged through insurance brokers in Australia, principally Lloyds of London. The claims experienced in a number of recent years 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 to raise serious questions about the ability of many suburban and country practitioners, in particular, to afford them. They would also pose considerable barriers against entry into the profession, thereby reducing competition. Consequently, the Law Institute of Victoria decided to investigate the possibility of a self-insurance scheme as a means of reducing the extent of premium increase in 1986 and subsequent years.” (Emphasis added)
The Minister added (at 1573):
“The scheme proposed would make use of an exemption under the Commonwealth Insurance Act. As from 1 January 1986, the Law Institute would be required by the law of Victoria to carry 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 amount of the contributions - which will be paid at the time of solicitors applying for annual practising certificates - 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 (s.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 -
(i)the practice or former practice of the solicitor or firm; or
(ii)any trust of which the solicitor is or was an executor or trustee; or (Emphasis added)
(b)...”
The Committee, with the approval of the Council of the Law Institute, may determine:
“(a)the amount of contribution payable by classes of solicitors, former solicitors or firms 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 contributions are payable; and
(d)the rate of interest payable on contributions not paid by the due date; and
(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 that solicitor or firm of solicitors; and
(f)any other terms and conditions of any class 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 that 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 paid by another person and the contribution has been paid; or
(b)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, to indemnity from 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 VII 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:
“(a)The Insurer will indemnify the Insured against any civil liability in connection with the Practice in respect of which a claim is first made against the Firm during the Period of Insurance. (Emphasis added)
(b)The Insurer will also:
(i)indemnify the Insured against costs and expenses reasonably and necessarily incurred in defending any proceedings arising out of a claim in respect of which the Insurer is liable to indemnify the Insured, where such costs and expenses are incurred after notification of the claim to the Insurer 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:
“(i)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)....”
The “Firm” is relevantly defined to mean:
“(i)...;
(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 practice of a solicitor carried on by the Firm solely on its own behalf and includes 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 remuneration, the Firm expressly approved the appointment, but does not include:
(i)acting in the course of employment by an employer who is not a solicitor in private practice; or
(ii)accepting moneys for investment, 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.” (Emphasis added)
The exclusions from liability in the Indemnity include the following -
“(ii)[claims] arising out of any trading or personal debt incurred by any Insured;
....
(iv)[claims] under or for breach of any warranty, guarantee or indemnity given by any Insured other than as agent for and with the express authority of a client;
(v)[claims] arising, in whole or in part, directly or indirectly, from or brought about by the dishonesty or fraudulent act or omission of any Insured, other than liability for any pecuniary loss from any defalcation committed by an Employee to the extent that the Solicitors’ Guarantee Fund is not liable to pay compensation 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 fund, scheme, business, arrangement or entity in which at any relevant time there was a Related Interest, including investment by way of a loan to any such fund, 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 through any firm, company, trust or other entity) by or on behalf of any one or more of:
(i) the Firm;
(ii) any Principal;
(iii) any Relative of 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 Indemnity was provided 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).
THE CASE PLEADED BY MESSRS GRAY AND WINTER
It is necessary to identify 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:
“10.By [the Partners’] Statement of Claim, [the Partners] claimed against Gray & Winter in the said proceedings 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]... and in respect of which a fee of $126,500.00 would be paid to Gray & Winter;
(b)in order to induce [the Partners] to enter into the agreement, Gray & Winter misrepresented to [the Partners] matters concerning the yield of a kiwi fruit orchard business conducted on the said land, the profits that would be derived from the operation of such business and the market value of the land and/or orchard thereon;
(c)Gray & Winter in breach of a fiduciary [duty] owed to [the Partners], failed to make full and fair disclosure of matters within the knowledge of Gray & Winter which were material to [the Partners’] decision to enter into the agreement.
11.Gray & Winter denied liability to [the Partners].
12.Insofar as Gray & Winter was involved in any arrangement or agreement with [the Partners] and/or the making of any representations in connection therewith and/or any failure to disclose material matters (all of which allegations were denied), then Gray & Winter were so engaged in connection with its practice as solicitors carried on solely on its own behalf.
13.In the premises, [the Partners’] claim was one in respect of which Gray & Winter is entitled to indemnity under and pursuant to the terms of the said Indemnity Insurance Contract.
14.The trial of the said proceedings [brought by the Partners] commenced on 29 August 1994 and on 30 August 1994, the proceedings were settled by the parties [to the proceedings] entering into an agreement upon [certain] terms and conditions, including the term and condition that Gray & Winter pay to [the Partners] the sum of $500,000.00 and that the parties to the proceedings bear their own costs of the same (‘the settlement agreement’).
15.As a result of Gray & Winter becoming aware of certain information after the settlement agreement, on 31 August 1994 Gray & Winter sought to avoid and/or repudiated the settlement agreement.
16.On 1 September 1994, [the Partners] by Motion on Notice sought to move [this]... Court... to enforce the settlement agreement.
17.On 5 September 1994, Gray & Winter issued proceedings No. VG 293 of 1994 in [this]... Court... seeking, inter alia, a declaration that the settlement agreement was void and of no effect and an Order that the settlement agreement be rescinded...
18.On 19 September 1994,... Olney [J.] made Orders that:
(a)proceeding No. VG 293 of 1994 be dismissed;
(b)the costs of [the Partners] of and incidental to the proceeding be paid by Gray & Winter;
(c)Gray & Winter pay to [the Partners] the sum of $500,000.00 in accordance with the settlement agreement;
(d)[the Partners’] costs of and incidental to the said Motion be paid by Gray & Winter.
19.On 20 September 1994, Gray & Winter issued Notices of Appeal against the said findings and Orders of... Olney [J.] in Appeals No. VG 314 of 1994 and VG 315 of 1994 respectively.
20.On 6 October 1994, the Full Court... dismissed the said Appeals with costs.
21.In the premises, the said Motion and further proceeding No. VG 293 of 1994 and the Appeals thereon numbered VG 314 and VG 315 of 1994 respectively were proceedings brought as part of Gray & Winter’s defence of [the Partners’] claim against Gray & Winter.”
Particulars of alleged loss and damage were then given by Messrs Gray and Winter against the Committee as follows:
The sum of $500,000.00 paid and/or 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 314 and VG 315 of 1994 respectively.
THE ORDERS MADE AT FIRST INSTANCE IN THE PRESENT PROCEEDINGS
As has been noted, the learned primary Judge ordered that Messrs Gray and Winter recover judgment against the Committee in the sum of $500,000. His Honour further 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.
THE APPEAL AND THE CROSS-APPEAL
The Committee now appeals from the orders made at first instance. Messrs. Gray and Winter cross-appeal from his Honour’s refusal to find that they were entitled to be indemnified in respect of their costs reasonably and necessarily incurred in the enforcement motion, the rescission proceeding and the appeals therefrom (that is, proceedings Nos. VG 293, VG 314 and VG 315 of 1993).
We turn now to the appeal and will come to the cross-appeal later.
In order to understand the issues which arise in the appeal, it will first be necessary to refer in some detail to the reasoning and findings at first instance.
THE REASONING AND FINDINGS MADE AT FIRST INSTANCE RELEVANT TO THE QUESTIONS ARISING IN THE APPEAL
His Honour’s description of the character of the claims made by the Partners against Messrs Gray and Winter
His Honour first noted that in proceeding No. VG 479 of 1993 (“the Kiwi Fruit Action”) the Partners had pleaded three causes of action against Messrs Gray and Winter to the following effect:
The Partners’ claim pursuant to the Fair Trading Act 1985 (Vic)
The learned primary Judge noted that the Partners had made the following claims in this regard:
·That Messrs Gray and Winter had been beneficially interested in and controlled Covent Pty Ltd (“Covent”), which had been used as the corporate vehicle by which they had entered into two contracts, each dated 15 November 1989, whereby Covent had agreed to purchase from Murray Valley Kiwi Fruit Pty Ltd (“the vendor”) the land at Nathalia (“the land”) together with the kiwi fruit orchard business (“the orchard”) conducted on the land and certain plant and equipment relating to the conduct of the orchard.
·That prior to completion of the contracts of sale, the Partners and Messrs Gray and Winter had agreed that the Partners 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 and Winter a fee of $126,500.
·That in order to induce the Partners to enter into the agreement, Messrs Gray and Winter had made certain representations as to the anticipated yield of the orchard, the cash flow to be produced by the orchard, and the value of the land and orchard.
·That the representations were constituted by cash flow budgets prepared by a firm of accountants dated 21 December 1989, 22 December 1989, 4 January 1990, 14 February 1990 and 16 February 1990; a valuation of the land and the orchard dated 24 January 1990; statements made to three of the Partners, Messrs Hedigan, Guest and Chernov, in early January 1990; and statements made to four of the Partners, Messrs Hedigan, Guest, O’Callaghan and Myers, on 18 February 1990.
·That, acting in reliance on the representations, the Partners had entered into the agreement, purchased the land, the orchard and the plant and equipment and paid the fee to Messrs Gray and Winter.
·That each of the representations was made in trade and commerce, and was false, misleading and deceptive, or likely to mislead or deceive; and that insofar as the representations were made with respect to future matters, there were no reasonable grounds for making them; and that, by reason of the foregoing matters, Messrs Gray and Winter had engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in contravention of s.11 of the Fair Trading Act.
The Partners’ claim in negligence
His Honour next noted that the Partners had claimed that at the time of making the representations Messrs Gray and Winter intended, knew or ought reasonably to have known or foreseen that the Partners would rely on them in deciding whether or not to enter into the agreement; that Messrs Gray and Winter had owed a duty to the Partners to take reasonable care in making the representations; and that in breach of such duty, Messrs Gray and Winter had failed to take reasonable care in making the representations.
The Partners’ claim of breach of fiduciary duty
The trial Judge further noted that the Partners had claimed that in and between November 1989 and February 1990, Messrs Gray and Winter had promoted to the Partners an undertaking, scheme or enterprise whereby the Partners 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”); that Messrs Gray and Winter had owed the Partners 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 Partners as to whether or not to participate in the scheme; that in breach of the fiduciary duty, Messrs Gray and Winter had not disclosed certain of these matters, which were material, to the Partners, prior to their deciding whether or not to participate in the scheme; and that if the undisclosed matters had been disclosed to them, the Partners would not have entered into the agreement.
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 drawn, as was done in Leary, distinguishing professional functions from entrepreneurial activities. In the present context, that distinction remains valid.
Dual activities of other professionals
A similar distinction (i.e. professional versus personal or entrepreneurial) has been drawn in professional insurance contexts beyond the context of legal professional insurance.
In FAI 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’]”. The 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, 812):
"The definition of risk and the measure of the obligation to indemnify in a professional indemnity policy in terms of breach of professional duty in the conduct of the practice of Municipal Authority requires that effect be given to the word ‘professional’. It is not every breach of duty in the course of the conduct of the ‘practice’ or ‘business’ of ‘Municipal Authority’ which will be a breach of professional duty. The meaning of ‘professional’ will, of course vary with context. ‘Professional’, however, connotes ‘pertaining or appropriate to a profession’, ‘engaged in one of the learned professions’.
The point is illustrated by the decision of the British Columbia Court of Appeal in Chemetics International Ltd v Commercial Union Assurance Co of Canada 11 DLR (4th) 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 qualified engineer. That was, however, held to be irrelevant to determining whether the particular instruction 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 engineer. It was simply part of a service provided by a vendor to a purchaser 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 convey factual information which was incorrect and upon which it may be accepted that a professional judgment was exercised by those responsible for the design of the Plaintiff’s building. That, however, did not impart any ‘professional’ component to the Respondent’s duty to provide correct information in the circumstances." (Emphasis added).
In Drayton v Martin (1996) 67 FCR 1, 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 arose 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 to them to invest in the cash flow plan was, to use his words ‘inextricably interwoven’ with his role as their accountant and his business or profession as an accountant. In practice, the stringent demarcation identified by Mr Williams was blurred, at least in Mr Martin’s dealings 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 undertaken at the same time as his role as an investment adviser. His function as an adviser, however imperfectly performed, depended on information obtained as the accountant for the Draytons. In these circumstances, it seems to me inevitable that the liability Mr Martin incurred to the Draytons was incurred ‘in connection with’ his practice as an accountant." (Emphasis 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 recommendation that they participate in what his Honour called the ‘tax driven 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 future’. He then enlarged on the virtues of the plan.
I think a simple way of testing whether the liability arose out of Mr Martin’s practice as an accountant would be to ask what would have been his position if, 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 and there was nothing to indicate that, in future, it would receive profits of the dimensions necessary to require consideration of a plan such as this.
In other words, the scheme was fundamentally flawed from the outset. Mr Martin, as the Draytons’ accountant, should have known this." (Emphasis added).
Again, there is nothing in this case that detracts from the drawing of the professional/entrepreneurial 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 present 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 with”) the professional functions of a solicitor (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, emphasises 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 any 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 from premises 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 relationship.
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 remuneration, 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 further indication of an intention to confine the cover to professional activities.
The definition also excludes “accepting moneys for investment, 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 opinion, to exclude claims 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 appears that claims arising from professional functions fall within the scope of the cover, but that claims arising from entrepreneurial activities are not covered.
The learned primary Judge appears 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 an 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 full 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 done as the actions of businessmen, 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 Mr Riordan; it was Mr Allen 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
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 pursuant 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 further 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 unsuccessful 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 004 312 234 Ltd (1995) 8 ANZ Ins. Cas. 75,655 at 75,661. See also Edwards v Insurance Office of Australia Ltd (1933) 34 SR(NSW) 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 Barwick CJ, with whom Kitto J agreed; Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (No 2) (1992) 37 FCR 234 at 239. Accordingly, the course taken was procedurally appropriate, since Messrs Gray and Winter were alleging the settlement 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 determinative. The unreported decision on the appeal in Gray 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”.
“Necessarily” is a strong word. Its use in the context of the insuring clauses requires consideration to be given 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, Higgins J in The Commonwealth and the Postmaster-General v The Progress Advertising and Press Agency Company Proprietary Limited (1910) 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 431 at 436-437 explained that s 51 of the Income Tax and Social Services Contribution Assessment Act 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 expenditure. What is meant by the qualification is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part 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.
I 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 Burchett.
Associate:
Dated: 21 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: 11 March 1997 Date of Judgment: 21 July 1997
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