The Solicitors' Trust v Garrisons Pty Ltd

[2005] HCATrans 428

[2005] HCATrans 428

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Hobart  No H10 of 2004

B e t w e e n -

THE SOLICITORS’ TRUST

Applicant

and

GARRISONS PTY LTD

Respondent

Application for special leave to appeal

GUMMOW J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

FROM HOBART BY VIDEO LINK TO CANBERRA

ON FRIDAY, 17 JUNE 2005, AT 9.37 AM

Copyright in the High Court of Australia

MR M.E. O’FARRELL:   If it please the Court, I appear for the applicants.  (instructed by Creese Crisp & Fay)

MR D.J. PORTER, QC:   If it please the Court, I appear for the respondent.  (instructed by Hugh Murray)

GUMMOW J:   Yes, Mr O’Farrell.

MR O’FARRELL:   Your Honours, the applicant is the custodian of the Solicitors’ Guarantee Fund which is a public fund constituted under the Legal Profession Act (Tas) from which court funds, intended to protect the public from defaulting solicitors, are constituted.

It is my submission, your Honours, that it is against the public interest to allow compensation payable from the fund to be paid to persons who are not entitled to receive it, and for those reasons, your Honour, the issue, in my submission, is whether an error of the court with jurisdiction to supervise the fund should be allowed to govern the future administration of the fund.

GUMMOW J:   Just remind us of the salient facts.

MR O’FARRELL:   Your Honours, the court funds were made in respect of mortgage investment schemes run by two firms of solicitors in Hobart.  Prior to those funds being formed – perhaps I can start one step back.  There were a considerable number of investors in mortgage funds in the two firms.  The respondent who is an investment adviser, effectively, offered to take assignments of investments from the investors as a result of the investors apparent losses through a failure to account by the firms.

GUMMOW J:   Now, the investors were the clients?

MR O’FARRELL:   That is correct, your Honour.  That is exactly correct.

GUMMOW J:   And Garrisons took an assignment – or purported assignment – of the clients’ rights to indemnity or benefit out of the fund.  Is that right?

MR O’FARRELL:   That is right, your Honour.  It took the bundle of rights which constituted the investors’ interests in the mortgages and purportedly their rights to recover.  Now, one of those rights, it is said, is a right to claim compensation against a court fund.  The assignments were taken between approximately July 2001 and October 2003, I think the last one was taken, and in November 2001, an order was made establishing court funds in respect of one set of mortgages.  Similar orders were made on 8 March 2002 and also on 1 October 2002.

GUMMOW J:   So it turns then on section 112 of the Legal Profession Act, does it?

MR O’FARRELL:   That is correct, your Honour.

GUMMOW J:   This appears at page 25.  It says:

(1)     A Court fund in respect of –

the lawyers – 

is to be applied by the Supreme Court in –

(a)      the compensation to a client ‑ ‑ ‑

MR O’FARRELL:   That is correct, your Honour, and there are effectively two parts to this.  Firstly, it is to be applied in “compensation to a client”, whatever the meaning of that is, and, secondly, it has to be:

for the loss of trust money or other property as a result of a fiduciary default ‑ ‑ ‑

CALLINAN J:   Mr O’Farrell, you have put your submission on the basis of a public policy or a matter of public interest, that is how you began.

MR O’FARRELL:   Yes, your Honour.

CALLINAN J:   If the respondent had not indemnified the clients would there then have been – plainly, the clients would have had a claim then against the fund, would it not?  A fund would have been established for the clients and the clients would have had a claim against that.

MR O’FARRELL:   In part, your Honour, yes, that is correct.

CALLINAN J:   What is wrong with the public interest in somebody indemnifying or paying the clients and then standing in the shoes of the clients to get indemnity or some part of the indemnity for what they have paid out and save the fund?

MR O’FARRELL:   Your Honour, in my submission, the problem with that springs from the choice of the word “client”.

CALLINAN J:   I understand that, but it is simply you put your – you opened your application by talking about the public interest.

MR O’FARRELL:   Yes, your Honour.

CALLINAN J:   You might well have an argument on the meaning of “client” but I do not think you are going to get anywhere on the basis of reliance upon some public interest?

MR O’FARRELL:   With respect, your Honour, the fund being a fund which is constituted under statute must be administered to the benefit of all potential recipients in accordance with the terms of the statute.  So, in my submission ‑ ‑ ‑

CALLINAN J:   Once the respondent paid the money it exonerated the fund, and it saved the fund a lot of money. Why should it not now look to the fund for indemnification? Your answer to that is simply because the respondent is not a client within the meaning of section 112 of the Act, is not that right? Is it any more than that?

MR O’FARRELL:   That is the first point of call, your Honour.  I also submit that in his reasons at page 18 of the application book, the learned primary judge also pointed out that it would be inconsistent with the purpose or objectives of the relevant statutory provisions to interpret them so that they would be available to an assignee whose only loss had resulted from the payment of consideration pursuant to a contract, and it pointed out that to interpret the section otherwise would be to allow an assignee who purchased a client’s right for a small fraction of the amount claimable, that an assignee had contributed to causing the client’s loss by giving bad investment advice, and said that it would be inconsistent with the maintenance and replenishment of the fund to benefit such persons by a payment under the Act.  So, your Honour, in my submission, the question is wider than simply what the meaning of the word “client” is.

GUMMOW J:   There was no suggestion of any availability of subrogation, was there, subrogation of a third party to the client’s rights, even without an assignment?

MR O’FARRELL:   Your Honour, in section 113 ‑ ‑ ‑

GUMMOW J:   No, but in argument there was no such suggestion, was there?

MR O’FARRELL:   No, your Honour. 

GUMMOW J:   Sorry, you were referring to 113.

MR O’FARRELL:   I am sorry, your Honour, I misunderstood your Honour’s question.  I do not need to go there for the time being.

GUMMOW J:   Do we have the actual form of assignment?  Is it set out anywhere?

MR O’FARRELL:   It is set out in part, your Honour, in the reasons of the Full Court which appear at page 25.  This is at line 28 or so:

Each deed transferred to the appellant the clients’ “Investor’s Rights” -

and then the definition of “Investor’s Rights” and you will see, under (b)(iv), it purports to assign a right:

to recover compensation under the provisions of the Legal Profession Act ‑ ‑ ‑

GUMMOW J:   Suppose the assignment had been drafted differently and it was a present assignment for value of the future receipt from the fund - you see the distinction – as distinct from the right against the fund, the present assignment of a future receipt of funds.

MR O’FARRELL:   Your Honour, if that meant that the moneys would be directed into the investor’s hands ‑ ‑ ‑

GUMMOW J:   You would say that is bad, too.

MR O’FARRELL:   I would submit, so, your Honour, particularly if the investors had already received value from Garrisons.

GUMMOW J:   What particular passage in the Full Court’s reasoning do you attack?

MR O’FARRELL:   Essentially, your Honour, at paragraph 15, after a discussion about the learned primary judge’s conclusion that the only loss “resulted from payment of consideration pursuant to a contract” ‑ ‑ ‑

GUMMOW J:   It is on page 27.

MR O’FARRELL:   I am sorry, your Honour, yes, page 27.  Justice Underwood, as he then was, said:

At that stage, the trust property had not been realised, nor the personal remedies against the defaulting mortgagee been exhausted, so it cannot be said that at that stage there had been any “loss of trust money or other property” within the meaning of the Act . . . That loss only occurred after the exercise of the power of sale and the consequential loss of capital.  In these circumstances, it could not be said that such loss resulted from payment of a consideration pursuant to a contract.

He goes on, over the page:

In my view, in the circumstances of this case, upon the occurrence of such a loss, the appellant became a client of the firm whin the meaning of the Act, s112(1)(a).

GUMMOW J:   There seemed to have been a concession on your side, recorded at line 30 on page 28.

MR O’FARRELL:   Yes, your Honour. That concession was given in the context of the argument that there needs to be a causal nexus established between the person who is the client and the fiduciary loss suffered. That, in my submission, is a fundamental part of the application of compensation under section 112.

Your Honour, the mistake that I point to, so far as the Full Court’s reasoning is concerned, springs firstly from an error of fact which was that, on the Full Court’s finding, the trust property had not been realised or that other remedies had been exhausted before the notice of assignments were given, or that after the notice of the assignments was given, that a power of sale had been exercised and exhausted before the notice of the assignments had been exercised or that there was a consequential loss of capital as a result of the exercise of that power of sale.  There is one, in the evidence that was before the Full Court, minor exception to that, but the bulk of the evidence did not support such a conclusion.

It is as a result of that, your Honours, that the Full Court then went on to attribute the relevant loss of capital arising out of the fiduciary default to the respondent whereas, in my submission, it could only be the case, having regard to the assignments, that the relevant fiduciary default was, in fact, a failure to account by the firms to the original investors so that, causally, it was the failure to account that caused the investors’ loss at the time that they were investors and before the assignment. 

CALLINAN J:   Mr O’Farrell, the clients did suffer loss as a result of a fiduciary default, is that right?  Everybody seems to have accepted that.

MR O’FARRELL:   Yes, with respect, your Honour, that is a fair assessment of it, that at the time it was certainly apparent in respect of other matters that there had been significant losses occasioned to both of the ‑ ‑ ‑

CALLINAN J:   So the clients are still within 112(1)(a).  It is simply that they may be obliged to bring into account the money that was paid to them by Garrisons, by the respondent.  But they are still literally within 112(1)(a), are they not?

MR O’FARRELL:   So that if they made a claim now, your Honour, they would be entitled to a payment from the fund?

CALLINAN J:   Subject, perhaps, to their having to bring into account and I say “perhaps”.  It may be that they would have equitable obligations which would not require them to bring into account the money that they had been paid by the respondents. 

MR O’FARRELL:   That may be the case, your Honour.  On the other hand, in my submission, it would be right and proper for the applicant to reject any claim for compensation from a client who had been fully recompensed.

CALLINAN J:   Well, I do not know.  It may be a matter of argument.  It may be that although they have been recompensed they have a concurrent obligation, like subrogation as Justice Gummow put to you, notwithstanding that there may not be any express reference to it in the assignment, they may be under a concurrent obligation to pursue a remedy in order to indemnify, or repay, Garrisons.  I know those matters were not explored but ‑ ‑ ‑

GUMMOW J:   You have to look at it broadly if we are looking at special leave questions. 

MR O’FARRELL:   Your Honour, I understand that.  In my submission, the organisation of the arrangements between the clients and Garrisons is not something with respect to which the Trust is necessarily bound in the administration of the fund or the court, particularly where the Parliament directs the applicant and the court to have regard to losses which accrue to clients.  I realise that this is a broken record syndrome and it always gets back to what is the meaning of the word “client”, but that is precisely the issue that is raised by this case. 

Your Honours, in my submission, the applicant is not an insurer.  In my submission, it is not required to indemnify people who effectively invest money in order to organise their own affairs.  In particular in this case, your Honour, as the learned primary judge found, the respondent was under

threat from both the regulator and investors of action for negligent advice given in respect of the investments.  In those circumstances, your Honour, operating on that motivation, it is my submission that the Trust should not be made to pay, on a broader ground, should not be made to stand as if it were the insurer of the respondent’s negligence simply because it suited the insurer to avoid commercial liability.  That was the conclusion of the learned primary judge and, in my submission, that conclusion was correct.  If your Honours please.

GUMMOW J:   Thank you, Mr O’Farrell.  We do not need to call on you, Mr Porter.

There are insufficient prospects of success on an appeal from this decision of the Tasmanian Full Court to warrant a grant of special leave.  Accordingly, special leave is refused and refused with costs.

We will adjourn.

AT 9.57 AM THE MATTER WAS CONCLUDED